MicECo

If John values having his hair cut at €20 and Mary's cost of providing the hair cut is €10, any tax on hair cuts larger than €10 will eliminate the gains from trade and cause a €20 loss of total surplus.

False

If Roberto values smoking in a restaurant at €10 and Natalie values clean air while she eats at €15, according to the Coase theorem, Roberto will not smoke in the restaurant only if Natalie owns the right to clean air.

False

If the cross-price elasticity of demand between two goods is positive, the goods are likely to be complements.

False

If the equilibrium price of petrol is €1.00 per litre and the government places a price ceiling on petrol of €1.50 per litre, the result will be a shortage of petrol.

False

Producer surplus is a measure of the unsold inventories of suppliers in a market.

False

The demand for a necessity such as petrol tends to be elastic.

False

A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the equilibrium price above the fixed price ceiling.

True

A price floor set above the equilibrium price is a binding constraint.

True

A tax causes a deadweight loss because it eliminates some of the potential gains from trade.

True

A tax collected from buyers has an equivalent impact to a same size tax collected from sellers.

True

A tax creates a tax wedge between a buyer and a seller. This causes the price paid by the buyer to rise, the price received by the seller to fall, and the quantity sold to fall.

True

An advantage of using tradable pollution permits to reduce pollution is that the regulator need not know anything about the demand for pollution rights.

True

If a tax is doubled, the deadweight loss from the tax more than doubles.

True

If medicine is a necessity, the burden of a tax on medicine will probably fall more heavily on the buyers of medicine.

True

If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.

True

The demand for tyres should be more inelastic than the demand for Michelin brand tyres.

True

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is E

A. 1.50. B. 1.15. C. none of these answers. D. 0.15. E. 1.00.

Refer to Exhibit 4. If a tax is placed on the product in this market, total surplus is the area B

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

Refer to Exhibit 4. If a tax is placed on the product in this market, producer surplus is the area D

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

Refer to Exhibit 4. If there is no tax placed on the product in this market, producer surplus is the area E

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

Which of the following statements about a binding price ceiling is true? D

A. The shortage created by the price ceiling is greater in the short run than in the long run. B. The surplus created by the price ceiling is greater in the short run than in the long run. C. The surplus created by the price ceiling is greater in the long run than in the short run. D. The shortage created by the price ceiling is greater in the long run than in the short run.

Which side of the market is more likely to lobby government for a price floor? C

A the buyers B. Neither buyers nor sellers desire a price floor. C. the sellers D. Both buyers and sellers desire a price floor.

Which of the following is an example of a price floor? A

A the minimum wage B. rent controls C. restricting petrol prices to €1.00 per litre when the equilibrium price is €1.50 per litre D. All of these answers are price floors.

Which of the following is true with regard to a tax on labor income? Taxes on labor income tend to encourage C

A the unscrupulous to enter the underground economy. B the elderly to retire early. C. all of the things described in these answers. D. second earners to stay home. E. workers to work fewer hours.

For which of the following products would the burden of a tax likely fall more heavily on the sellers? D

A. clothing B. food C. housing D. entertainment

The surplus caused by a binding price floor will be greatest if C

A. demand is inelastic and supply is elastic. B. supply is inelastic and demand is elastic. C. both supply and demand are elastic. D. both supply and demand are inelastic.

If supply is price inelastic, the value of the price elasticity of supply must be C

A. infinite. B. zero. C. less than 1. D none of these answers. E. greater than 1.

If a market is efficient, then B

A. the market allocates buyers to the sellers who can produce the good at least cost. B. all of these answers. C. none of these answers. D. the quantity produced in the market maximizes the sum of consumer and producer surplus. E. the market allocates output to the buyers that value it the most.

A positive externality generates C

A. a social cost curve that is above the supply curve (private cost curve) for a good. B. none of these answers. C. a social value curve that is above the demand curve (private value curve) for a good. D. a social value curve that is below the demand curve (private value curve) for a good.

