Econ Exam 2

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood

Refer to Figure 7-9. At equilibrium, consumer surplus is represented by the area

A+B+C

Refer to Figure 6-11.Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

Between $5 and $7

Refer to Figure 8-1.Suppose the government imposes a tax of P'-P'''. Total surplus after the tax is measured by the area

J + K + L + M

If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would

increase by less than $1,000

When an externality is present, the market equilibrium is

inefficient, and the equilibrium does not maximize the total benefit to society as a whole

The deadweight loss from a tax per unit of good will be smallest in a market with

inelastic supply and inelastic demand

Refer to Figure 10-3.If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would

introduce a subsidy of $4 per unit social cost is started at $7 and private cost is started at $3; the difference (7 - 3 =) $3 is the tax rate

An externality is the uncompensated impact of

one person's actions on the well-being of a bystander

A legal minimum on the price at which a good can be sold is called a

price floor

If a nonbinding price floor is imposed on a market, then the

quantity sold in the market will stay the same

Moving production from a high-cost producer to a low-cost producer will

raise total surplus

Refer to Figure 10-5.Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is

$13,230 Total Surplus = Consumer Surplus + Producer surplus CS = 0 .5 (63-42) ( 420) = 0 .5 (21)(420) = 4410 PS = 0.5 (42)(420) = 8820 TS = 13,230

Refer to Figure 10-6.If the government imposed a corrective tax that successfully moved the market from the market equilibrium to the social optimum, then tax revenue for the government would amount to

$2,000 output at optimal level = 250 units tax rate per unit = difference in social and private cost at optimal level = 20-12 = $8 tax revenue = tax rate per unit * optimal output level = 8* 250 =$2000

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

$2.80 and 24 units, respectively

Refer to Figure 8-2. The per-unit burden of the tax on buyers is

$3

Refer to Figure 8-2. Consumer surplus without the tax is

$6, and consumer surplus with the tax is $1.50

Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in deciding how many hours to tutor. His producer surplus is

$64 Producer Surplus (40-10) + (40-18) + (40-28) + (40-40) =64

For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is

2,250 1/2 (15)(300) =2,250

Refer to Figure 7-5.If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?

625

Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?

Consumer surplus decreases

Which of the following statements is not correct?

Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution

Refer to Figure 8-4.The tax causes producer surplus to decrease by the area

D + F

Refer to Figure 6-14. The buyers will bear the highest share of the tax burden compared to sellers if the demand is

D2, and the supply is S2

In which of the following cases is the Coase theorem most likely to solve the externality?

Ed is allergic to his roommate's cat

Refer to Figure 7-5.If the supply curve is S and the demand curve shifts from D to D', what is the change in producer surplus?

Producer surplus increases by $3,125 Before change in demand producer surplus = 1/2*(100*50) = 1/2*5000 = 2500. After increase in demand producer surplus = 1/2*(150*75) = 1/2* 11250 = 5625. Increase in producer surplus = 5625 - 2500 = $3125.

Which of the following events would increase producer surplus?

Sellers' costs stay the same and the price of the good increases

Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct?

The effective price received by sellers is $0.40 per bottle less than it was before the tax

Which of the following is an example of a positive externality?

The mayor of a small town plants flowers in the city park

If an allocation of resources is efficient, then

all potential gains from trade among buyers are sellers are being realized

A shortage results when a

binding price ceiling is imposed on a market

Refer to Figure 6-3.A government-imposed price of $24 in this market is an example of a

binding price floor that creates a surplus

The decrease in total surplus that results from a market distortion, such as a tax, is called a

deadweight loss

If the government removes a tax on a good, then the price paid by buyers will

decrease, and the price received by sellers will increase

Refer to Figure 6-2. The price ceiling causes quantity

demanded to exceed quantity supplied by 90 units

The government's benefit from a tax can be measured by

tax revenue

The term tax incidence refers to

the distribution of the tax burden between buyers and sellers

Refer to Figure 7-6. Area A represents

the increase in producer surplus to those producers already in the market when the price increases from P1 to P2

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?

the railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur

Producer surplus directly measures

the well-being of sellers