Test 2 example #18996

Policymakers use taxes to raise revenue for public purposes and to influence market outcomes.

Price controls are usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers.

A price ceiling set above the equilibrium price is not binding.

A price is a legal minimum on the price at which a good or service can be sold.

To be binding, a price floor must be set above the equilibrium price.

A tax on sellers and an increase in input prices affect the supply curve in the same way.

A tax on buyers shifts the demand curve and the supply curve.

Who bears the majority of a tax burden depends on the relative elasticity of supply and demand.

Welfare economics is the study of the welfare system.

Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay for it.

Consumer surplus can be measured as the area between the demand curve and the equilibrium price.

Suppose there is an increase in supply that reduces market price. Consumer surplus increases because (1) consumer surplus received by existing buyers increases and (2) new buyers enter the market.

Each seller of a product is willing to sell as long as the price he or she can receive is greater than the opportunity cost of producing the product.

Producer surplus is the cost of production minus the amount a seller is paid.

When demand increases so that market price increases, producer surplus increases because (1) producer surplus received by existing sellers increases, and (2) new sellers enter the market.

Total surplus in a market can be measured as the area below the supply curve plus the area above the demand curve, up to the point of equilibrium.

When a transaction between a buyer and seller directly affects a third party, the effect is called externality.

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Some goods can be classified as either public goods or private goods depending on the circumstances.

A good that is rival in consumption is one that someone can be prevented from using if she did not pay for it.

A free-rider is someone who receives the benefit of a good but avoids paying for it.

One person's use of common resources does not reduce the enjoyment other people receive from the resource.

A price ceiling is a. often imposed on markets in which "cutthroat competition" would prevail without a price ceiling. b. a legal maximum on the price at which a good can be sold. c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. d. All of the above are correct.

A price ceiling will be binding only if it is set a. equal to the equilibrium price. b. above the equilibrium price. c. below the equilibrium price. d. either above or below the equilibrium price.

The imposition of a binding price ceiling on a market causes quantity demanded to be a. greater than quantity supplied. b. less than quantity supplied. c. equal to quantity supplied. d. Both (a) and (b) are possible.

If a price floor is not binding, then a. the equilibrium price is above the price floor. b. the equilibrium price is below the price floor. c. it has no legal enforcement mechanism. d. More than one of the above is correct.

A price floor will be binding only if it is set a. equal to the equilibrium price. b. above the equilibrium price. c. below the equilibrium price. d. either above or below the equilibrium price.

The minimum wage is an example of a. a price ceiling. b. a price floor. c. a wage subsidy. d. a tax.

If a tax is levied on the sellers of a product, then the demand curve a. will shift down. b. will shift up. c. will become flatter. d. will not shift.

Which of the following statements is correct concerning the burden of a tax? a. Buyers bear the entire burden of the tax. b. Sellers bear the entire burden of the tax. c. Buyers and sellers share the burden of the tax. d. We have to know whether it is the buyers or the sellers that are required to pay the tax to the government in order to make this determination.

Welfare economics is the study of how a. the allocation of resources affects economic well-being. b. a price ceiling compares to a price floor. c. the government helps poor people. d. a consumer's optimal choice affects her demand curve.

Willingness to pay a. measures the value that a buyer places on a good. b. is the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept. c. is the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept. d. is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

Consumer surplus is the a. amount of a good consumers get without paying anything. b. amount a consumer pays minus the amount the consumer is willing to pay. c. amount a consumer is willing to pay minus the amount the consumer actually pays. d. value of a good to a consumer.

If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to a. $4. b. $16. c. $20. d. $36.

Cost is a measure of the a. seller's willingness to sell. b. seller's producer surplus. c. producer shortage. d. seller's willingness to buy.

A supply curve can be used to measure producer surplus because it reflects a. the actions of sellers. b. quantity supplied. c. sellers' costs. d. the amount that will be purchased by consumers in the market.

Producer surplus equals a. Value to buyers - Amount paid by buyers. b. Amount received by sellers - Costs of sellers. c. Value to buyers - Costs of sellers. d. Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers.

At the equilibrium price of a good, the good will be purchased by those buyers who a. value the good more than price. b. value the good less than price. c. have the money to buy the good. d. consider the good a necessity.

The term market failure refers to a. a market that fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand. c. ruthless competition among firms. d. a firm that is forced out of business because of losses.

An externality exists whenever a. the economy cannot benefit from government intervention. b. markets are not able to reach equilibrium. c. a firm sells its product in a foreign market. d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.

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.

When an externality is present, the market equilibrium is a. efficient, and the equilibrium maximizes the total benefit to society as a whole. b. efficient, but the equilibrium does not maximize the total benefit to society as a whole. c. inefficient, but the equilibrium maximizes the total benefit to society as a whole. d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Which of the following policies is the government most inclined to use when faced with a positive externality? a. taxation b. permits c. subsidies d. usage fees

Private decisions about consumption of common resources and production of public goods usually lead to an a. efficient allocation of resources and external effects. b. efficient allocation of resources and no external effects. c. inefficient allocation of resources and external effects. d. inefficient allocation of resources and no external effects.

A good is excludable if a. one person's use of the good diminishes another person's enjoyment of it. b. the government can regulate its availability. c. it is not a normal good. d. people can be prevented from using it.

When a good is rival in consumption, a. one person's use of the good diminishes another person's ability to use it. b. people can be prevented from using the good. c. no more than one person can use the good at the same time. d. everyone will be excluded from obtaining the good.

The Tragedy of the Commons occurs because a. a common resource is rival in consumption. b. a common resource is underutilized. c. crimes are committed in public places. d. common resources are subject to exclusionary rules.