Practice Questions for Experiments 3 & 4


THE NEXT SIX QUESTIONS ARE BASED ON THE FOLLOWING SITUATION:  Consider a 
competitive market with 9 consumers, each of whom will buy at most one unit of 
the good, and 8 sellers, each of whom will sell at most one unit of the good.  
The distribution of buyer values (or buyer reservation prices) is as follows:

	Buyer Value		Number of Buyers
	$2		4
	$4		2
	$6		3

The distribution of seller costs (or seller reservation prices) is as follows:

	Seller Cost		Number of Sellers
	$1		6
	$3		2

1.  In this market, what price (P) and quantity (Q) would arise in a competitive 
equilibrium?

a) P=$1, Q=8
b) P=$2, Q=6
c) P=$3, Q=5
d) P=$4, Q=3
e) P=$6, Q=2

2.  What are the equilibrium price and quantity if sellers are required to pay a 
tax of $4 for each unit of the good sold?

a) P=$2, Q=4
b) P=$4, Q=5
c) P=$5, Q=3
d) P=$6, Q=2
e) P=$8, Q=4

3.  How much tax revenue is raised by this $4 per unit tax paid by sellers?

a) $8
b) $12
c) $16
d) $18
e) $20

4.  What is the excess burden of this $4 per unit tax paid by sellers?

a) $7
b) $10
c) $12
d) $16
e) $18

5. What are the equilibrium price and quantity if buyers, instead of sellers, 
are required to pay the tax of $4 for each unit of the good sold?

a) P=$1, Q=3
b) P=$2, Q=4
c) P=$4, Q=5
d) P=$5, Q=3
e) P=$6, Q=4

6.  What is the excess burden if buyers, instead of sellers, are required to pay 
the tax of $4 for each unit of the good sold?

a) $7
b) $10
c) $12
d) $16
e) $18


THE NEXT SIX QUESTIONS ARE BASED ON THE FOLLOWING SITUATION:  In Brass Monkey, 
Montana, there is a competitive market for snowmobiles.  Each demander will buy 
at most one snowmobile and each supplier will sell at most one snowmobile.  
There are 80 demanders willing to pay up to $550 for a snowmobile, 80 demanders 
willing to pay up to $450, and 80 demanders willing to pay up to $350.  There 
are 120 suppliers who are willing to sell a snowmobile for any price of $250 or 
higher but they will not sell for less than that amount.  There are 160 
suppliers who are willing to sell a snowmobile for any price of $400 or higher 
but they will not sell for less than that amount.

7.  In the absence of a sales tax, what would be the competitive equilibrium 
price (P) and quantity (Q) in this market?

a) P=$400, Q=160
b) P=$450, Q=120
c) P=$300, Q=80
d) P=$350, Q=160
e) P=$350, Q=120

8.  If the local government of Brass Monkey collects a sales tax of $150 at the 
time of purchase from each snowmobile buyer,

a) the supply curve will shift down by $150 from its pretax level.
b) the supply curve will shift up by $150 from its pretax level.
c) the demand curve will shift up by $150 from its pretax level.
d) the demand curve will shift down by some amount x between 0 and $150, and the 
supply curve will shift up by $150-x.
e) the demand curve will shift down by $150 from its pretax level.

9.  The $150 sales tax that must be paid by snowmobile buyers in Brass Monkey at 
the time of purchase would cause the equilibrium price that buyers pay to 
sellers to be:

a) $75 lower than the equilibrium price with no taxes.
b) $75 higher than the equilibrium price with no taxes.
c) $100 lower than the equilibrium price with no taxes.
d) $150 higher than the equilibrium price with no taxes.
e) $150 lower than the equilibrium price with no taxes.

