AP Micro Taxes and Trade Practice + Quiz

If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax?

• Consumers will bear most of the burden of the tax.

• Producers will bear all of the burden of the tax.

• Producers will bear most of the burden of the tax or risk losing sales.

• Both consumers and producers will share the burden of the tax equally.

• The price of the good will not change.

In the diagram of the effect of a unit tax placed on a good, what is the dollar amount of the unit tax?

• $0.00

• $0.45

• $0.55

• $1.00

• $1.45

Suppose that the market for low-wage labor is perfectly competitive and initially in equilibrium. If the government establishes an effective minimum wage, which of the following will occur?

• Employment of low-wage workers will decrease and unemployment will increase.

• The quantity of low-wage workers supplied will be less than the quantity demanded.

• The total wage payment received by all low-wage workers will increase.

• Economic efficiency will increase, since firms were paying workers less than the value of their marginal revenue product.

• Low-wage workers will be motivated to form a union.

If the government imposes a tariff on imports of cheese, the price and quantity of imported cheese will most likely change in which of the following ways?

• Price: Decrease, Quantity: Decrease

• Price: Decrease, Quantity: Increase

• Price: Increase, Quantity: Not change

• Price: Increase, Quantity: Decrease

• Price: Increase, Quantity: Increase

Country Z has a downward sloping domestic demand curve and an upward sloping domestic supply curve for widgets. In the absence of trade, the domestic price of widgets is P0. Now the country engages in trade, and the price for widgets is Pw. This is below the domestic price of P0. Which of the following will occur?

• Country Z will begin exporting widgets.

• Consumer surplus will decrease in Country Z.

• Domestic producer surplus will decrease in country Z.

• Domestic production of widgets in Country Z will increase.

• The price of widgets received by domestic producers will increase.

Country Z is both a producer and an importer of cloth. Which of the following will happen if the government of Country Z imposes a tariff on cloth and the country continues to import some cloth from abroad?

• There will be a decrease in domestic producer surplus.

• There will be an increase in the quantity demanded for cloth.

• As the country produces more cloth, there will be an efficiency gain for the economy.

• There will be a decrease in consumer surplus for domestic consumers.

• The domestic consumption of cloth will increase.

Answer explanation

The tariff will raise the domestic price of cloth in Country Z. There will be a higher price for cloth, increased domestic production of cloth, reduced imports of cloth, reduced total consumption of cloth, and some efficiency loss. With the higher price for cloth, domestic producer surplus will increase and consumer surplus will decrease.

Country Z is both a producer and an importer of green tea. If country Z imposes a tariff on imports of green tea, which of the following will occur in the domestic market of green tea?

• Consumer surplus will increase.

• Domestic production will increase.

• Total consumption of green tea will increase.

• Producer surplus will decrease.

• The price paid by domestic consumers will decrease.

Answer explanation

The imposition of the tariff increases the domestic price of green tea to producers and to consumers in country Z, which results in an increase in domestic production (an upward movement along the supply curve).

Following the imposition of a $4 per-unit tax in a competitive market, the seller’s after-tax price falls from the original equilibrium price of $12 to $11. Which of the following statements relating to the imposition of the tax is true?

• The seller bears 75 percent of the tax burden.

• The new after-tax equilibrium price is $16.

• There is no deadweight loss from this tax.

• The new after-tax equilibrium price is $15.

• The buyer bears 25 percent of the tax burden.

Answer explanation

Following the imposition of the $4 per-unit tax, when the after-tax seller’s price fell from $12 to $11, the after-tax equilibrium price must have risen to $15; ($11+$4).

Assume that in a competitive equilibrium, 1,000 units are sold at $20 per unit. Following the imposition of a $4.00 per unit tax, the new consumer price is $23, and the new equilibrium quantity is 950 units. What are the values of the tax revenue collected and the deadweight loss?

• Tax revenue $4,000; Deadweight loss $3,000

• Tax revenue $3,800; Deadweight loss $200

• Tax revenue $3,800; Deadweight loss $100

• Tax revenue $3,000; Deadweight loss $100

• Tax revenue $200; Deadweight loss $200

Answer explanation

The tax reduced the quantity sold to 950 units, each of which is subject to a $4.00 per unit tax. The after-tax price sellers receive is ($23−$4)=$19. Tax revenue is 950×$4.00=$3,800. Deadweight loss is the area of the triangle of inefficiency or lost surplus: ($23−19)×50×.5=$100.

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