Chapter 7

True/False
Indicate whether the statement is true or false.

____ 1. Welfare economics is the study of the welfare system.

____ 2. As a general rule, a consumer’s willingness to pay is never greater than twice the product’s price.

____ 3. When a good is purchased, the difference between what a consumer is willing to pay and what
they actually have to pay is consumer surplus.

____ 4. Suppose Jess can sell fruit smoothies for $5. The market price of fruit smoothies is $4.50. If Jess
decided to produce 100 smoothies, her producer surplus would be positive $50.

____ 5. Total surplus in a market is consumer surplus plus firm profit.

____ 6. Total surplus is the area under the demand curve up to the equilibrium quantity, minus the cost to
producers.

____ 7. In a perfectly competitive market, consumer surplus and producer surplus are equal.

____ 8. Total surplus in a market can be measured as the area below the supply curve and the area above
the demand curve.

____ 9. If all sellers in the market have an identical willingness to sell, then producer surplus will be zero.

____ 10. Restrictions against ticket scalping actually drive up the cost of many tickets.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Caitlin would be willing to pay $120 to see The Lion King musical but buys a ticket for only $40.
Caitlin values the performance at:
A. $40
B. $0
C. $120
D. $80
____ 2. Other things being equal, if the price of a good falls, the consumer surplus:
A. decreases
B. increases
C. is unchanged
D. may increase, decrease or remain unchanged
 Graph 7-1

____ 3. Refer to Graph 7-1. What area represents total surplus in the market when the price is P1?
A. A + B
B. B + C
C. C + D
D. A + B + C + D

Graph 7-2

____ 4. Refer to Graph 7-2. At the higher price P2, consumer surplus is:
A. A
B. A + B
C. A + B + C
D. A + B + D
____ 5. Producer surplus equals:
A. value to buyers – amount paid by buyers
B. amount received by sellers – costs of sellers
C. value to buyers – costs of sellers
D. value to buyers – amount paid by buyers + amount received by sellers – costs of sellers

Table 7-2
The costs of five possible sellers

Seller Cost ($)

Kyle 18
Nathan 15
Chelsea 10
Hillary 7.50
Landon 5
____ 6. Refer to Table 7-2. If the price is $11, Landon’s producer surplus will be:
A. $5
B. $11
C. $6
D. $11.50

Table 7-3

Market supply and demand for good X

Price ($) Quantity demanded Quantity supplied

12.00 0 36
10.00 12 30
8.00 24 24
6.00 36 18
4.00 48 12
2.00 60 6
0.00 72 0

____ 7. Refer to Table 7-3. The equilibrium or market-clearing price is:

A. $10.00
B. $8.00
C. $6.00
D. $4.00
____ 8. Refer to Table 7-3. At a price of $6.00, total surplus would be:
A. more than it would be at the equilibrium price
B. less than it would be at the equilibrium price
C. the same as it would be at the equilibrium price
D. there is insufficient information to say
____ 9. Which of the following is NOT correct?
A. consumer surplus = value to buyers – Amount paid by buyers
B. producer surplus = amount received by sellers – Cost of sellers
C. total surplus = value to buyers – Amount paid by buyers + Amount received by sellers –
Costs of sellers
D. total surplus = Value to sellers – Costs of sellers
____ 10. Total surplus in a market is:
A. the total costs to sellers of providing the goods less the total value to buyers of the goods
B. always less than consumer surplus plus producer surplus
C. the total value to buyers of the goods less the costs to sellers of providing those goods
D. always greater than consumer surplus plus producer surplus
____ 11. An efficient allocation of resources would be characterised by:
A. a good being produced by the sellers with lowest cost
B. a shortage at the current market price
C. a good is not being bought by the buyers at highest value
D. all of the above are correct
 Graph 7-4

____ 12. In Graph 7-4, the efficient price–quantity combination is:

A. P1 – Q1
B. P2 – Q2
C. P3 – Q1
D. none of the combinations are efficient
____ 13. The ‘invisible hand’:
A. is the name of an old radio program
B. is a concept used by Adam Smith to describe the virtues of free markets
C. is a concept used by J.M. Keynes to describe the role of government in guiding the
allocation of resources in the economy
D. always rewards individuals for using the wellbeing of society as the basis for economic
decision making
____ 14. Externalities are:
A. external forces that help establish equilibrium price
B. external forces that cause the price of a good to be higher than it otherwise would be
C. side effects of government intervention in markets
D. side effects passed on to a party other than the buyers and sellers in the market
____ 15. When markets fail, public policy can:
A. do nothing to improve the situation
B. potentially remedy the problem and increase economic efficiency
C. always remedy the problem and increase economic efficiency
D. in theory, remedy the problem, but in practice, has proven to be ineffective
Chapter 8

True/False
Indicate whether the statement is true or false.

