Exam Prep Chapter.10 Using the Competitive Model 244

Package: Test Bank

Title: Microeconomics: Theory and Application, 13e

Chapter Number: 10

Question Type: Multiple Choice

1. What is meant by consumer surplus?

a. It is the total quantity of a good bought by a consumer divided by the price paid.

b. It is a measure of an individual consumer’s utility from the consumption of a good.

c. It is the difference between a consumer’s maximum willingness to pay and the price.

d. It is a measure of the total benefit to consumers from the purchase of a good.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

2. What is meant by producer surplus?

a. It is the total quantity of a good produced by the seller.

b. It is the difference between the producer’s marginal cost and the price.

c. It is the difference between a producer’s minimum selling price and the actual price.

d. It is a measure of the total benefit to producers resulting from the purchase of an input.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

3. Producer surplus is calculated as _____.

a. the area between the price line and the supply curve up to the equilibrium level of output

b. the area between the supply curve and the X-axis up to the equilibrium level of output

c. the area between the price line and the demand curve up to the equilibrium level of output

d. the area between the demand curve and the supply curve up to the equilibrium level of output

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

4. Suppose the demand for raspberry frozen yogurt can be represented by the equation Q_D = 5 – 2P, and the supply is given by the equation Q_S = 3P. Which of the following is the best estimate of the consumer surplus in this market?

a. $2

b. $1.25

c. $2.25

d. $3.75

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

5. Suppose the demand for ice cream sundaes can be represented by the equation Q_D = 10 – P, and the supply is given by the equation Q_S = P. Which of the following is the best estimate of the producer surplus in this market?

a. $5

b. $10

c. $12.5

d. $22.5

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

6. The long-run supply curve in a constant-cost competitive industry is a(n) _____ line.

a. horizontal

b. vertical

c. downward sloping

d. upward sloping

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

7. In the long run, aggregate producer surplus is zero in:

a. industries with positive accounting profits.

b. industries with a positive economic profit.

c. decreasing-cost industries.

d. constant-cost competitive industries.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

8. The total surplus gained by all the participants in a competitive market is the area between the _____ up to the equilibrium level of output.

a. demand curve and the equilibrium price line

b. demand curve and the supply curve

c. demand curve and the horizontal axis

d. equilibrium price line and the horizontal axis

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

9. The area under the supply curve represents _____.

a. the variable cost of producing the good or service

b. the fixed cost of producing the good or service

c. the marginal value to the firm from producing the good or service

d. the total revenue earned by the firm from selling the good or service

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

10. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The total surplus at the initial point of equilibrium, F, is given by _____.

a. LFP₂

b. LFGP₁

c. LFM

d. LFIP₁

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

11. The following figure shows the intersection of demand and supply at the price P₂ and quantity Q₂ in a competitive market.

What is the consumer surplus at the equilibrium level of output?

a. a + b + f + g + h

b. a + b + c + d

c. a + b + c + f + g

d. a + b + c

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

12. The following figure shows the intersection of demand and supply at the price P₂ and quantity Q₂ in a competitive market.

What is the producer surplus at the equilibrium level of output?

a. f + g + j

b. f + g + h + i + j

c. f + g

d. i + h + g + f

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

13. What is meant by a deadweight loss?

a. It is the aggregate loss in total surplus in an inefficient market.

b. It is the total loss in producer surplus due to output being at an inefficient level.

c. It is the sum of the consumer and producer surpluses in an inefficient market.

d. It is the loss in consumer surplus due to a price ceiling or floor in the market.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

14. The level of output produced by a firm is efficient if _____ at that level of output.

a. marginal benefit equals marginal cost

b. total cost equals total revenue

c. fixed cost equals price

d. average variable cost equals average revenue

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

15. When the efficient rate of output is produced in the short run:

a. marginal cost is greater than marginal benefit.

b. the producer surplus is as large as possible.

c. the total surplus is as large as possible.

d. marginal benefit is greater than marginal cost.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

16. The equilibrium of a competitive industry is:

a. equitable but not necessarily efficient.

b. efficient.

c. not always efficient.

d. neither efficient nor equitable.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

17. When a price ceiling is imposed in a competitive market at a level below the equilibrium price:

a. the gain to producers outweighs the loss to consumers.

b. the output level becomes inefficient.

c. the total surplus in the market is not affected.

d. the producer surplus is increased.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

18. The following figure shows the intersection of demand and supply at the price P₂ and quantity Q₂ in a competitive market.

