Practice Quiz #2
Topics: Elasticities, Perfect Competition, Price Controls, Taxes, Subsidies,
Labor Markets
Background:
The nations of Sijanistan and Vandyland are located on opposite sides of
the same island. This isolated region has no contact with the rest of the
world, other than migratory birds and fish.
Sijanistan has thick jungles along its western reaches and they are an abundant source of hardwood
lumber. To the east it has rolling meadows ideal for farming. In particular, they produce wheat and
potatoes. The semi-arid south has vast salt deposits, but working conditions are grueling. The salt is used
in the process of preserving meats and fish. The salt mines work 24 hours a day, 7 days a week and have
no capacity to fit any more miners in the mine. The miners are independent contractors with a set
mining area and time they can be in the mine. If they fail to work, they don’t make any money. The only
domesticated animals are cattle, though wild boars are hunted for meat as well. The tusks of the boar
are prized and often decorated with ornate carvings. Some tusks can cost more than a year’s wages for
the average Sijanistani citizen. Recently, a factory opened to make leather goods. The factory is powered
by water wheels, which means the factories are all located along rivers, which is convenient, since they
can easily dump waste products into the rivers. In addition, a new invention called a printing press has
allowed the production of books at much lower costs than hand-copied books.
Vandyland is a rugged country of steep mountains and rocky islands. The pine forests yield softwood
lumber. Fishing provides most of the food, but the winter weather makes it difficult for them to sail in
the choppy waters. Many of the islands gleam white due to the abundance of guano from migratory
birds. This guano is high in nitrogen and phosphates, making it an ideal fertilizer. The guano islands are
uninhabited, so anyone can collect the guano, and there are many ships available to haul it to the
market, though the cost of transport adds to the price, depending on how far the ships must travel.
There are only three major distributors who buy the guano at the docks and then resell it to farmers.
The recent discovery of copper and advances in smelting have led to a productive metallurgy industry.
Both Sijanistan and Vandyland have adopted copper coins as their currency. A guild for coppersmiths
formed and controls who is allowed to work in the industry and the prices charged by all coppersmiths.
Whales are still a source of oil for lamps, however, the recent discovery of petroleum-based kerosene is
slowly replacing whale oil, since kerosene is cheaper to produce. The overall demand for lamp oil
(kerosene and whale oil) has risen sharply as wealth has increased and people have been able to read
more books. Vandyland farmers have managed to domesticate a variety of sheep that can graze on the
steep mountains that are unsuitable for cultivation. The sheep are used primarily for their wool.
1. Based on the Sijanistan background, what type of elasticity does the supply of salt likely exhibit?
A. Elastic supply
B. Inelastic supply
2. In Vandyland, how would you expect the elasticity of demand to be changing for whale oil?
A. Becoming more elastic
B. Becoming more inelastic
C. Nothing indicates a change in elasticity of demand
3. If consumers in Vandyland have relatively elastic demand for wild boar meat, what would be the
effect of a 5 copper permit required to hunt boar?
A. Wild boar hunting increases
B. Wild boar hunting decreases
C. No change to wild boar hunting
4. In a typical year, the price of wheat flour is around 1.5 coppers
per kilogram. However, this year summer flooding caused the
loss of much of the wheat crop, causing a shift in supply (S1),
which led to rapidly rising prices. During this same time period,
the rising cost for fish caused a shift in demand (D1) as
consumers switched consumption from fish to wheat flour. To
address the rising prices, the government imposed a price
ceiling of 3 coppers for wheat flour. What will be the shortage
in this market, given the current market conditions?
A. 300,000 kg
B. 500,000 kg
C. 600,000 kg
D. 800,000 kg
5. Suppose the Coppersmith Guild observes that copper farming
tools are the most popular items sold. They decide that no
tool will be sold for less than 7 coppers. Given the graph, what
will be the impact to copper farming tool sales?
A. +25%
B. No effect
C. -25%
D. -50%
6. Seeing the increase in sales of books, the government of
Sijanistan imposes a tax of 1 copper on all books. Who benefits from this tax?
A. Consumers
B. Producers using the printing press
C. Producers hand-copying books
D. None of these parties directly benefit
7. Potatoes are an increasing part of the Sijanistani diet. In
the previous growing season, farmers planted too many
potatoes and the price dropped very low. The
government does not want a repeat of this, so they have
implemented a price floor of 2 coppers. However, this
year, farmers did not plant enough potatoes and prices
rose to a point that consumers complained, so the
government also implemented a price ceiling of 4
coppers. Given the graph, what will be the effect of these
policies on the market?
A. A shortage of 6,000 kg
B. A shortage of 4,000 kg
C. A shortage of 2,000 kg
D. There will be no effect on this market from either price control
8. With an alternative to whale oil available, the
government of Vandyland wants to discourage whalebased products, due to changing social attitudes towards
hunting whales. They impose a tax on whale oil that’s
equivalent to 50% of the new price paid by consumers.
What is the total price paid by consumers for whale oil
now?
A. $9
B. $8
C. $7
D. $4
9. The leading manufacturer of kerosene influences the
government to further accelerate the adoption of
kerosene by providing a subsidy. How much of a subsidy
would it take to double the consumption of kerosene?
A. 1.5 coppers
B. 3.0 coppers
C. 4.5 coppers
D. 6.0 coppers
10. Which strategy might prove the most effective at keeping
the whale oil industry from being out-competed by
kerosene producers?
A. Petition the government to provide a subsidy on kerosene
B. Petition the government to impose a binding price floor on whale oil
C. Coordinate among whalers to decrease the harvest of whales
D. Petition the government to impose a binding price floor on kerosene
11. The price of fresh fish can vary greatly in winter due to
the changes in weather. Consequently, the government
of Sijanistan places a price ceiling of 5 coppers on fresh
fish. Given the graph, what is the quantity of fresh fish
sold on the market?
A. 100,000
B. 300,000
C. 500,000
D. 630,000
12. After the government of Sijanistan hears about how
many of their poorest residents are still not able to afford
fresh fish, they lower the price ceiling to 3 coppers.
What is the result on dead weight loss (DWL)?
A. It increases
B. It decreases
C. It remains unchanged
13. Believing the working conditions in the wool factories are
too dangerous and workers are being paid too little for
the risk, the government has imposed a minimum wage
for all factory workers. All workers must now be paid at
least 5 coppers per hour. Given the graph, how many
fewer workers will be hired compared to the situation
before there was a minimum wage?
A. 0 (no effect)
B. 2,000
C. 4,000
D. 5,000
14. After several years, the leather factories in Sijanistan start producing high quality, affordable leather
products, and soon they need to expand their labor force to meet the demand. After hiring every
available worker, they still need more workers. Unable to keep up with the demand, shortages
develop in the market for leather goods, leading to black market activity. The government imposes
price ceilings to protect consumers. Who is likely to benefit the most from the government price
control?
A. Black market sellers
B. Black market buyers
C. Producers
D. Consumers