____ 1. The effect of a tax on a good makes both sellers and buyers better off.

____ 2. Often the tax revenue collected by the government equals the reduced welfare of buyers and sellers
caused by the tax.

____ 3. A tax raises the price received by sellers and lowers the price paid by buyers.

____ 4. One of the important economic costs of imposing taxes on a market is the deadweight loss.

____ 5. If the supply of labour is inelastic, the deadweight loss from labour taxes is large.

____ 6. The demand for bread is less elastic than the demand for donuts; hence, ceteris paribus, a tax on
bread will create a larger deadweight loss than will the same tax on donuts.

____ 7. A source of the deadweight loss of taxation is the inefficient use of tax revenue by the government.

____ 8. The deadweight loss of a tax rises even more rapidly than the size of the tax.

____ 9. Revenue from a tax accruing to Government detracts from total welfare.

____ 10. A tax on land will distort economic incentives unless the tax applies only to raw (unimproved)
land.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. A tax on a good:

A. raises the price buyers pay and lowers the price sellers receive
B. raises the price buyers pay and raises the price sellers receive
C. lowers the price buyers pay and lowers the price sellers receive
D. lowers the price buyers pay and raises the price sellers receive
____ 2. A tax levied on the supplier of a product shifts the:
A. supply curve upwards or to the left
B. supply curve downwards or to the right
C. demand curve upwards or to the right
D. demand curve downwards or to the left
 Graph 8-1

____ 3. According to Graph 8-1, the price sellers receive after the tax is:
A. P3
B. P2
C. P1
D. impossible to determine
____ 4. According to Graph 8-1, after the tax is levied, producer surplus is represented by area:
A. A
B. A + B + C
C. D + E + F
D. F
____ 5. According to Graph 8-1, the benefits to the government (total tax revenue) is represented by area:
A. A + B
B. B + D
C. D + F
D. C + E

Graph 8-2

This graph shows supply and demand in a free market.

____ 6. According to Graph 8-2, when the market is in equilibrium, producer surplus is represented by
area:
A. A.
 B. B.
C. C.
D. D.
____ 7. Suppose a tax is placed on wine, this will mean:
A. the quantity of wine sold in the market will be unchanged because wine has perfectly
inelastic supply
B. the tax will be entirely passed on to the buyers
C. the quantity of wine sold in the market will fall
D. the tax will be paid entirely by the sellers
____ 8. The appropriate measure of the benefit from a tax is the:
A. consumer surplus
B. benefit received by those people who gain from government’s expenditure of the tax
revenue
C. producer surplus
D. government’s budget balance, which is increased with more taxes

Graph 8-3

____ 9. According to Graph 8-3, the reduction in producer surplus caused by the tax is:
A. $750
B. $1125
C. $375
D. $1000
____ 10. According to the information provided, assume that Joe is required to pay a tax of $60 when he
hires someone to clean his house. Which of the following is true?
A. Jane will continue to clean Joe’s home, but consumer surplus will decline
B. Joe will now clean his own home
C. Jane will continue to cleans Joe’s home but her producer surplus will decline
D. total economic welfare (consumer surplus plus producer surplus plus tax revenue) will
increase
____ 11. Assume that a tax is levied on a good and the government uses the revenue to clean up lethal toxic
waste that would cause irreparable harm to a large number of people. In this case there would be:
A. a decrease in consumer surplus to consumers of the taxed good
B. a decrease in producer surplus to producers of the taxed good
C. a probable increase in the total economic welfare of society
D. all of the above would occur
____ 12. Assume that a tax is levied on a good and the government uses the funds to build statues of former
prime ministers. In this case there would be:
A. a decrease in consumer surplus to consumers of the taxed good
B. a decrease in producer surplus to producers of the taxed good
C. a probable decrease in the welfare of society that exceeded the deadweight economic loss
from the tax
D. all of the above would occur
____ 13. The amount of deadweight loss from taxes depends on:
A. the price elasticity of demand and supply
B. how much of the tax revenue the government plans to spend
C. the product the government is planning to tax
D. all of the above are correct
____ 14. The greater the elasticities of demand and supply the:
A. smaller the deadweight loss from a tax
B. less intrusive a tax will be on a market
C. greater the deadweight loss from a tax
D. more equitable the distribution of a tax between buyers and sellers
____ 15. If the supply of land is fixed, a tax on land would be paid:
A. entirely by the landowners
B. entirely by the renters or users of the land
C. partly by landowners and partly by land users
D. only by workers
 Chapter 9

True/False
Indicate whether the statement is true or false.

____ 1. One of the important outcomes of international trade is that countries specialise in the output of
things they are best at.

____ 2. Policymakers in Australia are increasingly considering trade restrictions in order to protect
domestic producers from foreign competitors.

