Problem set #1-2 (2 pages)
A) 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 when appropriate
and be sure to show any of your calculations. Answers without correct explanations will get NO credit.
Write legibly.
1) Consider the price for buyers in a competitive market. We would expect the price to decrease if the government
(i) increases a binding price ceiling in that market.
(ii) increases a tax on the good sold in that market.
(iii) imposes a binding price ceiling in that market.
(iv) removes a binding price floor in the market.
a. (i) only
b. (ii) only
c. (iii) only
d. (iv) only
d. (i) and (iv) only
e. (ii) and (iii) only
f (iii) and (iv) only
2) Sellers of a good will bear the larger share of the burden of a tax when the
(i) supply is more elastic than the demand.
(ii) demand is more elastic than the supply.
(iii) tax is placed on the sellers of the product.
(iv) tax is placed on the buyers of the product.
a. (i) only
b. (ii) only
c. (i) and (iv) only
d. (ii) and (iii) only
e. None of the answers i)~iv) is correct.
3) Suppose that buyers of personal computers are currently required to pay a tax of $40 per computer. In the market for computer,
the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. If
the tax is increased from $40 to $70 per computer, then the
a. demand curve will shift upward by $30, and the effective price received by sellers will increase by $30.
b. demand curve will shift upward by $30, and the effective price received by sellers will increase by less than $30.
c. demand curve will shift downward by $30, and the price paid by buyers will decrease by $30.
d. demand curve will shift downward by $30, and the price paid by buyers will increase by $30.
e. demand curve will shift downward by $30, and the price paid by buyers will decrease by less than $30.
f. demand curve will shift downward by $30, and the price paid by buyers will increase by less than $30.
4) Suppose that the equilibrium price in the market for milk is $2/L. If the government imposes a price ceiling of $3/L, producer
surplus
a. would necessarily increase even if the higher price resulted in a surplus of widgets.
b. would necessarily decrease because the higher price would create a surplus of widgets.
c. might increase or decrease.
d. would be unaffected.
5) Which of the following will cause an increase in consumer surplus?
a. an increase in the number of sellers of the good
b. a decrease in the production cost of the good
c. sellers expect the price of the good to be lower next month
d. the removal of a binding price floor in the market
e. Answers a, b, and d are correct.
f. Answers a, b, c, and d are correct.
6) Taro offers house cleaning services and his opportunity cost is $70 per week. Mika is willing to pay $100 per week to have her
house cleaned. Assume that the government considers imposing a tax of $40 per week for cleaning service providers. Which of
the following is correct if the tax is imposed?
a. Mika will continue to hire Taro to clean her house, but her consumer surplus will decline after the tax.
b. Taro will continue to clean Mika’s house, and his producer surplus will not change after the tax.
c. Taro will continue to clean Mika’s house, but his producer surplus will decline after the tax.
d. Total economic welfare will increase after the tax.
e. Total economic welfare will not change after the tax.
f. None of the above answers is correct.
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B) Answer the following questions. Draw diagrams to illustrate your answers when appropriate and be sure to
show any of your calculations. Answers without correct explanations will get NO credit. Write legibly.
Price
85
80
75 Supply
70
65
60
55
50
45
40
35
30
25
20
15
10
5 Demand
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Quantity
7) Suppose that the market demand curve and the market supply curve of a good are given as in the above figure. When a tax of
$8 per unit is imposed on buyers, calculate the i) buyer’s price and ii) dead weight loss due to the tax.
8) Suppose that the demand and the supply curve are the same as in 7). Further suppose the government imposes a price floor of
$60 in this market. How much will this policy increase/decrease producer surplus compared to the case without the price floor
(and without the tax)?
9) The following table shows the willingness to pay of three consumers, Ichiro, Hiro, and Koji, for the first three apples of the day.
First Apple Second Apple Third Apple
Ichiro $2.50 $2.00 $1.20
Hiro $1.70 $1.30 $0.80
Koji $0.9 $0.5 $0
Who experiences the largest loss of consumer surplus when the price of an apple increases from $0.80 to $1.50? How much was
the loss?