Exam 2

lump-sum tax

a tax that is the same amount for every person

budget surplus

an excess of government receipts over government spending

free rider

a person who receives the benefit of a good but avoids paying for it

d

Refer to Figure 7-13. Total surplus can be measured as the area a. JNK b. JNML c. JRL d. JNL

b

Within a country, the domestic price of a product will equal the world price if a. trade restrictions are imposed on the product. b. the country allows free trade. c. the country chooses to import, but not export, the product. d. the country chooses to export, but not import, the product.

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

transaction costs

the costs that parties incur in the process of agreeing to & following through on a bargain

benefits principle

the idea that people should pay taxes based on the benefits they receive from government services

b

A negative externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. exactly the quantity that is socially desirable. d. zero amount of output.

a

A positive externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. exactly the quantity that is socially desirable. d. zero amount of output.

b

All else equal, what happens to consumer surplus if the price of a good increases? a. Consumer surplus increases. b. Consumer surplus decreases. c. Consumer surplus is unchanged. d. Consumer surplus may increase, decrease, or remain unchanged.

a

Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is a. $150. b. $200. c. $350. d. $550.

a

Externalities are a. side effects passed on to a party other than the buyers and sellers in the market. b. side effects of government intervention in markets. c. external forces that cause the price of a good to be higher than it otherwise would be. d. external forces that help establish equilibrium price.

c

If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover (e.g., basic reserach benefits many people even though they don't participate in the research themselves), it should a. tax consumers who benefit from the new technology. b. offer tax credits to consumers who are adversely affected by the new technology. c. subsidize producers by an amount equal to the value of the technology spillover. d. impose a corrective tax on any firm producing a technology spillover.

new trade theory

Monopolistic Competition Model- people love variety (cannot be explained by comparative advantage)

c

National defense is provided by the government because a. government care more about national security than individuals and firms. b. products provided by the government are produced more efficiently. c. free-rider problem make it difficult for private markets to supply the socially optimal quantity of public goods. d. public goods increase government revenues.

b

Refer to Figure 10-4. If this market is currently producing at Q3, then total economic well-being would be maximized if output a. decreased to Q1. b. decreased to Q2. c. increased to Q4. d. stayed at Q3.

b

Refer to Figure 10-4. This market a. has no need for government intervention. b. would benefit from a tax on the product. c. would benefit from a subsidy for the product. d. would maximize total well-being at Q3.

a

Refer to Figure 7-13. For a quantity less than M, the value to the marginal buyer is a. greater than the cost to the marginal seller, so increasing the quantity increases total surplus. b. less than the cost to the marginal seller, so increasing the quantity increases total surplus. c. greater than the cost to the marginal seller, so decreasing the quantity increases total surplus. d. less than the cost to the marginal seller, so decreasing the quantity increases total surplus.

a

Refer to Figure 7-14. When the price is P1, area B+C represents a. total surplus. b. producer surplus. c. consumer surplus. d. None of the above is correct.

a

Refer to Figure 7-15. At the equilibrium price, consumer surplus is a. $480. b. $640. c. $1,120. d. $1,280

d

Refer to Figure 7-2. Which area represents the increase in consumer surplus when the price falls from P1 to P2? a. ABD b. ACG c. DFG d. BCGD

b

Refer to Figure 7-7. Which area represents producer surplus when the price is P2? a. BCG b. ACH c. ABGD d. AHGB

a

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The tax revenue is measured by the area a. K+L b. I+Y c. J+K+L+M d. I+J+K+L+M+Y

d

Refer to Figure 8-5. After the tax is levied, producer surplus is represented by area a. A. b. A+B+C. c. D+H+F. d. F.

c

Refer to Figure 8-6. The amount of tax (on per unit of product) born by consumers is a. $4 b. $10 c. $6 d. $0

a

Refer to Figure 8-6. The amount of tax (on per unit of product) born by producers is a. $4 b. $10 c. $6 d. $0

c

Refer to Figure 8-6. What happens to total surplus in this market when the tax is imposed? a. Total surplus increases by $1,500. b. Total surplus increases by $3,000. c. Total surplus decreases by $1,500. d. Total surplus decreases by $,3000.

b

Refer to Figure 8-6. When tax is imposed in this market, sellers effectively pay what amount of the $10 tax? a. $0 b. $4 c. $6 d. $10

d

Refer to Figure 8-6. When the tax is imposed in this market, the price buyers effectively pay is a. $4. b. $6. c. $10. d. $16.