What is the deadweight loss if a price ceiling is imposed at the price level P₃ in this market?

a. b + f + c + g

b. b + c + d + e

c. c + g

d. d + e

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

19. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The deadweight loss due to a price ceiling set at P₁ is area _____.

a. GFH

b. EFI

c. EFK

d. EFHI

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

20. When a price ceiling is imposed in a competitive market at a level below the equilibrium price:

a. the total surplus is reduced.

b. there is no welfare cost associated with it.

c. the consumer surplus increases more than producer surplus.

d. the producer surplus increases more than consumer surplus.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

21. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The aggregate consumer surplus at the initial point of equilibrium, F, is _____.

a. EFJ

b. LEJP₂

c. LEP₃

d. LFP₂

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

22. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The aggregate consumer surplus after a price ceiling is set at P₁ is _____.

a. LFP₂

b. LEP₃

c. LEJP₂

d. LEIP₁

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

23. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

What is the quantity of output produced after the imposition of the price ceiling at P₁?

a. OA

b. OB

c. OC

d. ON

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

24. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The net change in total surplus due to a price ceiling set at P₃ is _____.

a. EKF

b. P₃KFP₂

c. 0

d. EFJ

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

25. When a price ceiling is imposed on a competitive market at a level above the equilibrium price:

a. the consumer surplus is reduced.

b. producers lose some or all of the producer surplus.

c. the total surplus is not changed by the price ceiling.

d. both the producers and consumers lose surplus.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

26. When a price ceiling is imposed on a competitive market at a level equal to the equilibrium price:

a. consumer surplus is increased.

b. producer surplus is increased.

c. both producer and consumer surplus is reduced.

d. total surplus remains unchanged.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

27. Suppose an increasing-cost competitive industry is in equilibrium at a price of $100 and an output of 1,000 units. When a price ceiling of $80 is imposed the quantity traded in the market reduces to 800 units. Which of the following is true?

a. Consumer surplus will increase and producer surplus will fall, but total surplus stays the same.

b. Consumer surplus will fall and producer surplus will increase, keeping total surplus unchanged.

c. Consumer surplus may or may not fall but producer surplus will fall.

d. Consumer surplus will remain unchanged, but producer surplus and total surplus will fall.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

28. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The change in aggregate consumer surplus due to a price ceiling set at P₁ is area _____.

a. –EFJ

b. EFJ + P₂JIP₁

c. EFJ – P₃EJP₂

d. P₂JIP₁ – EFJ

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

29. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The change in aggregate producer surplus due to a price ceiling set at P₁ is area _____.

a. –EFI

b. EFJ – P₂JIP₁

c. –P₂FIP₁

d. P₁IM

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

30. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The aggregate producer surplus after a price ceiling is set at P₁ is area _____.

a. MFP₂

b. MIEP₃

c. MIJP₂

d. MIP₁

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

31. The following figure shows the effect of a price ceiling in the market for yams. The market was initially in equilibrium at price P₂ and quantity B.

