test2_answer_key

test2_answer_key - 1(p 156 Energy prices increased sharply...

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1. (p. 156) Energy prices increased sharply in late 2004 but consumers in some countries were unaffected. The governments of Thailand and Indonesia, for example, spent several billion dollars to subsidize the price of fuel to keep it from rising. From the point of view of consumer and producer surplus, what is the problem with a fuel subsidy? a. It hurts the poor and benefits the rich. b. It leads to less fuel being used than the amount which maximizes consumer surplus. C . It encourages the consumption of too much fuel at the expense of other goods. d. It has no effect; consumers gain consumer surplus, but taxpayers lose the same amount because they must finance the subsidy. Feedback: A subsidy is the opposite of a tax. A tax leads to a deadweight loss because too little of the good or services is consumed. A subsidy leads to a deadweight loss because too much of the good or service is consumed. 2. (p. 161) Suppose the equilibrium price of CDs is $10 a CD. At that price, quantity of CDs demanded and supplied is 100,000. If a $6 tax per CD paid by suppliers increases equilibrium price to $14 per CD and reduces equilibrium quantity sold to 90,000: a. suppliers pay a greater portion of the tax because they are more price elastic. B . consumers pay a greater portion of the tax because they are less price elastic. c. suppliers pay a greater portion of the tax because the tax is levied on them. d. suppliers pay a greater portion of the tax because they are less price elastic. Feedback: Suppliers receive a price (net of the tax) of $8 while consumers pay $14. Thus, elasticity of demand is approximately .3 while elasticity of supply is approximately .5. The party who is more price inelastic bears the larger burden of the tax. 3. (p. 161) Those with more inelastic demands will bear a larger burden of a tax because they: a. have more buying power. b. have more income. c. will switch to other products with a tax. D . have fewer substitutes for that good. Feedback: Those with inelastic demands have fewer substitutes. Thus, they will accept more of the burden of a tax.
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4. (p. 165) Refer to the graph above. Which statement best characterizes the difference between the effect of a price ceiling in the short run and the long run? a. A price ceiling of P 0 will create a shortage of (Q 4 -Q 0 ) in the short run and the long run. b. A price ceiling of P 2 will create a shortage of (Q 3 -Q 0 ) in the short run and a smaller shortage of (Q 3 -Q 1 ) in the long run. C . A price ceiling of P 2 will create a shortage of (Q 3 -Q 1 ) in the short run but a greater shortage of (Q 3 -Q 0 ) in the long run. d. A price ceiling of P 0 will create a shortage of (Q 3 -Q 0 ) in the short run and the long run. Feedback: In the long run, supply becomes more elastic (shown here rotating from S
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This note was uploaded on 10/12/2008 for the course ECON 2030 taught by Professor Bong during the Spring '07 term at LSU.

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test2_answer_key - 1(p 156 Energy prices increased sharply...

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