Econ 101 Section 3– Principles of Microeconomics

Instructor: C. Burkart

Exam #6  [40 points total]

October 5, 2005

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.       The amount of the deadweight loss resulting from an excise tax is

a.       the difference between the government revenue from an excise tax and the reduction in total surplus resulting from imposition of the tax.

b.       the difference between the amount of consumer surplus and the amount of producer surplus remaining after imposition of the tax.

c.       independent of the elasticity of demand for the taxed good.

d.       the amount of revenue collected from the tax.

2.       Mark owns a ranch in Colorado that costs $3.76 million per year to operate. Of that, his explicit cost equals $3.29 million. Therefore, his actual monetary cost of running the ranch is

a.       $470,000.

b.       $3.76 million.

c.       $3.29 million.

d.       over $7 million.

3.       Marginal analysis is used to

a.       make an either-or decision.

b.       determine which costs are sunk costs.

c.       convince others that the costs of a certain activity do not matter.

d.      decide how much of something is the optimal amount.

4.       Some proponents of an excise tax on cigarettes argue that it will discourage smoking. Others argue that it will collect revenue for the government. Given the economic model of supply and demand, which of the following is true?

a.       The less elasticity there is in the supply of and demand for cigarettes, the more revenue will be collected from the tax.

b.       The more the tax discourages smoking, the more revenue it will collect for the government.

c.       A tax that discourages smoking will not cause a deadweight loss.

d.       The more elasticity there is in the supply of and demand for cigarettes, the more revenue will be collected from the tax.

5.       Economic theory asserts that

a.       only implicit costs are relevant in decision-making.

b.       only explicit costs are relevant in decision-making.

c.       a cost to be incurred in the future should count more heavily than a cost incurred today.

d.      both implicit costs and explicit costs are relevant in decision-making.

6.       To the extent that a firm incurs an implicit cost of capital,

a.       it will earn more of its profit in the future and less in the present.

b.      its economic profit will be less than its accounting profit.

c.       its accounting profit will be less than its economic profit.

d.       it will encounter more difficulty determining the optimal quantity to produce.

Question 7 [12 pts.] The figure to the right shows a demand curve and two supply curves for a hypothetical good.  Supply curve S₁ is the market supply curve before an excise tax is imposed. S2 represents supply in the after-tax situation. 

Ø      Use the graph to show the consumer surplus and producer surplus before and after the imposition of the tax.

Ø      Show the tax revenue collected by the government.

Ø      Show the deadweight loss of the tax.

Note: the easiest way for you to clearly illustrate these aspects of the market is to label areas on the graph A,B,C,D, etc. as I’ve done in class, and then refer to sums of these areas to describe the values required.  If you choose not to answer this way, make sure that the areas you indicate are clear and legible.

CS before: A+B+C, CS after: A

PS before: D+E+F, PS after: F

Tax revenue: B+D

Deadweight loss: C+E

Question 8 [8 pts.] Consider the market for cheese-stuffed jalapeno peppers. There are two consumers, Casey and Josie, and their willingness to pay for each pepper is given in the table. Use the table below to:

Ø      construct the demand schedule for pepper for prices of $0.00, $0.10, and so on, up to $0.90

Ø      calculate the total consumer surplus when the price of a pepper is $0.40

Question 9 [8 pts.] Consider the market for cheese-stuffed jalapeno peppers again. There are two producers, Cara and Jamie, and their costs of producing each pepper are given in the following table. Use the table :

Ø      construct the supply schedule for peppers for prices of $0.00, $0.10, and so on, up to $0.90.

Ø      calculate the total producer surplus when the price of a pepper is $0.70