Heather Gloria B. Cabrera
BAC ECON
Final Exam
July 20, 2024
Part 1 True or False
1 Rent-control laws dictate a minimum rent that landlords may charge tenants. False
2 Policymakers use taxes to raise revenue for public purposes and to influence market outcomes. True
3 If a good or service is sold in a competitive market free of government regulation, then the price of the
good or service adjusts to balance supply and demand. True
4 Prices are inefficient rationing devices. False
5 A price ceiling is a legal minimum on the price at which a good or service can be sold. False
6 A price ceiling set above the equilibrium price is not binding. True
7 A price ceiling set below the equilibrium price causes quantity demanded to exceed quantity supplied.
True
8 Long lines and discrimination are examples of rationing methods that may naturally develop in response
to a binding price ceiling. True
9 When the government imposes a binding price ceiling on a competitive market, a surplus of the good
arises, and sellers must ration the scarce goods among the large number of potential buyers. False
10 Economists argue that rent control is a highly efficient way to help the poor raise their standard of
living. False
11 If the equilibrium price of an airline ticket is $400 and the government imposes a price floor of $500
on airline tickets, then fewer airline tickets will be sold than at the market equilibrium. True
12 A binding minimum wage creates unemployment. True
13 A binding minimum wage creates a surplus of labor. True
14 A tax on golf clubs will cause buyers of golf clubs to pay a higher price, sellers of golf clubs to receive
a lower price, and fewer golf clubs to be sold. True
15 When a tax of $1.00 per gallon is imposed on sellers of gasoline, the supply curve for gasoline shifts
upward, but by less than $1.00. False
16 A tax on sellers shifts the supply curve but not the demand curve. True
17 A tax on sellers usually causes buyers to pay more for the good and sellers to receive less for the good
than they did before the tax was levied. True
18 Who bears the majority of a tax burden depends on the relative elasticity of supply and demand. True
19 If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers
will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. True
20 A tax burden falls more heavily on the side of the market that is less elastic. True
Part 2
1. The market for pizza is characterized by a downward sloping demand curve and an
upward-sloping supply curve.
a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus,
and producer surplus. Is there any deadweight loss? Explain.
In a perfectly competitive market equilibrium, there is no deadweight loss because
resources are allocated efficiently.
b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold.
Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus,
producer surplus, government revenue, and deadweight loss. How does each area compare to
the pre-tax case?
Consumer and Producer surplus both decrease compared to pre-tax. Tax revenue
increases as it collects $1 for each pizza sold. Deadweight loss, the area between Q(0)
and Q(1), created due to the reduction in total surplus.
c. If the tax were removed, pizza eaters and sellers would be better off, but the government
would lose tax revenue. Suppose that consumers and producers voluntarily transferred some
of their gains to the government. Could all parties (including the government) be better off
than they were with a tax? Explain using the labeled areas in your graph.
Using the graph in part (b), all parties would be better off than they were with tax. By
eliminating tax and implementing voluntary contributions, the combined gains for
consumers and producers would be larger than the government’s loss in tax revenue
and deadweight loss.
2. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship
between the number of workers and Nimbus’s output in a given day:
a. Fill in the column of marginal products. What pattern do you see? How might you explain it?
The marginal product increases initially and then starts to decrease. This reflects the law of
diminishing marginal returns, where adding more workers eventually leads to less
additional output per worker.
Workers
Output
Marginal Product
0
0
1
20
20
2
50
30
3
90
40
4
120
30
5
140
20
6
150
10
7
155
5
b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in
the column for total cost.
Total cost increases linearly with the number of workers since each worker adds a constant
cost of $100.
Workers
Output
Total Cost
0
0
200
1
20
300
2
50
400
3
90
500
4
120
600
5
140
700
6
150
800
7
155
900
c. Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do you see?
Average total cost decreases initially, reaches a minimum, and then starts to increase. This
U-shape is typical due to spreading fixed costs over more units and then the increasing
variable costs per unit as marginal returns diminish.
Workers
Output
Total Cost
Average Total Cost
0
0
200
1
20
300
15
2
50
400
5
3
90
500
5.56
4
120
600
5
5
140
700
5
6
150
800
5.33
7
155
900
5.81
d. Now fill in the column for marginal cost. (Recall that MC = _TC/_Q.) What pattern do you
see?
Marginal cost decreases initially, reaches a minimum, and then starts to increase. This is
because of increasing marginal returns followed by diminishing marginal returns.
Workers
Output
Total Cost
Average Total
Cost
Marginal Cost
0
0
200
1
20
300
15
5
2
50
400
5
3.33
3
90
500
5.56
2.5
4
120
600
5
3.33
5
140
700
5
5
6
150
800
5.33
10
7
155
900
5.81
20
e. Compare the column for marginal product and the column for marginal cost. Explain the
relationship.
When marginal product is increasing, marginal cost is decreasing, and vice versa. This
inverse relationship occurs because as workers become more productive (higher marginal
product), it costs less to produce each additional unit (lower marginal cost).
f. Compare the column for average total cost and the column for marginal cost. Explain the
relationship.
When marginal cost is below average total cost, average total cost is decreasing. When
marginal cost is above average total cost, average total cost is increasing. This relationship
is due to the marginal cost pulling the average total cost up or down depending on its
relative position.