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Unformatted text preview: 73-100/Kesten-Deuss
SAMPLE QUESTIONS for MIDTERM 2
Midterm 2 covers Chapters 5 (Elasticity), Chapter 6 (Government Policies), Chapter 7 (Market
Efficiency), Chapter 8 (Costs of Taxation), and Chapter 9 (International Trade). You are only
responsible for the portions of these chapters that include material covered in class. The
following questions are meant to help you prepare for the exam. Some of the midterm questions
will be similar to the following. Needless to say, you are also responsible for the material
covered in lectures, recitations and in the homework assignments, which may or may not have
been covered in the following sample questions. So make sure you also review the problems
covered in class, recitations and homework assignments. Keep in mind that in the test there will
be fewer questions than below since you will have only 50 minutes.
A. Sample Explanation Questions
a. Consider the illegal market for drugs. Which side of this market should government try to
control in order to reduce drug use as well as drug-related crime? Explain and illustrate on
b. What are the determinants of price elasticity of demand? Explain with examples.
c. What kind of perceptions are the price control schemes generally based on?
d. Explain the following quote: “The surest way to destroy a city, short of dropping a nuclear
bomb on it, is to pass a rent control law.”
e. Does a tax affect only the side on which it is levied?
f. Why are markets efficient?
g. Compare economies based on free markets with command economies (i.e., centrally
h. Explain the following quote from Adam Smith: “…Every individual intends his own gain,
and he is in this, as in many other cases, led by an invisible hand to promote an end which
was no part of his intention.”
i. Which office allocation scheme used at ASU is the most efficient? What is the flaw of this
scheme? How would you fix it?
j. How is the deadweight of loss of a tax related to elasticity of demand/supply?
k. Explain and illustrate the welfare consequences of trade for an exporting/importing
l. Explain and illustrate the welfare consequences of a tariff for an importing country. 1 B. Sample Questions/Problems
1. Are the following statements true or false? Justify your answers.
a. A tax on food consumption reduces consumer and producer surplus. Hence, the
deadweight loss of the tax is equal to the loss in total surplus.
b. Large grocery stores have displaced mom-and-pop shops. The resulting equilibrium is not
efficient, because consumers might be willing to pay more for their groceries in order to keep
the mom-and-pop shops alive.
2. Suppose it is decided that rent control in New York City will be abolished and that market
rents will now prevail. Assume that all rental units are identical.
a. What will be the effect on the equilibrium quantity and price of rental units?
b. Is each of the following groups better or worse off as a result of eliminating rent control:
Society as a whole (Hint: use the concepts of consumer, producer and total surplus to answer this question.)
3. California currently imposes a tax of $0.18 per gallon of gasoline. Gasoline sales in California
total 5.6 billion gallons. The supply of gasoline is more elastic than the demand.
a. If California doubled the tax, would tax revenue double?
b. Who is more affected by the tax – consumers or producers? Draw a graph to illustrate
your answer, and provide the intuition for your answer.
4. President Chavez versus the Market. You can find this news article on pages 122&123 of the
textbook. Based on the article, answer the following questions:
a. What kind of price control (price floor / price ceiling) seems to have been implemented for
b. Describe the situation in the market for powdered milk before and after the price control.
c. Show consumer and producer surplus in the powdered milk market before and after the
price control. Based on this graph, is the price control efficient? 2 5. A current concern of the federal government is unemployment. Another is securing decent
wages for low-income workers. To accomplish the latter, many advocate the need to increase the
federal minimum wage (for the purpose of this question, assume all states have the same
minimum wage – equal to the federal minimum wage). Would raising the minimum wage
address the unemployment problem? Use a graph to illustrate your answer.
6. The city of Pittsburgh establishes a tax of $2 on every drink that is sold in restaurants. Assume
that the supply and demand of drinks in restaurants are normal. The demand of drinks is more
elastic than the supply. Prior to establishing the tax, 3,000 drinks per month were bought and
sold, at a price of $10 each.
a. The city estimates that this tax will lead to a fiscal revenue of $6,000 per month ($2 for
each of the 3,000 drinks). Do you agree with this estimate? If not, do you think the
estimate is too high or too low?
b. Will the price of a drink change because of the tax? By how much?
c. Who will bear the largest share of this tax – customers, or restaurants?
d. The Association of Pittsburgh Restaurants claims that the tax hurts consumers and
restaurants. However, the city claims that the losses to consumers and restaurants are
offset by fiscal revenues (which the city intends to use for good purposes). How would
you respond to this argument?
7. Problems 10 and 11 of Chapter 7 of textbook (on pp. 156&157).
8. Problem 12 of Chapter 8 of textbook (on pp. 174&175).
9. Problem 12 of Chapter 9 of textbook (on pp. 198&199). 3 ...
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This note was uploaded on 09/08/2011 for the course ECON 73-100 taught by Professor Klepper during the Spring '10 term at Carnegie Mellon.
- Spring '10