ECNS 105
Problem Set 10
Review
Name:_______________________________________
1. The graph below captures the market for milk in the State of Montana during the
summer of 2015. Currently, the State Legislature is considering the legislative
actions listed below. As a Stock Fellow for the Association of Montanan Economists,
your job is to evaluate the following policies and their effect on economic welfare.
Market for Milk in Summer 2015
20
18
Price per Gallon
16
14
12
10
Supply
8
Demand
6
4
2
0
0
2
4
6
Quantity of Gallons of Milk (in the Millions)
8
1. The Legislature is considering SB 342, which is a bill to impose a price ceiling at
$4.00 per gallon of milk.
A. What would the market price, quantity demanded, and quantity supplied
be at this price ceiling?
B. Would SB 342 cause a shortage, surplus, or no-change in the milk market?
C. If SB 342 was enacted into law, which is a price ceiling at $4.00, what
would be producer surplus in the milk market? (show math)
D. Calculate consumer surplus under SB 342 (show math)
E. If the market experiences deadweight loss under SB 342, please calculate
(show math). If the market does not experience deadweight loss, please
state, “No deadweight loss in the market.”
F. Calculate total revenue under SB 342 (show math)
2. The Legislature is considering SB 231, which is a bill to impose a price ceiling at
$12.00 per gallon of milk.
A. What would the market price, quantity demanded, and quantity supplied
be at this price ceiling?
B. Would SB 231 cause a shortage, surplus, or no-change in the milk market?
C. If SB 231 was enacted into law, which is a price ceiling at $12.00, what
would be producer surplus in the milk market? (show math)
D. Calculate consumer surplus under SB 342 (show math)
E. If the market experiences deadweight loss under SB 342, please calculate
(show math). If the market does not experience deadweight loss, please
state, “No deadweight loss in the market.”
F. Calculate total revenue under SB 342 (show math)
3. The Legislature is considering HB 136, which is a bill to impose a price floor at
$10.00 per gallon of milk.
A. What would the market price, quantity demanded, and quantity supplied
be at this price floor?
B. Would HB 136 cause a shortage, surplus, or no-change in the milk
market?
C. If HB 136 was enacted into law, which is a price floor at $10.00, what
would be producer surplus in the milk market? (show math)
D. Calculate consumer surplus under HB 136 (show math)
E. If the market experiences deadweight loss under HB 136, please calculate
(show math). If the market does not experience deadweight loss, please
state, “No deadweight loss in the market.”
F. Calculate total revenue under HB 136 (show math)
4. The Legislature is considering HB 224, which is a bill to impose a quota at 2
million gallons of milk.
A. What would the market price at this quota?
B. If HB 224 was enacted into law, which is a quota at 2 million gallons of milk,
what would be producer surplus in the milk market? (show math)
C. Calculate consumer surplus under HB 224 (show math)
D. If the market experiences deadweight loss under HB 224, please calculate
(show math). If the market does not experience deadweight loss, please
state, “No deadweight loss in the market.”
E. Calculate total revenue under HB 224 (show math)
5. Comparative advantage is the ability to
a. produce a good or service at a higher opportunity cost than another
economic agent
b. produce a good or service at the same opportunity cost as another
economic agent
c. produce more of a good or service than another economic agent
d. produce a good or service at a lower opportunity cost than another
economic agent
e. c and d are both correct
6. The correct relationship between the price elasticity of demand and total
revenue is: if demand is _______________, an increase in the price of a good will
_______________ total revenue.
a. elastic; increase
b. inelastic; increase
c. unit elastic; decrease
d. unit inelastic; decrease
e. inelastic; decrease
7. The responsiveness of quantity demanded to price changes is known as the
a. consumer sensitivity index
b. producer responsiveness index
c. demand coefficient
d. elasticity of demand
e. none of the above
8. If the price of a good falls and as a result producers' incomes decrease, the
demand for the good must be
a. relatively elastic
b. relatively inelastic
c. perfectly elastic
d. perfectly inelastic
9. The demand for a product will be relatively inelastic if
a. there are no close-substitute products available
b. spending on the product constitutes a large portion of consumer income
c. the product is considered to be a luxury
d. the consumer has considerable time to adjust to price changes