Quiz On Microeconomics: Supply, Demand, And Government Policies

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Quiz On Microeconomics: Supply, Demand, And Government Policies - Quiz

Supply, Demand, and Government Policies


Questions and Answers
  • 1. 

    If the equilibrium price of gasoline is $1.00 per gallon and the government places a price ceiling on gasoline of $1.50 per gallon, the result will be a shortage of gasoline

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    If the equilibrium price of gasoline is $1.00 per gallon and the government places a price ceiling on gasoline of $1.50 per gallon, the result will not be a shortage of gasoline. This is because the price ceiling is set above the equilibrium price, meaning that the market price can still adjust to the equilibrium level. In this case, the price ceiling would have no effect on the quantity of gasoline supplied and demanded, and there would be no shortage.

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  • 2. 

    A price ceiling set below the equilibrium price causes a surplus

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    A price ceiling set below the equilibrium price does not cause a surplus. In fact, it causes a shortage. When the price ceiling is set below the equilibrium price, it creates an artificial limit on how much sellers can charge for a product. This leads to an increase in demand as consumers are willing to buy more at the lower price. However, because sellers cannot charge more than the price ceiling, they reduce the quantity supplied. The result is that the quantity demanded exceeds the quantity supplied, causing a shortage rather than a surplus.

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  • 3. 

    A price floor set above the equilibrium price is a binding constraint

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    A price floor is a minimum price set by the government or a regulatory body that is higher than the equilibrium price. When a price floor is set above the equilibrium price, it creates a binding constraint because it prevents the market from reaching equilibrium. This means that the quantity supplied exceeds the quantity demanded, leading to a surplus. As a result, sellers are unable to sell all of their goods at the higher price, leading to inefficiency in the market. Therefore, the statement "A price floor set above the equilibrium price is a binding constraint" is true.

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  • 4. 

    The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Rent control is a government policy that sets a maximum limit on the amount landlords can charge for rent. In the short run, rent control may seem beneficial as it provides affordable housing options for tenants. However, in the long run, it leads to a shortage of housing. This is because landlords are discouraged from investing in new rental properties or maintaining existing ones due to the limited profit potential. As a result, the supply of housing decreases over time, leading to a more severe shortage in the long run. Therefore, the statement that the shortage of housing caused by binding rent control is likely to be more severe in the long run is true.

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  • 5. 

    The minimum wage helps all teenagers because they receive higher wages than they would otherwise

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement suggests that the minimum wage benefits all teenagers by providing them with higher wages. However, this is not necessarily true. While some teenagers may indeed receive higher wages due to the minimum wage, others may struggle to find employment altogether as businesses may not be able to afford to hire them at the mandated minimum wage. Additionally, some teenagers may already be earning wages higher than the minimum wage due to their skills or experience. Therefore, it cannot be said that the minimum wage helps all teenagers.

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  • 6. 

    A 10 percent increase in the minimum wage causes a 10 percent reduction in teenage employment

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because a 10 percent increase in the minimum wage does not necessarily cause a 10 percent reduction in teenage employment. The relationship between minimum wage and employment is complex and can vary depending on various factors such as the overall state of the economy, labor market conditions, and the elasticity of demand for labor. While some studies have shown a negative relationship between minimum wage increases and employment, others have found little to no effect or even positive effects on employment. Therefore, it is incorrect to make a blanket statement that a 10 percent increase in the minimum wage will always result in a 10 percent reduction in teenage employment.

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  • 7. 

    A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the eqilibrium price above the frixed price ceiling.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    If a price ceiling is not currently binding, it means that the equilibrium price is below the fixed price ceiling. However, if demand were to increase in the future, it could push the equilibrium price above the fixed price ceiling. This would create a shortage because suppliers would not be able to increase their prices to match the higher demand. Therefore, the statement is true.

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  • 8. 

    A price floor in a market always creates a surplus in that market

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    A price floor in a market does not always create a surplus. A price floor is a minimum price set by the government or a regulatory authority to prevent prices from falling below a certain level. It is typically set above the equilibrium price. If the price floor is set below the equilibrium price, it will have no effect on the market. However, if the price floor is set above the equilibrium price, it can lead to a surplus if the quantity supplied exceeds the quantity demanded at that higher price. Therefore, it is not always the case that a price floor creates a surplus in a market.

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  • 9. 