A binding price ceiling creates C

A. a shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price. B. a surplus. C. a shortage. D. an equilibrium.

Which of the following would likely cause the greatest deadweight loss? D

A. a tax on salt B. a tax on cigarettes C. a tax on petrol D. a tax on cruise line tickets

A buyer's willingness to pay is that buyer's D

A. minimum amount they are willing to pay for a good. B. producer surplus. C. consumer surplus. D. maximum amount they are willing to pay for a good. E. none of these answers.

In general, a steeper supply curve is more likely to be D

A. price elastic. B. none of these answers. C. unit price elastic. D. price inelastic.

In general, a flatter demand curve is more likely to be A

A. price elastic. B. unit price elastic. C. none of these answers. D price inelastic.

The ultimate burden of a tax falls most heavily on the side of the market that is less elastic.

True

The demand for which of the following is likely to be the most price inelastic? A

A transportation B taxi rides C. bus tickets D. airline tickets

Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to €40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for cable TV in Small Town? A

A. 1.4 B. 0.66 C. 0.75 D. 2.0 E 1.0

Which of the following statements is true if the government places a price ceiling on petrol at €1.50 per litre and the equilibrium price is €1.00 per litre? A

A. A significant increase in the demand for petrol could cause the price ceiling to become a binding constraint. B. A significant increase in the supply of petrol could cause the price ceiling to become a binding constraint. C. There will be a shortage of petrol. D. There will be a surplus of petrol.

Which of the following workers would be most likely to find it more difficult to get a job after a rise in the minimum wage rate? A

A. A teenage worker with few qualifications. B. A manual worker with fifteen years of work experience. C. A professional worker with a university degree. D. All three are equally likely to find it difficult to get a job.

Which of the following is true regarding tradable pollution permits and Pigouvian taxes? B

A. All of these answers are true. B. Pigouvian taxes and tradable pollution permits create an efficient market for pollution. C. Tradable pollution permits efficiently reduce pollution only if they are initially distributed to the firms that can reduce pollution at the lowest cost. D. To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights. E. Pigouvian taxes are more likely to reduce pollution to a targeted amount than tradable pollution permits.

Refer to Exhibit 4. If a tax is placed on the product in this market, tax revenue paid by the buyers is the area B

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

Refer to Exhibit 4. If there is no tax placed on the product in this market, total surplus is the area D

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

Refer to Exhibit 4. If a tax is placed on the product in this market, deadweight loss is the area B

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

Refer to Exhibit 4. If there is no tax placed on the product in this market, consumer surplus is the area C

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

Refer to Exhibit 4. If a tax is placed on the product in this market, tax revenue paid by the sellers is the area E

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

Refer to Exhibit 4. If a tax is placed on the product in this market, consumer surplus is the area B

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

Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true? A

A. It is efficient for Roberto to stop playing loud music regardless of who has the property right to the level of sound. B. It is efficient for Roberto to continue to play loud music. C. It is efficient for Roberto to stop playing loud music only if Thomas has the property right to peace and quiet. D. It is efficient for Roberto to stop playing loud music only if Roberto has the property right to play loud music.

Suppose an industry emits a negative externality such as pollution and the possible methods to internalize the externality are command-and-control policies, Pigouvian taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would probably rank them in the following order (from most favored to least favored): B

A. Pigouvian taxes, command-and-control policies, tradable pollution permits. B. tradable pollution permits, Pigouvian taxes, command-and-control policies. C. tradable pollution permits, command-and-control policies, Pigouvian taxes. D. command-and-control policies, tradable pollution permits, Pigouvian taxes. E. They would all rank equally high because the same result can be obtained from any one of the policies.

Refer to Exhibit 4. Which of the following is true with regard to the burden of the tax in Exhibit 4? D

A. The buyers pay a larger portion of the tax because demand is more inelastic than supply. B. The sellers pay a larger portion of the tax because supply is more elastic than demand. C. The buyers pay a larger portion of the tax because demand is more elastic than supply. D. The sellers pay a larger portion of the tax because supply is more inelastic than demand.

