Micro Economics EXAM 2 (Chapters 6,7,8)

Identify whether the statements about the economics of taxes are true or false. b. When demand is elastic and supply is inelastic, the burden of a tax falls mainly on consumers.

False

Identify whether the statements about the economics of taxes are true or false. c. When demand is inelastic and supply is elastic, the burden of a tax falls mainly on producers.

False

Identify whether the statements about the economics of taxes are true or false. d. The incidence of a tax is determined by which group - buyers or sellers - must actually pay the government.

False

Garret is an undergraduate looking for a job to pay for college. As Garret seeks employment, he is glad to know that he will be paid at least $7.25$7.25 per hour. Select the term that best fits the scenario. -black market -license -price ceiling -price floor -quota

Price floor

As part of the holiday celebration, the local church bells play carols every evening. The church bells are

public goods

Select the best definition of a public good. -a good that is nonexcludable and nonrival in consumption -a good that is paid for by public funds -a good that is nonexcludable and rival in consumption -a good that is excludable and nonrival in consumption -a good that is excludable and rival in consumption

a good that is nonexcludable and nonrival in consumption

The fraternity pays the local community to compensate for the noise pollution.

private solution to an externality

The residents of the apartment complexes pay Mu Epsilon Nu not to have loud parties.

private solution to an externality

When the production of a good results in pollution, private and social costs are different.

F

When the production of a good results in pollution, private and social costs are the same.

F

To raise money for a new student union, the Student Snack Bar charges a tax of $0.75$0.75 on each beverage. In the graph, the original demand curve for beverages is labeled "Demand" and the shifted demand curve, which accounts for the tax, is labeled "Shifted Demand." Use this graph to answer the questions. Answer to the nearest cent. For each soda, how much of the tax does the Student Snack Bar pay? For each beverage, how much of the tax do students pay?

$.50 $.25

The accompanying graphs depict the market for bags of potato chips, which is currently at an equilibrium price of $1.67 per bag and an equilibrium quantity of 3.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question c. What is the price received net of tax (Pp) per bag by producers after the production tax?

$1

The accompanying graphs depict the market for bags of potato chips, which is currently at an equilibrium price of $1.67 per bag and an equilibrium quantity of 3.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question f. What is the price received net of tax (Pp) by producers after the consumption tax?

$1

The accompanying graphs depict the market for bags of potato chips, which is currently at an equilibrium price of $1.67 per bag and an equilibrium quantity of 3.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question b. What is the price paid per bag by consumers (Pc) after the production tax?

$2

The accompanying graphs depict the market for bags of potato chips, which is currently at an equilibrium price of $1.67 per bag and an equilibrium quantity of 3.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question e. What is the effective price paid per bag by consumers (Pc) after the consumption tax?

$2

What is the deadweight loss associated with the price floor?

$25 (look at #10 graph)

More or less. In the long run, the shortages of available housing resulting from rent controls are________ pronounced than (as) they are in the short run. One explanation for this is that in the long run, firms can make changes to the amount of housing they provide________ easily than (as) they can in the short run. Because of differences in firms' ability to make changes to quantity supplied, the long-run supply curve for housing is modeled as a line that is_______ steep than (as) the short-run supply curve. Therefore, supply is_______ elastic in the short run than (as) in the long run.

-More -More -Less -Less

Rent controls are a typical example of a price ceiling. Please select all likely consequences of rent controls when the price ceiling is binding. There is more than one correct answer. -surplus of affordable housing -reductions in apartment quality -inefficient allocation of apartments -shortage of affordable housing

-Reductions in apartment quality -Inefficient allocation of apartments -Shortage of affordable housing

Rank the curves by how much deadweight loss would be generated if a per unit tax was levied in the market. Assume the supply curve has an elasticity equal to 1. -A demand curve that is perfectly inelastic -A demand curve that is unit elastic -A demand curve with price elasticity of demand equal to 100 -A demand curve with price elasticity of demand equal to 0.4

1. A demand curve with price elasticity of demand equal to 100 2. A demand curve that is unit elastic 3. A demand curve with price elasticity of demand equal to 0.4 4. A demand curve that is perfectly inelastic

Suppose that the city of Halifax decrees that all restaurants located within a 15 mile radius of the University of Halifax must charge at least $10 a meal so that college students can become more refined in their dining. What is a likely result of this price floor? A. Some restaurants like Le Cordon Bleu will create rustic chicken and imported cheese paninis at $10 a sandwich to satisfy the refined demands of college students instead of its old $5 ham and cheese specials. B. There will be a surplus of food at many of the restaurants as quantity demanded exceeds quantity supplied at a price of $10 per meal. C. Fewer meals will be sold than if Halifax had established a price ceiling. D. The price floor will make restaurants more efficient by limiting their menu to just the demands of students, which results in less food waste.

