FINA6204 MIDTERM CHAP 5-10

Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are

$1.60 and 42 units, respectively

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

$1.80 and 35 units, respectively

Refer to Table 7-12. You wish to purchase 10 piano lessons, so you take bids from each of the sellers. You will not accept a bid below a seller's cost because you are concerned that the seller will not provide all 10 lessons. What bid will you accept?

$249

Refer to Table 7-12. You wish to purchase 10 piano lessons for yourself and for your brother, so you take bids from each of the sellers. You will take lessons at the same time, so one teacher cannot provide lessons to both of you. You must pay the same price for both sets of lessons, and you will not accept a bid below a seller's cost because you are concerned that the seller will not provide all 10 lessons. What bid will you accept?

$349

Bill created a new software program he is willing to sell for $200. He sells his first copy and enjoys a producer surplus of $150. What is the price paid for the software?

$350

Refer to Table 7-12. The equilibrium market price for 10 piano lessons is $400. What is the total producer surplus in the market?

$400

Refer to Table 7-3. If there is only one unit of the good and if the buyers bid against each other for the right to purchase it, then the good will sell for

$45 or slightly less

Refer to Table 5-4. Using the midpoint method, when price rises from $8 to $12, the price elasticity of demand is

1

Charles purchases 20 basketball tickets per year when his annual income is $50,000 and 25 basketball tickets when his annual income is $60,000. Charles's income elasticity of demand for basketball ticket is

1.22 and basketball tickets are a normal good

Suppose the government imposes a tax in a certain market in order to internalize an externality. This type of policy is based on which of the Ten Principles of Economics?

People respond to incentives

Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Q2 to point Q3

Which of the following is not correct?

Taxes levied on sellers and taxes levied on buyers are not equivalent.

You receive a paycheck from your employer, and your pay stub indicates that $300 was deducted to pay the FICA (Social Security/Medicare) tax. Which of the following statements is correct?

The $300 that you paid is not necessarily the true burden of the tax that falls on you, the employee; your employer is required by law to pay $300 to match the $300 deducted from your check; this type of tax is an example of a payroll tax; ALL OF THE ABOVE ARE CORRECT

Which of the following illustrates the concept of a negative externality?

a college student plays loud music on his new stereo system at 2:00 am

There are very few, if any, good substitutes for motor oil. Therefore, the

demand for motor oil would tend to be inelastic

Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts?

It increases

When demand is perfectly inelastic, the price elasticity of demand

is zero, and the demand curve is vertical

The Earned Income Tax Credit is an example of a

wage subsidy

Price controls are usually enacted

when policymakers believe that the market price of a good or services is unfair to buyers or sellers

The maximum price that a buyer will pay for a good is called

willingness to pay

Lawmakers designed the burden of the FICA payroll tax to be split evenly between workers and firms. Labor economists believe that

workers bear most of the burden of the tax

Refer to Table 10-5. If the government charged a fee of $69 per unit of pollution, how many units of pollution would the firms eliminate altogether?

7

Refer to Figure 7-3. When the price is P1, consumer surplus is

A+B+C

Which of the following is likely to have the most price elastic demand?

Lattes

Refer to Figure 5-3. Jenna says she would buy 10 gallons of gas per week regardless of the price. If this is true, then Jenna's demand for gas is represented by demand curve

A.A (vertical line)

Refer to Figure 7-10. Which area represents producer surplus when the price is P2?

ACH

Refer to Table 7-2. Which of the following is not true?

At a price of $9.00, no buyer is willing to purchase Vanilla Coke; At a price of $5.50, Megan is indifferent between buying a case of Vanilla Coke and not buying one; At a price of $4.00, total consumer surplus in the market will be $9.00; ALL OF THE ABOVE ARE CORRECT

Which of the following require firms to pay to pollute? (i) corrective taxes (ii) tradable pollution permits (iii) pollution regulations

BOTH i and ii

Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the market for antibiotics is shown in

Panel B

Which of the following is an illustration of the market for original paintings by deceased artist Vincent Van Gogh?

C; Supply line is vertical - Demand is slanting down from left to right

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

P2 and Q1

Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the price ceiling?

Panel B only

Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

Dallas's consumer surplus would increase

Refer to Table 7-2. If the price of Vanilla Coke is $6.90, who will purchase the good?

David and Laura

Which of the following is not correct?