Which of the following would cause a demand curve for a good to be price inelastic? C

A. The good is a luxury. B. There are a great number of substitutes for the good. C. The good is a necessity. D. The good is an inferior good.

Which of the following statements about the burden of a tax is correct? C

A. The tax burden generated from a tax placed on a good consumers perceive to be a necessity will fall most heavily on the sellers of the good. B. The burden of a tax falls on the side of the market (buyers or sellers) from which it is collected. C. The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation. D. The tax burden falls most heavily on the side of the market (buyers or sellers) that is most willing to leave the market when price movements are unfavourable to them.

Suppose the equilibrium price for apartments is €500 per month and the government imposes rent controls of €250. Which of the following is unlikely to occur as a result of the rent controls? E

A. There may be long lines of buyers waiting for apartments. B. Landlords may discriminate among apartment renters. C. Landlords may be offered bribes to rent apartments. D. There will be a shortage of housing. E. The quality of apartments will improve.

Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true about an efficient solution to this externality problem if Roberto has the right to play loud music and if there are no transaction costs? C

A. Thomas will pay Roberto between €100 and €150 and Roberto will continue to play loud music. B. Roberto will pay Thomas €150 and Roberto will continue to play loud music. C. Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music. D. Roberto will pay Thomas €100 and Roberto will stop playing loud music.

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay €30 for one, buyer 2 is willing to pay €25 for one, and buyer 3 is willing to pay €20 for one. If the price is €25, how many vases will be sold and what is the value of consumer surplus in this market? E

A. Three vases will be sold and consumer surplus is €80. B. One vase will be sold and consumer surplus is €5. C. One vase will be sold and consumer surplus is €30. D. Three vases will be sold and consumer surplus is €0. E. Two vases will be sold and consumer surplus is €5.

Which of the following takes place when a tax is placed a good? D

A. a decrease in the price buyers pay, an increase in the price sellers receive, and a decrease in the quantity sold B. an increase in the price buyers pay, a decrease in the price sellers receive, and an increase in the quantity sold C. a decrease in the price buyers pay, an increase in the price sellers receive, and an increase in the quantity sold D. an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped land would generate D

A. a small deadweight loss and the burden of the tax would fall on the renter. B. a large deadweight loss and the burden of the tax would fall on the landlord. C. a large deadweight loss and the burden of the tax would fall on the renter. D. a small deadweight loss and the burden of the tax would fall on the landlord.

The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an example of D

A. a tradable pollution permit. B. an attempt to internalize a positive externality. C. an application of the Coase theorem. D. an attempt to internalize a negative externality.

For a price ceiling to be a binding constraint on the market, the government must set it B

A. above the equilibrium price. B. below the equilibrium price. C precisely at the equilibrium price. D. at any price because all price ceilings are binding constraints.

Total surplus is the area C

A. above the supply curve and below the price. B. below the demand curve and above the price. C. below the demand curve and above the supply curve. D. below the supply curve and above the price. E. above the demand curve and below the price.

If an increase in the price of a good has no impact on the total revenue in that market, demand must be C

A. all of these answers. B. price inelastic. C. unit price elastic. D price elastic.

A price floor D

A. always determines the price at which a good must be sold. B sets a legal maximum on the price at which a good can be sold. C. is not a binding constraint if it is set above the equilibrium price. D sets a legal minimum on the price at which a good can be sold.

When wealthy alumni provide charitable contributions to their universities to reduce the tuition payments of current students, it is an example of A

A. an attempt to internalize a positive externality. B. an attempt to internalize a negative externality. C. a Pigouvian tax. D. a command-and-control policy.

If the income elasticity of demand for a good is negative, it must be B

A. an elastic good. B. an inferior good. C. a normal good. D. a luxury good.

If a producer has market power (can influence the price of the product in the market) then free market solutions D

A. are equitable. B. are efficient. C. maximize consumer surplus. D. are inefficient.

To internalize a positive externality, an appropriate public policy response would be to C

A. ban the good creating the externality. B. tax the good. C. subsidize the good. D. have the government produce the good until the value of an additional unit is zero.