A.

a. Price ceilings result in resources being allocated to activities with the highest possible value.

A. False

Determine whether the items are characteristics of taxes, subsidies, or both. Assume that markets are perfectly competitive. A. increase the price that buyers pay. B. increase the price that sellers receive, C. create a wedge between the price that buyers pay and the price that sellers receive. D. are shared by both buyers and sellers. E. result in government revenue. F. result in a deadweight loss.

A. Taxes B. Subsidies C. Both D. Both E. Taxes F. Both

b. Price ceilings result in a reduction in mutually beneficial exchanges.

B. True

Suppose the city council in a large city decides to pass a law that forces landlords to charge a maximum rent of $750/month for a one-bedroom apartment. Prior to the rent control, the average rent for a one-bedroom apartment was $1,750/month. Which is likely to occur as a result of the price ceiling? A. Some landlords and renters will agree on a price of less than $750/month and not report it to the government. B. Landlords will supply more apartments to the market than they did before the price ceiling. C. Landlords will begin decreasing the quality of one-bedroom apartments by not making repairs or paying for upkeep. D. The rental market will become more efficient. The answer above is an example of A. a black market. B. a quota rent. C. quantity controls. D. inefficiently low quality.

C D

Suppose that the city of Lethbridge decrees that all restaurants located within a 1515 mile radius of the University of Lethbridge can charge no more than $1$1 a meal so that college students can eat out economically. Which statement is NOT a likely result of this price ceiling? A. Some restaurants will choose to secretly sell meals at $5 each to consumers who are willing to pay this higher price. B. The portion sizes and quality at the finest dining establishments at Lethbridge will decrease significantly. C. There will be food surpluses at many of the restaurants as quantity supplied exceeds quantity demanded at a price of $1 per meal. D. People will waste time standing outside long lines to camp for food.

C.

c. Though they may face higher prices, consumers usually see an increase in product quality when price ceilings are imposed.

C. False

Private costs are costs that the firm is not obligated to disclose to the public.

F

Assuming that both alcohol demand and supply are relatively elastic, what happens to alcohol consumption and to the alcohol market price? A. Alcohol consumption increases, whereas the alcohol market price increases if the tax is placed on the buyers or decreases if the tax is placed on the sellers. B. Alcohol consumption increases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers. C. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the buyers or decreases if the tax is placed on the sellers. D. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers.

D.

d. A problem with price ceilings is that they lead to surpluses.

D. False

Suppose that a city government introduces a $0.50 excise (commodity) tax on consumers of bottles of soda to improve the health of its citizens. Manipulate the accompanying graph to demonstrate the impact of the tax on the market for soda What would be the new equilibrium quantity if instead of taxing consumers, the city taxed producers?

Demand curve will shift down/left 4 thousand bottles

The terms "social cost" and "external cost" are synonyms.

F

Wages are an example of an external cost.

F

What is a subsidy wedge? A. the difference between the quantity supplied and the quantity demanded that results from a subsidy B. government cheese C. the combined reduction in consumer surplus and producer surplus that results from a subsidy D. the difference between the amount of a good that is produced before and after a subsidy is imposed E. the difference between the price that sellers receive and the price that buyers pay, resulting from a subsidy

E.

e. When price ceilings are imposed, consumers pay lower explicit prices but often face higher costs in terms of waiting in line for goods and services.

E. True

Pollution is an example of an external cost.

T

Social cost is the sum of private and external costs.

T

The accompanying graphs depict the market for bags of potato chips, which is currently at an equilibrium price of $1.67 per bag and an equilibrium quantity of 3.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question. a. Suppose the government levies this tax on manufacturers for each bag of potato chips they produce. Please shift the curve(s) to illustrate this.

The supply curve shifts up/left

The accompanying graphs depict the market for bags of potato chips, which is currently at an equilibrium price of $1.67 per bag and an equilibrium quantity of 3.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question d. Suppose the government, instead of levying the tax on producers, levies this tax on consumers for each bag of potato chips they purchase. Please shift the curve(s) to illustrate this.