    A $10 tax on baseball gloves will always raise the price that the buyers pay for baseball gloves by $10

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    A $10 tax on baseball gloves will not always raise the price that the buyers pay for baseball gloves by $10. The burden of the tax can be shared between the buyers and the sellers, depending on the elasticity of supply and demand. If the demand for baseball gloves is highly elastic, the sellers may choose to absorb a portion of the tax in order to keep the price competitive and maintain sales. As a result, the price increase for buyers may be less than $10.

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  • 10. 

    The ultimate burden of a tax lands more heavily on the side of the market that is less elastic

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The explanation for the given correct answer is that when a tax is imposed, the burden of the tax is generally passed on to the consumers or producers in the form of higher prices or lower profits. The elasticity of demand or supply determines how much of the tax burden is absorbed by each side of the market. If the demand or supply is more elastic, it means that consumers or producers are more responsive to price changes, and therefore, they can shift the burden of the tax more easily. On the other hand, if the demand or supply is less elastic, it means that consumers or producers are less responsive to price changes, and therefore, they bear a greater burden of the tax.

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  • 11. 

    When we use the model of supply and demand to analyze a tax collected form the buyers, we shift the demand curve upward by the size of the tax

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    When we use the model of supply and demand to analyze a tax collected from the buyers, we actually shift the demand curve downward by the size of the tax. This is because the tax increases the price that buyers have to pay, reducing their willingness and ability to purchase the good or service. Therefore, the correct answer is False.

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  • 12. 

    If medicine is a necessity, the burden of a tax on medicine will likely land more heavily on the buyers of medicine

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement suggests that if a tax is imposed on medicine, the burden of the tax will be borne by the buyers of medicine. This is because medicine is considered a necessity, and people who require medicine will still need to purchase it regardless of the tax. Therefore, the tax will likely increase the cost of medicine for buyers, making them bear the burden of the tax.

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  • 13. 

    A tax creates a tax wedge between a buyer and a seller.  This causes the price paid by the buyer to rise, the price received by the seller to fall, and the quantity sold to fall

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    A tax creates a tax wedge between a buyer and a seller because it increases the price paid by the buyer and decreases the price received by the seller. This difference in price creates a gap or wedge between what the buyer pays and what the seller receives. As a result, the quantity sold also tends to decrease because the higher price for the buyer and lower price for the seller can discourage transactions. Therefore, the statement "A tax creates a tax wedge between a buyer and a seller, causing the price paid by the buyer to rise, the price received by the seller to fall, and the quantity sold to fall" is true.

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  • 14. 

    The government can choose to place the burden of a tax on the buyers in a market by collecting the tax from the buyers rather than the sellers

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because the burden of a tax cannot be shifted solely by collecting it from the buyers instead of the sellers. The burden of a tax is determined by the elasticity of demand and supply in the market. If the demand is more elastic than the supply, then the burden will fall more on the sellers. Conversely, if the supply is more elastic than the demand, then the burden will fall more on the buyers. The government's collection method does not determine the burden of the tax, but rather the elasticity of the market determines who bears the burden.

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  • 15. 

    A tax collected from buyers has an equivilant impact to a same size tax collected from sellers

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    When a tax is collected from buyers or sellers, it ultimately affects the price of the product. In both cases, the tax burden is shared between the buyers and sellers, resulting in a change in price. Whether the tax is collected from buyers or sellers, the impact on the market is equivalent, as it leads to a similar increase in price for the buyers or decrease in revenue for the sellers. Therefore, the statement is true.

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  • 16. 

    For a price ceiling to be a binding constraint on the market, the government must set it

    • A.

      Above the equilibrium price

    • B.

      Below the equilibrium price

    • C.

      Precisely at the equilibrium price

    • D.

      At any price because all price ceilings are binding constraints

    Correct Answer
    B. Below the equilibrium price
    Explanation
    A price ceiling is a maximum price that can be charged for a good or service. If the government sets the price ceiling below the equilibrium price, it creates a binding constraint on the market because it restricts the price that sellers can charge to a level lower than what would naturally occur in the market. This can lead to shortages as the quantity demanded exceeds the quantity supplied at the artificially low price. Therefore, the correct answer is below the equilibrium price.

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  • 17. 

    A  binding price ceiling creates

    • A.

      A shortage

    • B.

      A surplus

    • C.

      An equilibrium

    • D.