The aggregate producer surplus at the initial point of equilibrium, F, is area _____.

a. P₂FIP₁

b. FP₂M

c. MIP₁

d. LP₂F

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

32. Presently, the United States produces as well as imports crude oil. Suppose the government imposes a $10 per barrel excise tax on imported oil. What will happen?

a. The price of oil will rise by $10; less oil will be consumed but sales of foreign producers will rise at the expense of domestic producers.

b. The price of oil will rise; less oil will be consumed but sales of domestic producers will rise at the expense of the foreign oil producers.

c. The price of oil will decline and more U.S.-produced oil will be sold in place of the heavily taxed foreign oil.

d. The price of oil will decline and more oil will be consumed but the relative shares of the oil market between the U.S. and foreign oil producers will be unchanged.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

33. In the short run, an excise tax placed on all firms in an increasing-cost competitive industry will result in:

a. a fall in price and an increase in output.

b. an increase in output and a fall in price.

c. a fall in both price and output.

d. an increase in price and a fall in output.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

34. A per-unit excise tax on a single competitive firm causes:

a. all cost curves, except the total fixed cost curve to increase by the amount of the tax.

b. all per-unit cost curves to increase by less than the amount of the tax.

c. all per-unit cost curves, except the marginal cost curve, to decrease by the amount of the tax.

d. all per-unit cost curves and the marginal cost curve to increase by the amount of the tax.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

35. An excise tax levied on firms in a constant-cost competitive industry will:

a. increase output more in the short run than in the long run.

b. reduce output more in the long run than in the short run.

c. benefit consumers in the short run but harm them in the long run.

d. increase the product price more in the short run than in the long run.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

36. If a good is produced by an increasing-cost competitive industry and the demand for its product is elastic, the imposition of a per-unit tax on producers will cause price to _____ in the short run.

a. rise by the amount of the tax

b. fall by the amount of the tax

c. rise by less than the amount of the tax

d. fall by more than the amount of the tax

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

37. In the long run, the imposition of an excise tax in a constant-cost competitive industry will cause price to:

a. rise by the amount of the tax.

b. fall by the amount of the tax.

c. rise by less than the amount of the tax.

d. fall by more than the amount of the tax.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

38. A given per-unit excise tax will increase the short run product price by the highest amount when:

a. demand is elastic and supply is inelastic.

b. supply is inelastic and demand is elastic.

c. demand is inelastic and supply is elastic.

d. supply is perfectly inelastic and demand is elastic.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

39. Consider two increasing-cost competitive industries A and B having identical supply curves. However, the demand curve faced by industry A is more inelastic than the demand curve of industry B. Which of the following is true if a per-unit excise tax is levied on the output of both the industries?

a. The consumers of industry A’s product will bear a greater burden of the tax than the producers.

b. The consumers of industry A’s product will bear a smaller burden of the tax than the producers.

c. The consumers of industry B’s product will bear a larger burden of the tax than the consumers of industry A.

d. The consumers of industry B’s product will bear the entire burden of the tax imposed on that product.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

40. Consider two increasing cost competitive industries A and B having identical demand curves. However, the supply curve faced by industry A is more inelastic than the supply curve of industry B. Which of the following is true if a per-unit excise tax is levied on the output of both the industries?

a. The consumers of industry A’s product will bear a greater burden of the tax than the producers.

b. The consumers of industry A’s product will bear a smaller burden of the tax than the producers.

c. The consumers of industry B’s product will bear a smaller burden of the tax than the consumers of industry A.

d. The consumers of industry B’s product will bear the entire burden of the tax imposed on that product.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

41. If a commodity has a(n) _____, a greater share of the burden of an excise tax levied on the commodity would be borne by the producers.

a. relatively elastic supply curve and a perfectly inelastic demand curve

b. perfectly elastic supply curve

c. relatively inelastic demand curve and a relatively elastic supply curve

d. perfectly elastic demand curve

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

42. If a commodity has a(n) _____, a greater share of the burden of an excise tax levied on the commodity would be borne by the consumers.

a. perfectly elastic demand curve and an elastic supply curve

b. perfectly elastic demand curve and perfectly inelastic supply curve

c. relatively inelastic supply curve

d. perfectly inelastic demand curve

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

43. For an excise tax which causes output in a market to fall to zero:

a. the tax revenue and deadweight loss are both zero.

b. the tax revenue is positive but there is no deadweight loss.

