Microeconomics Unit 2

Negative externalities lead markets to produce

greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.

Welfare economics is the study of

how the allocation of resources affects economic well-being.

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the

social value exceeds the private value at the private market solution.

The following table represents the costs of five possible sellers. SellerCost Abby$1,500 Bobby$1,200 Carlos$1,000 Dianne$750 Evalina$500

750

Pat bought a new car for $15,500 but was willing to pay $24,000. The consumer surplus is

8500

Suppose England exports cars to Australia and imports cheese from Mexico. This situation suggests that

England has a comparative advantage relative to Australia in producing cars, and Mexico has a comparative advantage relative to England in producing cheese.

Suppose the demand for peaches decreases. What will happen to producer surplus in the market for peaches?

It decreases

An optimal tax on pollution would result in which of the following?

Producers will internalize the cost of the pollution.

Which of the following is an example of a positive externality?

The mayor of a small town plants flowers in the city park.

Suppose the government has imposed a price floor on cellular phones. Which of the following events could transform the price floor from one that is binding to one that is not binding?

Traditional land line phones become more expensive.

The difference between a corrective tax and a tradable pollution permit is that

a corrective tax sets the price of pollution and a permit sets the quantity of pollution.

The demand for salt is inelastic, and the supply of salt is elastic. The demand for caviar is elastic, and the supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt, and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on

buyers of salt and the sellers of caviar

Patterns of trade among nations are primarily determined by

comparative advantage.

Trade among nations is ultimately based on

comparative advantage.

Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?

consumer and producer surplus

The difference between social cost and private cost is a measure of the

cost of an externality.

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

decreases, and producer surplus decreases.

A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes

decreases, and the consumer surplus in the market for red wine decreases.

Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the

demand is more inelastic than the supply.

If a country removes a tariff on imported shoes, we expect the domestic price of shoes to _____ and the quantity of shoes consumed in the domestic market to _____.

fall; rise

If an externality is present in a market, economic efficiency may be enhanced by

government intervention.

If the labor supply curve is nearly vertical, a tax on labor

has little impact on the amount of work that workers are willing to do.

A country has a comparative advantage in a product if the world price is

higher than that country's domestic price without trade.

If the demand for light bulbs increases, producer surplus in the market for light bulbs

increases

When the supply of a good increases and the demand for the good remains unchanged, consumer surplus

increases

When there is a technological advance in the pork industry, consumer surplus in that market will

increases

Externalities tend to cause markets to be

inefficient

A tax burden falls more heavily on the side of the market that

is more inelastic.

Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market

may increase, decrease, or remain the same

All remedies for externalities share the goal of

moving the allocation of resources toward the socially optimal equilibrium.

Assume, for the U.S., that the domestic price of wheat without international trade is higher than the world price of wheat. This suggests that, in the production of wheat,

other countries have a comparative advantage over the U.S. and the U.S. will import wheat.

The welfare of sellers is measured by

producer surplus

A tariff or quota will _____ prices and _____ the consumption of the protected goods in the importing country.

raise; decrease

An economy moves from autarky to free international trade. In the import sector, consumer surplus _____, producer surplus _____, and the economy as a whole _____.

rises; falls; gains

Cost is a measure of the

seller's willingness to sell

Suppose that in a particular market, the demand curve is highly elastic, and the supply curve is highly inelastic. If a tax is imposed in this market, then the

sellers will bear a greater burden of the tax than the buyers.

Markets are often inefficient when negative externalities are present because

social costs exceed private costs at the private market solution.

Suppose that a tax is placed on books. If the sellers pay the majority of the tax, then we know that the

supply is more inelastic than the demand.

The job creation argument for protection against free trade is:

that keeping out foreign imports allows the goods and services to be produced by domestic workers.

Assume, for the U.S., that the domestic price of pineapples without international trade is lower than the world price of pineapples. This suggests that, in the production of pineapples,

the U.S. has a comparative advantage over other countries and the U.S. will export pineapples.

Suppose the United States exports cars to Canada and imports bananas from Mexico. This situation suggests

the United States has a comparative advantage relative to Canada in producing cars, and Mexico has a comparative advantage relative to the United States in producing bananas.

If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price,

the country will be an exporter of the good.

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,

the market equilibrium quantity will not be the socially optimal quantity.

Total surplus is

the total value of the good to buyers minus the cost to sellers of providing the good.

If a price ceiling is not binding, then

there will be no effect on the market price or quantity sold.

Total surplus in a market is equal to

value to buyers - costs of sellers

An example of normative analysis is studying

whether equilibrium outcomes are socially desirable.

Suppose Haiti has an absolute advantage over other countries in producing oranges, but other countries have a comparative advantage over Haiti in producing oranges. If trade in oranges is allowed, Haiti

will import oranges.

Suppose Guatemala has an absolute advantage over other countries in producing sugar, but other countries have a comparative advantage over Guatemala in producing sugar. If trade in sugar is allowed, Guatemala

will import sugar.

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. 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. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

$4,500; $3,500

A binding price floor (i) causes a surplus.(ii)causes a shortage.(iii)is set at a price above the equilibrium price.(iv)is set at a price below the equilibrium price.

(i) and (iii) only

How is the burden of a tax divided? (i)When the tax is levied on the sellers, the sellers bear a higher proportion of the tax burden. (ii)When the tax is levied on the buyers, the buyers bear a higher proportion of the tax burden. (iii)Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear an equal proportion of the tax burden. (iv)Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear some proportion of the tax burden.

(iv) only

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 250 per month when there is no tax. Then a tax of $6 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the after-tax quantity of widgets is

125 per month.

Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is

150

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Refer to Figure 7-18. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus to producers already in the market would be

480

What is the difference between command-and-control policies and market-based policies toward externalities?

Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior.

Assume the supply curve for cigars is a typical, upward-sloping straight line, and the demand curve for cigars is a typical, downward-sloping straight line. Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The government's tax revenue amounts to $475 per month. Which of the following statements is correct?

The deadweight loss of the tax is $12.50.

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?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

The equilibrium quantity is less than the socially optimal quantity.

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.

Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?

The number of firms selling laptop computers decreases.

If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price,

the country will be an importer of the good.