      A shortage or surplus depending on whether the price ceiling is set above or below the equlibrium price

    Correct Answer
    A. A shortage
    Explanation
    A binding price ceiling creates a shortage because it sets the maximum price that can be charged for a good or service below the equilibrium price. This means that suppliers are unable to charge the market price and are therefore discouraged from producing or supplying the good or service. At the same time, consumers are incentivized to demand more of the good or service at the lower price, leading to excess demand and a shortage in the market.

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  • 18. 

    Suppose the equlibrium price for apartments is $500 per month and the government imposes ren controls of $250. Which of the following is unlikely to occur as a result of the rent controls?

    • A.

      There will be a shortage of housing

    • B.

      Landlords may discriminate among apartment renters

    • C.

      Landlords may be offered bribes to rent apartments

    • D.

      The quality of apartments will improve

    • E.

      There may be long lines of buyers waiting for apartments

    Correct Answer
    D. The quality of apartments will improve
    Explanation
    Rent controls typically lead to a decrease in the quality of apartments. When the government imposes rent controls, landlords may not have the incentive or financial means to invest in maintaining or improving the quality of their apartments. Therefore, it is unlikely that the quality of apartments will improve as a result of rent controls.

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  • 19. 

    A price floor

    • A.

      Sets a legal maximum on the price at which a good can be sold

    • B.

      Set a legal minimum on the price at which a good can be sold

    • C.

      Always determines the price at which a good must be sold

    • D.

      Is not a binding constraint if it is set above the equilibrium price

    Correct Answer
    B. Set a legal minimum on the price at which a good can be sold
    Explanation
    A price floor is a government-imposed regulation that sets a minimum price at which a good can be sold. It ensures that the price of the good does not fall below a certain level. This is typically done to protect producers and workers in industries where prices may fluctuate significantly. By setting a minimum price, the government aims to ensure that producers receive a fair income and prevent exploitation. Therefore, the correct answer is that a price floor sets a legal minimum on the price at which a good can be sold.

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  • 20. 

    Which of the following statements about a binding price ceiling is true?

    • A.

      The surplus created by the price ceiling is greater in the short run than in the long run

    • B.

      The surplus created by the price ceiling is greater in the long run than in the short run

    • C.

      The shortage created by the price ceiling is greater in the short run than in the long run

    • D.

      The shortage created by the price ceiling is greater in the long run than in the short run

    Correct Answer
    D. The shortage created by the price ceiling is greater in the long run than in the short run
    Explanation
    A binding price ceiling is a government-imposed limit on the maximum price that can be charged for a good or service. When a price ceiling is set below the equilibrium price, it creates a shortage in the market. In the short run, the shortage may not be as severe because both buyers and sellers may take time to adjust their behavior. However, in the long run, the shortage becomes more pronounced as buyers and sellers have more time to react to the price ceiling. Therefore, the statement "The shortage created by the price ceiling is greater in the long run than in the short run" is true.

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  • 21. 

    Which side of the market is more likely to lobby government for a price floor?

    • A.

      Neither buyers nor sellers desire a price floor

    • B.

      Both buyers and sellers desire a price floor

    • C.

      The sellers

    • D.

      The buyers

    Correct Answer
    C. The sellers
    Explanation
    Sellers are more likely to lobby the government for a price floor because it benefits them by setting a minimum price for their goods or services. With a price floor, sellers can ensure that they receive a certain level of income and protect themselves from price fluctuations or competition. Buyers, on the other hand, generally prefer lower prices and would not have an incentive to lobby for a price floor.

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  • 22. 

    Which of the following is an example of a price floor?

    • A.

      Rent controls

    • B.

      Restricting gasoline prices to $1.00 per gallon when the equilibrium price is $1.50 per gallon

    • C.

      The minimum wage

    • D.

      All of the above are price floors

    Correct Answer
    C. The minimum wage
    Explanation
    The minimum wage is an example of a price floor because it sets a minimum price that employers must pay for labor. This means that employers cannot pay their workers below this set minimum wage. By setting a price floor, the government aims to ensure that workers receive a fair wage and are protected from exploitation. However, this can also lead to unintended consequences such as job losses or reduced hours for workers, as employers may not be able to afford to pay the higher minimum wage.

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  • 23. 

    Which of the following statements is true if the government places a price ceiling on gasoline at $1.50 per gallon and the equilibrium price is $1.00 per gallon?

    • A.

      There will be a shortage of gasoline

    • B.

      There will be a surplus of gasoline

    • C.

