Econ 101 Section 3– Principles of Microeconomics
Instructor: C. Burkart
Questions 1 to 6 are worth 2 points each. Clearly circle the one best answer to each question. You will not receive credit if your answer choice is unclear or ambiguous.
1. A binding minimum wage is a type of
(a) price ceiling.
(b) price floor.
(c) quota.
(d) tax incidence.
2. What is the result of a binding quota restriction on quantity?
(a) The efficiency of the market will be enhanced.
(b) Demand for the good will increase.
(c) The supply price at the transacted quantity will exceed the demand price.
(d) The market-clearing price will be higher than the equilibrium price.
3. Suppose that the rate for a hotel room is $75 before the imposition of an $8 excise tax. With the tax, the rate rises to $80. What is the consumer's burden of the tax?
(a) $8
(b) $5
(c) $3
(d) $10
4. If a price ceiling is imposed above the equilibrium price, what is the effect?
(a) A shortage results.
(b) The quantity demanded will decrease.
(c) A surplus results.
(d) There is no visible effect on the market outcome.
5. If the U.S. government imposes a quota on the amount of French wine allowed into the U.S. (the quota is set at a quantity below equilibrium), the price of French wine in the U.S. will _______ and the price of U.S.-manufactured wine will ________.
(a) Increase, increase
(b) Increase, decrease
(c) Decrease, increase
(d) Decrease, decrease
6. Suppose that the price of overnight package delivery service is $18 before a $5 excise tax is imposed. With the tax, the price rises to $20. What is the producer's burden of the tax?
(a) $3
(b) $5
(c) $2
(d) $13
Question 7 [20 pts.] The U.S. government would like to help domestic automakers compete against foreign automakers in the light truck market. It can either impose a quota on the number of foreign trucks imported or by put an excise tax on each foreign truck sold in the U.S. The demand and supply schedules for imported trucks are given in the table below.
|
|
Market for imported trucks |
|
|
Price |
Quantity demanded |
Quantity Supplied |
|
$32,000 |
100,000 |
400,000 |
|
$31,000 |
200,000 |
350,000 |
|
$30,000 |
300,000 |
300,000 |
|
$29,000 |
400,000 |
250,000 |
|
$28,000 |
500,000 |
200,000 |
|
$27,000 |
600,000 |
150,000 |
In the absence of government interference, what is the price of an imported truck? $30,000
How many are sold in the U.S.? 300,000
Illustrate this situation with a diagram in the space next to the supply and demand schedule (you do not need to include numbers in your graph, just sketch supply, demand, label equilibria, etc.).
Suppose the government adopts a quota at 200,000 foreign trucks. What are the new market price and quantity for these trucks? Price: $31,000 Quantity: 200,000
Show the effect of this in your diagram.
Suppose that, instead of a quota, the government imposes an excise tax of $3,000 per truck. How many trucks will be purchased and at what price? Market price: $31,000 Quantity: 200,000
What price will the foreign automaker receive per truck? $28,000
How much tax revenue will the government collect? $3,000 x 200,000 = $600 million
(You do not need to draw a diagram for the excise tax scenario.)
Question 8 [8 pts.] The Pirate’s Booty, a seafood restaurant, raises the price of their full course set menu meal from $19 to $21. Before the price change, they were serving 400 meals a night, but after raising their price they only serve 300 meals a night. Using the midpoint (a.k.a. “average”) method of calculating percentage changes, find the price elasticity of demand for these meals. You may report the elasticity in its absolute value if you wish. For full credit be sure to show all of your work.
