Question

8. Assume the market for gasoline in California can be described by ordinary supply and demand curves. If a $1.00 per gallon tax is placed on gasoline companies, which of the following will likely occur ( note: according to ordinary D & S)?

A. Consumers will pay the full amount of the tax, as the companies simply shift the tax.

B. The tax will be split between consumers and firms.

C. The quantity purchased may not change at all.

D. All the above.     

9. Assume the marijuana market in California can be described by ordinary demand and supply curves. Currently consumption is legal, but production is limited to relatively small quantities by licensed growers. What would happen to the (P, Q) of marijuana if the licenses were dropped and large scale production was allowed?

A. The Q would increase but P is indeterminate because both D and S increase.

B. The P would decline and the Q would increase as the S increases.

C. The P would increase and Q would increase as D would increase.

D. All the above.

10. What is a dead weight loss?

A. A dead weight loss is a loss in consumer surplus whenever a price goes up.

B. A deadweight loss is a loss of producer surplus whenever a price goes down.

C. A deadweight loss is a loss in economic surplus whenever a market is pushed away from its (D and S) equilibrium.

D. All the above.

Answer 1

Answer

8. B. The tax will be split between consumers and firms.

Generally the incidence of tax or the burden of tax on consumers and producers depends on the elasticity of demand and supply curves. But here, it is said that the market for gasoline in California is described by ordinary supply and demand curves. Thus we can say that the tax will be split between consumers and firms.

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9. B. The P would decline and the Q would increase as the S increases.

Currently the consumption of marijuana in California is legal, but production is limited to relatively small quantities by licensed growers. Now, if the licenses were dropped and large scale production was allowed, the production of marijuana will increase which in turn will increase the supply of marijuana. The demand for marijuana remains constant. Thus the increase in the supply(S) of marijuana will decrease the price(P) of marijuana and will increase the quantity(Q) of marijuana in the market.

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10. C. A deadweight loss is a loss in economic surplus whenever a market is pushed away from its (D and S) equilibrium.

When the price of a good is above or below the equilibrium price of the good in the market, then the society experiences a loss in economic surplus. This loss in economic surplus is the deadweight loss in the society. Thus, a deadweight loss is a loss in economic surplus whenever a market is pushed away from its demand and supply equilibrium.

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