      A significant increase in the supply of gasoline could cause the price ceiling to become a binding constraint

    • D.

      A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint

    Correct Answer
    D. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint
    Explanation
    If the government places a price ceiling on gasoline at $1.50 per gallon and the equilibrium price is $1.00 per gallon, a significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint. This means that if the demand for gasoline increases, the quantity demanded would exceed the quantity supplied at the price ceiling, leading to a shortage of gasoline.

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  • 24. 

    Studies show that a 10 percent increase in the minimum wage

    • A.

      Decreases teenage employment by about 10 to 15 percent

    • B.

      Increases teenage employment by about 10 to 15 percent

    • C.

      Decreases teenage employment by about 1 to 3 percent

    • D.

      Increases teenage employment by about 1 to 3 percent

    Correct Answer
    C. Decreases teenage employment by about 1 to 3 percent
    Explanation
    The correct answer is "decreases teenage employment by about 1 to 3 percent." Studies have shown that when the minimum wage is increased by 10 percent, there is a decrease in teenage employment by approximately 1 to 3 percent. This suggests that higher minimum wages may lead to reduced job opportunities for teenagers.

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  • 25. 

    Within the supply-and-demand model, a tax collected from the buyers of a good shifts the

    • A.

      Demand curve upward by the size of the tax per unit

    • B.

      Demand curve downward by the size of the tax per unit

    • C.

      Supply curve upward by the size of the tax per unit

    • D.

      Supply curve downward by the size of the tax per unit

    Correct Answer
    B. Demand curve downward by the size of the tax per unit
    Explanation
    When a tax is collected from the buyers of a good, it increases the price that buyers have to pay for the good. This increase in price decreases the quantity demanded of the good, causing a downward shift in the demand curve. The size of the tax per unit determines the magnitude of this downward shift. Therefore, the correct answer is "demand curve downward by the size of the tax per unit."

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  • 26. 

    Within the supply-and-demand model, a tax collected from the sellers of a good shifts the

    • A.

      Demand curve upward by the size of the tax per unit

    • B.

      Demand curve downward by the size of the tax per unit

    • C.

      Supply curve upward by the size of the tax per unit

    • D.

      Supply curve downward by the size of the tax per unit

    Correct Answer
    C. Supply curve upward by the size of the tax per unit
    Explanation
    When a tax is collected from the sellers of a good, it increases the cost of production for the sellers. As a result, the supply curve shifts upward by the size of the tax per unit. This means that at every given price level, sellers are willing to supply fewer units of the good because their costs have increased. Therefore, the supply curve moves upward to reflect this decrease in supply.

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  • 27. 

    Which of the following takes place when a tax is placed on a good?

    • A.

      An increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

    • B.

      An increase in the price buyers pay, a decrease in the price sellers receive, and an increase in the quantity sold

    • C.

      A decrease in the price buyers pay, an increase in the price sellers receive, and a decrease in the quantity sold

    • D.

      A decrease in the price buyers pay, an increase in the price sellers receive, and an increase in the quantity sold

    Correct Answer
    A. An increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold
    Explanation
    When a tax is placed on a good, the price that buyers pay for the good increases. This is because the tax is added to the price of the good, making it more expensive for buyers. On the other hand, the price that sellers receive for the good decreases. This is because the tax reduces the amount of money that sellers can keep from each sale. Additionally, the quantity sold of the good decreases. This is because the higher price for buyers and the lower price for sellers make the good less attractive and reduce the demand for it.

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  • 28. 

    When a tax is collected from the buyers in a market,

    • A.

      The buyers bear the burden of the tax

    • B.

      The sellers bear the burden of the tax

    • C.

      The tax burden on the buyers and sellers is the same as an equivalent tax collected from he sellers

    • D.

      The tax burden falls most heavily on the buyers

    Correct Answer
    C. The tax burden on the buyers and sellers is the same as an equivalent tax collected from he sellers
    Explanation
    When a tax is collected from the buyers in a market, the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers. This means that regardless of whether the tax is collected from the buyers or the sellers, the overall burden of the tax remains the same. The tax incidence is determined by the elasticity of demand and supply in the market, and it is divided between the buyers and sellers in a way that is equivalent to an equivalent tax collected from the sellers.

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  • 29. 

    A tax of $1.00 per gallon on gasoline

    • A.

      Increases the price the buyers pay by $1.00 per gallon

    • B.

      Decreases the price the sellers receive by $1.00 per gallon

    • C.

