Frequent Exam Questions with Answers
Effects of Government Intervention
Chapter 12 ― Question 3
If a tariff is raised on a commodity,
- foreign producers charge a lower price
- foreign producers receive a higher price
- domestic producers receive a higher price
- domestic producers charge a lower price
*C. The tariff raises the price of imports. This enables domestic producers to raise their prices. B is wrong because the tariff must be deducted from the higher price importers receive.
Chapter 12 ― Question 4
If the government sets a price floor above equilibrium price of a commodity, which of the following will happen
- an increase in tax revenues for the government
- an increase in demand for the commodity
- excess supply of the commodity
- excess demand for the commodity
*C. Price floors above equilibrium price attract new suppliers, for instance, more workers seek jobs when the minimum wage has been raised. Answer A is nonsense. Government do not raise revenues by setting price floors. Answers B and D are also nonsense. Why should an increase in price lead to an increase in demand?
Chapter 12 ― Question 8
What precisely does it mean to say that suppliers must bear a tax because supply is inelastic?
* It means that they cannot lower quantity supplied. They supply a quantity that exceeds quantity demanded at the new price. As a result, they must lower their net prices.
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