Principles of Microeconomics (Econ 2)
Drake University, Summer 2008
William M. Boal
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QUIZ #5 VERSION B
“Market Controls and Taxes”
July 31, 2008
INSTRUCTIONS: This quiz is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or
calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3
significant digits. Point values for each question are noted in brackets. Maximum total points are 100.
I. Multiple choice: Circle the one best answer to each question. [3 pts each: 33 pts total]
(1) If the free-market equilibrium price of corn is $5, but
the government imposes a price ceiling (or legal
maximum price) of $10, then that price ceiling
a. is binding.
b. is nonbinding.
c. creates excess demand.
d. creates excess supply.
e. All of the above.
(2) If a price floor (or legal minimum price) for bananas
were binding, it would create
a. excess demand for bananas.
b. excess supply of bananas.
c. a shortage of bananas.
d. an increase in the quantity of bananas demanded.
(3) Who loses if a price ceiling (or legal maximum price)
is imposed on milk?
a. All consumers of milk.
b. All producers of milk.
c. All consumers and producers of milk.
d. No one loses—everyone gains.
(4) A quota on selling wood from tropical rainforests
would cause the price of wood from tropical rainforests
to
a. rise.
b. fall.
c. remain constant.
d. rise or fall, depending on the shapes of the demand
and supply curves.
(5) Who loses if a quota is imposed on buyers of
fireworks?
a. All sellers of fireworks.
b. All buyers of fireworks.
c. All sellers and buyers of fireworks.
d. No one loses—everyone gains.
(6) Suppose the price elasticity of supply of computers in
Iowa is 7.0 and the price elasticity of demand is -0.8. If
a tax is imposed on computers sold in Iowa, which side
of the market effectively pays most of the tax?
a. Sellers.
b. Buyers.
c. Sellers and buyers each pay half of the tax.
d. Answer depends on which side is legally required to
remit the tax to the government.
(7) Suppose the supply of private parking downtown
were perfectly inelastic. If parking were taxed,
a. buyers would pay all of the tax.
b. buyers would pay most of the tax.
c. sellers would pay all of the tax.
d. sellers would pay most of the tax.
(8) Who wins if consumers of natural gas are required to
pay a tax on each unit of natural gas that they buy?
a. All consumers of natural gas.
b. All producers of natural gas.
c. Both consumers and producers of natural gas.
d. Neither consumers nor producers of natural gas.
(9) Suppose the price elasticity of demand for vitamins is
-0.6 and the price elasticity of supply of vitamins is 6.0.
If a subsidy is given for vitamins,
a. Sellers of vitamins will enjoy most of the benefit.
b. Buyers of vitamins will enjoy most of the benefit.
c. Sellers and buyers each enjoy half of the benefit.
d. Answer depends on which side is legally designated
to receive the subsidy check from the government.
Principles of Microeconomics (Econ 2)
Drake University, Summer 2008
Quiz 5 Version B
Page 2 of 6
(10) The number of child car seats actually sold would
increase if the government enacted
a. a quota on sellers of child car seats.
b. a quota on buyers of child car seats.
c. a price floor (or legal minimum price) for child car
seats.
d. a price ceiling (or legal maximum price) on child car
seats.
e. all of the above.
f. none of the above.
(11) The amount of incandescent light bulbs actually
sold would decrease if the government enacted a
a. a quota on sellers of incandescent light bulbs.
b. a quota on buyers of incandescent light bulbs.
c. a price floor (or legal minimum price) for
incandescent light bulbs.
d. a price ceiling (or legal maximum price) on
incandescent light bulbs.
e. all of the above.
f. none of the above.
II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch
workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in
this section.
Price per bushel
(1) [Price controls: 12 pts] The following graph shows the market for corn. Suppose a price floor (or legal minimum price)
of $6 is imposed on this market. No corn may be sold for less than $6.
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Demand
Supply
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14
Millions of bushels
a. Is this price floor binding or nonbinding?
b. Find the quantity of corn actually sold with this price floor.
million bushels
c. Will this price floor result in excess demand or excess supply of corn?
d. How much?
million bushels
Principles of Microeconomics (Econ 2)
Drake University, Summer 2008
Quiz 5 Version B
Page 3 of 6
(2) [Quotas: 12 pts] Suppose the government wants to limit the use of coal. The government has decided to impose a quota
of six million tons. The market for coal is shown in the graph below.