Consumer surplus is the area A

A. below the demand curve and above the price. B. above the supply curve and below the price. C. above the demand curve and below the price. D. below the supply curve and above the price. E. below the demand curve and above the supply curve.

Producer surplus is the area E

A. below the supply curve and above the price. B. below the demand curve and above the supply curve. C. below the demand curve and above the price. D. above the demand curve and below the price. E. above the supply curve and below the price.

The burden of a tax falls more heavily on the sellers in a market when D

A. both supply and demand are elastic. B. both supply and demand are inelastic. C. demand is inelastic and supply is elastic. D. demand is elastic and supply is inelastic.

The burden of a tax falls more heavily on the buyers in a market when D

A. both supply and demand are inelastic. B. demand is elastic and supply is inelastic. C. both supply and demand are elastic. D. demand is inelastic and supply is elastic.

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold than otherwise, the tax has A

A. caused a deadweight loss. B. decreased equity. C. generated no tax revenue. D. increased efficiency.

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should B

A. choose a price below the market equilibrium price. B allow the market to seek equilibrium on its own. C. choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers). D. choose a price above the market equilibrium price.

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality? B

A. costs incurred due to lawyers fees B. costs incurred to reduce the pollution C. costs incurred to enforce the agreement D. costs incurred due to a large number of parties affected by the externality E. All of these answers are considered transaction costs.

Within the supply and demand model, a tax collected from the sellers of a good shifts the D

A. demand curve downward by the size of the tax per unit. B. supply curve downward by the size of the tax per unit. C. demand curve upward by the size of the tax per unit. D supply curve upward by the size of the tax per unit.

A decrease in supply (shift to the left) will increase total revenue in that market if A

A. demand is price inelastic. B. supply is price elastic. C. supply is price inelastic. D. demand is price elastic.

If a tax on a good is doubled, the deadweight loss from the tax C

A. doubles. B. stays the same. C. increases by a factor of four. D. could rise or fall.

Joe has ten pairs of football boots and Sue has none. A pair of football boots costs €50 to produce. If Joe values an additional pair of boots at €100 and Sue values a pair of boots at €40, then to maximize B

A. efficiency Sue should receive the glove. B. efficiency Joe should receive the glove. C. equity, Joe should receive the glove. D. consumer surplus both should receive a glove.

If demand is linear (a straight line), then price elasticity of demand is A

A. elastic in the upper portion and inelastic in the lower portion. B. inelastic in the upper portion and elastic in the lower portion. C. inelastic throughout. D. constant along the demand curve. E. elastic throughout.

Medical care clearly enhances people's lives. Therefore, we should consume medical care until B

A. everyone has as much as they would like. B. the benefit buyers place on medical care is equal to the cost of producing it. C. buyers receive no benefit from another unit of medical care. D. we must cut back on the consumption of other goods.

A tax placed on a good that is a necessity for consumers will likely generate a tax burden that C

A. falls more heavily on sellers. B. falls entirely on sellers. C falls more heavily on buyers. D. is evenly distributed between buyers and sellers.

If buyers are rational and there is no market failure, E

A. free market solutions are efficient. B. free market solutions maximize total surplus. C. all of these answers. D. free market solutions are equitable. E. free market solutions are efficient and free market solutions maximize total surplus.

A tax on petrol is likely to B

A. generate a deadweight loss that is unaffected by the time period over which it is measured. B. cause a greater deadweight loss in the long run when compared to the short run. C. none of these answers D. cause a greater deadweight loss in the short run when compared to the long run.

An increase in the price of a good along a stationary demand curve B

A. improves the material welfare of the buyers. B. decreases consumer surplus. C. improves market efficiency. D. increases consumer surplus.

