BE SURE TO WRITE YOUR NAME ON YOUR ANSWER SHEET!!
IMPORTANT: MAKE ALL ERASURES COMPLETELY - IT IS YOUR
RESPONSIBILITY TO CLEARLY INDICATE YOUR CHOSEN
ANSWER. RESPONSES THAT ARE NOT COMPLETELY ERASED
WILL BE COUNTED AS INCORRECT. THIS EXAM IS WORTH 100
POINTS.
Temple College
Government 2301/2302
Spring, 2000
Exam #2
MULTIPLE CHOICE. INSTRUCTIONS: Answer each of the following
multiple-choice questions by marking the letter on your scan-tron form that
corresponds to the BEST response. 55 questions/1.82 points each/100 points
total.
1. An arrangement of exchange between people who want to buy a particular good or
service and people who are willing to sell it is called a(n)
a. business.
b. market.
c. enterprise.
d. economy.
2. Efficiency is
a. the only legitimate standard for judging whether government policies are good or
bad.
b. one of several standards that may be used to judge government policies.
c. more difficult to measure than fairness.
d. essentially the same thing as equity.
3. When a person seeks to maximize the value of some objective, we say he or she is
acting
a. selfishly.
b. irresponsibly.
c. irrationally
d. rationally.
4. The total number of units of a good that are provided to the market by sellers at
various prices are represented graphically by
a. the area to the left and above the equilibrium price but within the supply curve.
b. the supply curve itself.
c. the area to the left and below the equilibrium price but within the supply curve.
d. none of these.
5. The total number of units of a good that are purchased in the market by buyers at
various prices are represented graphically by
a. the area to the left and above the equilibrium price but within the demand curve.
b. the area to the left and below the equilibrium price but within the demand curve.
c. the demand curve itself.
d. none of these.
6. In a market for a good without interference from government, there is one price at
which the quantity demanded equals the quantity supplied. This price is called the
a. competitive equilibrium price.
b. subsidized price.
c. effective price.
d. hypothetical market price.
7. When the quantity demanded of a good is equal to the quantity supplied, we say an
unregulated market
a. has produced an inefficient outcome.
b. requires government intervention.
c. is in competitive equilibrium.
d. has failed.
8. The difference between the maximum price a consumer is willing to pay for a good
and the price he actually pays in the marketplace is called a
a. consumer’s MWTP.
b. consumer’s surplus.
c. consumer’s windfall.
d. none of these.
9. The difference between the minimum price a producer (or seller) is willing to pay for a
good and the price he actually receives in the marketplace is called a
a. producer’s (or seller’s) profit.
b. producer’s MWTS.
c. producer’s windfall.
d. none of these.
10. Some government policies are said to be inefficient because they reduce the profits
of consumers and producers. Such a reduction in profits is called
a. an inequitable outcome.
b. official extortion.
c. a welfare loss.
d. none of these.
11. The maximum amount that a consumer is willing to pay for a good (MWTP)
represents
a. the dollar value that the consumer places on the good.
b. after tax surplus.
c. the consumer’s perception of the best price she can negotiate for the good.
d. none of these.
12. Which of the
supply curves
indicated
Price
C
A
20
B
10
correctly
represents the
information
presented in the
table below.
a. Curve A
b. Curve B
c. Curve C
d. none of these
0
10
20
Quantity
Supply Table
Price Range
price < $10
$10 < price < $20
price > $20
Quantity Supplied
0
10
20
13. The minimum amount that a producer is willing to sell his product for (MWTS) is
equal to his
a. perception of the best price he can get in the open market.
b. costs of producing the good.
c. after tax profit.
d. none of these.
14. Competitive markets are those in which the profits of consumers and sellers depend
only on trades they make themselves. In such markets, competitive equilibrium is
efficient because
a. total profits (sum of consumers’ surpluses and sellers’ profits) are at least as large
as they would be with any other arrangement.
b. the government can arrange trades that will make all participants better off.
c. the government has a better sense of most people’s best interest than they do.
d. none of these.
