ECON 202 Problem Set 11

Both presidents Kennedy and Reagan proposed significant cuts in income taxes because

they believed that the tax cuts would enhance economic efficiency.

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.

Refer to the table above. Suppose a series of votes are taken in which each pair of alternatives is considered in turn. The first pair considered is between subsidies for education and research on​ Alzheimer's. The second pair considered is between​ Alzheimer's research and increased border security. The third pair considered is between education subsidies and increased border security. In this​ case, the collective preferences of the voters

turn out not to be​ transitive, and will not result in a consistent outcome.

Suppose it is October 1. You have paid ​$16,000 in tuition and have been attending college classes. ​ However, you are offered a​ full-time job paying ​$27,000 for the next two months. If you take the​ job, you'll have to stop attending classes and withdraw from college for the semester. ​ Unfortunately, at this point in the​ semester, tuition is no longer refundable. You must decide whether to remain enrolled in college. What is the relevant cost of staying in​ school? When deciding whether to remain in​ school, the relevant cost of staying in school is

$27000

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods​, quasi-public goods​, or common resources. Education in a public school​ (Grades K through​ 12):

A common resource

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods​, quasi-public goods​, or common resources. An​ apple:

A private good

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods​, quasi-public goods​, or common resources. Mail​ delivery:

A private good

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods​, quasi-public goods​, or common resources. A television broadcast of the World​ Series:

A public good

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods​, quasi-public goods​, or common resources. Hiking in a large park​ (no congestion) not surrounded by a​ fence:

A public good

Company A and Company B are considering whether to spend a certain sum of money to advertise their new range of products. If Company A chooses to advertise while Company B does​ not, Company​ A's annual sales will increase by​ $5 million while Company​ B's sales will remain unchanged. If Company B chooses to advertise while Company A does​ not, Company​ B's annual sales will increase by​ $5 million while Company A will not experience any change in its sales. If both companies decide to​ advertise, their sales will increase by​ $2 million each and if neither spends on​ advertisement, their sales will remain unchanged. Refer to the scenario above. If the cost of advertising is​ negligible, what will be the outcome of this​ game? A. Both companies will advertise their products. B. Company A will advertise its​ products, while Company B will not advertise. C. Neither company will advertise its products. D. Company B will​ advertise, while Company A will not advertise.

A. Both companies will advertise their products.

Choco Fantasy is a firm that produces both dark chocolates as well as liquor chocolates. It can produce​ 10,000 bars of dark chocolate per month if all its resources are used to produce only this variety.​ Similarly, using all its resources in the production of liquor​ chocolates, the firm can produce​ 8,000 bars per month.​ However, during a given​ month, the firm produces both varieties. Which of the​ following, if​ true, would suggest that the firm is operating on its​ PPF? A. Even though the demand for both liquor and dark chocolates has​ increased, the company can increase the production of only one variety. B. In an attempt to cut​ costs, the company is planning to fire its unproductive resources. C. Medical reports earlier this year indicated that higher chocolate consumption increases the risk of heart attack. D. Most domestic consumers prefer the better quality Swiss chocolates imported by the country. E. The opportunity cost of shifting resources from the production of liquor chocolates to dark chocolates is marginal.

A. Even though the demand for both liquor and dark chocolates has​ increased, the company can increase the production of only one variety.

From the list​ below, select the variable that will cause the supply curve to​ shift: A. The cost of raw materials B. Consumer income C. Population and demographics D. Prices of related goods

A. The cost of raw materials

A corrective subsidy induces the​ ________ to the socially optimal level. A. consumers of a positive externality to increase the quantity consumed B. consumers of a negative externality to increase the quantity consumed C. producers of a positive externality to reduce the quantity produced D. producers of a negative externality to increase the quantity produced

A. consumers of a positive externality to increase the quantity consumed

When a Pigouvian tax is​ imposed, ________. A. the marginal private cost curve shifts upward B. the marginal social benefit curve shifts downward C. the marginal social cost curve shifts downward D. the demand curve shifts rightward

A. the marginal private cost curve shifts upward

A landlord who intends to abide by the rent control law A. will be worse off because he will be receiving less rent. B. will be worse off because there will be a shortage of apartments. C. will be better off because there will be a shortage of apartments. D. will be better off because he will be receiving more rent. E. both a and b.

