Microeconomics Final Exam Review
CH 10- Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 20 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will dump
CH 10- 10 fewer tons of pollution into the river, and Firm B will dump 50 fewer tons of pollution into the river.
CH 10- Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?
CH 10- Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders.
CH 10- What is the difference between command-and-control policies and market-based policies toward externalities?
CH 10- Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior.
CH 10- Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct?
CH 10- Dick will pay to keep his dog if his benefit exceeds Jane's cost
CH 10- Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that
CH 10- Jane pays Dick $650 to give the dog to his parents who live on an isolated farm.
CH 10- Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
CH 10- The equilibrium quantity is greater than the socially optimal quantity.
CH 10- Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
CH 10- The equilibrium quantity is less than the socially optimal quantity.
CH 10- Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.
CH 10- True
CH 10- If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the policy would be considered
CH 10- a corrective tax
CH 10- A local cafe that allowed patrons to smoke was forced to stop serving customers because it did not comply with local clean air standards. This decision provides an example of
CH 10- a direct regulation of an externality.
CH 10- Tradable pollution permits
CH 10- are widely viewed as a cost-effective way to reduce pollution. have helped reduce carbon emissions. have helped reduce sulfur dioxide emissions.
CH 10- Emission controls on automobiles are an example of a
CH 10- command-and-control policy to increase social efficiency.
CH 10- The Coase theorem states that
CH 10- in the absence of transaction costs, private parties can solve the problem of externalities on their own.
CH 10- Since almost all forms of transportation produce some type of pollution,
CH 10- society has to weigh the cost and benefits when deciding how much pollution to allow.
CH 10- Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then
CH 10- the equilibrium quantity of education will equal the socially optimal quantity of education.
CH 10- Tradable pollution permits
CH 10- will be more valuable to firms that can reduce pollution only at high costs.
CH 3- The principle of comparative advantage as we know it today was developed by
CH 3- David Ricardo
CH 3- If Shawn can produce donuts at a lower opportunity cost than Sue, then
CH 3- Shawn has a comparative advantage in the production of donuts.
CH 3- The principle of comparative advantage does not provide answers to certain questions. One of those questions is as follows:
CH 3- What determines the price at which trade takes place?
CH 3- Suppose labor is the only resource used in production, and that the productivity of labor in the production of a particular commodity is measured by the amount of the commodity that is produced by one unit of labor. If labor in Mexico is less productive than labor in the United States in the production of every commodity,
CH 3- both Mexico and the United States still can benefit from trade.
CH 3- The difference between production possibilities frontiers that are bowed out and those that are straight lines is that
CH 3- bowed-out production possibilities frontiers illustrate increasing opportunity cost, whereas straight-line production possibilities frontiers illustrate constant opportunity cost.
CH 3- Economists generally support
CH 3- free international trade.
CH 3- When an economist points out that you and millions of other people are interdependent, he or she is referring to the fact that we all
CH 3- rely upon one another for the goods and services we all consume.
CH 3- Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage in producing wheat if
CH 3- the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.
CH 3- Consider a world with just two people: a shoemaker and a vegetable farmer. Potentially, trade could benefit both individuals if
CH 3- the shoemaker can produce only shoes and the vegetable farmer can produce only vegetables the shoemaker is capable of growing vegetables, but he is not very good at it. the vegetable farmer is better at growing vegetables and better at making shoes than the shoemaker.
CH 3- The opportunity cost of an item is
CH 3- what you give up to get that item.
CH 4- Suppose the quantity of ice cream demanded by Catherine (Qd) depends upon (i) the weather, (ii) Catherine's income, (iii) the price of ice cream, (iv) the price of frozen yogurt (which Catherine tends to buy more of when ice cream becomes more expensive), (v) the price of bananas (which Catherine tends to consume with ice cream), and (vi) how generally optimistic Catherine feels about her future. Changes in which of these factors will cause Catherine's demand curve to shift (either to the left or to the right)?
CH 4- All factors except (iii).
CH 4- For a perfectly competitive market, which of the following statements is correct?
CH 4- If a seller charges more than the going price (which is the price being charged by all other sellers), buyers will go elsewhere to make their purchases.