15. Which of the following are among the fundamental questions that must be answered
by every country’s economy?
a. What goods and services will be produced?
b. How will these goods and services be produced?
c. For whom will these goods and services be produced?
d. All of these.
16. A laissez-faire economy is one in which
a. the government answers the fundamental questions outlined in the previous
question.
b. most of the major industries are owned and operated by the government.
c. government intervention in the economy is virtually non-existent.
d. both a and b.
17. Which of the following terms BEST describes the American economy?
a. socialist b. pure capitalism c. laissez-faire market system
d. mixed capitalism or market capitalism
Price
40
30
20
10
0
25
40 50
75
80 100
Quantity
18. Examine the above graph. Which of the following statements is correct?
1. There are two types of buyers – 50 with an MWTP of $40 and 50 with an MWTP
of $20.
2. There are two types of sellers – 40 with an MWTS of $15 and 40 with an MWTS
of $30.
3. The equilibrium price of this good is $30.
4. The equilibrium quantity of this good is $50.
5. Consumers’ surplus is $500 [($40-$30)*50]; producers’ profits are $600 [($30$15)*40]
a. 1, 3, and 5
b. 2, 4, and 5
c. 1, 3, and 4
d. 1, 2, 3, 4, and 5
19. In class discussions, we noted that the United States, Japan, and most of the
countries of western Europe have economies that we call __________ while Russia
and most of the countries of eastern Europe have economies that we call
__________.
a. market socialism; command socialism b. market capitalism; command capitalism
c. market capitalism; market socialism d. command capitalism; market socialism
20. Most of the countries of the Middle East, Africa, and Latin America have
__________ economies while Cuba, North Korea, and the former Soviet Union have
[had] ________ economies.
a. market socialism; command socialism b. market capitalism; command capitalism
c. market capitalism; market socialism d. command capitalism; command socialism
21. The model of pure capitalism [perfect competition] assumes
1. government will have to interfere in the market place to protect consumers.
2. consumers and suppliers act as price-takers - no single consumer or supplier has
enough market share to set the price for a good or service.
3. consumers and suppliers act as competitors - therefore, they must have complete
information about transactions.
4. government may allow some monopolies to exist, but they will be regulated.
5. income [wealth] should be redistributed as to reduce inequalities.
a. 1 and 2 b. 2 and 3 c. 2, 3, and 4 d. 1, 4, and 5
22. In which type of economy does government own most of the capital and natural
resources but permit individuals who operate firms to make choices about the use of
these resources?
a. market capitalism
b. command capitalism
c. market socialism
d. command socialism
23. In which type of economy are capital and natural resources generally privately
owned but the government has broad power to determine their uses?
a. market capitalism
b. command capitalism
c. market socialism
d. command socialism
24. Which of the following major industries in the United States are primarily owned and
operated by the government?
a. telecommunications
b. airlines
c. automobiles
d. none of these
25. Which of the following are basic tenets (assumptions) of capitalism?
1. People have the right to control, use, and dispose of property they own.
2. Freedom of enterprise and freedom of choice exist.
3. Rational self-interest is the driving force of the economy.
4. The role of government is limited.
5. Competition between buyers and sellers, among buyers, and among sellers
exists.
a. all of these
b. 1, 2, 3, and 4
c. 1, 2, and 3
d. 3, 4, and 5
26. Which of the following would serve as an example of a government economic
function which attempts to strengthen or facilitate the operation of the market system
[push the economy towards the model of pure capitalism]?
a. government providing a public good such as a highway
b. government regulating a polluting industry to correct a negative externality
c. government enforcing anti-trust legislation to prevent the formation of monopolies
d. none of these
27 . Suppose Congress rewrote the tax code to make the federal income tax more
progressive. Such an action would be an example of
a. government providing a suitable legal framework for the market system.
b. a government effort to modify or supplement the operation of the market system.
c. government regulation to correct a negative externality.
d. government regulation to correct a positive externality.
28. A tax with a special “per unit” rate placed on sales of a specific good or service is
called a(n)
a. head tax.
b. value-added tax
c. excise tax.
d. general sales tax.