A. will be worse off because he will be receiving less rent.

We can show economic​ inefficiency: A. with points inside the production possibilities frontier. B. with points inside and on the production possibilities frontier. C. with points on and outside the production possibilities frontier. D. with points outside the production possibilities frontier. E. with points on the production possibilities frontier.

A. with points inside the production possibilities frontier.

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods​, quasi-public goods​, or common resources. Hiking in a large park​ (no congestion) surrounded by a​ fence:

A​ quasi-public good

Which of the following statements is false about rent​ seeking? A. If a firm can benefit from government intervention in the​ economy, it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market. B. Because rent seeking redistributes​ society's resources, anyone engaging in such behavior is violating the law. C. A person is engaging in​ rent-seeking behavior when he uses the political process to acquire ownership of a resource that belongs to the public. D. Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for.

B. Because rent seeking redistributes​ society's resources, anyone engaging in such behavior is violating the law.

In an article in the Quarterly Journal of Economics​, Ted​ O'Donoghue and Matthew Rabin make the following​ observation: ​"People have​ self-control problems caused by a tendency to pursue immediate gratification in a way that their​ 'long-run selves' do not​ appreciate." ​Source: Ted​ O'Donoghue and Matthew​ Rabin, "Choice and​ Procrastination," Quarterly Journal of Economics​, February​ 2001, pp.​ 125-26. Which of the following is an example of pursuing a goal which is in a​ person's long-term​ interest? A. Going to the movies instead of studying. B. Succeeding in school. C. Spending more money than you earn. D. Eating donuts instead of sticking to a healthy diet.

B. Succeeding in school.

According to an article on the Boston​ Globe's Web​ site, during the last three months of​ 2014, gasoline prices dropped 33 percent at the same time as ridership on mass​ transit, such as subways and trains increased by 1 percent. According to a spokesperson for the American Public Transportation​ Association, a group that lobbies Congress in behalf of public transit​ systems, "Even with gas prices dropping like a​ rock, the public is still demanding more transit​ options." ​Source: "US Transit Rides at​ 58-year High While Gas Prices​ Fall," bostonglobe.com, March​ 9, 2015. a. Gasoline and rides on mass transit are A. substitutes because the​ cross-price elasticity of demand is negative. B. complements because the​ cross-price elasticity of demand is negative. C. substitutes because the​ cross-price elasticity of demand is positive. D. complements because the​ cross-price elasticity of demand is positive.

B. complements because the​ cross-price elasticity of demand is negative.

Which of the following is not an example of​ rent-seeking behavior? A. lobbying the government to impose tariffs on certain imported products B. engaging in aggressive advertising that slams a​ competitor's product C. competition for the exclusive right to import a product D. competition for subsidies

B. engaging in aggressive advertising that slams a​ competitor's product

Traffic congestion is an example of a​ ________. A. ​free-rider problem B. negative externality C. pecuniary externality D. positive externality

B. negative externality

The presence of a positive externality in a market leads to​ ________. A. overproduction of the good B. underproduction of the good C. a fall in consumer surplus D. a deadweight loss

B. underproduction of the good

According to an article on the Boston​ Globe's Web​ site, during the last three months of​ 2014, gasoline prices dropped 33 percent at the same time as ridership on mass​ transit, such as subways and trains increased by 1 percent. According to a spokesperson for the American Public Transportation​ Association, a group that lobbies Congress in behalf of public transit​ systems, "Even with gas prices dropping like a​ rock, the public is still demanding more transit​ options." ​Source: "US Transit Rides at​ 58-year High While Gas Prices​ Fall," bostonglobe.com, March​ 9, 2015. b. During this period the unemployment rate was​ declining, the news story also included the​ observation, "An improving economy means more people need to get to​ work." Given this​ observation, A. the​ cross-price elasticity of demand between gasoline and rides on mass transit is likely to be more negative. B. we can no longer be sure of the value of the​ cross-price elasticity of demand between gasoline and rides on mass transit. C. the​ cross-price elasticity of demand between gasoline and rides on mass transit is likely to be positive. D. the​ cross-price elasticity of demand between gasoline and rides on mass transit is likely to be zero.