c. the deadweight loss is equal to the total surplus before the tax.

d. the deadweight loss is equal to the producer’s surplus.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

44. A rent control has been imposed on the market for rental housing in a country. If the long run supply curve in this competitive market is more price elastic than the short run supply curve, it implies that:

a. the deadweight loss of the rent control is higher in the long run compared to the short run.

b. the deadweight loss of the rent control is higher in the short run compared to the long run.

c. the deadweight loss of the rent control is zero in the long run.

d. the deadweight loss of the rent control is zero in the short run.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

45. Rent controls in the rental housing market:

a. will lead to the deterioration of the quality of rental housing.

b. will not significantly affect supply in the long run.

c. does not have any adverse effects in the short run.

d. benefits tenants but not landlords.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

46. How do price ceilings in the rental housing market affect tenants?

a. Since price ceilings keep rents from rising above a certain level, the net gain to tenants is positive.

b. Tenants are worse off from price ceilings since the supply of rental housing falls in the long run.

c. Tenants benefit from price ceilings since landlords have incentives to improve the quality of existing rental housing

d. Since the supply of rental housing is inelastic in the short run, tenants are not affected by a price ceiling.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

47. One of the reasons for the low profitability of U.S. airlines during the era of regulation by the Civil Aeronautics Board (CAB) was _____.

a. the absence of organized labor unions

b. low airline safety

c. the scheduling of airline flights to sparsely populated areas

d. the price ceiling imposed by the CAB

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

48. The U.S. airline industry, prior to deregulation, was characterized by _____.

a. excessive profits

b. a high level of efficiency

c. excess demand

d. nonprice competition

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

49. The Civil Aeronautics Board (CAB) allowed airlines to charge prices above the equilibrium price. Even then the airlines were not profitable because:

a. their economic profits were zero.

b. nonprice competition between the airlines raised costs and eroded profits.

c. the demand was too low to make profit.

d. they were subject to heavy taxes by the government which drove down profits.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

50. Although U.S. airline fares fell significantly after deregulation, profits did not fall. This was because:

a. the airline industry is a decreasing cost industry.

b. the airlines reduced costs by lowering wages to workers.

c. the demand for air travel did not increase by a significant percentage.

d. the airlines received subsidies from the federal government.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

51. When the U.S. airline industry was regulated by the Civil Aeronautics Board (CAB), airline workers’ unions:

a. did not benefit since the airlines were unprofitable and could not pay high wages.

b. negotiated higher-than-competitive fares from the airlines.

c. received lesser pay than what they received after deregulation.

d. were not organized and so did not have any bargaining power.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

52. Deregulation of the airline industry has resulted in:

a. a reduction in the number of airline passengers.

b. a reduction in the wages and salaries in the airline industry.

c. an increase in airfares.

d. a rapid expansion of airport capacity.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

53. A contestable market is one in which:

a. a small number of firms operate, keeping price above marginal cost.

b. the market price is independent of the number of firms.

c. the price in the market depends upon the number of firms because entry is free.

d. the lack of barriers to entry causes price to remain low.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

54. Which of the following strengthens the possibility that the airline market is a contestable market?

a. Since other airlines can enter the market at no cost and charge lower fares, the fare charged by a single airline is always equal to the marginal cost.

b. The barriers to entry in the airline market lead to nonprice competition between the airlines operating in the market.

c. The fares that are charged for routes with more than one airline are significantly higher than the fares charged for a route with only one airline.

d. Airlines regularly charge fares that are above the competitive levels irrespective of the number of airlines plying a particular route.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

55. Which of the following is true of deregulation and airline safety in the U.S.?

a. Airline safety has deteriorated since the deregulation of the airline industry because safety standards are determined by the airlines themselves.

b. Airline safety has deteriorated since airline deregulation because increased competition does not give airlines any incentive to reduce the number of accidents.

c. Since airline safety standards are set by a government agency, deregulation of routes and fares is not directly linked to airline safety.