29. A tax with a single rate applying to sales of a wide range of goods and services is
called a(n)
a. excise tax.
b. head tax.
c. value-added tax.
d. general sales tax
30. A tax imposed on the assessed value of commercial/industrial and residential
property is called a(n)
a. value-added tax.
b. property tax.
c. excise tax.
d. selective tax.
31. When the government imposes a tax on the sale of a good or service, inefficiency or
welfare losses occur as a result of transactions that are lost as participants avoid the
tax. This is known as
a. the economic incidence of the tax.
b. the statutory incidence of the tax.
c. the excess burden of the tax.
d. none of these.
32. A government payment to a producer to encourage production of a good or to a
consumer to encourage consumption is known as a(n)
a. payoff.
b. bribe.
c. inefficient policy.
d. subsidy.
33. When consumers are relatively sensitive to changes in the price of a good, demand
for that good is said to be relatively
a. price unstable.
b. flexible.
c. price elastic.
d. none of these.
34. When consumers are relatively insensitive to changes in the price of a good,
demand for that good is said to be relatively
a. price stable.
b. price inelastic.
c. rigid.
d. none of these.
35. The entity that has the legal responsibility (liability) to remit tax revenues to
government is said to bear the
a. bureaucratic burden of a tax.
b. administrative responsibility of a tax.
c. economic incidence of a tax.
d. statutory incidence of a tax.
36. The entity that is hurt economically by a tax is said to bear the
a. statutory incidence of the tax.
b. legal liability of the tax.
c. economic incidence of the tax.
d. full costs of the tax.
37. The phenomenon in which the economic burden of a tax is borne by an entity other
than the one on which the legal liability falls is called
a. tax shifting.
b. tax bouncing.
c. tax exporting.
d. tax evasion.
38. When the sale or purchase of a particular good or service is made illegal by
government, it is called a(n)
a. closed market.
b. black market.
c. illicit market.
d. prohibited market.
39. The gasoline tax is an example of a
a. an excise tax.
b. a progressive tax.
c. an ability-to-pay tax.
d. a type of income tax
40. Which of the following terms describes the legal responsibility for remitting tax
revenues to government?
a. statutory incidence
b. economic incidence
c. tax capitalization
d. excess burden
41. Which of the following statements is TRUE?
a. The economic incidence of most taxes in the United States are paid by
businesses.
b. The economic incidence of a tax imposed on a business will always be paid by
the business’ customers in the form of higher prices for the goods/services they
buy.
c. In the United States, the statutory incidence of taxes rarely falls on businesses.
d. None of the above statements are true.
42. In which of the following scenarios are consumers MOST likely to bear the biggest
share of the economic incidence of an excise tax?
a. when the statutory incidence of the tax is imposed on consumers
b. when demand for the good on which the tax is imposed is relatively price elastic
c. when demand for the good on which the tax is imposed is relatively price inelastic
d. when the sellers of the good have enough political power to get legislators to write
the tax law so that consumers will have to bear the economic burden of the tax
43. In which of the following scenarios are sellers MOST likely to bear the biggest share
of the economic incidence of an excise tax?
a. when the statutory incidence of the tax is imposed on sellers
b. when demand for the good on which the tax is imposed is relatively price elastic
c. when demand for the good on which the tax is imposed is relatively price inelastic
d. when the consumers of the good have enough political power to get legislators to
write the tax law so that sellers will have to bear the economic burden of the tax
44. Refer to the figure on the following page in which S is the before-tax supply curve
and Stax is the supply curve after the imposition of an excise tax. Which of the
following statements is accurate based on the graph?
1. the statutory incidence of the tax is placed on the consumers (demanders).
2. the statutory incidence of the tax is placed on the suppliers (sellers).
3. the economic incidence of the tax falls exclusively on the suppliers (sellers).
4. the economic incidence of the tax shared equally by the consumers and the
sellers.
5. A greater percentage of the economic incidence of the tax is being borne by the
consumer than by the seller.
a. 1 and 4 b. 2 and 3 c. 2 and 5 d. 1 and 5
45. Refer to the figure
to the right in
which S is the
before-tax supply
curve and Stax is
the supply curve
after the imposition
of an excise tax.
