Econ Chapter 11

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(GRAPH)Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the price of each dose is: • A) $50. • B) $60. • C) $70. • D) $80.

A) $50.

Which of the following is an example of a positional arms control agreement? • A) Campaign spending limits • B) Highly selective admissions standards at colleges • C) Prohibiting speech that causes more harm than good • D) Public education

A) Campaign spending limits

Which of the following is NOT an example of an activity with external benefits? • A) Eating a sandwich in the dining hall • B) Planting flowers in your front yard • C) Installing smoke alarms in your house • D) Having your car's faulty exhaust system repaired

A) Eating a sandwich in the dining hall

A) decrease total economic surplus.

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The actual monthly gain in surplus to Curly and Moe from living together after addressing the snoring problems in the least costly way is: • A) $200. • B) $150. • C) $100. • D) $50.

B) $150.

(GRAPH) Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The socially optimal quantity of the vaccine is ________ doses per day. • A) 50 • B) 75 • C) 100 • D) 125

C) 100

Suppose Frank likes to snack on sugary candy. Frank knows that it's bad for his teeth to eat sugary candy, but he doesn't care. Frank's snacking habits have no impact on anyone other than Frank. In this case, Frank's consumption of sugary candy generates: A) a negative externality. • B) a positive externality. • C) neither a positive nor a negative externality. • D) both a positive and a negative externality.

C) neither a positive nor a negative externality

D) $20

(GRAPH) Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. The cost (in thousands of dollars) of the filter to Erie Textiles is ________, and the net benefit (in thousands of dollars) of the filter to the fishermen and bird watchers is ________. • A) $400; $310 • B) $310; $200 • C) $200; $75 • D) $200; $235

D) $200; $235

Which one of the following government actions is intended to generate positive externalities? • A) Taxing polluting industries • B) Speed limits on the highways • C) Requiring autos to meet minimum emissions regulations • D) Subsidies for planting trees on hillsides

D) Subsidies for planting trees on hillsides

(GRAPH) The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die. For the US, the dominant strategy is to have ________, and for Russia, the dominant strategy is to have ________. • A) atomic weapons; conventional weapons • B) conventional weapons; atomic weapons • C) conventional weapons; conventional weapons • D) atomic weapons; atomic weapons

D) atomic weapons; atomic weapons

Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates: • A) a negative externality. • B) a positive externality. • C) neither a positive nor a negative externality. • D) both a positive and a negative externality.

A) a negative externality.

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ________ externality, and burning tires generates ________ externality. • A) a positive; a negative • B) a negative; a positive • C) a positive, no • D) no; a negative

A) a positive; a negative

The essential reason some species of whales have nearly been driven to extinction is that: • A) it is difficult to define and enforce property rights to whales. • B) the demand for whales is extremely high. • C) the price of whales is very low. • D) experienced whalers find it easy to catch whales.

A) it is difficult to define and enforce property rights to whales.

The tragedy of the commons refers to the: • A) overuse of resources that have no price. • B) overuse of resources that have no cost. • C) under production of goods that have external benefits. • D) failure of the Coase theorem when negotiation is costly

A) overuse of resources that have no price.

For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that • A) the marginal cost of pollution control is the same across all firms. • B) enforcement is vigorous. • C) all firms be the same size. • D) large polluters reduce emissions by more than small polluters.

A) the marginal cost of pollution control is the same across all firms.

(GRAPH) Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Is it socially optimal for Quick Burger to operate a drive-through window? • A) No, because The Sunshine Café's payoff is lower when Quick Burger operates a drive-through window. • B) No, because total payoffs are higher when Quick Burger does not operate a drive- through window. • C) Yes, because Quick Burger's payoff is higher when Quick Burger operates a drive- though window. • D) Yes, because total payoffs are higher when Quick Burger operates a drive-through window.

B) No, because total payoffs are higher when Quick Burger does not operate a drive- through window.

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then which of the following outcomes is consistent with the Coase theorem? • A) The cigar smoker will not be able to smoke because the majority of people in the room dislike the smell of cigar smoke. • B) The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking. • C) The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration. • D) The nine non-smokers will each pay the cigar smoker fifty cents and the cigar smoker will not smoke.

B) The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking.

Which of the following would be most vulnerable to the tragedy of the commons? • A) Restrooms in a restaurant • B) Timber on public land • C) Cattle on a ranch • D) Apples in Phoebe's apple orchard.

B) Timber on public land

In the absence of environmental protection laws, firms pollute because: • A) business owners follow different norms than do environmentalists. • B) controlling emissions costs money, thereby reducing profits. • C) business owners do not believe that pollution is a problem. • D) the cost pollution imposes on society is small relative to the cost of reducing pollution.

B) controlling emissions costs money, thereby reducing profits.

If the production of a good generates a negative externality, then at the market equilibrium quantity, the marginal cost to society of another unit of the good will be: • A) less than the marginal benefit of another unit. • B) greater than the marginal benefit of another unit. • C) equal to the marginal benefit of another unit. • D) negative due to the external cost.

B) greater than the marginal benefit of another unit.

In order to achieve the socially optimal level of output, goods that entail positive externalities should be: • A) required. • B) subsidized. • C) taxed. • D) deregulated.

B) subsidized.

(GRAPH) The following payoff matrix shows the outcomes for the United States and Russia from relying oN conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die. This situation above illustrates a positional externality because: • A) using atomic weapons is a dominated strategy. • B) using atomic weapons improves each country's outcome but hurts the other country. • C) the game does not have a Nash equilibrium. • D) no matter what kind of weapons each country chooses, many people will die.