CH 4- The theory of demand and supply assumes that the market in which a commodity is traded is perfectly competitive. This means that:
CH 4- It is assumed that there are many buyers of the commodity It is assumed that there are many sellers of the commodity. It is assumed that all sellers of the commodity sell exactly the same product.
CH 4- Suppose the quantity of ice cream demanded by Catherine (Qd) depends upon (i) the weather, (ii) Catherine's income, (iii) the price of ice cream, (iv) the price of frozen yogurt (which Catherine tends to buy more of when ice cream becomes more expensive), (v) the price of bananas (which Catherine tends to consume with ice cream), and (vi) how generally optimistic Catherine feels about her future. The Law of Demand assumes that:
CH 4- Qd will increase if the price of ice cream decreases, and vice versa, if all the other factors remain unchanged.
CH 4- Assume that the following changes occur in the market for ice-cream: (i) the price of frozen yogurt (which consumers tend to buy more of when ice-cream gets more expensive) increases, (ii) the price of the milk that is needed to make ice-cream decreases, (iii) the weather gets hotter because of global warming, and (iv) the technology used to make ice-cream becomes more efficient and less wasteful. Which of the following predictions follow from the theory of supply and demand?
CH 4- The market demand for ice-cream will shift right and the market supply of ice-cream will shift right. As a result, the price of ice-cream may increase or decrease and the quantity of ice-cream bought and sold will increase.
CH 4- If a good is normal, then an increase in income will result in
CH 4- an increase in the demand for the good.
CH 4- If a decrease in income increases the demand for a good, then the good is
CH 4- an inferior good
CH 4- Two goods are substitutes if a decrease in the price of one good
CH 4- decreases the demand for the other good.
CH 4- The point at which the supply and demand curves intersect is called
CH 4- equilibrium
CH 4- Two goods are complements if a decrease in the price of one good
CH 4- increases the demand for the other good.
CH 4- The quantity supplied of a good is negatively (that is, inversely) related to the
CH 4- prices of the raw materials and labor used to make the good.
CH 4- As long as all other factors that affect buyers' and sellers' decisions are unchanged, when the price of a good rises, the
CH 4- quantity supplied of the good increases.
CH 4- A technological advance that reduces production costs will shift the
CH 4- supply curve to the right.
CH 4- If, at the current price, there is a shortage (that is, excess demand) of a good,
CH 4- the price is below the equilibrium price.
CH 4- The quantity of ice-cream supplied by Ben depends on:
CH 4- the price that all other ice-cream sellers -- in this perfectly competitive ice-cream market -- are charging. Ben tends to produce more when this market price is high.
CH 4- Suppose you make jewelry. If the price of gold falls, you will
CH 4- want to produce more jewelry than before, at any given price.
CH 5- Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. If one uses the midpoint formula, the price elasticity of demand for Twinkies in the given price range is
CH 5- 0.64
CH 5- Suppose there is a 6 percent increase in the price of good X and -- as a result -- a 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is
CH 5- 1
CH 5- If the cross-price elasticity of two goods is negative, then an increase in the price of one good leads to a decrease in the quantity demanded of the other good. Therefore, these two goods are
CH 5- Complements
CH 5- When the quantity demanded responds strongly to changes in price, demand is said to be
CH 5- Elastic
CH 5- For which of the following goods would demand be most elastic?
CH 5- Tommy Hilfiger Blue Jeans
CH 5- Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of M&Ms. Jean-Paul's demand for M&Ms is
CH 5- Unit elastic
CH 5- When demand is inelastic within a certain price range, then within that price range,
CH 5- an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.
CH 5- Holding constant all other factors that affect our consumption of gasoline, when the price of gasoline rises, the number of gallons of gasoline demanded falls substantially over a ten-year period because
CH 5- buyers tend to be much more sensitive to a change in price when given more time to react.
CH 5- The cross-price elasticity of demand can tell us whether goods are
CH 5- complements or substitutes.
CH 5- If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the
CH 5- demand for marijuana is inelastic.
CH 5- If the demand for donuts is elastic, then a decrease in the price of donuts will
CH 5- increase total revenue of donut sellers.
