[questions are not in the same order as in the quiz]

Suppose that a tax increase adds 50 cents to the price of gasoline overnight and without warning, and the tax increase is expected to be permanent. For each statement below, grid in bubble A for TRUE, B for FALSE, or C for UNKNOWN [i.e. not enough information to determine whether true or false]. Assume ceteris paribus for everything except what you are told above and in each numbered statement taken alone. [HINT: 'demand' and 'supply' are jargon words; how much you want to buy is (in jargon) 'quantity demanded,' not 'demand.']

1. The demand for gasoline decreases immediately. FALSE; no reason for demand to change; price has gone up, so quantity demanded fell.

2. The amount of gasoline that consumers want to buy will decrease immediately. TRUE; see above.

3. The demand for small cars will increase relative to the demand for large cars. TRUE, assuming they use less gas.

4. The price of small cars will increase compared to before the gas price increase. UNKNOWN; the increase in gas taxes, therefore gas prices, will reduce the demand for all cars (it is a complement), although relative to large cars demand for small cars increases. The net effect is unknown — demand for small cars may increase or decrease, so their price may too (so far, supply of small cars has not changed).

5. If the supply of small cars also decreases because of the new restrictions on imports, the price of small cars will rise compared to before the change in the price of gas. UNKNOWN; we don't know which way demand changed, or how much compared to the supply change.

6. If the supply of small cars decreases as in 5., the quantity of small cars sold will tend to decrease but we cannot say what will happen to their price relative to before the gas price change. Still UNKNOWN, because we don't know for sure the net change in demand for small cars.

7. If we give the market time to adjust, and the tax stays unchanged, the price of housing in rural areas of Leon county will probably fall relative to the price of housing close to downtown Tallahassee. TRUE; commuting costs have gone up, that reduces demand for distant housing.

8. Although the demand for gasoline does not change immediately, over time as consumers shift to smaller cars and shorter commutes etc., the demand for gasoline will fall. TRUE; once they have a smaller car or shorter commute, at any given price they will want to buy less gas than before.

9. Question 8. illustrates that in the long run, demand is more inelastic than in the short run. FALSE; it's the other way round, demand is more elastic, i.e. quantity adjusts more to price change, in the long run.

10. Consumption of a good is said to be non-rival if

a. Once a unit is produced, it does not matter how many people try to consume it; b. once a unit is produced, you cannot stop people from consuming it; c. once a unit is produced, you cannot produce more; d. none of the above.

Definition.

11. Exclusion is said to be nonfeasible if

a. Once a unit is produced, it does not matter how many people try to consume it; b. once a unit is produced, you cannot stop people from consuming it; c. once a unit is produced, you cannot produce more; d. none of the above.

Definition.

12. If something is produced by the public sector, is it, in economic jargon, a pure public good?

a. yes b. no c. maybe, but not necessarily d. only on national holidays;

Most things produced by the public sector are NOT pure public goods — see definitions below.

"BOX"

Consumption is

                                                    Rival                                         Non-Rival

Exclusion is

Feasible                                         a                                                 b

Nonfeasible                                  c                                                 d

13. A pure public good is one that would correspond to which letter in the box above?

a. b. c. d.

14. A pure private good is one that would correspond to which letter in the box above?

a. b. c. d.

15. "Economic efficiency" is defined such that improvements in efficiency come about if

a. costs exceed benefits b. benefits exceed costs c. distribution is fairer d. b. and c. Efficiency ignores distribution — that is known in economics as "equity," and is considered a separate issue from efficiency.

16. A good for which a market system can produce efficiency is one that would correspond to which letter in the box above?

a. b. c. d. Only for pure private goods can a competitive market be expected to produce efficient outcomes.

17. A good that would not be produced at all in a market system is one that would correspond to which letter in the box above?

a. b. c. d. No incentive to produce if you can't charge for it, and no incentive to pay voluntarily if everybody can consume it if its produced.

18. Goods that a market system can produce, but probably not efficiently, correspond to which letters in the box above?

a. a b. a & d c. b & c d. a & c b. for sure; c. seems dodgier, but often markets do manage some production, because the rival nature of consumption is an incentive to be willing to pay.