Problem Set #2-2 (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 if possible and be sure to show any of your calculations. Answers without correct
explanations will get NO credit.
1) Suppose that the government imposes a $10 per unit sales tax on producers, and this causes the
pre-tax equilibrium price of $100 to rise to $104 per unit, then,
a. producers pay 4% of the burden of the tax
b. producers pay 30% of the burden of the tax
c. producers pay 40% of the burden of the tax
d. producers pay 60% of the burden of the tax
e. none of the above is correct
2) Any decrease in employment resulting from an increase in the minimum wage will be greater:
a. the more elastic is the labor supply curve
b. the less elastic is the labor demand curve
c. the less elastic is the labor supply curve
d. the more elastic is the labor demand curve
3) An observation of consistent shortages of high school teachers indicates
a. that society does not value teachers
b. that the wage paid to teachers is too high
c. that the wage paid to teachers is too low
d. that the quality of the average teacher is too low
4) The incidence of a consumption tax will tend to fall more heavily on producers (as opposed to
consumers) when:
a. the more elastic is supply
b. the more elastic is demand.
c. the higher is the level of the tax
d. the lower is the equilibrium price before the imposition of the tax
5) Jiro operates a carpet-cleaning service. On each day, the cost of cleaning the first carpet is $10,
the cost of cleaning the second carpet is $12, and the cost of cleaning the third carpet is $15. His
producer surplus on the first three carpets of the day is $53. If Jiro charges all customers the same
price for carpet cleaning, that price is
a. $25.
b. $30.
c. $36.
d. $45.
6) If the current allocation of resources in the market for corns is inefficient, then it must be the case
that
a. producer surplus exceeds consumer surplus in the market for corns.
b. consumer surplus exceeds producer surplus in the market for corns.
c. the sum of consumer surplus and producer surplus could be increased by moving
to a different allocation of resources.
d. the costs that sellers of corns are incurring could be reduced by moving to a
different allocation of resources.
7) Hot-dogs and hot-dog buns are complementary goods. A technological advance in the production
of hot-dogs will
a. increase consumer surplus in the market for Hot-dogs and decrease producer
surplus in the market for Hot-dog buns.
b. increase consumer surplus in the market for Hot-dogs and increase producer
surplus in the market for Hot-dog buns.
c. decrease consumer surplus in the market for Hot-dogs and increase producer
surplus in the market for Hot-dog buns.
d. decrease consumer surplus in the market for Hot-dogs and decrease producer
surplus in the market for Hot-dog buns.
8) Hanako cleans Mike’s house for $300 per week. Mike values this service at $340 per week, while
the opportunity cost of Hanako’s time is $250 per week. The government places a tax of $100 per
week on house cleaning. After the tax, what is the loss in total surplus?
a. $40
b. $100
c. $90
d. $0
B) Answer the following questions. Be sure to provide brief explanations. Draw diagrams to
illustrate your answers if possible and be sure to show any of your calculations. You can assume
typical linear demand and supply curves for these questions. Answers without correct
explanations will get NO credit.
1) Suppose that a minimum wage imposed by a government changed the wage of unskilled labor by
20%. If you know that the price elasticity of demand for unskilled labor is －0.58, approximately
how much higher/lower would the demand for unskilled labor be if the minimum wage didn’t
exist? Use the arc method for your calculation.
2) Suppose that a tax of $1 is imposed on each banana that is sold. The tax decreases producer
surplus by $2,000 per day, generates tax revenue of $4,880 per day, and decreases the
equilibrium quantity of bananas by 240 per day. Calculate the amount of decrease in consumer
surplus due to the tax.
3) Suppose that the demand function and the supply function are given by the followings:
D： Q=200－2P
S： Q=－10＋P
Assume that the government imposes a tax of T per unit on sellers. Calculate the dead weight
loss as a function of T.