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is C

A. income inelastic. B. price inelastic. C. price elastic. D. unit price elastic. E. income elastic.

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to D

A. increase total revenue to farmers as a whole because the demand for food is elastic. B. increase total revenue to farmers as a whole because the demand for food is inelastic. C. reduce total revenue to farmers as a whole because the demand for food is elastic. D reduce total revenue to farmers as a whole because the demand for food is inelastic.

An increase in the price of a good along a stationary supply curve A

A. increases producer surplus. B. does all of the things described in these answers. C. decreases producer surplus. D. improves market equity.

If a market generates a side effect or externality, then free market solutions C

A. maximize producer surplus. B. are efficient. C. are inefficient. D. are equitable.

Adam Smith's "invisible hand" concept suggests that a competitive market outcome A

A. maximizes total surplus. B. generates equality among the members of society. C. minimizes total surplus. D. both maximizes total surplus and generates equality among the members of society

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a D

A. none of these answers B. Reagan curve. C. Keynesian curve. D. Laffer curve. E. Henry George curve.

The seller's cost of production is B

A. none of these answers. B. the minimum amount the seller is willing to accept for a good. C. the seller's producer surplus. D. the maximum amount the seller is willing to accept for a good. E. the seller's consumer surplus.

A tax of €1.00 per litre on petrol A

A. places a tax wedge of €1.00 between the price the buyers pay and the price the sellers receive. B. decreases the price the sellers receive by €1.00 per litre. C. increases the price the buyers pay by €1.00 per litre. D. increases the price the buyers pay by precisely €0.50 and reduces the price received by sellers by precisely €0.50.

If there is excess capacity in a production facility, it is likely that the firm's supply curve is D

A. price inelastic. B. none of these answers. C. unit price elastic. D price elastic.

Tradable pollution permits D

A. reduce the incentive for technological innovations to further reduce pollution. B. set the price of pollution. C. determine the demand for pollution rights. D. set the quantity of pollution.

A Pigouvian tax on pollution C

A. sets the quantity of pollution. B. reduces the incentive for technological innovations to further reduce pollution. C. sets the price of pollution. D. determines the demand for pollution rights.

If the cross-price elasticity between two goods is negative, the two goods are likely to be B

A. substitutes. B. complements. C. necessities. D luxuries.

Within the supply and demand model, a tax collected from the buyers of a good shifts the D

A. supply curve downward by the size of the tax per unit. B. supply curve upward by the size of the tax per unit. C. demand curve upward by the size of the tax per unit. D. demand curve downward by the size of the tax per unit.

Deadweight loss is greatest when D

A. supply is elastic and demand is perfectly inelastic. B. demand is elastic and supply is perfectly inelastic. C. both supply and demand are relatively inelastic. D. both supply and demand are relatively elastic.

If consumers think that there are very few substitutes for a good, then C

A. supply would tend to be price elastic. B. none of these answers. C. demand would tend to be price inelastic. D. demand would tend to be price elastic. E. supply would tend to be price inelastic.

The price elasticity of demand is defined as C

A. the percentage change in the quantity demanded divided by the percentage change in income. B. the percentage change in income divided by the percentage change in the quantity demanded. C. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good. D. none of these answers. E. the percentage change in price of a good divided by the percentage change in the quantity demanded of that good.

If a supply curve for a good is price elastic, then A

A. the quantity supplied is sensitive to changes in the price of that good. B. the quantity demanded is insensitive to changes in the price of that good. C. the quantity demanded is sensitive to changes in the price of that good. E. the quantity supplied is insensitive to changes in the price of that good. E. none of these answers.

The most efficient pollution control system would ensure that D

A. the regulators decide how much each polluter should reduce its pollution. B. no pollution of the environment is tolerated. C. each polluter reduce its pollution an equal amount. D. the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount.

When a tax is collected from the buyers in a market D

A. the tax burden falls most heavily on the buyers. B. the buyers bear the burden of the tax. C. the sellers bear the burden of the tax. D. the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers.

