ECON 1210 Economics and Society

Exercise 2
Deadline: No Need to Submit

Section A: Multiple Choices Questions

1. Refer to the diagram on the right. The Price

price ceiling causes a 6

A. surplus of 40 units. 5 Supply

B. surplus of 85 units. 4
C. shortage of 45 units.
D. shortage of 85 units. 3

2 Price ceiling

1 Demand

60 120 180 Quantity

80 165

2. If a binding price ceiling is imposed on the baby formula market, then

A. the quantity of baby formula demanded will increase.

B. the quantity of baby formula supplied will decrease.
C. a shortage of baby formula will develop.
D. All of the above are correct.

3. Under rent control, landlords cease to be responsive to tenants' concerns about the quality of
the housing because

A. with rent control, the government guarantees landlords a minimum level of profit.
B. they become resigned to the fact that many of their apartments are going to be vacant at any
given time.
C. with shortages and waiting lists, they have no incentive to maintain and improve their property.
D. with rent control, it becomes the government's responsibility to maintain rental housing.

4. 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.

5. A binding minimum wage

A. alters both the quantity demanded and quantity supplied of labor.

B. affects only the quantity of labor demanded; it does not affect the quantity of labor supplied.
C. has no effect on the quantity of labor demanded or the quantity of labor supplied.
D. causes only temporary unemployment because the market will adjust and eliminate any
temporary surplus of workers.

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Refer to the following diagram for Question 6.

12 Price

10 Supply

2 Demand

60 120 180 Quantity

70 160

6. Suppose the market is initially in equilibrium. Then the government imposes a price control, as
represented by the horizontal line on the graph. If the price control is a price floor, then the
price control

A. causes the quantity demanded to decrease by 50 units, relative to the initial equilibrium.
B. causes the quantity supplied to increase by 40 units, relative to the initial equilibrium.
C. results in some firms being more successful than others in selling their goods.
D. All of the above are correct.

7. Refer to the diagram on the right. The price

vertical distance between points A and B

represents the tax in the market. The
effective price that sellers receive after the S
tax is imposed is 24
A

A. $6. 16
B. $10.
C. $16. 10
B
D. $24.

70 100 quantity

8. A tax on the buyers of sofas

A. increases the size of the sofa market.

B. decreases the size of the sofa market.
C. has no effect on the size of the sofa market.
D. may increase, decrease, or have no effect on the size of the sofa market.

9. Suppose the government imposes a 20-cent tax on the sellers of iced tea. Which of the
following is not correct? The tax would

A. shift the supply curve upward by 20 cents.

B. raise the equilibrium price by 20 cents.
C. reduce the equilibrium quantity.
D. discourage market activity.

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Refer to the following diagram for Question 10.

market (a) market (b)

price price
S S

D D

quantity quantity

market (c)
price
S

quantity

10. In which market will the majority of the tax burden fall on buyers?

A. market (a)
B. market (b)
C. market (c)
D. All of the above are correct.

11. Which of the following represents a way that a government can help the private market to
internalize an externality?

A. taxing goods that have negative externalities

B. subsidizing goods that have positive externalities
C. The government cannot improve upon the outcomes of private markets.
D. Both a and b are correct.

12. A paper plant produces water pollution during the production process. If the government forces
the plant to internalize the negative externality, then the

A. supply curve for paper would shift to the right.

B. supply curve for paper would shift to the left.
C. demand curve for paper would shift to the right.
D. demand curve for paper would shift to the left.

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13. Refer to the diagram on the right. This
graph represents the tobacco industry.
The industry creates

A. positive externalities.
B. negative externalities.
C. no externalities.
D. no equilibrium in the market

14. Refer to the diagram on the right.

This graph represents the tobacco
industry. The socially optimal price and
quantity are

A. $1.90 and 38 units, respectively.

B. $1.80 and 35 units, respectively.
C. $1.60 and 42 units, respectively.
D. $1.35 and 58 units, respectively.

15. Which of the following is true of markets characterized by positive externalities?

A. Social value exceeds private value, and market quantity exceeds the socially optimal quantity.
B. Social value is less than private value, and market quantity exceeds the socially optimal
quantity.
C. Social value exceeds private value, and market quantity is less than the socially optimal
quantity.
D. Social value seldom exceeds private value; therefore, social quantity is less than private
quantity.

Section B: Analytical Questions

Question 1

In the labor market, workers would like to receive higher wages and firms would like to pay lower
wages.

(a) Suppose that workers succeed in having a minimum wage established above the equilibrium
wage. What will happen to the producer surplus of workers when compared with the original
equilibrium? What will happen to the number of workers employed when compared with the
original equilibrium? Illustrate the impact with a supply-and-demand diagram.

(b) Suppose that firms succeed in having a maximum wage established below the equilibrium
wage. What will happen to the consumer surplus of firms when compared with the original
equilibrium? What will happen to the number of workers employed when compared with the
original equilibrium? Illustrate the impact with a supply-and-demand diagram.

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Question 2

The figure above illustrates the market for antifreeze. Suppose the government decides to
implement an $8 sales tax on the sellers for every gallon of antifreeze sold.

a) Illustrate the effect of tax with a supply-and-demand diagram.

b) What is the equilibrium price of a gallon of antifreeze before the tax? What is the price paid by
buyers after the tax?

c) What is the equilibrium quantity of antifreeze before the tax? What is the equilibrium quantity
after the tax?

d) How much of the $8 per gallon tax is paid by buyers? How much is paid by sellers? Which is
more elastic, the supply or demand?

e) What is the government’s total tax revenue?

f) On your graph, shade the area corresponding to the deadweight loss.

Question 3

Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on
people who do not drink and drive.

(a) Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply
curve, the social-cost curve, the market equilibrium level of output, and the efficient level of
output.

(b) On your graph, shade the area corresponding to the deadweight loss of the market equilibrium.
How can the government improve the situation?

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