AP Microeconomics Practice Quiz: The Effects of Government Intervention in Markets

Correct Answer: B

A price ceiling is a form of government price intervention that establishes a maximum legal price for a good or service. A price floor is a minimum price, a tax is a levy, and a quantity limit is a quota.

Correct Answer: B

A binding price floor is set above the equilibrium price. At this higher price, producers have an incentive to supply more, while consumers have an incentive to demand less. This disparity between quantity supplied and quantity demanded results in a surplus.

Correct Answer: B

A tax on producers is an additional cost of production. This changes their incentives, causing the supply curve to shift to the left (or vertically upward by the amount of the tax). This shift results in a new, higher equilibrium price for consumers and a lower equilibrium quantity.

Correct Answer: A

The incidence of a tax falls more heavily on the side of the market that is less elastic, meaning less responsive to price changes. Since demand is relatively inelastic, consumers are less able to reduce their quantity demanded in response to the price increase, so they will bear a larger portion of the tax burden.

Correct Answer: B

Government intervention in a market that is already producing the efficient quantity (where marginal benefit equals marginal cost) will move the market away from this optimal point. This creates a deadweight loss, which represents a decrease in total economic surplus and therefore a decrease in allocative efficiency.

Correct Answer: C

Deadweight loss is the reduction in total economic surplus (the sum of consumer and producer surplus) that results from a market distortion, such as a tax or price control. It represents the value of the mutually beneficial trades that do not occur because of the government intervention.

Correct Answer: B

A subsidy to producers lowers their cost of production, which changes their incentives and causes the supply curve to shift to the right. This leads to a lower market price for consumers. However, because producers also receive the subsidy payment from the government, the total price they receive (market price + subsidy) is higher than the original equilibrium price.

Correct Answer: C

Taxes are payments made to the government by individuals or firms, thus generating revenue for the government. Subsidies are payments made by the government to individuals or firms, thus representing a cost or expenditure for the government.

Correct Answer: B

The benefit of a subsidy accrues to the side of the market that is less elastic. If supply is perfectly inelastic, the quantity supplied cannot change. A subsidy to consumers shifts demand to the right, but since quantity cannot increase, the market price simply rises by the full amount of the subsidy. Consumers pay this higher price, but their net price after the subsidy is the same as before. Producers, however, now receive this much higher market price, capturing the entire benefit.

Correct Answer: B

The equilibrium price, where quantity demanded equals quantity supplied, is $6. A price ceiling at $4 is binding because it is below equilibrium. At a price of $4, the quantity demanded is 400 units, but the quantity supplied is only 200 units. The difference between the quantity demanded and the quantity supplied (400 - 200 = 200) results in a shortage of 200 units.

Correct Answer: B

Total tax revenue is calculated by multiplying the per-unit tax by the quantity of the good sold after the tax is imposed. The per-unit tax is the difference between the price consumers pay ($12) and the price producers receive ($7), which is $5. The quantity sold is 80 units. Therefore, total tax revenue is $5/unit * 80 units = $400.

Correct Answer: C

A binding quota restricts the quantity transacted to a level below the efficient equilibrium quantity. By preventing mutually beneficial trades from occurring, the quota reduces total economic surplus and creates a deadweight loss. The price will typically rise, the quantity sold will decrease, and the government only earns revenue if it sells licenses for the quota, which is not a guaranteed outcome of the quota itself.

Correct Answer: D

Allocative efficiency occurs when a market produces the quantity where the marginal benefit to consumers equals the marginal cost to producers. By setting a price ceiling that reduces the quantity traded to 150, the government prevents 50 units from being traded. For these units, the price consumers would have been willing to pay was greater than the price producers would have been willing to accept. The loss of this potential surplus is the source of the deadweight loss and allocative inefficiency.

Correct Answer: B

First, find the original equilibrium: 10 + Q = 70 - Q => 2Q = 60 => Q = 30. The tax shifts the supply curve up by $20 to P = 30 + Q. Find the new equilibrium quantity: 30 + Q = 70 - Q => 2Q = 40 => Q = 20. The change in quantity (ΔQ) is 30 - 20 = 10 units. The deadweight loss is a triangle with a base equal to the tax ($20) and a height equal to the change in quantity (10). DWL = 0.5 * tax * ΔQ = 0.5 * $20 * 10 = $100.