CH 5- Last year, Joan bought 50 pounds of hamburger when her household's income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan's income elasticity of demand for hamburger is
CH 5- negative, so Joan considers hamburger to be an inferior good.
CH 5- The demand for Chocolate Chip Cookie Dough ice cream is likely to be quite elastic because
CH 5- other flavors of ice cream are good substitutes for this particular flavor.
CH 5- Suppose the demand for crude oil is inelastic in the short run and elastic in the long run. If the Organization of Petroleum Exporting Countries (OPEC) succeeds in getting its member nations to reduce their output of crude oil, it is likely that the total revenue from OPEC's sale of crude oil will _____ in the short run and _____ in the long run.
CH 5- rise; fall
CH 5- For a good that is a luxury, demand
CH 5- tends to be elastic.
CH 5- Suppose the demand for a good is perfectly inelastic. Suppose also that the supply of the good decreases. As a result,
CH 5- the equilibrium price increases and the equilibrium quantity is unchanged.
CH 5- Suppose the demand for a good is perfectly elastic. Suppose also that the supply of the good in question decreases. As a result,
CH 5- the equilibrium quantity decreases and the equilibrium price is unchanged
CH 5- Cross-price elasticity of demand measures how
CH 5- the quantity demanded of one good changes in response to a change in the price of another good.
CH 7- Total surplus in a market is equal to
CH 7- Consumer surplus + Producer surplus
CH 7- The area below a demand curve and above the price is a measure of
CH 7- consumer surplus
CH 7- Suppose consumer income increases. If grass seed is a normal good, the equilibrium price of grass seed will
CH 7- increase, and producer surplus in the industry will increase
CH 7- Other things equal, if the price of a good falls, the consumer surplus
CH 7- increases
CH 7- The "invisible hand" refers to
CH 7- the idea that the marketplace guides the self-interests of market participants into promoting general economic well-being
CH 7- An economic outcome is efficient if
CH 7- total surplus is maximized
CH 8- Scenario 8-1 Ryan is willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. If Tammy cleans Ryan's house for $80, Tammy's producer surplus is
CH 8- $10
CH 8- Scenario 8-1 Ryan is willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. If Ryan pays Tammy $80 to clean his house, Ryan's consumer surplus is
CH 8- $20
CH 8- Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. Further suppose that the tax reduces consumer surplus by $3,000 and that it reduces producer surplus by $4,400. Then, the deadweight loss of the tax is
CH 8- $600
CH 8- Which of the following statements is true for markets in which the demand curve slopes downward and the supply curve slopes upward?
CH 8- As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss continually rises.
CH 8- Scenario 8-1 Ryan is willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. Assume Ryan is required to pay a tax of $40 when he hires someone to clean his house for a week. Which of the following is correct?
CH 8- Ryan will now clean his own house.
CH 8- When a tax is being collected on the production or consumption of a good or service, total surplus is equal to
CH 8- consumer surplus plus producer surplus plus tax revenue.
CH 8- Consider a good on which a per-unit tax is imposed. The greater the price elasticities of demand and supply for the good, the
CH 8- greater the deadweight loss from the tax.
CH 8- Other things equal, the deadweight loss of a tax
CH 8- increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax.
CH 8- The benefit that a government receives from a tax is measured by
CH 8- its tax revenue
CH 8- If the size of a tax increases, tax revenue
CH 8- may increase, decrease, or remain the same.
CH 8- If the per-unit tax on a good is doubled, the deadweight loss of the tax
CH 8- quadruples
CH 8- A tax on a good
CH 8- raises the price that buyers actually pay and lowers the price that sellers actually receive.
CH 8- Suppose the tax on gasoline is raised from $0.50 per gallon to $2.50 per gallon. As a result,
CH 8- the deadweight loss of the tax necessarily increases.
CH 8- Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things equal,
CH 8- the larger is the decrease in quantity demanded as a result of the tax. the smaller is the tax burden on buyers relative to the tax burden on sellers. the larger is the deadweight loss of the tax.
An example of a perfectly competitive market would be the
Soybean Market
