Micro Econ Midterm 3

Suppose the Social Security tax rate is 6.2% of earnings up to a maximum of $117, 000, beyond which there is no additional tax. Zia has earnings of $130,000. How much Zia will pay on taxes? a. $7,254 b. $8,060 c. $13,000 d. $806

a. $7,254

Is the entire burden of the tax always borne by those on whom it is imposed? a. Not necessarily, since the burden of the tax depends on price elasticity. b. Yes, since taxes are paid by consumers. c. No, the burden of the tax is always passed along to others. d. Not necessarily, since the burden of the tax falls on consumers.

a. Not necessarily, since the burden of the tax depends on price elasticity.

The tragedy of the commons results when ___________. a. common pool resources are overused. b. common pool resources are underused. c. people are excluded from public goods. d. too many public goods are provided.

a. common pool resources are overused.

Which of the following would not be considered a common pool resource good? a. Park bench b. Streetlight c. Public pool d. All of these choices are correct.

b. Streetlight

Britain taxed windows from 1696 until 1851. Under the 1747-1757 tax rates, you would pay no tax if your home had 0-9 windows, but if your home had 10-14 windows you would pay a tax of 6 pence per window for every window in your home. The window tax is similar to the U.S. income tax in that both are ___________. a. proportional taxes. b. progressive taxes. c. sales taxes. d. regressive taxes.

b. progressive taxes.

Externalities are called market failures because they ___________. a. cause markets to overproduce when there is inflation. b. raise prices in an unfair manner for the poor. c. cause markets to produce suboptimal social outcomes. d. raise prices for everyone.

c. cause markets to produce suboptimal social outcomes.

The tax incidence on sellers is higher if ________. a. the number of buyers in a market is larger than the number of sellers b. the buyers and sellers of a good are equally sensitive to price changes c. the buyers are more sensitive to price changes than the sellers d. the sellers are more sensitive to price changes than the buyer

c. the buyers are more sensitive to price changes than the sellers

The free-rider problem arises when an individual ____________. a. does not pay for a good because nonpayment does not prevent consumption. b. pays for a good only when he or she is in the top quartile of people needing the good. c. does not pay for a good because that individual is engaging in illegal activity. d. pays for a good only when being monitored by the authorities for noncompliance.

a. does not pay for a good because nonpayment does not prevent consumption.

Suppose the production of a particular good causes a negative externality. Based on market forces only, how will this impact the production levels for a factory if negative externalities are present? a. It will produce the good below the socially efficient level. b. It will produce the good above the socially efficient level. c. It will produce the same level regardless of whether externalities are present. d. Negative externalities do not impact production levels.

b. It will produce the good above the socially efficient level.

Which of the following is not an externality? a. Jose, who is allergic to pollen, is sick from the flowers that grow in his neighbor's garden. b. Jordan has lung cancer from smoking cigarettes. c. Alisha did not sleep well because her neighbor was playing loud music. d. Rochelle has asthma caused by the pollution of a local factory near her home.

b. Jordan has lung cancer from smoking cigarettes.

Criminals spend vast resources trying to avoid taxes and regulations, break laws, and undermine bans and, in turn, authorities spend resources to catch criminals. What does this reflect? a. Deadweight losses. b. Problems generated by the underground economy. c. Direct costs of bureaucracy. d. Corrupt and inefficient government officials.

b. Problems generated by the underground economy.

You have just been appointed as the County Commissioner of Hazard County. Your first day on the job you have the following conversations: Jeb mentions that the hog farm down the road from his house is creating a very nasty smell. a. not an externality b. a negative externality c. a positive externality d. a pecuniary externality

b. a negative externality

Which of the following would be considered a true public good? a. a public pool b. a road sign c. a park bench d. None of these

b. a road sign

Direct regulation is ____________. a. the government determining the incidence of a tax. b. direct actions by the government to control the amount of an activity. c. consumer sovereignty in a competitive market. d. using the tax system to influence behavior.

b. direct actions by the government to control the amount of an activity.

An example of a progressive tax is the __________. a. property tax. b. income tax. c. Social Security tax. d. sales tax.

b. income tax.

The burden of a tax falls entirely on sellers if ________. a. the income elasticity of demand is high b. the price elasticity of supply is zero (perfectly inelastic) c. the price elasticity of demand is unitary elastic d. the price elasticity of supply is greater than 1

b. the price elasticity of supply is zero (perfectly inelastic)

If a tax is imposed per unit of a good sold, ________. a. the supply curve of the good shifts to the right b. the supply curve of the good shifts to the left c. the demand curve for the good shifts to the right d. the demand curve for the good shifts to the left

b. the supply curve of the good shifts to the left

Tax incidence refers to ____________. a. the extent to which a tax is regressive. b. who bears the burden of a tax. c. how much revenue a tax generates. d. the marginal tax rate.

b. who bears the burden of a tax.

Jones and Smith live in the same apartment building. Jones loves to play his opera recordings so loudly that Smith can hear them. Smith hates opera. Jones receives $100 worth of benefits from his music and Smith suffers $60 worth of damages. Now suppose the apartment building passes a rule that says residents are not allowed to play music their neighbors can hear if any of the neighbors object. As before, Jones and Smith can bargain at zero cost. According to the Coase Theorem, Jones will pay _______ to Smith to compensate for the negative externality. a. Jones will pay up to $40 to Smith b. Smith will pay up to $40 to Jones c. Jones will pay $60 to Smith d. Jones will pay $0 to Smith

c. Jones will pay $60 to Smith

Which of the following is not likely to be subject to the tragedy of the commons? a. Coral reefs. b. Donuts brought to the office. c. National defense. d. A public area for grazing cattle

c. National defense.