____ 3. If Colombia exports coffee to the rest of the world, Colombian coffee sellers benefit from higher
producer surplus. Colombian coffee buyers are worse off because of lower consumer surplus, but
total surplus in Colombia increases because of trade.

____ 4. In general, if a country allows trade and becomes an importer of a good, domestic producers of the
good are worse off, domestic consumers of the good are better off, but the economic wellbeing of
the country increases.

____ 5. Suppose that Tonga, a small country, imports apples at the world price of $4 per kilogram. If
Tonga imposes a tariff of $1 per kilogram on imported apples, the price of apples in Tonga will
increase, but by less than $1, ceteris paribus.

____ 6. When a government imposes a tariff on a product, the domestic price will equal the world price.

____ 7. The decrease in total surplus that results from a tariff or quota is called the gains from trade.

____ 8. If a small country imposes a tariff on an imported good, domestic sellers will gain producer
surplus, the government will gain tariff revenue and domestic consumers will gain consumer
surplus.

____ 9. Tariffs cause deadweight loss because they move the price of an imported product closer to the
equilibrium price without trade, thus reducing the gains from trade.

____ 10. Import quotas make domestic buyers better off and domestic sellers worse off.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Trade among nations is ultimately based on:

A. absolute advantage
B. international trade treaties
C. comparative advantage
D. exploitation of weaker countries by more powerful countries
____ 2. When a quota is imposed on a market, the:
A. supply curve (above the world price) shifts to the right by the amount of the quota
B. supply curve (above the world price) shifts to the left by the amount of the quota
C. demand curve (above the world price) shifts to the right by the amount of the quota
D. demand curve (above the world price) shifts to the left by the amount of the quota
____ 3. When a country allows trade and becomes an importer of a good, consumer surplus:
A. and producer surplus will increase
 B. and producer surplus will decrease
C. will increase and producer surplus will decrease
D. will decrease and producer surplus will increase
____ 4. If Brazil has a comparative advantage in producing rubber and trade in rubber is allowed:
A. Brazil will become an importer of rubber
B. Brazil will become an exporter of rubber
C. Brazil could become either an exporter or an importer of rubber
D. it is impossible to determine whether Brazil will become an importer or an exporter of
rubber without additional information about rubber prices
____ 5. Suppose Australia has a free-trade treaty with the United States. As a result, Australia increases its
exports of kangaroo to the USA. Which of the following statements is NOT true?
A. the price paid by Australian consumers of kangaroo increases
B. the price received by Australian producers of kangaroo increases
C. the losses of Australian consumers exceed the gains of Australian producers
D. the gains of Australian producers exceed the losses of Australian consumers

Graph 9-1

This graph refers to the market for beef in Japan.

____ 6. According to Graph 9-1, if the world price rose to $6 and trade in beef is allowed, the price of beef
in Japan will be:
A. $5 per pound
B. $2 per pound
C. between $2 per pound and $5 per pound
D. $6 per pound

Graph 9-3
____ 7. In Graph 9-3, area G represents:
A. consumer surplus under free trade
B. producer surplus under free trade
C. a surplus for import licence holders
D. producer surplus before trade

Graph 9-4

This graph refers to the market for kiwifruit in New Zealand.

____ 8. According to Graph 9-4, consumer surplus in New Zealand before trade the trade in kiwifruit is:
A. A
B. A + B
C. A + B + D
D. C
____ 9. According to Graph 9-4, producer surplus in New Zealand after trade is:
A. A
B. A + B
C. C + B + D
D. C
____ 10. According to Graph 9-4, the change in total surplus in New Zealand because of the trade in
kiwifruit is:
A. A.
B. B.
C. C.
D. D.

Graph 9-5

This graph refers to the market for oil in Spain.

____ 11. According to Graph 9-5, the quantity of oil imported into Spain is:
A. Q0
B. Q1
C. Q2
D. Q2 minus Q1

Graph 9-7

____ 12. According to Graph 9-7, consumer surplus before trade would be:
A. $20 000
B. $24 000
C. $40 000
D. $48 000
____ 13. According to Graph 9-7, producer surplus after trade would be:
A. $21 600
B. $25 200
C. $43 200
D. $50 400
____ 14. Jess usually buys a muffin before work every day. If the government decides to impose a tariff on
muffins, how will Jess’ behaviour change?
A. she will buy more muffins because the price of the muffins will fall
B. she will buy fewer muffins because she doesn’t like imported muffins
 C. she will buy more muffins because Australia now has a comparative disadvantage in
producing muffins
D. she will buy fewer muffins because the domestic price of muffins will rise
____ 15. The infant industry argument:
A. is based on the belief that protecting industries when they are young will pay off later
B. is based on the belief that protecting industries producing goods and services for infants is
necessary if a country is to have healthy children
C. has the support of most economists
D. has proven to be correct in nearly all cases