Externalities cannot be positive

One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?

He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is

Inelastic

A demand curve reflects each of the following except the

ability of buyers to obtain the quantity they desire

When demand is elastic, a decrease in price will cause

an increase in total revenue

When a tax is placed on the sellers of cell phones, the size of the cell phone market

and the effective price received by sellers both decrease

An advance in farm technology that results in an increased market supply is

bad for farmers because total revenue will fall but good for consumers because prices for food will fall

On a graph, consumer surplus is represented by the area

below the demand curve and above the price

Producer surplus measures the

benefits to sellers of participating in a market

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good

You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a bakery. The first step you would take would be to

determine the price elasticity of demand for the bakery's products

Which of the following is an example of an externality?

cigarette smoke that permeates an entire restaurant; flu shot that prevents a s student from transmitting the virus to her roommate; a beautiful flower garden outside of the local post office; ALL OF THE ABOVE ARE CORRECT

Which of the following is a way to address an externality problem?

command and control solution; corrective tax; corrective subsidy; ALL THE ABOVE

The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

decreases, and producer surplus decreases

A tax on buyers will shift the

demand curve downward by the amount of the tax

Suppose there is currently a tax of $50 per ticket on airline tickets. Buyers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $20 per ticket, then the

demand curve will shift upward by $30, and the price paid by buyers will decrease by less than $30

If the government wants to reduce the burning of fossil fuels, it should impose a tax on

either buyers or sellers of gasoline

Total surplus is

equal to the total value to buyers minus the total cost to sellers

Which of the following is not an example of a public policy?

equilibrium laws

Market failure can be caused by

externalities

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

flatter the demand curve will be

Which of the following statements is not correct?

government policies cannot improve upon private market outcomes

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

In general, elasticity is a measure of

how much buyers and sellers respond to changes in market conditions

Welfare economics is the study of

how the allocation of resources affects economic well-being

If the price of milk rises, when is the price elasticity of demand likely to be the lowest?

immediately after the price increase

If the government levies a $5 tax per ticket on buyers of NFL game tickets, then the price paid by buyers of NFL game tickets would

increase by less than $5

When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip

increases the social cost above the private cost

When an externality is present, the market equilibrium is

inefficient, and the equilibrium does not maximize the total benefit to society as a whole

In some cases, selling pollution permits is a better method for reducing pollution than imposing a corrective tax because

it is hard to estimate the market demand curve and thus charge the "right" corrective tax

Which of the Ten Principles of Economics does welfare economics explain more fully?

markets are usually a good way to organize economic activity

Minimum wage laws

may encourage some teenagers to drop out and take jobs

In a market economy, government intervention

may improve market outcomes in the presence of externalities.

All remedies for externalities share the goal of

moving the allocation of resources toward the socially optimal equilibrium

Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

negative externalities

Refer to Figure 10-13. In order to reach the social optimum, the government could

offer a subsidy of $6 per unit on plastics

In response to a shortage caused by the imposition of a binding price ceiling on a market,

price will no longer be the mechanism that rations scarce resources; long lines of buyers may develop; sellers could ration the good or service according to their own personal biases; ALL OF THE ABOVE ARE CORRECT

Which of the following is not a function of prices in a market system?

prices ensure an equal distribution of goods and services among consumers

Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor,

quantity demanded decreases; quantity supplied increases; there is a surplus; ALL OF THE ABOVE ARE CORRECT

The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should

raise the price of the cinnamon rolls

Since air pollution creates a negative externality,

social welfare will be enhanced when some, but not all air pollution is eliminated

Which of the following policies is the government most inclined to use when faced with a positive externality?

subsidies

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the

supply curve will shift downward by $20, and the effective price received by the sellers will increase by less than $20

When a supply curve is relatively flat,

supply is relatively elastic

For a good that is a luxury, demand

tends to be elastic

For which of the following goods is the income elasticity of demand likely highest?

tennis lessons

In the 1970s, long lines at gas stations in the United States were primarily a result of the fact that

the U.S. government maintained a price ceiling on gasoline

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because

the market-based solution is less costly to society; the market-based solution can result in a greater reduction in pollution; the market based solution raises revenue for the government

Which of the following is not a determinant of the price elasticity of demand for a good?

the steepness or flatness of the supply curve for the good

Efficiency in a market is achieved when

the sum of producer surplus and consumer surplus is maximized