PRINCIPLES OF ECONOMICS
PROBLEM SET 3
Due date:
1. A result of welfare economics is that the equilibrium price of a product is considered to be the
best price because it
a. maximizes total revenue for firms and maximizes the quantity supplied of the product.
b. maximizes the combined welfare of buyers and sellers.
c. minimizes costs and maximizes profits of sellers.
d. minimizes the level of welfare payments to those who no longer live below the poverty line.
2. Refer to Figure 7-11. At the equilibrium, total surplus is measured by the area
a. ACG.
b. AFG.
c. DBG.
d. CFG.
3. Refer to Figure 7-11. At the equilibrium, total surplus amounts to
a. $64.
b. $72.
c. $96.
d. $108.
4. Refer to Figure 7-11. The equilibrium allocation of resources is
a. efficient because total surplus is maximized at the equilibrium.
b. efficient because consumer surplus is maximized at the equilibrium.
c. inefficient because consumer surplus is larger than producer surplus at the equilibrium.
d. inefficient because total surplus is maximized when 10 units of output are produced and sold.
5. Suppose a tax of $5 per unit is imposed on a good. The supply curve and the demand curve are
straight lines. The tax decreases consumer surplus by $10,000 and it decreases producer surplus
by $15,000. The deadweight loss of the tax is $2,500. From this information it follows that the tax
decreased the equilibrium quantity of the good
a. from 6,500 to 5,500.
b. from 5,500 to 4,500.
c. from 5,000 to 3,000.
d. from 6,000 to 4,000.
6. When the government places a tax on a product,
a. the cost of the tax to buyers and sellers is less than the revenue raised from the tax by the government.
b. the cost of the tax to buyers and sellers is equal to the revenue raised from the tax by the government.
c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.
d. Without additional information, such as the elasticity of demand for this product, it is impossible to
compare the cost of a tax to buyers and sellers with tax revenue.
7. Taxes cause deadweight losses because they
a. lead to losses in surplus for consumers and for producers that, when taken together, exceed tax
revenue collected by the government.
b. distort incentives to both buyers and sellers.
c. prevent buyers and sellers from realizing some of the gains from trade.
d. All of the above are correct.
Figure 8-4
8. Refer to Figure 8-4. The tax is levied on
a. buyers only.
b. sellers only.
c. both buyers and sellers.
d. This is impossible to determine from the figure.
9. Refer to Figure 8-4. Consumer surplus before the tax was levied is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
10. Refer to Figure 8-4. Producer surplus before the tax was levied is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
11. Refer to Figure 8-4. After the tax is levied, consumer surplus is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
12. Refer to Figure 8-4. After the tax is levied, producer surplus is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
13. Refer to Figure 8-4. The tax causes a reduction in consumer surplus that is represented by area
a. A.
b. B + C.
c. D + E.
d. F.
14. Refer to Figure 8-4. The tax causes a reduction in producer surplus that is represented by area
a. A.
b. B + C.
c. D + E.
d. F.
15. Refer to Figure 8-4. The benefit to the government is
a. measured by tax revenue and is represented by area A + B.
b. measured by tax revenue and is represented by area B + D.
c. measured by the net gain in total surplus and is represented by area B + D.
d. measured by the net gain in total surplus and is represented by area D + E.
16. Refer to Figure 8-4. The total surplus (consumer, producer, and government) with the tax is
represented by area
a. C + E.
b. A + B + C.
c. D + E + F.
d. A + B + D + F.
17. Refer to Figure 8-4. The loss in total welfare that results from the tax is represented by area
a. A + B + D + F.
b. A + B + C.
c. D + E + F.
d. C + E.
18. Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax
is smaller, the
a. less elastic is the demand for the good.
b. less elastic is the supply of the good.
c. smaller is the amount of the tax.
d. All of the above are correct.