B. we can no longer be sure of the value of the​ cross-price elasticity of demand between gasoline and rides on mass transit.

Which of the following best describes the process of regulatory​ capture?

Bank of America encourages the​ FDIC-Federal Deposit Insurance​ Corporation- to make banks with less than​ $50 million of deposits pay a higher percentage into the insurance fund​ "for the protection of​ consumers."

Which of the following illustrates the law of​ supply? A. An increase in the number of firms in an industry causes a shift of the supply curve. B. A change in price causes a shift of the supply curve. C. An increase in price causes an increase in the quantity​ supplied, and a decrease in price causes a decrease in the quantity supplied. D. All of the above illustrate the law of supply.

C. An increase in price causes an increase in the quantity​ supplied, and a decrease in price causes a decrease in the quantity supplied.

Company A and Company B are considering whether to spend a certain sum of money to advertise their new range of products. If Company A chooses to advertise while Company B does​ not, Company​ A's annual sales will increase by​ $5 million while Company​ B's sales will remain unchanged. If Company B chooses to advertise while Company A does​ not, Company​ B's annual sales will increase by​ $5 million while Company A will not experience any change in its sales. If both companies decide to​ advertise, their sales will increase by​ $2 million each and if neither spends on​ advertisement, their sales will remain unchanged. Refer to the scenario above. Which of the following is​ true? A. Company A should not advertise its products irrespective of what Company B does. B. Company B should not advertise if Company A decides to advertise its products. C. Company A should advertise if Company B decides to advertise its products. D. Company B should not advertise its product irrespective of what Company A does.

C. Company A should advertise if Company B decides to advertise its products.

Which of the following is​ true? A. If consumption of a good gives rise to a negative​ externality, it can be internalized by subsidizing the purchase of the good. B. If consumption of a good gives rise to a positive​ externality, it can be internalized by taxing the producers of the good. C. If production of a good gives rise to a negative​ externality, it can be internalized by taxing the producers of the good. D. If production of a good gives rise to a positive​ externality, it can be internalized by taxing the consumers of the good.

C. If production of a good gives rise to a negative​ externality, it can be internalized by taxing the producers of the good.

Scenario: Elly owns a small coffee shop. She has only one employee. One​ weekend, she decides to take a break from work. She is wondering whether she should trust her employee to run the shop in her absence. If she does not trust​ him, she would have to keep the shop​ closed, in which case neither she nor her employee will be able to make money. On the other​ hand, if she trusts​ him, he can either cooperate and run the​ shop, or he can defect and steal from the shop. If he​ cooperates, both of them will earn money. If he steals from the​ shop, he will make more money while she will lose. Refer to the scenario above. Which of the following is likely to be true in this​ case? A. Multiple Nash equilibria occur. B. The equilibrium outcome is Nash. C. The equilibrium outcome is socially inefficient. D. A dominant strategy equilibrium exists.

C. The equilibrium outcome is socially inefficient.

The production of an industrial good in a plant emits harmful gases that cause breathing difficulty. Which of the following will happen if the government imposes a Pigouvian tax on the​ plant? A. The demand for the good will increase. B. Marginal external cost will increase. C. The quantity supplied of the good will decrease. D. Marginal private cost will fall.

C. The quantity supplied of the good will decrease.

An article in the Wall Street Journal notes that although U.S. oil production has increased rapidly in recent​ years, the increase has still amounted to only 5 percent of world production.​ Still, that increase has been​ "enough to help trigger a price​ collapse." ​Source: Georgi Kantchev and Bill​ Spindle, "Shale-Oil Producers Ready to Raise​ Output," Wall Street Journal​, May​ 13, 2015. A small increase in supply can lead to a large decline in equilibrium price when A. demand is perfectly elastic. B. demand is relatively elastic. C. demand is relatively inelastic. D. supply is perfectly elastic.

C. demand is relatively inelastic.

We do not typically see laws limiting the prices hotels can charge during peak seasons since those prices A. are willingly paid by gullible tourists. B. are exempted from control by the Constitution. C. merely offset low prices and very high vacancy rates experienced during the off season. D. enable the resorts to hire seasonal workers.

