AP Micro Unit 6 Practice questions

Which of the following will cause an unregulated monopolist to produce a more allocatively efficient level of output?

A subsidy that increases as output increases

A. Identify the type of Market Failure illustrated by the graph. Explain. B. Using the numbers on the graph, identify the market equilibrium price and quantity. C. Using the labeling on the graph, identify the area representing the deadweight loss at the quantity identified in part (b). D. Suppose the government is considering granting a subsidy to correct the market failure. What is the dollar value of the per unit subsidy that would achieve the socially optimal quantity? E. Suppose the government does not grant the subsidy and instead impose a price floor. i. How many units will consumers and producers exchange at the price floor? ii. Does the price floor correct the market failure? Explain.

A. Positive externality, MSB >MPB B. P =$6, Q=16 C. DEF D. At Q of 16, $10 -$6 = $4 E. i.) 8 ii. No, the quantity exchanged in the market will be less than the socially optimal quantity.

Assume that product X is produced in a perfectly competitive industry and that product X yields cost to individuals who are neither consumers nor producers of product X. A. Using one correctly labeled graph, show the industry output and price under each of the following conditions. i. The industry ignores the externality. ii. The industry products the socially optimum level of output. Assume that the market is producing the level of output you identified in (i). b. Identify one policy the government might use to achieve the level of output you identified in (ii).

A. i. P1, Q1 ii. P2, Q2 b. A per-unit tax

The graph below shows the Marginal social cost (MSC), marginal private cost (MPC), demand (D) and marginal revenue (MR) curves for a monopoly. A. Identify the monopolist's i. profit-maximizing quantity ii. Profit maximizing price b. What information in the graph indicates there is a negative externality? C. Identify the socially optimal quantity. D. In the case in which the government impose a per-unit tax equal tote marginal external cost, identify each of the following: i. The dollar value of the tax. ii. The profit-maximizing quantity associate with the tax E. Will the deadweight loss increase, decrease, or stay the same?

A. i. Q3 ii. P4 B. MSC>MPC C. Q3 D. i. P4-P1 ii. Q2 E. increase

Which of the following is likely to result in allocative inefficiency?

An oligopoly market structure

If government regulators set price such that a natural monopolist earns only normal profits, price will be set equal to

Average total cost

In a perfectly competitive free market economy, a wage gap between two workers can be explained by difference in all of the following EXCEPT their

Tastes for luxury goods

There are negative externalities associated with the use of a freeway in a major city at rush hour because during this time:

Drivers slow down other drivers because of the high traffic volume

Which of the following best represents a positive externality?

Enjoying watching birds at a neighbor's bird feeder

Assume that the original supply and demand curves of a commodity are S and D, respectively. Also assume that the government imposes an excise tax (per unit tax) of t dollars on the commodity, which shifts the supply curve to S1. The deadweight loss created by the tax is equal to:

GKI

based on the information in the Lorenz Curve below, which of the following is true?

Income is more equally distributed in Country X than in Country Z.

Which of the following actions is most likely to reduce the degree of income inequality within a society?

Introducing progressive inheritance taxes on accumulated wealth

In the absence of externalities, which of the following is true of a competitive market in equilibrium?

Marginal Social benefit equals marginal social cost

A chemical plant pollutes a river that serves as the water supply for a nearby town. From an economist's point of view. Pollution from the plant should be reduced until:

Marginal benefit from the cleaner water is equal to the marginal cost of making the water cleaner.

Pollution abatement will improve efficiency if the:

Marginal cost of abatement is less than the Marginal benefit of abatement

National defense is a good example of a pure public good because it is:

Nonrival and nonexcludable

To correct for positive externalities, the government should:

Pay a subsidy equal to the marginal external benefit.

Public goods are typically provide by the government, because private markets tend to:

Produce less than the socially optimum quantity

Given the position of the marginal social cost curve, one can conclude that the:

Production of good X creates a negative externality

All of the following are sources of inequality in the distribution of personal income EXCEPT

Progressive income taxes

Which of the following statements about income inequality is true?

Raising taxes on savings and providing subsidies to low-income households will lead to more equal after-tax and transfer incomes

Public goods are underproduced in competitive market because the free-rider problem causes which of the following?

Reduced market demand

Assume that all residents of the city of Smallville prefer to have streetlights installed citywide. Which of the best explains why any individual residents to not install the optimal number of streetlights?

Streetlights are nonexcludable

Which of the following is a government policy that is intended to address a market failure?

Taxing the use of toxic pesticides by farmers

Which of the following best fits the definition of a public good?

The emergency broadcast system

The table below shows the distribution of income in country X in 2010 before and after taxes and transfer payments. Which of the following can be concluded about the effect of the government's tax and transfer policies on income distribution in Country X?

The major transfer of income is from the highest quintile to the two lowest quintiles.

Assume that many boats have free and open access to fishing in the waters of a country. Which of the following statements is true?

There will be a tendency for fishing operations to overfish, reduce the stock of fish and limit the future availability of fish for succeeding generations.

When cost and benefits are internalized:

Total surplus is maximized

Which of the following is the formula for a Gini coefficient, based on the graph below?

X/(X+Y)

The graph below shows the cost and revenue curves for a bridge to a popular island. The marginal cost of crossing the bridge is 0 and is indicated on the graph as the horizontal axis. The price is the toll to cross the bridge, and the output is the number of autos that cross the bridge each day. D. Suppose the municipality sets a break-even price that generates revenues to jut cover all economic costs. i. Based on the diagram, determine the break-even output ii. At the output you determined in (d)(i), is the demand relatively elastic, relatively inelastic, unit elastic, perfectly elastic or perfectly inelastic? E. If a company begins to provide access to the island via commercial watercraft, what will happen to each of the following in the diagram: i. The demand curve for bridge crossings ii. The profit-maximizing output F. Suppose the long-run average total cost is strictly downward sloping. Would it be efficient to build a second bridge? Explain.

d. i. Q3 ii. Relatively inelastic e. Shift left ii. decrease f. No, due to economies of scale