The Demand Curve shifts down/left

Suppose the government has decided to subsidize production in the hypothetical market depicted in the accompanying graph. Shift the appropriate curve on the graph below, and then answer the multiple choice question. What is the value of consumer surplus after the subsidy? A. $7.5 million B. $25 million C. $15 million D. $12 million

The Supply curve shifted down/right A.

Select the correct statement regarding commodity (or excise) taxes. -Regardless of who writes a check to the government, the burden of commodity taxes is shared equally by buyers and sellers. -The burden of a tax is unrelated to who actually pays money to the government. -The reduction in consumer and producer surplus associated with a commodity tax is equivalent to the tax revenue collected. -From the perspective of buyers, taxes imposed on firms are preferable to taxes imposed on buyers, because firms ultimately pay a larger share of these types of taxes.

The burden of a tax is unrelated to who actually pays money to the government

Select the correct statement regarding tax wedges. -Tax wedges are larger when demand is more inelastic than supply. -Tax wedges are smaller when commodity taxes are imposed on buyers. -Tax wedges are larger when commodity taxes are imposed on buyers. -The size of the tax wedge is unrelated to elasticity. -Tax wedges are larger when supply is more inelastic than demand.

The size of the tax wedge is unrelated to elasticity

Identify whether the statements about the economics of taxes are true or false. a. An excise tax can distort incentives and create missed opportunities for mutually beneficial transactions.

True

Suppose that in the quest to increase the number of insured, the government decides to implement a mandate that employers provide health insurance to all employees. Please categorize the items based on their truth or falsehood. -Firms will substitute capital for labor if possible -Firms will likely employ fewer workers after the mandate -The cost of the health insurance mandate will be borne entirely by the employer -Workers will benefit without any costs -Workers are always worse off than before the mandate because their take-home wage decreases

True: -Firms will likely employ fewer workers after the mandate -Firms will substitute capital for labor if possible False: -The cost of the health insurance mandate will be borne entirely by the employer -Workers will benefit without any costs -Workers are always worse off than before the mandate because their take-home wage decreases

Montgomery owns a nuclear power plant in the town of Springfield. His power plant dumps substantial quantities of radioactive waste into the local pond, which has given rise to a mutant guppy fish population with three eyes. The town decides to have Montgomery do something about the externality. Which method would NOT result in Montgomery accounting for the social cost of running the power plant? It would not work to a. subsidize Montgomery for every three‑eyed fish found in the pond. b. have the government give Montgomery a permit to allow a limited amount of pollution but no more. c. define property rights clearly to identify Springfield as the owner of the pond with the right to compensation from Montgomery for damages from the pollution. d. charge Montgomery $1,000 for every barrel of toxic waste his nuclear reactors produce.

a.

Ebenezer Scrooge has just been elected the new President of Christmasland. As his first action, he is thinking of introducing an excise (or commodity) tax on either Santa hats or Christmas lights. The demand and supply curves for both products are shown on the graphs. Use the graphs to answer the questions. a. What would be the total deadweight loss of a $3 tax on Santa hats? b. What would be the total deadweight loss of a $3 tax on Christmas lights? The deadweight loss for Santa hats and the deadweight loss for Christmas lights are different because the graph with the higher deadweight loss has a more A. elastic supply curve. B. inelastic demand curve. C. inelastic supply curve. D. elastic demand curve.

a. $3000 b. $1500 D. Elastic demand curve

Suppose the Canadian government has decided to place an excise tax of $20$20 per tire on producers of automobile tires. Excise taxes are also called sales or commodity taxes. Previously, there was no excise tax on automobile tires. As a result of the excise tax, producers of tires, such as Bridgestone and Michelin, are going to alter their tire prices. The graph illustrates the demand and supply curves for automobile tires before the excise tax. a. Please shift the appropriate curve or curves on the graph to demonstrate the new equilibrium. b.What is the price consumers pay for a tire post tax? Round to the nearest 10. What is the price producers receive for a tire net of taxes? Round to the nearest 10.

a. The supply curve shifts up/left b.price paid by consumers: $100 c.price received by producers: $80

a. A 24-hour diner is now open only 2020 hours a day. This could result from a

a. price ceiling

A factory emits pollution into the atmosphere as a by-product of production.

an example of a negative externality

A neighbor plays loud music that annoys the surrounding community.

an example of a negative externality

Suppose Jeremy, Francis, and Andrew are part of Mu Epsilon Nu, a college fraternity known for its very loud, rambunctious weekend parties. The parties annoy many of the residents in nearby apartment complexes due to the loud music and blaring neon lights. This is an example of......

