Chapter 11: Applying the Competitive Model

A deadweight loss of consumer and/or producer surplus occurs when
1. producers fail to maximize profits.
2. mutually beneficial transactions cannot be completed.
3. consumers do not maximize their utility.
4. the price of inputs increases.
In a competitive market, an efficient allocation of resources is characterized by
1. a price greater than the marginal cost of production.
2. the possibility of further mutually beneficial transactions.
3. the largest possible sum of consumer and producer surplus.
4. a value of consumer surplus equal to that of producer surplus.
“Missing markets” result from
1. high transactions costs of such markets.
2. strict price controls.
3. the inability of producers to gain economies of scale.
4. foreign countries dominating a domestic market for a product.
Price controls
1. are always popular with consumers because they lower prices.
2. create shortages.
3. increase producer surplus because firms can now sell a greater quantity of a good at a lower price.
4. are necessary to preserve equity.
One example of Ricardian rent is
1. rent paid to landlords under price controls.
2. the difference between the price of a highly demanded unique piece of artwork and the opportunity cost of maintaining it.
3. the amount paid to a seller above the equilibrium price of tourist class tickets in order to receive higher quality seats in first class.
4. the price rise of wool from a disease among sheep.
In the short run, the incidence of a sales tax is
1. wholly absorbed by the producer.
2. shared between the consumer and the producer.
3. deferred until the market is able to re-establish an equilibrium price.
4. wholly absorbed by the consumer.
In the long run, the greater burden of a specific tax will usually be absorbed by
1. consumers.
2. the party—consumers or producers—with the more elastic demand/supply curve.
3. the party with the least elastic demand/supply curve.
4. shareholders and employees of the firm in the form of reduced dividends and wages.
In the short run, specific taxes on a firm result in
1. price increases that may not persist in the long run.
2. an increase in consumer surplus because the tax permits spending in additional government services.
3. shortages of the good being taxed.
4. an increase in producer surplus because of the rise in price.
The excess burden of a tax is
1. the amount by which the price of a good increases.
2. the loss of consumer and producer surplus that is not transferred elsewhere.
3. The amount by which a person’s after-tax income decreases as a result of the new tax.
4. the welfare costs to firms forced to leave the market due to an inward shift of the demand curve.
One way to minimize the deadweight loss resulting from a specific tax is to
1. tax only wealthy firms and individuals.
2. spread the tax over many goods and services.
3. tax goods for which either supply or demand is inelastic.
4. tax luxury items such as yachts and sports cars.

Chapter 11: Applying the Competitive Model

Multiple Choice Questions