ECO 101 Exam 3 Review

Refer to Figure 8-9. The imposition of the tax causes the price received by sellers to decrease by

$300.

Refer to Figure 8-2. Producer surplus without the tax is

$4, and producer surplus with the tax is $1.

Refer to Figure 8-4. The per-unit burden of the tax on buyers is

$4.

​Refer to figure 9-26. Prior to opening of the U.S. baseball market to international trade, total surplus is

$4800.

Refer to Figure 8-2. The amount of tax revenue received by the government is

$5.

Refer to figure 9-26. After opening the U.S. baseball market to international trade, total surplus is

$6000.

Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, what price will the firm charge per unit of plastic?

$7.00

Refer to Figure 9-23. Consumer surplus with free trade is

$75

Refer to Figure 8-7. The deadweight loss associated with this tax amounts to

$80, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers.

Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

2 units

Refer to Figure 9-15. As a result of the tariff, there is a deadweight loss that amounts to

D + F.

Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the number of domestic jobs. An economist would argue that

foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding.

At any given quantity, the willingness to pay in the market for gasoline is reflected in the

height of the demand curve at that quantity.

Refer to Figure 9-4. With trade, Nicaragua

imports 250 calculators.

Refer to Figure 8-12. Suppose a $3 per-unit tax is placed on this good. The tax causes the price paid by buyers to

increase by $2.

Markets are often inefficient when negative externalities are present because

social costs exceed private costs at the private market solution.

Since almost all forms of transportation produce some type of pollution,

society has to weigh the cost and benefits when deciding how much pollution to allow.

Refer to Figure 9-2. At the world price and with free trade,

the calculator market is in equilibrium.

Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is imposed,

the deadweight loss amounts to $6

Suppose the tax on gasoline is decreased from $0.60 per gallon to $0.40 per gallon. As a result,

the deadweight loss of the tax necessarily decreases.

Economists disagree on whether labor taxes cause small or large deadweight losses. This disagreement arises primarily because economists hold different views about

the elasticity of labor supply.

If education produces positive externalities and the government does not intervene in the market, we would expect

the equilibrium quantity to be lower than the optimal level.

Suppose Brazil has an absolute advantage over other countries in producing almonds, but other countries have a comparative advantage over Brazil in producing almonds. If trade in almonds is allowed, Brazil

will import almonds.

A rain barrel is a container that captures and stores rainwater for landscape and garden use during dry periods. Rain barrels provide an external benefit to the community through water conservation. What can the government do to equate the equilibrium quantity of rain barrels and the socially optimal quantity of rain barrels?

​offer a subsidy on rain barrels that is equal to the per-unit externality

Refer to Figure 9-5. The increase in total surplus resulting from trade is

$1,280, since consumer surplus increases by $3,520 and producer surplus falls by $2,240.

Refer to Figure 9-17. With free trade, consumer surplus is

$1,600 and producer surplus is $200.

Refer to Figure 8-6. The amount of the tax on each unit of the good is

$10

Refer to figure 9-26. Prior to opening the U.S. baseball market to trade, the equilibrium price of a baseball is​

$10

Refer to Figure 8-6. Without a tax, the equilibrium price and quantity are

$10 and 600.

Refer to Figure 9-24. Suppose the government imposes a tariff of $10 per unit. The amount of revenue collected by the government from the tariff is

$100.

Refer to Figure 9-23. With free trade, the domestic price and domestic quantity demanded are

$120 and 5.

Refer to Figure 10-11. Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is

$13,230.

Refer to Figure 8-9. The total surplus with the tax is

$15,000.

Refer to Figure 8-4. The tax results in a loss of consumer surplus that amounts to

$170.

Refer to Figure 9-3. With trade, producer surplus in China is

$2,700.

​Refer to Figure 9-3. With trade, producer surplus in China is

$2,700.

Refer to Figure 9-18. Suppose Isoland changes from a no-trade policy to a policy that allows international trade. If the world price of peaches is $5, then the policy change results in a

$25 decrease in consumer surplus.

Refer to Figure 8-2. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is

$3

Refer to Figure 8-9. The loss of producer surplus as a result of the tax is

$9,000.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. Total surplus before the tax is measured by the area

. I+J+K+L+M+Y.

Refer to Figure 9-21. With free trade, domestic production and domestic consumption, respectively, are

1,600 and 800.

Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?

10 units

Refer to Figure 10-20. The graph depicts the market for fertilizer. Without any government regulation, how much fertilizer will be produced?

250 units

Refer to Figure 10-11. The socially optimal quantity of output is

420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit.

