Part 2: Answer The Following Questions
1. True or False? An economic model can accurately explain how the economy is
organized because it is designed to include, to the extent possible, all features of the
real world.
a. True
b. False
2. Fill in the blanks (only one word is allowed for each blank. Misspelling is considered
wrong).
As both demand and supply curves shift to the right, there is a/an ________ in the
equilibrium quantity while the effect on ______ is ambiguous.
3. Fill in the blanks (only one word is allowed for each blank. Misspelling is considered
wrong).
Points lying inside the production possibilities frontier are _____ but ______.
4. Matching the following terminologies with their right definitions (note: one
terminology can be matched with more than one definitions where possible).
Terminologies:
i. Quantity supplied
ii. Invisible hand
Definitions:
a. the claim that the quantity supplied of a good rises when the price of the good rises,
other things equal
b. the amount that sellers are willing and able to sell.
c. refers to how the decisions of self-interested households and firms lead to desirable
market outcomes.
d. refers to the government.
Part 3: Short-answer Question
Suppose that the government needs to raise tax revenue. A politician suggests that the
government place a tax on food because everyone must eat and, thus, a food tax would
surely raise a great deal of tax revenue. However, since the poor spend a large
Dr. Nguyen Anh Phuong
proportion of their income on food, the tax should be collected only from the sellers of
food (grocery stores) and not from the buyers of food. The politician argues that this
type of tax would place the burden of the tax on corporate grocery store chains and not
on poor consumers.
Can the government legislate that the burden of a food tax will fall only on the sellers
of food? Why or why not? Explain
Part 4: Exercise
Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.
a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented
room. After the tax is imposed, the going rate for hotel rooms rises to $108, and
the number of rooms rented falls to 900. Calculate the amount of revenue this
tax raises for Smalltown and the deadweight loss of the tax.
b. What is the amount of tax revenue that is collected from seller? What is the
amount of tax revenue that is collected from buyer?
END
Dr. Nguyen Anh Phuong