C. merely offset low prices and very high vacancy rates experienced during the off season.

Like many other​ cities, Denver experienced a sharp decline in construction of new houses in the years following 2006. Many​ carpenters, roofers, and other skilled workers left the area or found jobs in other industries. In​ addition, builders stopped buying and preparing home lots for construction. According to an article in the Wall Street Journal​, by​ 2014, as consumers increased their demand for new homes in​ Denver, "New-home prices have surged over the past two years ... amid a shortage of home lots and skilled construction​ workers." ​Source: Kris​ Hudson, "Labor Shortage Besets Home​ Builders," Wall Street Journal​, May​ 1, 2014. In the​ future, the price increases of new houses in Denver can be expected to be A. larger because supply is less elastic over time. B. larger because supply is more elastic over time. C. smaller because supply is more elastic over time. D. smaller because supply is less elastic over time.

C. smaller because supply is more elastic over time.

​________ are highly excludable but​ non-rival in consumption. A. Public goods B. Common pool resources C. Private goods D. Club goods

D. Club goods

A price ceiling A. does increase the amount of the product that consumers buy because it lowers the price. B. does increase the amount of the product that consumers buy because it creates a surplus. C. does not increase the amount of the product that consumers buy because it creates a surplus. D. does not increase the amount of the product that consumers buy because it creates a shortage. E. both a and b.

D. does not increase the amount of the product that consumers buy because it creates a shortage.

The production possibilities frontier will shift outward A. if resources are not used in production. B. if production occurs outside the production possibilities frontier. C. if technology declines. D. if resources are used to produce capital goods. E. if resources are used to produce consumption goods.

D. if resources are used to produce capital goods.

Consider the supply of copper. What would make the supply of copper more​ elastic? The supply of copper would become more elastic if A. it were more of a luxury. B. more substitutes were available. C. the definition of the market becomes narrower. D. the time horizon becomes longer. E. it becomes a larger portion of a​ consumer's budget.

D. the time horizon becomes longer.

The editorial argues that buying and selling kidneys should be​ legalized: "With proper​ regulation, a kidney market would be a big improvement over the current sorry state of affairs. Sellers could be checked for disease and drug​ use, and cared for after operations...Buyers would get better​ kidneys, faster. Both sellers and buyers would do better than in the illegal​ market, where much of the money goes to​ middlemen." Do you agree with the​ argument? Should the government treat kidneys like other goods and allow the market to determine​ price? A. Yes. Legalizing the exchange of kidneys would increase the quantity​ supplied, benefiting those who need a kidney but are unable to obtain one due to the shortage. B. No. Legalizing the exchange of kidneys would hurt those who otherwise would have been supplied a kidney at no cost. C. Yes. Legalizing the exchange of kidneys would benefit consumers by lowering the price. D. Yes. Legalizing the exchange of kidneys would hurt suppliers by decreasing the amount they could receive for providing a kidney. E. Both a and b are reasonable arguments.

E. Both a and b are reasonable arguments.

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 who will be moving to Lowell next year and who intends to rent an apartment A. will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling. B. will be worse off if they are unable to find an apartment to rent. C. will be worse off regardless of whether they find an apartment to rent because there is a shortage of apartments. D. will be better off regardless of whether they find an apartment to rent because rent is lower due to the price ceiling. E. both a and b.

E. both a and b.

Tax incidence indicates A. the burden of a tax on consumers. B. the burden of a tax on producers. C. who is legally required to send a tax payment to the government. D. who is not legally required to send a tax payment to the government. E. the actual division of the burden of a tax.

E. the actual division of the burden of a tax.

Over the past 30​ years, the price of oil has been relatively​ unstable, fluctuating between​ $11.00 and well over​ $100 per barrel. Which of the following potentially contributes to​ oil-price instability? Oil prices are relatively unstable because A. the income elasticity of demand for oil is negative. B. OPEC has been successful in controlling the quantity of oil its members supply. C. the demand for oil is elastic. D. the market for oil is relatively competitive. E. the supply of oil is inelastic.