Suppose a tax of $5 per unit is imposed on a good. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. The tax decreases consumer surplus by $10,000 and decreases producer surplus by $15,000. The deadweight loss of the tax is $2,500. The tax decreased the equilibrium quantity of the good from

5,500 to 4,500.

Refer to Figure 9-9. Consumer surplus in this market after trade is

A

Refer to Figure 9-15. Consumer surplus with trade and without a tariff is

A + B + C + D + E + F.

Refer to Figure 9-9. Total surplus in this market before trade is

A + B + C.

Refer to Figure 9-9. Consumer surplus in this market before trade is

A + B.

Refer to Figure 8-5. Consumer surplus before the tax was levied is represented by area

A+B+C.

Refer to Figure 8-24. Tax revenue would

All of the above are correct.

The amount of deadweight loss from a tax depends upon the

All of the above are correct.

When one firm sells its pollution permit to another firm,

Both a and b are correct.

Refer to Figure 9-11. Producer surplus in this market after trade is

C.

Refer to Figure 9-11. The change in total surplus in this market because of trade is

D, and this area represents a gain in total surplus.

Refer to Figure 8-17. Suppose the government imposes a $1 tax in each of the four markets represented by demand curves D1, D2, D3, and D4. The deadweight will be the largest in the market represented by

D4.

Which of the following is not correct?

Externalities cannot be positive.

Refer to Figure 8-5. After the tax is levied, producer surplus is represented by area

F

A tax on a good causes the size of the market to increase.

False

A technology spillover is a type of negative externality.

False

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

False

Economists dismiss the idea that lower tax rates can lead to higher tax revenue, because there is a consensus that the relevant elasticities of demand and supply are very low.

False

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

False

If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good.

False

The nation of Cranolia used to prohibit international trade, but now trade is allowed, and Cranolia is exporting furniture. Relative to the previous no-trade situation, buyers of furniture in Cranolia are now better off.

False

Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue.

False

Refer to Figure 9-7. Which of the following is a valid equation for the gains from trade?

Gains from trade = (1/2)(P1 - P0)(Q2 - Q1).

Which of the following statements is correct?

Government should tax goods with negative externalities and subsidize goods with positive externalities.

Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that

Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

Refer to Figure 9-7. Which of the following is a valid equation for Welsh producer surplus with trade?

None of the above is correct.

Refer to Figure 10-5. Which price and quantity combination represents the social optimum?

P2 and Q1.

Refer to Figure 9-15. With the tariff, the price paid and quantity demanded by domestic buyers are

P2 and Q3.

Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. The price that buyers pay is

P2.

Refer to Figure 8-3. The equilibrium price before the tax is imposed is

P2.

Refer to Figure 8-3. The amount of the tax on each unit of the good is

P3 - P1.

Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. The price that sellers receive is

P8.

Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution?

Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15).

A corrective tax is also known as:

Pigovian tax

When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Provide a subsidy equal to the value of the technology spillover.

Refer to Figure 10-6. Which quantity represents the socially-optimal quantity of output in this market?

Q'

Refer to Figure 9-15. A result of the tariff is that, relative to the free-trade situation, the quantity of saddles imported decreases by

Q4 - Q3 + Q2 - Q1.

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $11-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.

Which of the following statements is correct regarding a tax on a good and the resulting deadweight loss?

The greater are the price elasticities of supply and demand, the greater is the deadweight loss.

When a country allows trade and becomes an importer of bottled water, which of the following is not a consequence?

The losses of domestic producers of bottled water exceed the gains of domestic consumers of bottled water.

Refer to Figure 10-5. Which of the following statements is correct?

The marginal cost of the negative externality is measured by P3 - P1.

In principle, trade can make a nation better off, because the gains to the winners exceed the losses to the losers.

True

Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibrium without trade, thus reducing the gains from trade.

True

The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market, and the more likely it is that a tax cut in that market will raise tax revenue.

True

The more elastic the supply, the larger the deadweight loss from a tax, all else equal.

True

When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.

True

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

True

Refer to Figure 9-20. Given that Vietnam is a small country, it is apparent from the figure that

Vietnam will export rice if trade is allowed.

Which of the following would not be considered a negative externality?

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

The difference between a corrective tax and a tradable pollution permit is that

a corrective tax sets the price of pollution and a permit sets the quantity of pollution.

If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the policy would be considered

a corrective tax.

A corrective tax

allocates pollution to those factories that face the highest cost of reducing it.