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then B

A. the value placed on the last unit of production by buyers exceeds the cost of production. B. the cost of production on the last unit produced exceeds the value placed on it by buyers. C. consumer surplus is maximized. D. total surplus is maximized. E. producer surplus is maximized.

According to the Coase theorem, private parties can solve the problem of externalities if A

A. there are no transaction costs. B. each affected party has equal power in the negotiations. C. the party affected by the externality has the initial property right to be left alone. D. there are a large number of affected parties. E. the government requires them to negotiate with each other.

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then B

A. total surplus is maximized. B. the value placed on the last unit of production by buyers exceeds the cost of production. C. producer surplus is maximized. D. the cost of production on the last unit produced exceeds the value placed on it by buyers. E. consumer surplus is maximized.

When a tax on a good starts small and is gradually increased, tax revenue C

A. will fall. B. will rise. C. will first rise and then fall. D. will first fall and then rise. E. none of these answers

The reduction of a tax C

A. will have no impact on tax revenue. B will always reduce tax revenue regardless of the prior size of the tax. C. could increase tax revenue if the tax had been extremely high. D. causes a market to become less efficient.

If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught the fisherman's price elasticity of supply for fresh fish is A

A. zero. B. infinite. C. one. D. unable to be determined from this information.

Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to €40 per month, the number of subscribers will fall to 20,000. At which of the following prices does Small Town Cablevision earn the greatest total revenue? B

A. €0 per month B. €30 per month C. €40 per month D. Either €30 or €40 per month because the price elasticity of demand is 1.0.

If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is C

A. €18,000. B. €20,000. C. €2,000. D. €0. E. €38,000.

Suppose that the price of a new bicycle is €300. Natalie values a new bicycle at €400. It costs €200 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike? C

A. €500 B. €300 C. €200 D. €400 E. €100

When an individual buys a car in a congested urban area, it generates D

A. a positive externality. B. a technology spillover. C. an efficient market outcome. D. a negative externality.

A negative externality generates A

A. a social cost curve that is above the supply curve (private cost curve) for a good. B. none of these answers. C. a social cost curve that is below the supply curve (private cost curve) for a good. D. a social value curve that is above the demand curve (private value curve) for a good.

The government engages in a technology policy B

A. by allocating tradable technology permits to high technology industry. B. to internalize the positive externality associated with technology-enhancing industries. C. to help stimulate private solutions to the technology externality. D. to internalize the negative externality associated with industrial pollution.

A positive externality (that has not been internalized) causes the C

A. equilibrium quantity to exceed the optimal quantity. B. equilibrium quantity to equal the optimal quantity. C. optimal quantity to exceed the equilibrium quantity. D. equilibrium quantity to be either above or below the optimal quantity.

To internalize a negative externality, an appropriate public policy response would be to C

A. have the government take over the production of the good causing the externality. B. ban the production of all goods creating negative externalities. C. tax the good. D. subsidize the good.

A negative externality (that has not been internalized) causes the D

A. optimal quantity to exceed the equilibrium quantity. B. equilibrium quantity to be either above or below the optimal quantity. C. equilibrium quantity to equal the optimal quantity. D. equilibrium quantity to exceed the optimal quantity.

An externality is E

A. the benefit that accrues to the buyer in a market. B. the cost that accrues to the seller in a market. C. none of these answers. D. the compensation paid to a firm's external consultants E. the uncompensated impact of one person's actions on the well-being of a bystander.

A larger tax always generates more tax revenue.

False

A market that generates a negative externality that has not been internalized generates an equilibrium quantity that is less than the optimal quantity.

False

A positive externality is an external benefit that accrues to the buyers in a market while a negative externality is an external cost that accrues to the sellers in a market.

False

A price ceiling set below the equilibrium price causes a surplus.

False

A price floor in a market always creates a surplus in that market.

False

A tax always makes a market less efficient.

False

A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.

False

A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.

