Western Michigan University Microeconomics Exam 3

One reason that private solutions to externalities do not always work is that?

Interested parties incur transaction costs in the bargaining process.

Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax burden when?

The demand for the product is more elastic than the supply of the product.

Which of the following is not a necessary condition for the Coase Theorem? Property rights are clearly defined There are no bargaining costs The government intervenes to internalize the externalities There are only a few parties involved

The government intervenes to internalize the externality

An example of a price floor is?

The minimum wage

In the short run, a firm incurs fixed costs?

Whether it produces output or not.

Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because?

With shortages and waiting lists, they have no incentive to maintain and improve their property.

Which of the following would not be considered a negative externality? Smelter, Inc. creates steel and pollution Your friend buys a new puppy that barks every night You have an adverse reaction to a medication your doctor prescribed for you Your neighbor plays loud music that you dislike through stereo speakers set up on his deck

You have an adverse reaction to a medication your doctor prescribed for you

Doreen's Dairy produces and sells Swiss cheese. Last year, it produced 7,000 pounds and sold each pound for $6. In producing the 7,000 pounds, the dairy incurred variable costs of $28,000 and a total cost of $40,000. In producing 7,000 pounds of cheese, the firm's average fixed cost was?

$1.71

Bubba is a shrimp fisherman who catches 4,000 pounds of shrimp per year. He can sell the shrimp for $5 per pound. His average total cost of catching shrimp is $3 per pound. Bubba's annual total profit is?

$12,000

Doreen's Dairy produces and sells Swiss cheese. Last year, it produced 7,000 pounds and sold each pound for $6. In producing the 7,000 pounds, the dairy incurred variable costs of $28,000 and a total cost of $40,000. Suppose the owner of the business had an offer to work for another firm for $25,000. The firm's accounting profit for the year was?

$2,000

A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $3,500. When it produces 101 units of output, its total costs are $3,750. What is the marginal cost of producing the 101st unit of output.

$250

Doreen's Dairy produces and sells Swiss cheese. Last year, it produced 7,000 pounds and sold each pound for $6. In producing the 7,000 pounds, the dairy incurred variable costs of $28,000 and a total cost of $40,000. In producing the 7,000 pounds of cheese, the firm's average total cost was?

$5.71

Doreen's Dairy produces and sells Swiss cheese. Last year, it produced 7,000 pounds and sold each pound for $6. In producing the 7,000 pounds, the dairy incurred variable costs of $28,000 and a total cost of $40,000. Suppose the owner of the business had an offer to work for another firm for $25,000. The firm's economic profit for the year was?

-$23,000

Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 181 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is?

16 units of output

Which of the following expressions is correct?

Average Total Cost = Total Cost/Quantity of Output

When a tax is placed on the sellers of energy drinks, the?

Burden of the tax will be shared by the buyers and sellers, but the division of the burden is not always equal.

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

Can be done by imposing a corrective tax Internalizing the Externality The role of the government in markets with externalities

A tax is placed on a good?

Causes the equilibrium quantity of the good to decrease.

Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to?

Charge your roommate at least $50 but no more than $100 to keep you from complaining about the mess.

If the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a?

Command and Control Policy

What is the difference between command-and-control policies and market-based policies toward externalities?

Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decision makers to change their behavior.

When the marginal product of an input declines as the quantity of that input increases, the production function exhibits?

Diminishing marginal product and diminishing total product

Two firms A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that?

Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.

A production function describes?

How a firm turns inputs into outputs

Economists normally assume that the goal of a firm is to?

Maximize its profit

In a market economy, government intervention?

May improve market outcomes in the presence of externalities.

Which of the following is the most likely explanation for the imposition of a price floor on the market for corn? Policy makers have studied the effects of the price floor carefully, and they recognize that the price floor is advantageous for society as a whole. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into imposing a price floor Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into imposing the price floor. Sellers of corn, recognizing that the price floor is good for them have pressured policy makers into imposing the price floor.

Sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor.

Rent Control?

Serves as an example of a price ceiling.

Pete owns a shoe-shine business. Which of the following costs are the explicit costs? Shoe Polish Rent on the shoe stand Wages Pete could earn delivering newspapers Interest that Pete's money was earning before he spent his savings to set up the shoe-shine business

Shoe Polish and Rent on the shoe stand

When a binding price ceiling is imposed on a market to benefit buyers,

Some buyers benefit and some buyers are harmed.

Which of the following statements about the effects of rent control is correct? The short-run effect of rent control is a surplus of apartments, and the long-run effect of rent control is a shortage of apartments The short-run effect of rent control is a relatively small shortage of apartments, and the long run effect of rent control is a larger shortage of apartments. In the long run, rent control leads to a shortage of apartments and an improvement in the quality of available apartments The effects of rent control are very noticeable to the public in the short run because the primary effects of rent control occur very quickly

The short-run effect of rent control is a relatively small shortage of apartments, and the long-run effect of rent control is a larger shortage of apartments.

If the government passes a law requiring sellers of mopeds to send $200 to the government for every moped they sell then?

The supply curve for mopeds shifts inward (or to the left) by $200

An externality is?

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

Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?

They equilibrium quantity is less than the socially optimal quantity.