Download Microeconomics Quiz: Market Controls and Taxes - Drake University, Summer 2002 - Prof. Wil and more Quizzes Microeconomics in PDF only on Docsity!
Principles of Microeconomics (Econ 002) Signature: Drake University, Summer 2002 William M. Boal Printed name:
QUIZ #5 VERSION B
“Market Controls and Taxes”
INSTRUCTIONS: This quiz is closed-book, closed-notes, but calculators are permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100.
I. Multiple choice: Circle the one best answer to each question. [3 pts each: 27 pts total]
(1) If a price ceiling (or legal maximum price) on airline tickets is binding, it creates a. excess demand for airline tickets. b. excess supply of airline tickets. c. a surplus of airline tickets. d. an increase in quantity of airline tickets supplied.
(2) Who loses if a price floor (or legal minimum price) is imposed on gasoline? a. All buyers of gasoline. b. All sellers of gasoline. c. All buyers and all sellers of gasoline. d. No one loses—everyone gains.
(3) The quantity traded of computers would be reduced if the government imposed a. a price floor (or legal minimum price) for computers. b. a price ceiling (or legal maximum price) on computers. c. a quota on computers. d. any of the above.
(4) The price of oranges will fall if the government imposes a. a price floor (or legal minimum price) for oranges. b. a quota on sellers of oranges. c. a quota on buyers of oranges. d. any of the above.
(5) A quota on consumers of steel, if binding, will cause the price of steel to a. rise. b. fall. c. remain constant. d. rise or fall, depending on the shapes of the demand and supply curves for steel.
(6) The quantity of skateboards actually sold would increase if the government imposed a a. price floor (or legal minimum price) on skateboards. b. subsidy for skateboards. c. tax on skateboards. d. quota for skateboards.
(7) The total price of a good received by sellers is greater than the net price paid by buyers if the government imposes a a. price ceiling (or legal maximum price). b. price floor (or legal minimum price). c. subsidy. d. tax.
(8) Suppose the price elasticity of demand for renting lakefront cabins is -3 and the price elasticity of supply of lakefront cabins is 0.2. If a tax is imposed on lakefront cabins, which side of the market effectively pays most of the tax? a. Sellers (landlords). b. Buyers (renters). c. Sellers and buyers each pay half of the tax. d. Answer depends on which side is legally required to remit the tax to the government.
(9) If the tax rate on hotel rooms were steadily increased, the tax revenues collected by the government would likely a. increase steadily. b. decrease steadily. c. first increase and then decrease. d. first decrease and then increase.
Principles of Microeconomics (Econ 002) Drake University, Summer 2002
Quiz #5 Version A Page 2 of 4
II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section.
(1) [Price controls: 16 pts] The following graph shows the market for three-ring notebooks. Suppose a price floor (or legal minimum price) of $6 is imposed on this market. No three-ring notebooks may be sold for less than $6.
Quantity (thousands)
Price
Demand Supply
a. Is this price floor binding or nonbinding?
b. Find the quantity of notebooks actually sold with this price floor. thousand
c. Will this price floor result in excess demand or excess supply of notebooks?
d. How much? thousand
(2) [Quotas: 16 pts] Suppose the government discovers that a particular chemical poses an environmental hazard. To control use of the chemical, the government has decided to impose a quota of six thousand kilograms. The market for the chemical is shown in the graph below.
Quantity (thousands of kilograms)
Price per kilogram
Demand
Supply
First suppose the quota is imposed on producers. Six thousand permits to sell one kilogram of the chemical are distributed to producers of the chemical.
a. What will be the equilibrium price of the chemical with the quota? $ per kilogram
b. If the government sells the permits to producers at auction, what price will the permits go for at the auction?
$ per permit
Alternatively, suppose the quota is imposed on consumers. Six thousand permits to buy one kilogram of the chemical are distributed to consumers of the chemical.
c. What will be the equilibrium price of the chemical with the quota? $ per kilogram
d. If the government sells the permits to consumers at auction, what price will the permits go for at the auction?
$ per permit
Principles of Microeconomics (Econ 002) Drake University, Summer 2002
Quiz #5 Version B Page 4 of 4
III. Critical thinking: Write a one-paragraph essay answering either question (1) or question (2) below, but not both. Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [5 pts]
(1) Consider the market for cars imported from Japan. (Assume they form a special market, different from the market for domestically produced cars.) In the 1980s, the U.S. government put a quota on producers (sellers) of these cars, called “voluntary export restraints.” What was the likely effect of this quota on the price of cars imported from Japan? The quota permits were given away for free to the Japanese government, which assigned them to car producers in proportion to their previous sales. Thus the producers paid nothing for the quota permits. Why did Japanese car producers not object strenuously to “voluntary export restraints”? Who were the likely winners and losers from “voluntary export restraints”?
(2) It has been proposed that the federal government subsidize prescription drugs for persons over 65. Suppose the government offered a subsidy of $5 per prescription. Draw a supply-and-demand diagram to illustrate the effects of this subsidy. How would the subsidy affect the net price of prescriptions paid by senior citizens, the total price received by drug sellers, and the quantity of prescriptions sold?
Which question are you answering, (1) or (2)? _________. Please write your answer below.
[end of quiz]