      Increases the price the buyers pay by precisely $.50 and reduces the price received by sellers by precisely $.50

    • D.

      Places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive

    Correct Answer
    D. Places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive
    Explanation
    This answer is correct because when a tax of $1.00 per gallon is imposed on gasoline, it creates a difference of $1.00 between the price the buyers pay and the price the sellers receive. This difference is known as a tax wedge, which is the amount of tax that is borne by both the buyers and the sellers. Therefore, the tax places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive.

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  • 30. 

    The burden of a tax falls more heavily on the sellers in a market when

    • A.

      A demand is inelastic and supply is elastic

    • B.

      Demand is elastic and supply is inelastic

    • C.

      Both supply and demand are elastic

    • D.

      Both supply and demand are inelastic

    Correct Answer
    B. Demand is elastic and supply is inelastic
    Explanation
    When demand is elastic and supply is inelastic, it means that consumers are very responsive to changes in price, while producers are not able to easily adjust their production levels. In this situation, if the government imposes a tax on the sellers, they are not able to pass on the burden of the tax to the consumers by increasing the price, as demand is elastic and consumers will simply choose to buy less of the product. Therefore, the sellers have to bear a larger portion of the tax burden themselves.

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  • 31. 

    A tax is placed on a good that is a necessity for consumers will likely generate a tax burden that

    • A.

      Falls more heavily on buyers

    • B.

      Falls more heavily on sellers

    • C.

      Is evenly distributed between buyers and sellers

    • D.

      Falls entirely on sellers

    Correct Answer
    A. Falls more heavily on buyers
    Explanation
    When a tax is placed on a good that is a necessity for consumers, it is likely to generate a tax burden that falls more heavily on buyers. This is because buyers of the good have limited alternatives and are less able to shift the burden of the tax onto sellers. As a result, they end up bearing a larger portion of the tax burden compared to sellers.

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  • 32. 

    The burden of a tax falls more heavily on the buyers in a market when

    • A.

      Demand is inelastic and supply is elastic

    • B.

      Demand is elastic and supply is inelastic

    • C.

      Both supply and demand are elastic

    • D.

      Both supply and demand are inelastic

    Correct Answer
    A. Demand is inelastic and supply is elastic
    Explanation
    When demand is inelastic, it means that buyers are not very responsive to changes in price. On the other hand, when supply is elastic, it means that producers are very responsive to changes in price. In this situation, if a tax is imposed on the market, the buyers will bear a larger portion of the burden because they are less likely to reduce their quantity demanded in response to the higher price. Producers, on the other hand, can more easily adjust their quantity supplied in response to the higher price, thereby shifting some of the burden of the tax onto the buyers.

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  • 33. 

    Which of the following statements about the burden of a tax is correct?

    • A.

      The tax burden generated from a tax placed on a good consumers perceive to be a necessity will fall most heavily on the sellers of the good

    • B.

      The tax burden falls heavily on the side of the market (buyers or sellers) that is most willing to leave the market when price movements are unfavorable to them

    • C.

      The burden of a tax lands on the side of the market (buyers or sellers) from which it is collected

    • D.

      The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation

    Correct Answer
    D. The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation
    Explanation
    The correct answer states that the distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation. This means that the burden of a tax does not necessarily fall on the side of the market (buyers or sellers) from which it is collected, but rather depends on how sensitive the quantity demanded and supplied are to changes in price. If demand is more elastic than supply, then the burden of the tax will fall more on the sellers. Conversely, if supply is more elastic than demand, then the burden of the tax will fall more on the buyers. Legislation does not determine who bears the burden, but rather the elasticity of supply and demand.

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  • 34. 

    For which of the following products would the burden of a tax likely fall more heavily on the sellers?

    • A.

      Food

    • B.

      Entertainment

    • C.

      Clothing

    • D.

      Housing

    Correct Answer
    B. Entertainment
    Explanation
    The burden of a tax is likely to fall more heavily on the sellers of entertainment products. This is because entertainment is often considered a luxury or discretionary expense, meaning that consumers have more flexibility in choosing whether or not to purchase these products. If the price of entertainment products increases due to a tax, consumers may choose to reduce their spending in this area, leading to a decrease in demand. As a result, sellers may have to bear a larger portion of the tax burden in order to maintain their sales levels.

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 07, 2014
    Quiz Created by
    Aziz.popy
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