Question

The “dead-weight loss” from an excise tax…

a. is greater if demand is perfectly inelastic.

b. is caused by a shift in consumer preferences when the tax is raised.

c. is the lost surplus that results from the higher price and lower output resulting from the tax.

d. is of little concern to policy makers since all excise taxes are “sin” taxes.

e. is the difference between consumer surplus and producer surplus.

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Question 62 pts

Aaron is willing to pay a maximum of $35 for a month’s supply of dietary supplements. Zoë, a seller, would be willing to accept a minimum of $24 for the same.

Assuming that the prevailing equilibrium price for a month’s supply is $28, if Aaron buys from Zoë, then…

a. Aaron will receive $7 of consumer surplus while Zoë will receive $4 of producer surplus.

b. Aaron will receive $11 of consumer surplus while Zoë will receive $24 of producer surplus.

c. Aaron will receive $4 of consumer surplus while Zoë will receive $7 of producer surplus.

d. Aaron will receive $35 of consumer surplus while Zoë will receive $28 of producer surplus.

e. Aaron will receive $35 of consumer surplus while Zoë won’t receive any producer surplus.

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Question 72 pts

In the context of “imperfect competition,” the greatest advantage a pure monopoly possesses is that…

a. it is usually the largest firm in a market that includes many other smaller firms.

b. it produces a “standardized” product that is very similar to those of its competitors.

c. it operates in an industry where there is no “market power,” which gives it the ability to never change its selling price.

d. it operates in an industry or market that has very high “barriers to entry.”

e. the enforcement of patent rights is extremely lax in most modern economies.

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Question 82 pts

Compared to a market that is “perfectly competitive,” an industry dominated by a monopoly will consistently attain an equilibrium that has a…

a. lower price and a higher quantity.

b. higher price and a lower quantity.

c. lower price and a lower quantity.

d. higher price and a higher quantity.

e. There is usually no major difference between equilibrium prices and/or quantities, regardless of whether the market is monopolistic or not.

Answer 1

Correct Answer:

C

Due to the taxation, the price increases and output decreases at the new equilibrium. It creates loss of total surplus that is termed as dead weight loss.

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6

Correct Answer:

A

Consumer surplus = 35-28 = $7

Producer surplus = 28-24 = $4

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7

Correct Answer:

D

There are very high entry barriers, making only one firm to operate in monopoly.

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8

Correct Answer:

B

A monopoly market will have higher price and lower quantity, exhibiting allocative and productive inefficiency.