b

Refer to Figure 8-6. Without a tax, the equilibrium price and quantity are a. $16 and 300. b. $10 and 600. c. $10 and 300. d. $6 and 300.

b

Refer to Figure 8-8. The deadweight loss of the tax is the area a. B+D. b. C+F. c. A+C+F+J. d. B+C+D+F.

c

Refer to Figure 9-15. As a result of the tariff, there is a deadweight loss that amounts to a. B. b. E. c. D+F. d. B+D+E+F.

b

Refer to Figure 9-15. The amount of government revenue created by the tariff is a. B. b. E. c. D+F. d. B+D+E+F.

d

Refer to Figure 9-15. With the tariff, the domestic price and domestic quantity demanded are a. P1 andQ1. b. P1 andQ4. c. P2 andQ2. d. P2 andQ3.

b

Refer to Figure 9-17. When the country moves from free trade to trade and a tariff, consumer surplus a. decreases by $144 and producer surplus does not change. b. decreases by $144 and producer surplus increases by $48. c. decreases by $198 and producer surplus does not change. d. decreases by $198 and producer surplus increases by $48.

c

Refer to Figure 9-17. With free trade, total surplus is a. $150. b. $300. c. $450. d. $600.

b

Refer to Figure 9-5. Total surplus with trade exceeds total surplus without trade by a. $60. b. $75. c. $135. d. $210.

a

Refer to Figure 9-5. With trade, producer surplus is a. $80. b. $150. c. $210. d. $245.

d

Refer to Figure 9-5. With trade, this country a. exports 20 wagons. b. exports 50 wagons. c. imports 30 wagons. d. imports 50 wagons.

c

Refer to Figure 9-5. Without trade, consumer surplus amounts to a. $210.50. b. $245.50. c. $367.50. d. $607.50.

c

Refer to Figure 9-5. Without trade, consumer surplus amounts to a. $210.50. b. $245.50. c. $367.50. d. $607.50.

a

Refer to Figure 9-6. With free trade (no tariff), what is the quantity of imports? a. 400 b. 200 c. 100 d. 500

b

Refer to Figure 9-6. With tariff, how does domestic production change compared to free trade case? a. decreases by 100 b. increase by 100 c. increase by 200 d. increase by 500

a

Refer to Figure 9-6. With tax in place, what is government tariff revenue? a. $400 b. $200 c. $100 d. $0

a

Refer to Figure 9-6. Without trade, the equilibrium price of carnations is a. $8 and the equilibrium quantity is 300. b. $6 and the equilibrium quantity is 200. c. $6 and the equilibrium quantity is 400. d. $4 and the equilibrium quantity is 500.

b

Refer to Figure 9-9. The change in total surplus in this market because of trade is a. D, and this area represents a loss of total surplus because of trade. b. D, and this area represents a gain in total surplus because of trade. c. B + D, and this area represents a loss of total surplus because of trade. d. B + D, and this area represents a gain in total surplus because of trade.

c

Refer to Figure 9-9. Total surplus in this market after trade is a. A+B. b. A+B+C. c. A+B+C+D. d. B+C+D.

b

Refer to Figure 9-9. Total surplus in this market before trade is a. A+B. b. A+B+C. c. A+B+C+D. d. B+C+D.

c

Refer to Table 7-1. If the price of the product is $15, then who would be willing to purchase the product? a. Mike b. Mike and Sandy c. Mike, Sandy, and Jonathan d. Mike, Sandy, Jonathan, and Haley

c

Refer to Table 7-6. If the market price is $1,100, the combined total cost of all participating sellers is a. $3,700. b. $2,700. c. $2,250. d. $1,250.

c

Senator Blowhard represents a state in which many textile firms are located. He wants to impose tariffs on all imported textiles. Which of the following is the least likely consequence of such tariffs? a. Domestic textile buyers will lose consumer surplus, have less variety, and will pay higher prices. b. Domestic textile sellers will gain producer surplus. c. More domestic textile sellers will have to exit the market due to the tariffs. d. Domestic textile sellers will have higher market share.

