Microeconomic chapter 3-4

in which of these two statements are the terms "supply" and "demand" used correctly? "In the corn market, demand often exceeds supply, and supply sometimes exceeds demand. "The price of corn rises and falls in response to changes in supply and demand."

B

If the equilibrium price in a market is $20, and the government imposes a price ceiling of $25, what will be the resulting market condition? multiple choiceA surplusA shortageEquilibrium

Equilibrium

True or False: A "change in quantity demanded" is a shift of the entire demand curve to the right or to the left.

False

Yogi Berra was once asked about a popular New York restaurant. He said, "Nobody ever goes there anymore—it's too crowded." All joking aside, was he referring to:

a congestion effect

LAST WORD If a government wants to efficiently reduce a widespread negative externality like air pollution, it must know the costs of pollution abatement of the individual polluters. However, this information is difficult to obtain directly. Tradeable emissions permits are one way to solve the asymmetric information problem affecting pollution abatement efforts. Fill in the blanks to explain how this is possible. Because the permits are tradeable, firms with (Click to select) higher lower constant abatement costs will sell some of their permits to firms with (Click to select) constant lower higher abatement costs. Now consider that even after a firm has sold its permits, it must still reduce its pollution output. Since those who sell their permits would have (Click to select) the lowest constant the highest abatement costs, the negative externality is reduced at (Click to select) the lowest constant the highest possi

a: lower, higher b: the lowest, the lowest

Spillover costs and spillover benefits are also called negative and positive externalities because multiple choice 1spillover costs have a positive impact on third parties and spillover benefits have a negative impact on third parties.spillover costs increase the utility of third parties and spillover benefits decrease the utility of third parties.spillover costs have a negative impact on third parties and spillover benefits have a positive impact on third parties. Explain how a tax can correct for a negative externality. A tax can correct for a negative externality because it shifts the cost onto firms producing the product, which (Click to select) increases decreases output. Explain how a subsidy to producers can correct for a positive externality. A subsidy can correct for a positive externality because it (Click to select) increases supply decreases demand increases demand decreases supply and (Click to select)

a: spillover costs have a negative impact on third parties and spillover benefits have a positive impact on third parties. b: decreases increases supply increases

For each item, decide if it describes a moral hazard problem or an adverse selection problem. A person with a terminal illness buys several life insurance policies through the mail. (Click to select) Moral hazard Adverse selection A person drives carelessly because she has automobile insurance. (Click to select) Adverse selection Moral hazard A person who intends to torch his warehouse takes out a large fire insurance policy. (Click to select) Moral hazard Adverse selection A professional athlete who has a guaranteed contract fails to stay in shape during the off season. (Click to select) Adverse selection Moral hazard A person who anticipates having a large family takes a job with a firm that offers exceptional child care benefits. (Click to select) Moral hazard Adverse selection

adverse selection moral hazard adverse selection moral hazard adverse selection

If the income of buyers decreases, and good A is an inferior good, the (Click to select) demand for good A quantity demanded of good A will (Click to select) increase decrease . This will cause the equilibrium price to (Click to select) increase decrease be indeterminate and the equilibrium quantity to (Click to select) increase be indeterminate decrease .

demand A increase increase increase

If the income of buyers decreases, and good A is an inferior good, the (Click to select) demand for good A quantity demanded of good A will (Click to select) decrease increase . This will cause the equilibrium price to (Click to select) be indeterminate increase decrease and the equilibrium quantity to (Click to select) increase be indeterminate decrease .

demand for good A increase increase increase

When negative externalities exist in a market, multiple choice 1equilibrium output will be greater than the efficient price.equilibrium price will be less than the efficient output.equilibrium output will be less than the efficient output.equilibrium output will be greater than the efficient output. The government could correct these divergences between equilibrium output and efficient output by multiple choice 2shifting the demand curve down.imposing regulations that force firms to externalize the internal costs.imposing regulations that force firms to internalize the external costs. An example of an external benefit is multiple choice 3the safety provided by motion-detector lights.pollution.loud noise from your neighbor.second-hand smoke.

equilibrium output will be greater than the efficient output. imposing regulations that force firms to internalize the external costs. the safety provided by motion-detector lights.

Suppose that the price of a cupcake is $4. At this price, 50 cupcakes will be demanded. If the price rises to $5 per cupcake, consumer surplus will multiple choicerise by more than $50.fall by more than $50.rise by less than $50.fall by less than $50.

fall by less than $50.

Economists say, "Price floors and ceilings stifle the rationing function of prices and distort resource allocation". For example, a binding price ceiling will cause an _________ blankof resources towards the production of a particular good, resulting in a _________blank of the good.

underallocation; shortage

Because medical records are private, individuals applying for health insurance will know more about their own health conditions than will the insurance companies to which they are applying for coverage. This information asymmetry is likely to ________ the insurance premium. multiple choiceincreasedecreasehave little impact on

increase

It is in the interest of people purchasing new homes as well as the builders of new homes to have government building codes and building inspectors because_________blank. multiple choiceinspections reduce information asymmetry which improves the efficiency of the market for new homesinspection fees increase the revenues of local governmentsinspections improve the productivity of subcontractorsinspections improve the productivity of homebuilders

inspections reduce information asymmetry which improves the efficiency of the market for new homes

A price ceiling will result in a shortage only if the ceiling price is (Click to select) greater than less than equal to the equilibrium price.

less than

People drive faster when they have auto insurance. This example illustrates: multiple choiceasymmetric information.adverse selection.moral hazard.

moral hazard

Efficiency losses_________blank. multiple choiceare not possible if suppliers are willing to produce and sell a productcan result only from underproductioncan result only from overproductionnone of the answer choices are correct

none of the answer choices are correct

How will an increase in state subsidies to public colleges affect the market for public and private colleges? a: In the market for public colleges: b: In the market for private colleges:

supply will shift to the right supply will shift to the left

If the equilibrium price in a market is $18, and the government imposes a price floor of $15, what will be the resulting market condition?

surplus

An apple grower's orchard provides nectar to a neighbor's bees, while the beekeeper's bees help the apple grower by pollinating his apple blossoms. Consider the figure below to answer the questions that follow. This situation of dual positive externalities might lead to an underallocation of resources to both apple growing and beekeeping because multiple choice 1there are spillover benefits for the apple growers, but spillover costs for the beekeepers.there are spillover benefits for both the apple growers and the beekeepers.there are spillover costs for the apple growers, but spillover benefits for the beekeepers.there are spillover benefits for the apple growers, but not the beekeepers. This underallocation can get resolved via the means suggested by the Coase theorem because multiple choice 2beekeepers can rely on nearby orchards at no cost.apple growers and beekeepers can benefit from the other, so they will

there are spillover benefits for both the apple growers and the beekeepers. apple growers and beekeepers can benefit from the other, so they will negotiate an optimal solution.