Micro Chapter 4 Test Questions – Flashcards

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Relationship between resource and product markets
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an increase in demand for a product will increase demand for resources
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When demand for a product increases, what happens to the demand for the resource
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it will increase
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When the demand for a product decreases, what happens to the demand for the resources
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it will decrease
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Price Ceiling
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A legally determined maximum price that sellers may charge
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Price Floor
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A legally determined minimum price that sellers may receive.
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Shortage
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A situation in which the quantity demanded is greater than the quantity supplied, more people want than what is in stock
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Surplus
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A situation in which quantity supplied is greater than quantity demanded, more in stock than what people want
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Example of a common price ceiling
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rent control
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Example of a common price floor
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minimum wage
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Deadweight loss
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loss of gains from trade
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An effective price floor sets price _______ equilibrium to limit how low the price can fall
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above
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An effective price ceiling sets price ______ equilibrium to limit how high the price can rise
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below
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What are common secondary effects of price controls
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black markets changes in future supply quality deterioration non price methods of rationing inefficient use of good
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Tax Incidence
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The distribution of tax burden among taxpayers; who ultimately pays the tax
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Excess burden of taxation
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another term for deadweight loss
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Statuary Incidence
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who is legally responsible to pay the tax, this is the tax burden
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Actual Incidence
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who really pays the tax but is not responsible for it
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Marginal Tax Rate
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The extra taxes paid from an additional dollar of income
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Laffer Curve
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a curve illustrating the relationship between the tax rate and tax revenues
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An increase in tax rate may what
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may lower revenue
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Subsidy
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a grant paid by a government to an enterprise that benefits the public
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An increase in the number of students attending college would tend to
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increase the demand for college professors, increase number of college of professors employed, increase wages of college professors
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The term deadweight loss or excess burden is used to describe which of the following
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the loss from the elimination of mutually beneficial exchanges that results from the imposition of a tax in a market
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What would happen in a market where a price ceiling was set above equilibrium
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equilibrium price would become the market price
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When a shortage of a good is present due to a price ceiling
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non-price factors will play a greater role in the allocation of the good
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If the government imposes a price floor on the market for milk, what will happen
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There will be a surplus of milk
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Correlation with price ceiling
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shortage
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Correlation with price floor
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surplus
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Both price floors and price ceilings lead to
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a reduction in quantity traded
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If a $5000 tax is placed legally o nthe sellers of new automobiles and as a result the price of the automobiles rises by $4000 the actual burden of tax is
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$4000 on the buyers and $1000 on the sellers
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The burden of tax will fall primarily on sellers when
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demand for the product is highly elastic and the supply is relatively inelastic
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When the government increase the tax rate what happens to tax revenue
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it depends
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According to the Laffer Curve
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when marginal tax rates are high a reduction in tax rates may increase tax revenue
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The actual benefit of a government subsidy is determined primarily by
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the elasticities of demand and supply
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if $50 subsidy is granted to the sellers of exercise and a as a results the price of the exercise to consumers falls by $30 the actual benefit of the subsidy
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$30 to buyers and $20 to sellers
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Which of the following is a true statement regarding the economic impact of a subsidy?
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When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.
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An increase in the demand for a product will cause output to
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increase and both the demand for and prices of the resources used to produce the product to increase.
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During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by
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allowing the price to rise, so gas was rationed to those willing to pay the most for it.
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If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?
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a surplus of unskilled labor
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With a price ceiling above the equilibrium price
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the market would be in equilibrium.
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Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls
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reduce the future supply of rental housing.
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Currently, federal and state gasoline taxes (imposed statutorily on the sellers of gasoline) amount to about $.45 per gallon. Suppose the current price of gasoline is $1.20 per gallon, and that if the tax was not in place, the price would be only $.80.
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A $.05 burden is being borne by sellers and $.40 by consumers.
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The deadweight loss resulting from levying a tax on an economic activity is
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the loss of potential gains from trade from activities forgone because of the tax.
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Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by
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consumers, because the increase in market price will be large relative to the increase in the excise tax.
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The Laffer curve illustrates the principle that
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when tax rates are quite high, reducing tax rates will increase tax revenue.
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A legal minimum wage is an example of
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price floor
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Both price floors and price ceilings, when effective, lead to
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a reduction in quantity traded
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If there was an increase in the tax on cell phones, what would be the effect on the equilibrium price and quantity of cell phones?
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price increases, quantity decreases
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The more elastic the supply of a product, the more likely it is that the burden of a tax will
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fall on buyers.
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The marginal tax rate is defined as
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the change in tax liability divided by the change in taxable income.
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Why does a price floor set above an equilibrium price tend to cause persistent imbalances in the market?
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Because quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.
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Why does a price ceiling set below an equilibrium price tend to cause persistent imbalances in the market?
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Because quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.
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Why will price controls will tend to cause misallocation of resources?
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Production (or opportunity) cost no longer corresponds to market price.
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When a tax is imposed on a good, the actual incidence of the tax generally
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Is shared between the buyer and seller
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When will a subsidy on a product generate more actual benefit for consumers (and less for producers)?
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When the supply of the product is relatively elastic
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Which of the following will most likely occur when government price controls fix the price of a good above market equilibrium?
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a surplus of the good will develop
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What happens when a tax is imposed on a good?
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The equilibrium quantity of the good always decreases.
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How would an increase in the price of paper influence the market for college textbooks?
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The supply of textbooks would decrease causing the price of textbooks to rise.
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Why does the imposition of a tax on a good create a deadweight?
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The tax reduces the quantity of exchanges between buyers and sellers.
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