Jones receives benefits worth $200 regardless of whether he listens to music on his speakers or headphones. The cost of headphones is $50. Smith is not able to concentrate on his work and suffers damages worth $350 when Jones listens to music without his headphones. Smith does not suffer any damages when Jones listens to music on his headphones. Which of the following is the outcome of bargaining when Jones and Smith can bargain at zero cost? a. Smith starts listening to music on his speakers at a higher volume so as to cause disturbance to Jones. As a result, both of them suffer the damages worth more than $350. b. Jones gives $350 to Smith and continues to listen to music on speakers. c. Smith gives $50 to Jones, and Jones agrees to listen to music using his headphones. d. A private deal between Jones and Smith cannot be struck as headphones are not free.

c. Smith gives $50 to Jones, and Jones agrees to listen to music using his headphones.

Which of the following reasons explains why a subsidy creates deadweight loss? a. The additional trade induced by the subsidy allows for consumption by buyers who value the good at above marginal cost. b. The additional trade induced by the subsidy allows for consumption by buyers who value the good at below average cost. c. The additional trade induced by the subsidy allows for consumption by buyers who value the good at below marginal cost. d. The additional trade induced by the subsidy allows for consumption by buyers who value the good at above average cost.

c. The additional trade induced by the subsidy allows for consumption by buyers who value the good at below marginal cost.

A college campus must decide whether to spend $40,000 to clear sidewalks of snow during the winter. There are 4,000 students. One thousand of these students are willing to pay up to $30 each to walk on a snowless sidewalk. The other 3,000 are willing to pay $8 each. In terms of efficiency, which of the following statements is true? a. The university should not pay $40,000 to keep the snow off the sidewalks, since marginal social cost is greater than marginal private cost. b. The university should not pay $40,000 to keep the snow off the sidewalks, since marginal social benefit is greater than marginal social cost. c. The university should pay $40,000 to keep the snow off the sidewalks, since total benefit is greater than total cost. d. The university should pay $40,000 to keep the snow off the sidewalks, since marginal private cost is greater than marginal benefit.

c. The university should pay $40,000 to keep the snow off the sidewalks, since total benefit is greater than total cost.

In an attempt to help the poor, India announced a policy to implement price ceilings on several essential drugs in December 2012. Some industry analysts, however, claimed that this would actually end up hurting the poor more than helping them. Do you think this is a possibility? a. No, it will help the poor by increasing demand. b. No, it will help the poor by increasing output. c. Yes, it might hurt the poor by creating a shortage. d. Yes, it might hurt the poor by lowering prices.

c. Yes, it might hurt the poor by creating a shortage.

An individual or a firm can internalize an externality by ___________. a. doubling the size of the externality. b. disputing that an externality exists. c. paying the cost of the externality. d. ignoring the externality

c. paying the cost of the externality.

The supply of milk in Nexus City is perfectly elastic. If a tax is imposed on each liter of milk sold, ________. a. the burden of the tax will fall entirely on sellers b. the tax incidence on sellers is higher than that on buyers c. the burden of the tax will fall entirely on buyers d. the deadweight loss due to taxation is zero

c. the burden of the tax will fall entirely on buyers

Deadweight loss refers to the loss in ________. a. producer surplus due to a fall in the market price b. consumer surplus due to an increase in the market price c. total surplus due to a market distortion such as an externality d. total surplus due to a change in consumers' preferences

c. total surplus due to a market distortion such as an externality

Which of the following goods have a high excludability? a. Public goods. b. Club goods. c. Ordinary private goods. d. Both b and c.

d. Both b and c.

Why is the market demand curve for public goods calculated as a vertical summation of individual demand curves? a. because public goods are the opposite of private goods, therefore the summing must be done similar to club goods. b. because public goods are finite in availability of consumption, so the vertical summation accounts for the limit. c. because public goods require vertical summation to account for the higher level of fairness compared to private goods. d. because the public good is non-rival, so you and others can consume every unit of the good at the same time.

d. because the public good is non-rival, so you and others can consume every unit of the good at the same time.

If government tax revenues are $6.4 trillion and government spending is $7.2 trillion, the government is running a ______________. a. budget surplus b. tax revenue c. balanced budget d. budget deficit

d. budget deficit

You are the County Commissioner of Hazard County. Dwight's neighbors bring a complaint before you that Dwight's hog farm is creating a terrible odor, and they are demanding government action. You respond to the neighbor's complaints by limiting the number of hogs that Dwight can have on his farm. Limiting the amount of Dwight's production is an example of: a. Private bargaining b. Market base policy c. Pigouvian taxation d. command and control

d. command and control

The Coase Theorem states that ____________. a. public and private partnerships will result in an efficient allocation of resources. b. public bargaining will result in an efficient allocation of resources. c. government and private partnerships will result in an efficient allocation of resources. d. private bargaining will result in an efficient allocation of resources.

d. private bargaining will result in an efficient allocation of resources.

The government runs a budget surplus when ____________. a. the budget is balanced. b. tax revenue falls below its spending. c. investment exceeds its spending. d. tax revenue exceeds its spending.

d. tax revenue exceeds its spending.