d. Airline safety has increased post-deregulation because airlines are now not required to insure their aircrafts against accidents.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

56. Restrictions on entry in the taxicab market tends to benefit _____ the most.

a. the government

b. original recipients of medallions

c. current taxicab drivers

d. taxicab passengers

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

57. Issuing a fixed number of licenses to operate a taxicab in a city would mean that the number of:

a. cabs and fares are both above the efficient level.

b. cabs is less than the efficient quantity and fares are above free-market levels.

c. cabs is above the efficient level and fares are depressed below the free-market level.

d. cabs and fares are both below the efficient level.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

58. Suppose a city limits the number of cabs that can provide taxi service by issuing medallions. If the medallions can be bought and sold and they command a positive price, you can conclude that:

a. fares are above the competitive levels.

b. no illegal cabs will operate in the city.

c. the demand for cabs is lesser than the supply of cabs.

d. the supply curve for taxicabs is horizontal.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

59. Suppose the government limits the number of cabs that can operate in the city by issuing a limited number of medallions. Later, if the government decides to regulate fares instead and sets them below current levels:

a. surpluses will result in the taxicab market.

b. the resale value of the medallion will fall.

c. the demand for taxicabs will decline.

d. congestion during peak traffic hours will decrease.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

60. Deregulation of the taxicab industry is most likely to result in:

a. an increase in the operation of illegal cabs.

b. reduced safety of passengers.

c. a shift of taxicab services from poor neighborhoods to the city.

d. a large financial loss for those who own medallions.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

61. Suppose there is a city which licenses cabs, but cab owners find they cannot get anyone to buy their medallions at any price. You can conclude that:

a. selling medallions is illegal.

b. cab owners are making a normal profit.

c. cab fares are higher than the efficient level.

d. the number of licenses issued are limited.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

62. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

In the absence of trade, the equilibrium price in the U.S. market is _____.

a. P₃

b. P₂

c. P₁

d. P₀

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

63. The following figure shows the intersection of the demand and supply curves for a commodity in the domestic market at price P₂ and quantity Q₂, in the absence of trade. With trade, the supply curve shifts to Supply_trade.

The quantity of imports into the domestic market is given by _____.

a. Q₂ – Q₁

b. Q₃ – Q₂

c. Q₃ – Q₁

d. Q₃

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

64. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

The total consumer surplus prior to trade was _____.

a. P₄EP₃

b. P₄KP₂

c. P₄ELP₂

d. P₃EP₀

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

65. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

The total producer surplus prior to trade was _____.

a. P₃EP₀

b. P₂LP₀

c. P₁MP₀

d. P₃EMP₁

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

66. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

Trade increases consumer surplus in the U.S. by _____.

a. P₃EKP₂

b. P₃EP₀

c. EKL

d. P₂LMP₁

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

67. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

The total producer surplus after trade is _____.

a. P₃ELP₂

b. ELK

c. P₂LP₀

d. P₂LMP₁

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

68. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

The net gain to the U.S. from trade is _____.

a. P₃EP₀

b. P₃ELP₂

c. P₄EP₀

d. ELK

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

69. The following figure shows the intersection of the demand and supply curves for a commodity in the domestic market at price P₂ and quantity Q₂, in the absence of trade. With trade, the supply curve shifts to Supply_trade.

In the absence of trade, the total consumer surplus is given by _____.

a. a + b + c + g + f

b. a + b + c + d

c. d + b + c

d. a + b + c

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

70. The following figure shows the intersection of the demand and supply curves for a commodity in the domestic market at price P₂ and quantity Q₂, in the absence of trade. With trade, the supply curve shifts to Supply_trade.

In the absence of trade, the total producer surplus is given by _____.

a. f + g + j

b. f + g + h + j

c. f + g + h + i

d. f + g + h + i + j

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

71. The following figure shows the intersection of the demand and supply curves for a commodity in the domestic market at price P₂ and quantity Q₂, in the absence of trade. With trade, the supply curve shifts to Supply_trade.

