microeconomics test 2
Suppose you were assigned the task of choosing a price that maximized economic surplus. What price would you choose? Why?
Choose the price where the quantity demanded equals the quantity supplied because that is the equilibrium condition.
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
T/F? consumer and producer surplus measure the total benefit consumers and producers receive from participating in a market
FALSE
Your neighbor John has a barking dog. Which of the following statements is true?
It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders
A few years ago, Governor Deval Patrick of Massachusetts proposed that criminals would have to pay a "safety fee" to the government. The size of the fee would be based on the seriousness of the crime (that is, the fee would be larger for more serious crimes). Is there an economically efficient amount of crime? Briefly explain. Briefly explain whether the "safety fee" is a Pigovian tax of the type discussed in this chapter.
Yes. The economically efficient amount of crime is where the marginal social benefit equals the marginal social cost. The safety fee is a Pigovian tax because it is designed to make the marginal private cost of crime equal to the marginal social cost.
Writing in the New York Times, Michael Lewis argues: "Good new technologies are a bit like good new roads: Their social benefitsLOADING... far exceed what any one person or company can get paid for creating them." Does this observation justify the government subsidizing the production of new technologies?
Yes. When marginal social benefits exceed marginal private benefits, subsidies can increase output to achieve efficient outcomes.
What is an externality?
a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
a black market is
a market in which buying and selling take place at prices that violate government price regulations
What externality does obtaining human food pose for the bear? When campers and hikers leave human food for bears to consume, that poses
a negative externality for the bears because the taste of human food often causes the bears to be aggressive and since they pose a threat to human safety, they are eventually removed from the park or even destroyed.
by market failure, the author means
a situation in which the market fails to produce effcient level of output
a pigovian tax is
a tax to bring about an efficient level of output in the presence of externalities
economist define economic efficiency in this way
all of the above
which of the following terms corresponds to a market in which buying and selling take place at prices that violate the government price regulations
black market
When will the private benefit from consuming a good differ from the social benefit?
both a and b
economic efficiency
both a and b is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum
externalities affect the economic efficiency of a market equilibrium by causing a difference between
both a and b the private cost of production and the social cost of production the private benefit of consumption and the social benefit of production
The competitive equilibrium rent in the city of Lowell is currently $1,000 per month. The government decides to enact rent control and to establish a price ceiling for apartments of $750 per month. Briefly explain whether rent control is likely to make each of the following people better or worse off. Someone currently renting an apartment in Lowell
both a and b, both a and b , will be worse off because he will be recieveing less rent, both a and b
The author of a newspaper article remarks that many economists "support Pigovian taxes because, in some sense, we are already paying them." A Pigovian tax is a government tax intended to In a sense, consumers in a market might be "paying" a Pigovian tax even if the government hasn't imposed an explicit tax if there are
bring about an efficient level of output in the presence of externalities. negative externalities in that market so that consumers are experiencing an external cost.
which of the following is an example of a good or service having the effects of a negative externality
cigarette smoking
As a result, a tax on production reduces consumer surplus because ___ lose the ___ of the ___ quantity caused by the tax.
consumers, marginal benefit minus cost, decreased
which of the following is not an example of an externality
consuming a big mac
a price ceiling
does not increase the amount of the product that consumers buy because it creates a shortage
Eric Finklestein, an economist at Duke University, has argued that the external costs from being obese are larger than the external costs from smoking because "the mortality effect for obesity is much smaller than it is for smoking and the costs start much earlier in life." The "mortality effect" Finklestein refers to means that people If the mortality effect of obesity is smaller than the mortality effect of smoking, then obesity has a larger external cost because What is the most likely reason why tobacco taxes have been more politically popular than taxes on soda?
don't die as quickly from obesity as they do from smoking. obese people live longer than smokers and thus incur higher costs from their related illnesses. Second hand smoke is a more obvious negative externality than the social costs of obesity.
John Cassidy, a writer for the New Yorker magazine, wrote a blog post arguing against New York City's having installed bike lanes. Cassidy complained that the bike lanes had eliminated traffic lanes on some streets as well as some on-street parking. A writer for the Economist magazine disputed Cassidy's argument by writing: "I hate to belabour the point, but driving, as it turns out, is associated with a number of negative externalities." One such negative externality associated with driving is due to the
emmisions from automobiles that create air pollution automobiles create nagative externalitiles
A Wall Street Journal article noted that a study by the U.S. Congressional Budget Office "estimated raising the minimum wage to $10.10 an hour would reduce U.S. employment by 500,000 but lift 900,000 Americans out of poverty." 1. The minimum wage might reduce employment because 2. The minimum wage might raise some people out of poverty because 3.These estimates influence the normative analysis of the minimum wage because they
employer costs would increase it would increase the incomes of people who had minimum wage jobs previously influence the judgement of policymakers and members of the general public regarding this issue
In particular, the author describes inefficient land allocation as a market failure because the market results in a quantity of land to be used for urban development that is ______ than the efficient level.