The total tax
revenue collected
from this tax will be
the area
a. PcPsEC.
b. PcPsEC + ECF.
c. CEF.
d. 0PcCQtax.
e. 0PeFQe.
Stax
Price
Pc
S
C
Pe
F
Ps
E
D
0
Qtax Qe
Quantity
46. Refer to the above figure in which S is the before-tax supply curve and Stax is the
supply curve after the imposition of an excise tax. The efficiency loss or excess
burden of this tax will be
a. PcPsEC.
b. PcPsEC + ECF.
c. CEF.
d. 0PsEQtax.
e. 0PeFQe.
47. Which of the following generalizations is CORRECT?
a. the more price elastic the demand of a product, the larger the portion of an
excise tax which is borne by buyers.
b. the more price inelastic the demand for a product, the larger the portion of an
excise tax which is borne by buyers.
c. the more price inelastic the demand of a product, the larger the portion of an
excise tax which is borne by suppliers.
48. Refer to the figure to
the right in which S is
the before-tax supply
curve for bottled
water. The pre-tax
market price for
bottled water is $1.00
and the equilibrium
quantity is 125,000
bottles per week. Stax
is the supply curve
after the imposition of
an excise tax. The tax
rate is ______ per
bottle sold and the tax
revenues paid to
government are
______ per week.
a. $0.50; $62,500
b. $1.00; $100,000
c. $0.75; $75,000
d. $0.50; $50,000
e. $1.25; $156,250
Price
Stax
$1.25
$1.00
S
$ .75
D
0
100
125
Quantity
49. Refer to the above figure in which S is the before-tax supply curve for bottled water.
The market price for bottled water is $1.00 and the equilibrium quantity is 125,000
bottles per week. Stax is the supply curve after the imposition of an excise tax. The
total amount of the tax paid by consumers is _____; the total amount of the tax paid
by sellers (producers) is ______; the excess burden (efficiency loss) of the tax is
______.
a. $50,000; $0; $6,250
b. $0; $50,000, $3,125
c. $25,000; $25,000; $3,125
d. $25,000; $25,000; $6,250
e. $50,000; $50,000; $12,500
50. Suppose government decides to impose an excise tax on each of the following items
as indicated. Some of the economic burden of the taxes will likely be borne by both
sellers and consumers in each case, but consumers are MORE likely to bear the
greater share of the economic burden of the tax on
a. $1 tax per lb. of mangoes [juicy, aromatic tropical fruit with a firm skin]
b. $.50 tax per pack of chewing gum [5 sticks]
c. $5 tax per dose of insulin [essential medication for diabetics]
d. $1 tax per “hand-held wand” car wash [3 minute cycle]
51. Which of the following terms describes the phenomenon that takes place when the
economic burden of a tax is borne by some entity other than the one that bears the
statutory incidence?
a. legal liability b. tax shifting c. tax evasion d. tax slighting
52. Assume that the government prohibits the market for some narcotic. The police
vigorously enforce the law by intercepting sales and destroying the units they
confiscate. The punishments provided under the law are harsh: long prison
sentences and stiff fines. Based on our in-class analysis of the drug market, which
of the following is NOT a likely outcome?
a. The street price of drugs will rise.
b. The number of casual users will be greatly reduced.
c. Addiction will be eliminated as a social problem.
d. Total expenditures on the drug will likely increase.
53. Government-subsidized drug treatment programs are designed to
a. increase a dealer’s seller costs above the addicts’ MWTP.
b. decrease a user’s MWTP below the street price.
c. reduce the street price of the drug to eliminate drug-related crimes.
d. none of these.
54. Our analysis of illegal drug markets assumes that
a. only drug dealers behave rationally.
b. only drug users behave rationally.
c. both dealers and users behave rationally.
d. neither dealers nor users behave rationally.
55. Which of the following was NOT provided as an example of a market that at one
time or another has been illegal in some place in the United States?
a. yellow-dyed margarine
b. human organs for transplant
c. animals (or body parts of animals) belonging to endangered species
d. “vegetarian” burgers