When foreign suppliers enter the domestic market the total consumer surplus becomes _____.

a. a + b + c + d

b. a + b + c + f + g + h

c. a + b + c + f + g + j

d. a + b + c + f + g + h + i

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

72. The following figure shows the intersection of the demand and supply curves for a commodity in the domestic market at price P₂ and quantity Q₂, in the absence of trade. With trade, the supply curve shifts to Supply_trade.

The net gain to domestic residents when they trade with foreign suppliers is represented by _____.

a. d + e

b. h + i

c. k + l + m

d. f + g + j

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

73. The following figure shows the demand and supply for a commodity in the domestic U.S. market as well as the global market. The commodity is imported from the rest of the world to the U.S. market.

For the rest of the world:

a. the gain in producer surplus equals the gain in consumer surplus.

b. producer surplus increases while consumer surplus is unchanged.

c. the gain in consumer surplus is greater than the gain in producer surplus.

d. there are no changes in consumer or producer surplus after trade.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

74. Which of the following is true of international trade?

a. Free international trade benefits foreign producers at the cost of domestic industry.

b. The net gain to a country from free international trade is positive.

c. The proportion of international trade in the world is on the decline.

d. Free trade is a zero-sum game; one nation gains at another’s expense.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

75. The Candlemakers' petition was a satire of protectionism written and published in 1845. In the petition, candlemakers advocated that all businesses should shut their blinds and curtains and block all sunlight from entering their buildings. Although satirical, which of the following would be expected to take place if this policy were implemented?

a. The net effect on employment would be negative since the demand for candles would decrease the number of jobs associated with the candlemaking industry.

b. Since consumers would have to spend a larger proportion of their income on candles than before, the net effect of this policy would be to reduce spending on other domestic goods.

c. Domestic citizens would be better off because it would increase consumer surplus.

d. Although sunlight is a free alternative to candlelight during the daytime, a policy to block sunlight would productively allocate resources to domestic industries.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

76. In 2002, the U.S. imposed higher tariffs on steel imports to save American jobs. How did these tariffs reduce U.S exports?

a. The dollars that foreigners could have earned on U.S. imports decreased, thus reducing U.S. exports.

b. The tariffs led to lower imports of steel, a depreciation of the dollar, and consequently lower U.S. exports.

c. The country’s trading partners have always imposed high tariffs on their own imports.

d. The tariffs increased domestic inflation leading to a depreciation of the dollar and consequently, lower U.S. exports.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

77. In 2002, the U.S. imposed higher tariffs on steel imports to save American jobs. However, the

30 percent increase in tariffs on steel imports imposed a net job loss on the U.S. in part because:

a. the substitution effect of the tax led consumers to buy more of other domestic goods.

b. the tariff led to the depreciation of the dollar and an increase in exports.

c. consumers spent less on other goods as a result of higher steel prices.

d. the tariff was not high enough to sustain employment in the American steel industry.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

78. In which of the following cases is it likely that the entire U.S. domestic demand for corn is met through imports?

a. The price of corn in the rest of the world is equal to the domestic price of corn in the U.S.

b. The uniform world price of corn is less than the minimum price at which the U.S. producers are willing to supply.

c. The price of corn in the rest of the world exceeds the domestic U.S. price of corn.

d. The uniform world price of corn exceeds the cost of U.S. production of corn.

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

79. The following figure shows the domestic U.S. market for bananas and the global market for bananas. The domestic supply curve is given by SUPPLY_US. With free trade, the equilibrium output in the U.S. market is Q. The import quota imposed by the government is equal to 0A.

Which of the following should necessarily be true?

a. FG = BC

b. 0D = EH

c. EH = 0C + CQ

d. BC = EF

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

80. The following figure shows the domestic U.S. market for bananas and the global market for bananas. The domestic supply curve is given by SUPPLY_US. With free trade, the equilibrium output in the U.S. market is Q. The import quota imposed by the government is equal to 0A.