a

Suppose the supply of milk and water are equally elastic, while the demand for milk is more elastic than the demand for water. Suppose the government levies an equivalent amount of tax on milk and water. The deadweight loss would be larger in the market for a. milk than water because quantity of milk would fall by more than the quantity of water. b. milk than water because quantity of water would fall by more than the quantity of milk. c. water than milk because quantity of milk would fall by more than the quantity of water. d. water than milk because quantity of water would fall by more than the quantity of milk.

d

The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $600 per ton. The U.S. is a price-taker in the market for tomatoes. If trade in tomatoes is allowed, the a. price paid by American consumers of tomatoes is unchanged relative to the no-trade situation. b. total well-being of American producers of tomatoes is diminished relative to the no-trade situation. c. total well-being of American consumers of tomatoes is enhanced relative to the no-trade situation. d. total well-being of the United States is enhanced relative to the no-trade situation.

d

The deadweight loss from a $2 tax will be smallest in a market with a. elastic demand and elastic supply. b. elastic demand and inelastic supply. c. inelastic demand and elastic supply. d. inelastic demand and inelastic supply.

b

The world price of a pound of T-bone steak is $9.00. Before Latvia allowed trade in beef, the price of a pound of T-bone steak there was $7.50. Once Latvia traded in beef with other countries, Latvia began a. exporting T-bone steak and the price per pound in Latvia remained at $7.50. b. exporting T-bone steak and the price per pound in Latvia increased to $9.00. c. importing T-bone steak and the price per pound in Latvia remained at $7.50. d. importing T-bone steak and the price per pound in Latvia increased to $9.00.

c

When a country allows trade and becomes an importer of a good, a. both domestic producers and domestic consumers become better off. b. domestic producers become better off, and domestic consumers become worse off. c. domestic producers become worse off, and domestic consumers become better off. d. both domestic producers and domestic consumers become worse off.

b

Which of the following can NOT explain why the private solution to externality based on the Coase Theorem is usually hard to reach? a. The transaction costs of private solution to externality is usually very high. b. Coase theorem is fundamentally wrong. c. Each party may hold out for a better deal. d. If the number of parties is large, coordinating them may be costly and difficult.

b

Which of the following statements is correct? a. Government should tax goods with either positive or negative externalities. b. Government should tax goods with negative externalities and subsidize goods with positive externalities. c. Government should subsidize goods with either positive or negative externalities. d. Government should tax goods with positive externalities and subsidize goods with negative externalities.

Tragedy of the Commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

cost-benefit analysis

a study that compares the costs & benefits to society of providing a public good

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

proportional tax

a tax for which high-income & low-income taxpayers pay the same fraction of income

progressive tax

a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

regressive tax

a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

Heckscher Ohlin theorem

a theory that explains the existence of a country's comparative advantage by it's factor endowments

Ricardo model

a theory that explains the existence of a country's comparative advantage by its productivity

budget deficit

an excess of government spending over government receipts

private goods

goods that are both excludable & rival in consumption

club goods

goods that are excludable but not rival in consumption

public goods

goods that are neither excludable nor rival in consumption

common resources

goods that are rival in consumption but not excludable

tariff

tax on goods produced abroad & sold domestically

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

marginal tax rate

the amount that taxes increase from an additional dollar of income

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

vertical equity

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

horizontal equity

the idea that taxpayers with similar abilities to pay taxes should pay the same amount

world price

the price of a good that prevails in the world market for that good

excludability

the property of a good whereby a person can be prevented from using it

rivalry in consumption

the property of a good whereby one person's use diminishes other people's use

equality

the property of distributing economic prosperity uniformly among the members of society

efficiency

the property of society getting the most it can from its scarce resources

Coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

welfare economics

the study of how the allocation of resources affects economic well-being

externality

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

cost

the value of everything a seller must give up to produce a good

average tax rate

total taxes paid divide by total income

c

Refer to Table 12-2. If Max has taxable income of $227,000, his marginal tax rate is a. 26%. b. 31%. c. 34%. d. 36%.

c

Refer to Table 7-1. If price of the product is $30 and assume that one person buy at most one product, then the total consumer surplus is a. $-10. b. $-6. c. $20. d. $30.

b

Refer to Figure 8-6. What is the government tax revenue after the tax? a. $1,800. b. $3,000. c. $1,200. d. $0

internalizing the externality

altering incentives so that people take account of the external effects of their actions

ability-to-pay principle

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

willingness to pay

the maximum amount that a buyer will pay for a good