$160
$150
$140
$130
$120
Price per ton
$110
$100
$90
Demand
Supply
$80
$70
$60
$50
$40
$30
$20
$10
$0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Millions of tons
First suppose the quota is imposed on coal producers (mines). Six million permits to sell one ton of the coal are distributed
to producers of coal.
a. What will be the equilibrium price of coal with the quota?
$
per ton
b. If the government sells the permits to producers at auction, or allows
permits to be traded, what price will be the equilibrium price of a permit?
$
per permit
Alternatively, suppose the quota is imposed on coal consumers (factories and electric power plants). Six million permits to
buy one ton of coal are distributed to consumers of coal.
c. What will be the equilibrium price of coal with the quota?
$
per ton
d. If the government sells the permits to consumers at auction, or allows
permits to be traded, what price will be the equilibrium price of a permit?
$
per permit
Principles of Microeconomics (Econ 2)
Drake University, Summer 2008
Quiz 5 Version B
Page 4 of 6
(3) [Tax: 15 pts] Suppose six buyers and six sellers
engage in a market similar to the exercise we did in
class. Each buyer may buy at most one unit and each
seller may sell at most one unit, but no one is forced to
trade. Assume that buyers and sellers are each trying to
maximize their personal earnings (or “gains from trade”).
Earnings for each buyer equal the buyer's value of the
good minus the price paid. Earnings for each seller equal
the price received minus the seller's cost of the good.
Earnings of persons who do not trade are zero. Buyers’
values and sellers’ costs are given in the following table.
Buyer
Art
Betty
Carl
Darla
Evan
Felicia
Value
$14
$13
$11
$ 9
$ 7
$ 5
Seller
Gary
Helen
Ian
Jill
Kevin
Laura
$15
$14
$13
$12
Price
$11
$10
$9
$8
$7
$6
$5
$4
Cost
$ 1
$ 2
$ 4
$ 6
$ 9
$12
$3
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity
You can use the graph at right for scratch work.
Suppose with some experience, the market settles on a single price. All trades are made at that price.
a. What is that single price likely to be? Give an answer to the nearest whole dollar.
$
b. How many units of the good will be sold in this market?
units
Now suppose a tax of $5 per unit is imposed on sellers. All sellers must pay this tax if they sell the good. (If they do not
sell the good, they owe no tax.) Consider the new equilibrium.
c. What is the net price received by sellers (excluding the tax) likely to be? Give an answer to
$
the nearest whole dollar.
d. What is the total price paid by buyers (including the tax) likely to be? Give an answer to the $
nearest whole dollar.
e. How many units of the good will be sold in this market?
units
Tax rate
a. $2 per pound
Tax revenue
$
million
b. $4 per pound
$
million
c. $6 per pound
$
million
d. $8 per pound
$
million
Price per pound
(4) [Laffer curve: 12 pts] The graph below shows the
market for artichokes. Calculate the tax revenue
collected by the government if artichokes are taxed at the
following rates:
$12
$11
$10
$9
$8
$7
Demand
Supply
$6
$5
$4
$3
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity (millions of pounds)
9
10
Principles of Microeconomics (Econ 2)
Drake University, Summer 2008
Quiz 5 Version B
Page 5 of 6
(5) [Subsidies: 12 pts] Suppose the market for infant car seats is described by the curves graphed below.
$70
$65
$60
$55
$50
$45
Price
$40
Demand
$35
Supply
$30
$25
$20
$15
$10
$5
$0
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Quantity (millions)
Suppose the government offers a subsidy of $30 per car seat.
a. Compute the equilibrium number of infant car seats that will be sold.
b. Compute the equilibrium net price of an infant car seat paid by buyers (excluding
the subsidy).
c. Compute the equilibrium total price of an infant car seat received by sellers
(including the subsidy).
d. Compute the direct cost of the subsidy program to the government. In other words,
how much should the government budget for subsidy payments?
million
$
$
$
million
Principles of Microeconomics (Econ 2)
Drake University, Summer 2008
Quiz 5 Version B
Page 6 of 6
III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). [4 pts]
(1) Suppose the government is concerned that not enough children are getting daily vitamins. Would a price ceiling (or
legal maximum price) for vitamins encourage more children to get vitamins? Justify your answer with a supply-anddemand graph.
(2) Consider the following statement. "It is unfair that consumers must pay the tax on gasoline. The producers of gasoline
are big, rich corporations. It would be fairer if the tax were paid by gasoline producers." Does it matter who pays the tax?
Justify your answer with a supply-and-demand graph.
Please circle the question you are answering. Write your answer below. Full credit requires correct economic reasoning,
legible writing, good grammar including complete sentences, and accurate spelling.
[end of quiz]