Suppose a country abandons a no-trade policy in favor of a free-trade policy. If, as a result, the domestic price of pistachios decreases to equal the world price of pistachios, then

at the world price, the quantity of pistachios demanded in that country exceeds the quantity of pistachios supplied in that country.

When a tax is levied on a good,

both buyers and sellers are made worse off.

The price elasticities of supply and demand affect

both the size of the deadweight loss from a tax and the tax incidence.

When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelastic,

buyers of the good will bear most of the burden of the tax.

Patterns of trade among nations are primarily determined by

comparative advantage.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J+K+I represents

consumer surplus before the tax.

When a country abandons a no-trade policy, adopts a free-trade policy, and becomes an exporter of a particular good,

consumer surplus decreases and total surplus increases in the market for that good.

Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is imposed,

consumer surplus decreases by $11.

When the nation of Mooseland first permitted trade with other nations, domestic producers of sugar experienced a decrease in producer surplus of $5 million and total surplus in Mooseland's sugar market increased by $2 million. We can conclude that

consumer surplus in Mooseland increased by $7 million.

Suppose Iceland goes from being an isolated country to being an importer of coats. As a result,

consumer surplus increases for consumers of coats in Iceland.

Refer to Figure 9-5. If this country allows free trade in tricycles,

consumers will gain more than producers will lose.

Refer to Figure 10-3. The difference between the social cost curve and the supply curve reflects the

cost of spillover effects from the concert (e.g., noise and traffic).

Corrective taxes differ from most taxes in that corrective taxes

do not cause deadweight losses.

Refer to Figure 9-26. As a result of opening up the baseball market to international trade, the U.S. will​

export 600 baseballs.

The world price of a pound of almonds is $4.50. Before Uruguay allowed trade in almonds, the price of a pound of almonds there was $3.00. Once Uruguay began allowing trade in almonds with other countries, Uruguay began

exporting almonds and the price per pound in Uruguay increased to $4.50.

Refer to Figure 9-7. With trade, Wales

exports Q2 - Q1 units of cheese.

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

give sellers the incentive to account for the external effects of their actions.

A positive externality

is a benefit to someone other than the producer and consumer of the good.

Refer to Figure 8-11. The size of the tax is represented by the

length of the line segment connecting points A and B.

In a market economy, government intervention

may improve market outcomes in the presence of externalities.

Refer to Figure 10-10. An increase in output from 120 units to 160 units would

move the market from a socially efficient outcome to a socially inefficient outcome.

A cost imposed on someone who is neither the consumer nor the producer is called a

negative externality.

An externality is the impact of

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

Assume, for Mexico, that the domestic price of beets without international trade is higher than the world price of beets. This suggests that, in the production of beets,

other countries have a comparative advantage over Mexico and Mexico will import beets.

Refer to Figure 8-11. The price labeled as P3 on the vertical axis represents the price

paid by buyers after the tax is imposed.

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

pay your roommate at least $25 but no more than $50 to clean up after herself.

When a country abandons a no-trade policy, adopts a free-trade policy, and becomes an exporter of a particular good,

producer surplus increases and total surplus increases in the market for that good.

A tax on a good

raises the price that buyers effectively pay and lowers the price that sellers effectively receive.

For a good that is taxed, the area on the relevant supply-and-demand graph that represents government's tax revenue is a

rectangle.

Refer to Figure 8-8. One effect of the tax is to

reduce producer surplus from $96 to $24.

One should be especially wary of the national-security argument for restricting trade when that argument is made by

representatives of industry.

When the nation of Worldova allows trade and becomes an exporter of silk,

residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic well-being of Worldova rises.

When a tax is placed on a product, the price paid by buyers

rises, and the price received by sellers falls.

Suppose the government places a per-unit tax on a good. The smaller the price elasticities of demand and supply for the good, the

smaller the deadweight loss from the tax.

A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current level of output of good x,

social cost = private cost = private value < social value.

When a certain nation abandoned a policy of prohibiting international trade in automobiles in favor of a free-tree policy, the result was that the country began to import automobiles. The change in policy improved the well-being of that nation in the sense that

the gains to automobile consumers in that nation exceeded the losses of the automobile producers in that nation.

If education produces positive externalities, we would expect

the government to subsidize education.

Refer to Figure 10-4. At Q3

the marginal consumer values this product less than the social cost of producing it.

Trade enhances the economic well-being of a nation in the sense that

trade results in an increase in total surplus.

The Coase theorem suggests that private markets may not be able to solve the problem of externalities

when the number of interested parties is large and bargaining costs are high.

The price of a good that prevails in a world market is called the

world price.