B) using atomic weapons improves each country's outcome but hurts the

(GRAPH) Refer to the figure below. Private markets will provide ________ units of this good per day, and the socially optimal number of units per day is ________. • A) H; F • B) H; G • C) F; G • D) G; F

D) G; F

(GRAPH) Two firms, Kegareta Inc. and Sucio Enterprises, have access to five production processes, each one of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. Suppose the government imposes a tax of $56 per day on each ton of smoke emitted. Assuming the revenue the government collects from the tax is used to offset other taxes, what's the total cost to society of this policy? • A) $120 per day • B) $180 per day • C) $205 per day • D) $225 per day

C) $205 per day

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for: • A) Curly to endure Moe's snoring. • B) both to live alone. • C) Moe to eliminate his snoring. • D) Moe to pay Curly for his discomfort.

C) Moe to eliminate his snoring.

Which of the following is an example of an activity with an external cost? A) Raising honeybees where neighbors on all sides grow apples. B) Keeping your front yard clean. C) Speeding on the interstate. D) Having to buy batteries for the new remote that came with a TV.

C) Speeding on the interstate.

Which of the following investments is part of a positional arms race? • A) Watching your friend train for a soccer game • B) Renting movies for the weekend • C) Studying hard for your economics exam because your professor grades on a curve • D) Playing golf for fun

C) Studying hard for your economics exam because your professor grades on a curve

The use of pollution permits by the government to reduce pollution is: • A) theoretically interesting, but untried in the United States. • B) workable in theory but unworkable in practice. • C) common in several parts of the United States. • D) common in the third world.

C) common in several parts of the United States.

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Picking up the 20th bag of litter would: • A) be socially efficient. • B) increase total economic surplus. • C) create deadweight loss. • D) be socially efficient, but would not be consistent with the actions of self-interested individuals.

C) create deadweight loss.

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, the quantity of diesel fuel sold after imposition of the regulation will: • A) remain the same. • B) increase. • C) decrease. • D) decrease only if diesel fuel is a normal good.

C) decrease.

Your economics professor has announced that he or she will assign final grades as follows: the top 20 percent of students will get an A, the bottom 20 percent of students will get an F, and everyone else will get a C. You would expect that, as the semester progresses, students who really care about getting an A will: • A) study less and less to maintain low standards. • B) try to forget about the grading scheme. • C) engage in a positional arms race, studying more and more. • D) maintain a stable agreement to not study for exams.

C) engage in a positional arms race, studying more and more.

(GRAPH) Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by: • A) banning production of paper. • B) compensating those injured by the externality. • C) imposing a tax on paper equal to the external cost. • D) subsidizing paper by the amount of the the external benefit.

C) imposing a tax on paper equal to the external cost.

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way about Shel's consumption. Fran has bought a new Jaguar (a luxury car), and shortly thereafter, Shel bought a new Mercedes (also a luxury car). Shel and Fran seem to be: • A) making independent rational consumption decisions. • B) unaware of the other's actions. • C) involved in a positional arms race. • D) imposing external benefits on each other.

C) involved in a positional arms race.

(GRAPH) Refer to the figure below. At the private market equilibrium quantity, the marginal cost of the last unit produced is ________ the social marginal benefit of the last unit produced. • A) equal to • B) greater than • C) less than • D) more important than

C) less than

(GRAPH) Refer to the figure below. This graph suggests that the private market provides incentives to: • A) eliminate the externalities generated by paper production. • B) under-produce paper relative to the social optimum. • C) over-produce paper relative to the social optimum. • D) over-price paper relative to the social optimum.

C) over-produce paper relative to the social optimum.

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ________ reduction in driving if demand is ________. • A) small; perfectly elastic • B) large; perfectly inelastic • C) small; relatively inelastic • D) large; relatively inelastic

C) small; relatively inelastic

(GRAPH) Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. • The government could increase total economic surplus by: • A) taxing production of the vaccine. • B) encouraging people to pay each other to get the vaccine. • C) subsidizing production of the vaccine. • D) providing 250 doses of the vaccine for free.

C) subsidizing production of the vaccine.

(GRAPH) A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. • What will be the total village income if each villager decides how to invest based on his or her individual self-interest? • A) $5 • B) $125 • C) $75 • D) $25

D) $25

(GRAPH) Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. When Erie Textiles operates without a filter, the total gain (in thousands of dollars) to all three parties is ________. • A) $985 • B) $325 • C) $510 • D) $475

D) $475

(GRAPH) A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. If each villager is purely self-interested, how many goats will be sent onto the commons? • A) 2 • B) 3 • C) 4 • D) 5

D) 5

(GRAPH) Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. If pollution is unregulated, then a total of ________ tons of smoke will be emitted each day. • A) 1 • B) 2 • C) 4 • D) 8

D) 8

On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music really annoying. In this case, Stan's saxophone playing generates: A) a negative externality. • B) a positive externality. • C) neither a positive nor a negative externality. • D) both positive and negative externalities.

D) both positive and negative externalities.

(GRAPH) The following data show the relationship between the number of drivers who leave for work at 8 a.m., their average commute time, and their marginal benefit of commuting. One way for the government to increase economic efficiency would be for it to: • A) require all 500 drivers to collectively decide when each should leave for work. • B) subsidize gasoline consumption. • C) require employers to allow workers to arrive late for work. • D) charge a toll to use the highway during rush hour.

D) charge a toll to use the highway during rush hour.

An external benefit implies that private markets will provide ________ than the socially optimal quantity, and an external cost implies that private markets will provide ________ than the socially optimal quantity. • A) more; more • B) less; less • C) more; less • D) less; more

Econ Chapter 11

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