10.  In competitive equilibrium, how much revenue would the government of Brass 
Monkey collect from its tax on snowmobiles?

a) $18,000
b) $0
c) $8,000
d) $4,000
e) $2,000

11.  How much excess burden would result from the tax on snowmobiles in Brass 
Monkey?

a) $4,000
b) $0
c) $9,000
d) $2,000
e) $800

12.  Now suppose that, whenever a snowmobile is purchased in Brass Monkey, the 
$150 sales tax is collected from the seller, rather than from the buyer.  This 
would cause the equilibrium price that buyers pay to sellers to be:

a) $150 higher than the equilibrium price without taxes.
b) $75 higher than the equilibrium price without taxes.
c) $75 lower than the equilibrium price without taxes.
d) $50 higher than the equilibrium price without taxes.
e) the same as the equilibrium price without taxes.


THE NEXT TWO QUESTIONS ARE BASED ON THE FOLLOWING SITUATION:  The demand curve 
for jelly beans is given by the equation P=38-Q, where P is the price of jelly 
beans (in dollars) and Q is the quantity of jelly beans sold.  The supply curve 
is given by the equation P=8+(Q/2).

13.  What are the competitive equilibrium price and quantity?

a) P=$18, Q=20
b) P=$24, Q=14
c) P=$20, Q=18
d) P=$21, Q=24
e) P=$26, Q=18

14.  Now the government offers a subsidy of $6 to suppliers for every unit of 
jelly beans that they sell.  The effect of this subsidy on the equilibrium price 
paid by consumers for jelly beans is to:

a) increase this price by $6.
b) reduce this price by $6.
c) reduce this price by $4.
d) reduce this price by $3.
e) increase this price by $3.


THE NEXT FOUR QUESTIONS ARE BASED ON THE FOLLOWING SITUATION:  Consider a 
competitive market for a prohibited good, similar to what we encountered in 
experiment 4.  There are 32 demanders, each of whom will buy at most one unit of 
the good.  Eighteen of the demanders are willing to pay up to $100 to acquire 
the good, and the other 14 demanders are willing to pay up to $30 to acquire the 
good.  There are 12 suppliers, each of whom can produce at most 3 units of the 
good.  It costs a supplier $20 to produce each unit of the good.  Initially, 1/3 
of the sales are confiscated by the police.  When a sale is confiscated, the 
seller must pay a fine of $10 for each unit of the good that is confiscated from 
him, in addition to the costs that the seller has already incurred for producing 
the good.  Moreover, sellers receive no payment from buyers for confiscated 
units of the good.  We will consider two different scenarios for what the police 
do with the units of the good that they confiscate.  In the first scenario, the 
police destroy all units of the good that they confiscate.  This means that 
buyers do not pay for confiscated units of the good and buyers do not receive 
these units of the good.  In the second scenario, the police sell confiscated 
units of the good back to the original buyers at the price that these buyers had 
agreed to with the supplier.

15.  Under the scenario where the police destroy all units of the good that they 
confiscate, what are the equilibrium price (P) and quantity (Q) in this market?

a) P=$100, Q=12
b) P=$80, Q=18
c) P=$80, Q=12
d) P=$35, Q=18
e) P=$30, Q=32

16.  Under the scenario where the police resell all units of the good that they 
confiscate, what are the equilibrium price (P) and quantity (Q) in this market?

a) P=$100, Q=12
b) P=$80, Q=18
c) P=$80, Q=12
d) P=$35, Q=18
e) P=$30, Q=32

17.  Suppose that the fraction of sales confiscated by the police increases from 
1/3 to 2/3.  Under the scenario where the police destroy all units of the good 
that they confiscate, what are the equilibrium price (P) and quantity (Q) in 
this market?

a) P=$100, Q=12
b) P=$80, Q=18
c) P=$80, Q=12
d) P=$35, Q=18
e) P=$30, Q=32

18.  Once again, suppose that the fraction of sales confiscated by the police is 
now 2/3.  Under the scenario where the police resell all units of the good that 
they confiscate, what are the equilibrium price (P) and quantity (Q) in this 
market?

a) P=$100, Q=12
b) P=$80, Q=18
c) P=$80, Q=12
d) P=$35, Q=18
e) P=$30, Q=32


Correct Answers:

1.  b
2.  c
3.  b
4.  a
5.  a
6.  a
7.  a
8.  e
9.  c
10.  a
11.  d
12.  d
13.  a
14.  c
15.  d
16.  d
17.  a
18.  b