E. the supply of oil is inelastic.

The public choice model can be used to examine voting models that contrast the manner in which collective decisions are made by governments​ (state, local, and​ federal) and the manner in which individual choices are made in markets. Which of the following descriptions is consistent with the difference between collective decision−making and decision−making in​ markets?

Individuals are less likely to see their preferences represented in the outcomes of government policies than in the outcomes of markets.

What is meant by the term​ "rational ignorance"?

It means the lack of an economic incentive for voters to become informed about a pending legislation.

​"The prisoner's dilemma game is unrealistic. Each​ player's strategy is based on the assumption that the other player​ won't cooperate. But if each player assumes that the other player will​ cooperate, then the​ 'dilemma' disappears." Is this argument correct or​ incorrect?

The argument is incorrect. The best strategy for each player is to not cooperate no matter what the other player does.

What is the focus of a​ command-and-control approach to reducing​ pollution?

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

Briefly explain whether the​ "safety fee" is a Pigovian tax of the type discussed in this chapter.

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.

Why do most economists favor tradable emissions allowances to the​ command-and-control approach to​ pollution?

Tradable emissions allowances eliminate pollution at lower cost than the​ command-and-control approach.

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). ​Source: Michael​ Levenson, "Patrick Proposes New Fee on​ Criminals," Boston Globe​, January​ 14, 2007. Is there an economically efficient amount of​ crime? Briefly explain.

Yes. The economically efficient amount of crime is where the marginal social benefit equals the marginal social cost.

When members of Congress vote to pass new​ legislation, they will

fail to consistently represent the underlying preferences of voters.

Elly owns a small coffee shop. She has only one employee. One​ weekend, she decided to take a break from work. She is wondering whether she should trust her employee to run the shop in her absence. If she does not trust​ him, she would have to keep the shop​ closed, in which case neither she nor her employee will be able to make money. On the other​ hand, if she trusts​ him, he can either cooperate and run the​ shop, or he can defect and steal from the shop. If he​ cooperates, both of them will earn money. If he steals from the​ shop, he will make more money while she will lose. Refer to the scenario above. Elly should use​ ________ to make her decision.

backward induction

Why is a typical person likely to gather more information when buying a new car than when voting for a member of​ Congress?

because buying a new car affects a person more immediately and personally compared to voting for a member of Congress. In the​ latter, a​ person's vote is only one of many voters and​ therefore, not likely to have a large impact on the outcome.

For several​ years, a professor at Johns Hopkins University had been using the following grading scheme for his final​ exam: He would give an A to the student with the highest score. The grades of the remaining students were then based on what percentage their scores were of the top​ student's score. In the fall of​ 2012, the students in the class came up with the idea of boycotting the final exam. They stood in the hallway outside the classroom but did not enter the room to take the exam. After waiting for a​ time, the professor cancelled the exam​ and, applying his grading​ scale, gave everyone in the class an A on the exam. An article in the New York Times about this incident​ observes: "This is an amazing game theory​ outcome, and not one that economists would likely​ predict." ​Source: Catherine​ Rampell, "Gaming the​ System," New York Times​, February​ 14, 2013. Game theory indicates the​ students' strategy was unlikely to work because

it is difficult to get a group of people to agree and not defect.

The median voter model implies that

many people will be dissatisfied with the amount of spending on government funded projects.

The voting paradox suggests that the​ "voting market", as represented by elections

may often lead to an inefficient outcome in representing consumer preferences compared to the private market for goods and services.

The tragedy of the commons occur because some goods are​ ________ in consumption.

non-excludable but rival

One result of the public choice model is that most economists believe that

policymakers may have incentives to intervene in the economy in ways that do not promote economic efficiency.

An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following​ observation: ​"It was important... to understand the ways that government could fail​ systematically." ​Source: "Don't Hate the​ Player, Hate the​ Game," Economist​, January​ 17, 2013. In this​ context, government failure means

politicans making bad decisions for their own selfish reasons.

At what level must a Pigovian tax be set to achieve​ efficiency? A Pigovian tax must be set equal to

the cost of the externality.

How is free riding related to the tendency of a public good to create market​ failure? Free riding results in

the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

One important difference between the political process and the market process is that

the political process results in collective actions in which everyone is obliged to participate while in the market process individuals are free to participate or not.