Problem Set #3-2

1. Multiple Choice: Choose the best alternative and briefly explain why your choice is the correct answer
(briefly explain, where appropriate, why the other options are incorrect). Draw diagrams to illustrate
your answers if possible and be sure to show any of your calculations.

A) If the government removes a binding price floor from a market, then the price paid by buyers will
a. increase, and the quantity sold in the market will increase.
b. increase, and the quantity sold in the market will decrease.
c. decrease, and the quantity sold in the market will increase.
d. decrease, and the quantity sold in the market will decrease.
B) Refer to Figure A. A government-imposed price of $6 in this market could be an example of a
(i) binding price ceiling.
(ii) non-binding price ceiling.
(iii) binding price floor.
(iv) non-binding price floor.
a. (i) only
b. (ii) only
c. (i) and (iv) only
d. (ii) and (iii) only

Price
Figure A
20
Supply
18

16

14

12

10

2
Demand

2 4 6 8 10 12 14 16 18 20 Quantity

C) Opponents of the minimum wage point out that the minimum wage
a. encourages teenagers to drop out of school.
b. prevents some workers from getting needed on-the-job training.
c. contributes to the problem of unemployment.
d. All of the above are correct.

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D) Rent control policies tend to cause
a. relatively smaller shortages in the short run than in the long run because supply and demand tend to be more
elastic in the short run than in the long run.
b. relatively larger shortages in the short run than in the long run because supply and demand tend to be more
elastic in the short run than in the long run.
c. relatively larger shortages in the short run than in the long run because supply and demand tend to be more
inelastic in the short run than in the long run.
d. relatively smaller shortages in the short run than in the long run because supply and demand tend to be more
inelastic in the short run than in the long run.
E) A tax on the sellers of coffee will increase the price of coffee paid by buyers,
a. increase the effective price of coffee received by sellers, and increase the equilibrium quantity of coffee.
b. increase the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
c. decrease the effective price of coffee received by sellers, and increase the equilibrium quantity of coffee.
d. decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
F) If the government levies a $2 tax per DVD on buyers of DVDs, then the price received by sellers of DVDs
would
a. decrease by more than $2.
b. decrease by exactly $2.
c. decrease by less than $2.
d. increase by an indeterminate amount.
G) If the government wants to reduce the burning of fossil fuels, it should impose a tax on
a. buyers of gasoline.
b. sellers of gasoline.
c. either buyers or sellers of gasoline.
d. whichever side of the market is less elastic.
H) The incidence of a tax falls more heavily on
a. consumers than producers if demand is more inelastic than supply.
b. producers than consumers if supply is more inelastic than demand.
c. consumers than producers if supply is more elastic than demand.
d. All of the above are correct.
I) David tunes pianos in his spare time for extra income. Buyers of his service are willing to pay $135 per
tuning. One particular week, David is willing to tune the first piano for $115, the second piano for $125, the
third piano for $140, and the fourth piano for $175. Assume David is rational in deciding how many pianos
to tune. His producer surplus is
a. $-15.
b. $20.
c. $30.
d. $75.

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J) Which of the following statements is not correct about a market in equilibrium?
a. The price determines which buyers and which sellers participate in the market.
b. Those buyers who value the good more than the price choose to buy the good.
c. Those sellers whose costs are less than the price choose to produce and sell the good.
d. Consumer surplus will be equal to producer surplus.
K) Coffee and tea are substitutes. Good weather that sharply increases the coffee bean harvest would
a. increase consumer surplus in the market for coffee and decrease producer surplus in the market for tea.
b. increase consumer surplus in the market for coffee and increase producer surplus in the market for tea.
c. decrease consumer surplus in the market for coffee and increase producer surplus in the market for tea.
d. decrease consumer surplus in the market for coffee and decrease producer surplus in the market for tea.
L) Suppose the government imposes a $10 per unit tax on a good.

Price
24 Figure B
22
20 A
18 Supply
16
B
14
C
12
10 D F
H
G
8
6 J
4 K L M Demand
2

3 6 9 12 15 18 21 24 27 30 33 36 39 Quantity

L-1) Refer to Figure B. The tax causes consumer surplus to decrease by the area
a. A.
b. B+C.
c. A+B+C.
d. A+B+C+D+F.
L-2) Refer to Figure B. One effect of the tax is to
a. reduce consumer surplus from $180 to $72.
b. reduce producer surplus from $96 to $24.
c. create a deadweight loss of $72.
d. All of the above are correct.
M) Suppose a tax of $3 per unit is imposed on a good. The supply curve is a typical upward-sloping straight
line, and the demand curve is a typical downward-sloping straight line. The tax decreases consumer surplus
by $3,900 and decreases producer surplus by $3,000. The tax generates tax revenue of $6,000. The tax
decreased the equilibrium quantity of the good from

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 a. 2,000 to 1,500.
b. 2,400 to 2,000.
c. 2,600 to 2,000.
d. 3,000 to 2,400.
N) The vertical distance between points A and B represents the original tax.
Price

12 Figure C
11
F
10 S
A
9

8
C
7

5 D
4
B
3 G
2

1
D
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Quantity

Refer to Figure C. Suppose the government changed the per-unit tax from $5.00 to $2.50. Compared to the
original tax rate, this lower tax rate would
a. increase government revenue and increase the deadweight loss from the tax.
b. increase government revenue and decrease the deadweight loss from the tax.
c. decrease government revenue and increase the deadweight loss from the tax.
d. decrease government revenue and decrease the deadweight loss from the tax.
O) When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will
a. decrease tax revenue and decrease the deadweight loss.
b. decrease tax revenue and increase the deadweight loss.
c. increase tax revenue and decrease the deadweight loss.
d. increase tax revenue and increase the deadweight loss.

2. Suppose that quantity supplied and quantity demanded are given as follows:
Qs = 100 + 3P
Qd = 400 - 2P
A) From this information compute equilibrium price and quantity.
B) Now suppose that a tax of T is placed on buyers. Solve for the new equilibrium price and quantity as a
function of T.
C) How much of the burden of the tax is born by consumers? Producers?
D) What is the value of T that maximizes tax revenue?

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