Q: A government supports the price of wheat by purchasing the surplus at a price above equilibrium. What is the total cost to the government if the support price is $$P_s$$, the equilibrium price is $$P_e$$, and the government buys $$Q_s - Q_e$$ units?

$$\text{Cost} = (Q_s - Q_e)P_s$$

Question 1

Suppose the government imposes a price ceiling below the market-clearing price for natural gas. Which of the following best describes the resulting effects on consumer surplus, producer surplus, and deadweight loss?

Accepted Answer

Consumer surplus increases (for some consumers), producer surplus decreases, and there is a deadweight loss equal to the sum of lost surplus from both consumers and producers.

Question 2

A competitive market is said to be economically efficient when:

Accepted Answer

Aggregate consumer and producer surplus is maximized.

Question 3

If the government sets a minimum price (price floor) above the equilibrium price and producers supply more than consumers demand, what happens to the unsold surplus and producer surplus?

Accepted Answer

The unsold surplus remains in the market, and the change in producer surplus is $$\Delta PS = A - C - D.$$

Question 4

Consider the market for human kidneys, where the supply curve is $$Q^S = 16,000 + 0.4P$$ and the demand curve is $$Q^D = 32,000 - 0.4P. $$What is the market-clearing price?

Accepted Answer

$$P = 20,000$$

Question 5

A government supports the price of wheat by purchasing the surplus at a price above equilibrium. What is the total cost to the government if the support price is $$P_s$$, the equilibrium price is $$P_e$$, and the government buys $$Q_s - Q_e$$ units?

Accepted Answer

$$	ext{Cost} = (Q_s - Q_e)P_s$$

Question 6

Which of the following best explains the deadweight loss from a binding minimum wage set above the equilibrium wage?

Accepted Answer

It is the sum of the lost consumer surplus and producer surplus due to unemployment, represented by triangles B and C.

Question 7

Suppose the government imposes a specific tax of $$t$$ per unit on a good. If the demand is perfectly inelastic, who bears the entire burden of the tax?

Accepted Answer

Consumers bear the entire burden.

Question 8

If the government imposes an import quota that restricts imports below the free-market level, what is the effect on domestic price and welfare?

Accepted Answer

Domestic price rises, consumer surplus falls, and there is a deadweight loss.

Question 9

In the context of airline regulation, what was one major effect of deregulation in the 1980s?

Accepted Answer

Airline prices fell, benefiting consumers, but profits did not increase much.

Question 10

A city limits the number of taxi medallions, causing the supply curve to become vertical. If demand increases, what happens to the price of medallions?

Accepted Answer

The price of medallions rises.

Question 11

If a subsidy is provided to buyers in a market, what is the effect on the price paid by buyers and the price received by sellers?

Accepted Answer

The price paid by buyers decreases, and the price received by sellers increases.

Question 12

Which of the following is an example of market failure in a competitive market?

Accepted Answer

Externalities cause prices to not reflect all costs or benefits.

Question 13

Suppose the supply and demand for wheat in 1981 are given by $$Q^S = 1800 + 240P$$ and $$Q^D = 3550 - 266P. $$What is the equilibrium price?

Accepted Answer

$$P = 3.46$$

Question 14

If the government uses a quota to restrict supply to $$Q_1 in $$order to maintain a price $$P_s$$ above equilibrium, what is the minimum cost to the government to incentivize producers to reduce output?

Accepted Answer

$$B + C + D$$

Question 15

When a tariff is imposed on an imported good, what happens to the area representing government revenue in the supply and demand diagram?

Accepted Answer

It is represented by rectangle D.

Question 16

If the demand for a good is more elastic than supply, who bears a greater share of a specific tax imposed on the good?

Accepted Answer

Producers bear a greater share.

Question 17

Which of the following best describes the effect of a binding price ceiling on a market with inelastic demand?

Accepted Answer

Consumers may suffer a net loss if the deadweight loss exceeds the gain from lower prices.

Question 18

In the case of a government-imposed price support, what is the net effect on total welfare (consumer surplus + producer surplus - government cost)?

Accepted Answer

Total welfare decreases by the deadweight loss area.

Question 19

If the government eliminates a quota and allows free imports, what happens to the domestic price and quantity consumed?

Accepted Answer

Domestic price falls and quantity consumed rises.

Question 20

Suppose the government imposes a specific tax of $$t$$ per unit. The price paid by buyers increases by $$\Delta P_b$$ and the price received by sellers decreases by $$\Delta P_s. $$Which formula correctly relates the tax to these price changes?

Accepted Answer

$$t = \Delta P_b + \Delta P_s$$

Chapter 9: The Analysis of Competitive Markets – Microeconomics Study Notes

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