ECON Exam 2

Suppose, that your community has identified five different areas of town that are polluted and has assigned clean-up projects to each area: projects A through E in the table below. For simplicity, let's assume that the marginal cost of each project is $75,000. The marginal benefit to the community, however, is different for each and listed in the table below. If your city has enough money to pay for all five projects, which areas should it clean up? Project Marginal Benefit A $150,000 B 125,000 C 100,000 D 75,000 E 50,000 A, B, C and D C, D, and E D and E E

A, B, C and D

Which of the following statements is inconsistent with an elastic demand curve? The absolute value of the price elasticity of demand is less than 1. Total revenues fall when prices rise. Buyers are relatively sensitive to price changes. The relative change in quantity exceeds the relative change in price.

The absolute value of the price elasticity of demand is less than 1.

Use the table below to answer the following question. Units Maximum Willingness to Pay Market Price 1 $14 $10 2 12 10 3 10 10 4 8 10 5 6 10 6 4 10 What is the value of consumer surplus? $54 $44 $12 $6

$6

Use the data in the table below to answer the following question. Price Quantity Demanded $20 12 18 17 16 20 14 24 12 30 10 36 8 40 6 44 4 48 Over which price range is the demand inelastic? $20-$18 $18-$16 $14-$12 $8-$6

$8-$6

Use the data in the table below to answer the following question. Price Quantity Demanded $20 12 18 17 16 20 14 24 12 30 10 36 8 40 6 44 4 48 The price elasticity of demand (based on the midpoint formula) when price decreases from $8 to $6 is -3.29. -1.37. -1. -0.33.

-0.33.

Price Quantity Demanded $20 12 18 17 16 20 14 24 12 30 10 36 8 40 6 44 4 48 The price elasticity of demand (based on the midpoint formula) when price decreases from $16 to $14 is -3.29. -1.37. -1. -0.33.

-1.37.

When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The price elasticity of demand for this product is -1.5. -0.15. -0.67. -67.

-1.5.

Suppose you are given the following demand data for a product. Price Quantity Demanded $10 30 9 40 8 50 7 60 6 70 The price elasticity of demand (based on the midpoint formula) when price increases from $8 to $10 is -.63. -1.16. -1.60. -2.25.

-2.25.

Demand is elastic between points A and B. D and E. F and G. G and H.

A and B.

Which demand curve is relatively most elastic between P1 and P2? D1 D2 D3 D4

D1

If the MC of polluting decreased, then what would happen to the optimal level of pollution? Increase Decrease Stay the same Unsure

Decrease

Total revenue decreases as the price of a good increases, if the demand for the good is elastic. inelastic. unitary elastic. perfectly elastic.

elastic.

Which of the following is an example of a negative externality (additional social cost)? an increase in the value of land you own when a nearby development is completed the costs paid by a company to build an automated factory falling property values in a neighborhood where a disreputable nightclub is operating the higher price you pay when you buy a heavily advertised product

falling property values in a neighborhood where a disreputable nightclub is operating

f a price floor in this market is set at P2, then Multiple Choice government revenue equals area b. government revenue equals area d. government does not raise revenue. government revenue equals the distance between P1 and P2.

government does not raise revenue.

If the absolute value of the price elasticity of demand for a good is .75, the demand for that good is described as normal. elastic. inferior. inelastic.

inelastic.

Answer the next question on the basis of the following demand schedule. Price Quantity Demanded $6 1 5 2 4 3 3 4 2 5 1 6 If this demand schedule were graphed, we would find that its slope diminishes as we move southeast down the curve. its slope diminishes as we move northwest up the curve. its slope is constant throughout. the data are inconsistent with the law of demand.

its slope is constant throughout.

Deadweight losses occur when the quantity of an output produced is less than the competitive equilibrium quantity. greater than the competitive equilibrium quantity. less than or greater than the competitive equilibrium quantity. such that the marginal benefit of the output is just equal to the marginal cost.

less than or greater than the competitive equilibrium quantity.

A deadweight loss decreases in size when a unit of output is produced for which consumer surplus exceeds producer surplus. producer surplus exceeds consumer surplus. maximum willingness to pay exceeds minimum acceptable price. marginal cost exceeds marginal benefit.

maximum willingness to pay exceeds minimum acceptable price.

When producers do not have to pay the full cost of producing a product, they tend to overproduce the product because of a positive externality. underproduce the product because of a positive externality. underproduce the product because of a negative externality. overproduce the product because of a negative externality.

overproduce the product because of a negative externality.