an external cost

In economics, what is the meaning of the phrase 'the tragedy of the commons?' a. Goods that are not rivalrous but are excludable are under‐produced by private markets, often with consequences that reduce social welfare. b. People will overuse or misuse a common resource that is not excludable but is rivalrous. c. in market economies products are often similar and common, so the government must actively attempt to create variety in goods and services. d. It serves the common good to produce items that are neither rivalrous nor excludable, but profit‑maximizing firms will not produce such products. e. in decisions involving intellectual property rights, policy-makers must compromise in order to reach common ground among competing interest groups.

b.

A person with no allergies gets a mosquito bite from a disease-free mosquito.

not an example of a negative externality

b. If your favorite restaurant downsizes its portion sizes, this could be the result of a

b. price ceiling

Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Which type of externality is likely to result from a consumer's decision to purchase a solar-powered vehicle instead of a gas-powered vehicle, and how does it arise? This decision generates a a. positive externality because individuals can use the money they save on gasoline to help the local community. b. positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution. c. negative externality because companies that do not produce solar-powered cars will be put out of business. d. negative externality because including new technology in the cars will drive up the market price. Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome? a. a subsidy to consumers who choose to purchase solar-powered vehicles b. a new tax levied on the makers of solar-powered cars c. granting one firm monopoly rights to produce solar-powered vehicles d. a price floor above the observed average price for a solar-powered car

b./a.

c. A shortage in the market for tie-dye shirts could result from a

c. price ceiling

Maple Havens, an expensive gated community, has tasteful light displays sponsored by the neighborhood association. Only those who know the code to unlock the gates are able to drive through the streets and enjoy the lights. Maple Havens's lights are

club goods

The government requires that auto manufacturers limit pollution to a specified threshold.

command-and-control regulation

The government requires that auto manufacturers use new, cleaner technology in producing cars.

command-and-control regulation

Merryweather's courthouse square is well‑known for its elaborate decorations, including a real Santa for the children. Unlike at the mall, parents are not required to buy a photo before their children can talk to Santa, but the line is long and Santa leaves at 8:00 p.m. Santa is a

common resource.

An auto manufacturer is charged a fee per unit of pollution emitted into a river.

corrective Tax

d. Lawrence stands an hour in line at the local butcher's shop to obtain a mutton cutlet. Long waiting lines could result from a

d. price ceiling

e. A surplus of workers in the labor market could result from a

e. price floor

f. Suppose an airline offers unnecessarily lavish flights. This could result from a

f. price floor

Bob can pay to support his local public radio station, which depends on donations to be as effective as possible. Bob listens to the radio station several hours per day but never donates since he suspects that other people will donate enough to keep the station on the air.

free-riding

Jim is working on a group project for a class in which he wants a high grade. However, since the grades are assigned to the group as a whole and he knows that the other group members will pick up most of the extra work, Jim calls in sick and plays video games on his Dream Station 6464

free-riding

The local city government sends the police to break up the parties.

non-private solution to an externality

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. d. A toll road in normal traffic

nonrivalrous and excludable

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. b. The air we breathe

nonrivalrous and nonexcludable

A donut shop emits a delicious smell into the air as a by-product of production.

not an example of a negative externality

A person gets a flu shot and is therefore less likely to spread illness to others.

not an example of a negative externality

Drew always buys the lunch special for $5$5 at the restaurant across the street from where he works. If he decided to eat at the restaurant after 3:003:00 p.m., however, he would be unable to get the lunch special, and would instead have to pay $10$10 for the same food.

not free-riding

Karl never drives at night, and gets no benefit from street lamps at all. Street lamps are nonexcludable and nonrival in consumption. When the community group tries to collect money to build street lamps, Karl does not donate any money.

not free-riding

Steve decides to rent out his second home since he is not allowed to set the rate above $1000 per month even though he knows he could find renters willing to pay much more.

price ceiling

Bob's Hardware Store stocks a large selection of the most commonly used lights for sale. Bob's lights are

private goods

A steel mill pays nearby homeowners to compensate them for the noise they must endure.

private property rights

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. a. A sports team t-shirt

rivalrous and excludeable

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. c. Atlantic bluefin tuna in the Mediterranean sea

rivalrous and nonexcludable

Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution vouchers.

tradable pollution permits

According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the _____________________ is (are) relatively low.

transaction costs