False

A tax will generate a greater deadweight loss if supply and demand are inelastic.

False

A €10 tax on football boots will always raise the price that the buyers pay for football boots by €10.

False

According to the Coase theorem, an externality always requires government intervention in order to internalize the externality.

False

An advance in technology that shifts the market supply curve to the right always increases total revenue received by producers.

False

Consumer surplus is the buyer's willingness to pay minus the seller's cost.

False

Deadweight loss is the reduction in consumer surplus that results from a tax.

False

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

False

If a demand curve is linear, the price elasticity of demand is constant along it.

False

If the quantity demanded of a good is sensitive to a change in the price of that good, demand is said to be price inelastic.

False

If your willingness to pay for a hamburger is €3.00 and the price is €2.00, your consumer surplus is €5.00.

False

Producing more of a product always adds to total surplus.

False

The demand for aspirin over one month should be more elastic than the demand for aspirin over one year.

False

The government can choose to place the burden of a tax on the buyers in a market by collecting the tax from the buyers rather than the sellers.

False

The majority of economists do not like the idea of putting a price on polluting the environment.

False

The minimum wage helps all teenagers because they receive higher wages than they would otherwise.

False

The price elasticity of demand is defined as the percentage change in the price of that good divided by the percentage change in quantity demanded of that good.

False

To reduce pollution by some targeted amount, it is most efficient if each firm that pollutes reduces its pollution by an equal amount.

False

Total surplus is the seller's cost minus the buyer's willingness to pay.

False

When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.

False

When we use the model of supply and demand to analyze a tax collected from the buyers, we shift the demand curve upward by the size of the tax.

False

A 10 per cent increase in the minimum wage is more likely to raise unemployment among teenage workers than among mid-career professional workers

True

A Pigouvian tax sets the price of pollution while tradable pollution permits sets the quantity of pollution.

True

A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceeded the costs to the sellers.

True

A larger tax always generates a larger deadweight loss.

True

Consumer surplus is a good measure of buyers' benefits if buyers are rational.

True

Cost to the seller includes the opportunity cost of the seller's time.

True

Equilibrium in a competitive market maximizes total surplus.

True

Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market.

True

For any given demand curve for pollution, a regulator can achieve the same level of pollution with either a Pigouvian tax or by allocating tradable pollution permits.

True

If a market generates a negative externality, a Pigouvian tax will move the market toward a more efficient outcome.

True

If a market generates a negative externality, the social cost curve is above the supply curve (private cost curve).

True

If a market generates a positive externality, the social value curve is above the demand curve (private value curve).

True

If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax.

True

If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.

True

If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.

True

If the demand for a good is price inelastic, an increase in its price will increase total revenue in that market.

True

If the income elasticity of demand for a bus ride is negative, then a bus ride is an inferior good.

True

If the price elasticity of supply for blue jeans is 1.3, an increase in the price of blue jeans of 10 percent would increase the quantity supplied of blue jeans by 13 percent.

True

If transactions costs exceed the potential gains from an agreement between affected parties to an externality, there will be no private solution to the externality.

True

In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.

True

Producer surplus is the area above the supply curve and below the price.

True

The height of the supply curve is the marginal seller's cost.

True

The income elasticity of demand for luxury items, such as diamonds, tends to be large (greater than 1).

True

The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient.

True

The price elasticity of supply tends to be more inelastic as the firm's production facility reaches maximum capacity.

True

The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run.

True

The supply of cars for this week is likely to be more price inelastic than the supply of cars for this year.

True

The two main types of market failure are market power and externalities.

True

Using the midpoint method to calculate elasticity, if an increase in the price of pencils from €0.10 to €0.20 reduces the quantity demanded from 1000 pencils to 500 pencils, then the demand for pencils is unit price elastic.

True

When a group of neighbors ask a householder to tidy his front garden because they keep their own gardens tidy and attractive, they are attempting to use moral codes and social sanctions to internalize the externality associated with an untidy garden in a residential area.

True