If there are external benefits associated with the consumption of a good or service the private demand curve will overestimate the true demand curve. the private demand curve will underestimate the true demand curve. consumers will be willing to pay for all these benefits in private markets. the market demand curve will be the vertical summation of the individual demand costs.

the private demand curve will underestimate the true demand curve.

What area represents society's total surplus after the government imposes the excise tax on the market? triangle abc triangle $1c$9 plus triangle $21a$13 square $13ac$9 plus triangle abc triangle $1c$9 plus triangle $21a$13 plus rectangle $13ac$9

triangle $1c$9 plus triangle $21a$13 plus rectangle $13ac$9

If a price floor in this market is set at P2, then deadweight loss equals area b + d. d. d + h. f.

d.

Why is the marginal benefit of cleaning up pollution downward sloping? At first cleaning pollution makes a big difference but there are diminishing marginal returns for subsequent efforts. Cleaning up pollution continues to cost the citizens in the area more and more. At first you see small effects to cleaning but then see larger differences because of diminishing marginal returns. The benefit can only be seen if you clean large amounts of pollution so there is little marginal benefit otherwise.

At first cleaning pollution makes a big difference but there are diminishing marginal returns for subsequent efforts.

Why does producer surplus decrease as price decreases? Producers sell less of the good and receive less from the lower price. Producers sell more of the good but receive less from the lower price. Consumers buy more of the good at the lower price. Producers sell less of the good while consumers buy even more of the good.

Producers sell less of the good and receive less from the lower price.

Asarta Inc. is polluting into the nearby aquifer and the citizens of Buttersville demand that this be cleaned up. If the benefit to cleaning up the aquifer is estimated to be about $133,000 and the cost is estimated at $130,000 will the aquifer get cleaned? Yes, because the benefit is high. Yes, because the benefits outweigh the costs. No, because the costs outweigh the benefits. Uncertain, with the information given.

Yes, because the benefits outweigh the costs.

For negotiations to eliminate an externality to be successful both parties must have property rights. both parties must agree on a mutually beneficial trade. one person must benefit by double the cost of the externality. one person must be willing to benefit by less than the cost of the externality.

both parties must agree on a mutually beneficial trade.

When a competitive market maximizes economic surplus, it implies that the marginal benefit of having the product is greater than the marginal cost. buyers are getting the maximum consumer surplus from the product. combined consumer and producer surplus is maximized. quantity demanded is lower than the quantity supplied.

combined consumer and producer surplus is maximized.

If the price of a product increases consumer surplus will decrease. consumer surplus will increase. total revenue will definitely increase. total revenue will definitely decrease.

consumer surplus will decrease.

The value that consumers get (from consuming a product) over and above what they actually paid for the product is called Consumer utility consumption expenditures. consumer surplus. consumer demand.

consumer surplus.

If a price ceiling in this market is set at P1, then deadweight loss equals area b + d. d. d + h. f.

d.

Use the following information to answer the question below. It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. In the situation described above, we would expect an overproduction of paper in the mills. underproduction of paper in the mills. external cost resulting from the production of hydroelectric power. attainment of allocative efficiency in the market.

overproduction of paper in the mills.

If a good that generates negative externalities were priced to take these negative externalities into account, its price would decrease, and its output would increase. price would remain constant and output would increase. price would increase, and its output would decrease. price would increase but its output would remain constant.

price would increase, and its output would decrease.

If actual production and consumption occur at Q1 and the price is P2 consumer surplus equals area a + b. producer surplus equals area c. producer surplus equals area c + b. deadweight loss equals area f.

producer surplus equals area c + b.

If the consumption of a product or service involves external benefits, then the government can improve efficiency in the market by providing a subsidy to correct for an overallocation of resources. providing a subsidy to correct for an underallocation of resources. imposing a corrective tax to correct for an overallocation of resources. imposing a corrective tax to correct for an underallocation of resources.

providing a subsidy to correct for an underallocation of resources.

Consumer surplus arises in a market because at the current market price, quantity supplied is greater than quantity demanded. at the current market price, quantity demanded is greater than quantity supplied. the market price is below what some consumers are willing to pay for the product. the market price is higher than what some consumers are willing to pay for the product.

the market price is below what some consumers are willing to pay for the product.

Use the following diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs, to answer the question below. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should not intervene because the market outcome is optimal. subsidize consumers so that the market demand curve shifts leftward. subsidize producers so that the market supply curve shifts leftward (upward). tax producers so that the market supply curve shifts leftward (upward).

tax producers so that the market supply curve shifts leftward (upward).

If a price ceiling in this market is set at P1, then government revenue equals area b. government revenue equals area d. the government does not raise revenue. the government revenue per unit equals P2 minus P1.

the government does not raise revenue.