Which of the following should necessarily be true in the absence of a quota?

a. EH = 0C + CQ

b. EH = 0Q

c. 0Q = 0Q'

d. 0A + BC = FG

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

81. The following figure shows the domestic U.S. market for bananas and the global market for bananas. The domestic supply curve is given by SUPPLY_US. With free trade, the equilibrium output in the U.S. market is Q. The import quota imposed by the government is equal to 0A.

The price of bananas in the global market prior to the imposition of an import quota is _____.

a. P₃

b. P₁

c. P₄

d. P₂

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

82. The following figure shows the domestic U.S. market for bananas and the global market for bananas. The domestic supply curve is given by SUPPLY_US. With free trade, the equilibrium output in the U.S. market is Q. The import quota imposed by the government is equal to 0A.

After the import quota has been imposed, the equilibrium price in the domestic market changes to _____.

a. P₁

b. P₂

c. P₃

d. P₄

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

83. The following figure shows the domestic U.S. market for bananas and the global market for bananas. The domestic supply curve is given by SUPPLY_US. With free trade, the equilibrium output in the U.S. market is Q. The import quota imposed by the government is equal to 0A.

Given that trade in bananas is free from any restrictions, which of the following would be true if P₅ was lesser than P₃?

a. The domestic demand for bananas would be fully satisfied through imports.

b. The U.S. would not import bananas; domestic demand would be satisfied by domestic production.

c. Domestic producers would be worse off and foreign producers would be better off.

d. Domestic consumers would lose surplus as they would have to pay a higher domestic price.

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

84. The following figure shows the domestic U.S. market for bananas and the global market for bananas. The domestic supply curve is given by SUPPLY_US. With free trade, the equilibrium output in the U.S. market is Q. The import quota imposed by the government is equal to 0A.

Which of the following correctly identifies the effect of an import quota on a good?

a. Domestic producers do not gain from an import quota.

b. The gain to domestic producers is higher than the loss to domestic consumers.

c. Prices in the global market will fall due to the imposition of an import quota.

d. Domestic consumers bear the burden of an import quota in terms of higher domestic prices.

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

85. Given that quotas benefit producers, who are few in number, at a greater expense to consumers, who are more in number, which of the following correctly explains why quotas are still in effect?

a. Domestic consumers are better organized than domestic producers.

b. Quotas reduce prices in domestic markets.

c. The benefits of quotas are concentrated and visible while the costs are dispersed.

d. When a quota is imposed by the importing country, it lowers prices in the global market.

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

86. Which of the following is true of a quota in a competitive market?

a. A quota increases total surplus as the quantity produced and consumed in the domestic market increases.

b. A quota is a trade policy used to promote greater efficiency in production within world markets.

c. A quota reduces the welfare of domestic consumers more than it increases the welfare of producers.

d. A quota is imposed in a competitive market to increase total world output of goods and services.

Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.

Question Type: True/False

87. Free international trade benefits foreign producers at the cost of domestic industry.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

88. The net gain to a country from free international trade is positive.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

89. The proportion of international trade in the world is on the decline.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

90. Free trade is a zero-sum game; one nation gains at another’s expense.

Learning Objective: Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.

91. Consumer surplus is gains to a consumer or group of consumers from purchasing a good arising from its cost being below the maximum that consumers are willing to pay.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

92. Producers of goods often secure gains, called consumer surplus, from the sale of output to consumers.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

93. Economic profits are zero at every point on a long-run supply curve.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

94. Producer surplus is the same as economic profit.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

95. Total surplus is the sum of producer surplus, consumer surplus, and excise tax benefits.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

96. To say that the output level is efficient is the same thing as saying that the net gain, or total surplus, from producing the good is as large as possible.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

97. Deadweight loss is also known as welfare cost.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

98. Most government studies indicate that the gasoline industry is close to perfectly competitive.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

99. The important economic effects of an ad valorem tax and a per-unit tax are the same.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

100. When we compare the elasticities of two curves at the same price–quantity combination, the steeper curve is the more elastic curve.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