greater
briefly explain whether you agree with the following statement: a lower price in a market always increases economic efficiency in that market
i disagree, because economic efficiency declines if price falls below the market equilibrium
under what conditions will the economic surplus increase in the market for chicken sandwiches?
if the supply curve shifts to the left less than the demand curve shifts to the right
according to economists, an efficient tax is one that
imposes a small dead weight loss relative to the tax revenue it raises
Black markets may arise
in reaction to binding price ceilings
An individual producer or a consumer "internalizes an externality" when
in their own decisions they take into account the external effects of their actions
briefly explain whether you agree with the following statement: "If at the current quantity marginal benefit is greater than marginal cost., there will be deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater than marginal benefit."
incorrect. If marginal cost is greater than marginal benefit (just as when marginal benefit is greater than marginal cost), there will be deadweightloss
why is the demand curve referred to as the marginal benefit curve
it shows the willingness of consumers to purchase a product at different prices
similarly, the intercept on the price axis in a linear supply equation gives the
lowest price at which quantity supplied will the zero
a price ceiling is a legally determined______ price that sellers may charge. A price floor is a legally determined ______ price that sellers may receive
maximum, minimum
which of the following is an example of a good or service having the effects of a positive externality
medical research, education both a and b
consumer and producer surplus measure the ___ benefit rather than the ____ benefit
net, total
does it matter whether buyers or sellers are legally responsible for paying a tax?
no, the market price to consumers and net proceed to sellers are the same independent of who pays the tax
Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
no. whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government
"rent controls, government farm programs, and other price ceilings and price floors are bad." this is an example of a
normative statement. It is concerned with what should be
Discussions of the economic results of rent control and of federal farm programs would be considered ________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered ________ analysis.
positive, normative
Why do some consumers tend to favor price controls while others tend to oppose them?
price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price won, but other consumers will loose because they would like to purchase the product but are unable to because of a shortage
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus
According to an article in the New York Times, the Venezuelan government "imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find." Imposing price controls on goods would make them hard to find because
producers would not want to supply as much as they did before the price controls
How do externalitiesvin the production of college educations result in market failure? Because of externalities, the market for college educations will
provide insufficient college educations
as explained in the chapter, economic efficiency is an outcome in a market when the marginal benefit to consumers of the last unit produced is equal to it's marginal cost of production considering this explanation of economic efficiency, why does a tax creates deadweight loss (i.e. reduce surplus)? What is the impact of a production tax on the equilibrium price? The equilibrium price
rises and the equilibrium quantity falls
when the government imposes price floors or price ceilings,
some people win, some people lose, and there is a loss of economic efficiency
economic surplus is the
sum of producer and consumer surplus
Why would economists use the term deadweight loss to describe the impact on consumer and producer surplus from a price control?
that is lost, being transferred to noone, as a result of a price control
Consumer surplus is used as a measure of a consumer's net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit. Consumer surplus gives us the benefit to consumers
that remains after subtracting the price
Tax incidence indicates
the actual division of the burden of a tax
tax incidence is
the actual division of the burden of a tax between buyers and sellers in a market
marginal benefit is
the additional benefit from consuming one more unit
the private benefit is ____, while the social benefit is ____
the benefit received by the consumer of a good service the total benefits from consuming the good or service
At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to
the cost of the externaltity
A student argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is largest." This statement is false because
the level of output where the difference between marginal benefit and marginal cost will be below the output level needed to have the max econmoic surplus
In a linear demand equation, what economic information is conveyed by the intercept on the price axis? In a linear demand equation, the intercept on the price axis tells us
the lowest price at which the quantity demanded will be zero
economic surplus is maximized when
the marginal benefit of consumption is equal to the marginal costs of production
Suppose education generates a positive externality in consumption. If so, then
the marginal social benefit of education is greater than the marginal private benefit
The author suggests the market for converting land to urban uses results in "inefficient land use allocation" because
the marginal social cost of converting land to urban uses is greater than the marginal private cost
how do externalities affect markets? if a negative externality in production is present in a market, then
the private cost of production will be different than the social cost of production
Suppose apple trees generate a positive externality in production. If so, then
the private market equilibrium results in a quantity that is less than the efficient quantity
deadweight loss is
the reduction in economic surplus resulting from a market not being in competitive equilibrium
a positive externality causes
the social benefit from consuming the good to be greater than the private benefit
Briefly explain whether you agree or disagree with the following statement: "If there is a shortage of a good, it must be scarce, but there is not a shortage of every scarce good."
the statement is correct because every good (except undesirable things) is scarce
briefly explian whether you agree with the following statement: if consumer surplus in a market increases, producer surplus must decrease
the statement is incorrect. consumer surplus (and producer surplus) could increse by decreasing deadweight loss
A producer or a consumer will internalize an externality because
they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.
The government could subsidize new technology and pay for it with taxes or collect fees from those who use the new technology. true/false
true
the private cost of producing a good will differ from the social cost
when there is an externality, such as acid rain generated by the production of electricity
what is economic efficiency
where consumer surplus and producer surplus are maximized