101. For a given demand curve and tax per unit, the more inelastic the supply curve, the smaller is the tax burden on consumers (price rises by less), the larger is the tax burden on producers (meaning the relevant input suppliers), and the smaller is the output reduction.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

102. If the demand curve is vertical, the price to consumers rises by the amount of the tax, regardless of the elasticity of the supply curve.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

103. The proportion of any excise tax borne by consumers is always greater than the proportion borne by producers.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

104. Deadweight loss is sometimes referred to as a tax burden when it is produced by a tax.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

105. All taxes produce deadweight losses.

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

106. Open markets are those in which competition is so perfect that the market price is independent of the number of firms currently serving a market, because the mere possibility of entry suffices to discipline the actions of incumbent suppliers.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

107. Since airline deregulation, airports in the US have more than doubled in size due to the fact that nearly twice as many passengers are using them.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

108. Airport congestion is almost entirely the result of deregulation.

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

109. Taxicab licenses look like and are often called metals.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

110. Cities rarely limit the number of taxicabs.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

111. Foreign trade accounts for less than five percent of US gross national product (GDP).

Learning Objective:

Question Type: Essay

112. Suppose the following supply and demand curves govern the market for lungs: Q_S = 4,000 + P and Q_D = 10,000 –2P.

a) Assume that individuals are allowed to sell their lungs. Graph the supply and demand curves and calculate the equilibrium price and quantity. Identify graphically and calculate total surplus.

b) What is the numerical change in consumer surplus in going from a situation in which the sale of lungs is permitted to one in which it is prohibited? Is there a gain or loss in consumer surplus?

c) What is the numerical change in producer surplus in going from a situation in which the sale of lungs is permitted to one in which it is prohibited? Is there a gain or loss in producer surplus?

d) What is the numerical deadweight loss created by prohibiting the sale of lungs?

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

113. Suppose the demand and supply for apples is given by the following supply and demand curves: Q_S = (1/3)P – (4/3) and Q_D = 12 – P.

a) Graph and calculate the equilibrium price [P*] and quantity [Q*].

b) Show that the effect of a per-unit tax of $1 levied on suppliers is the same as when levied on buyers.

c) What percent of the $1 per-unit tax is borne by sellers? What percent is borne by buyers?

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

115. Suppose the demand for some good can be estimated using the equation Q_D = a – bP, and the supply can be estimated using the equation Q_S = c + dP, where a is the intercept and b is the slope of the demand curve, and c is the intercept and d is the slope of the supply curve. P is the equilibrium price in the market.

(a) If a per-unit excise tax of size T were imposed on each unit of this good sold in the market, show that the percentage of the tax born by the consumer is, and the percentage of the tax born by the supplier is.

[Hint: The tax (T) is equal to the price the consumer pays (i.e., P_d. minus the price received by the supplier (P_S). Therefore, T = P_D – P_S. Rearrange and substitute into one of the equations above.]

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

116. Is the outcome of a competitive market efficient? Explain with the help of a graph.

Learning Objective: Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.

117. A government study concludes that excessive alcohol consumption is due to the low price of alcohol in the market. In order to reduce the consumption of alcohol, the government wishes to set a price floor above the equilibrium price of alcohol. Explain whether this policy would have its intended effect. What is the net loss or gain from the price floor?

Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.

117. What would be the welfare effect of a per-unit tax in the following markets?

a) The market for cigarettes

b) The market for cashmere scarves

Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.

95. Given that sale of crack cocaine for a positive price is completely banned in certain parts of the world, why is it that there is a thriving black market for this illegal drug? Explain with the help of demand and supply curves.

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.

118. The city planning authority in a city decides that street food vendors should be issued licenses in the interests of reducing inconvenience to pedestrians on the streets. They decide to issue a fixed number of transferable permits, say Q. Over time, how would this licensing system affect the price and quantity of street food?

Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis affect fares and the profits earned by licensed taxi owners.