Econ 202 Exam 2
Consider the production of some industrial good that creates air pollution. The table below gives the marginal social cost (MSC), the marginal cost (MC), and the marginal social benefit (MSB) for each level of output (Q). *chart The inefficient market quantity is _____ and the efficient market quantity is _____
4; 3
Which of the following is true?
A command system works well when the lines of authority and responsibility are clear
An example of a negative production externality is
a traffic jam that occurs when a new shopping mall is built on an already busy road
Rational ignorance is the decision to not
acquire information if the cost if it exceeds the expected benefit
According to your textbook, which of the following is income elastic demand?
airline travel
A cost that arises from the production of a good that is paid by someone who did not participate in the production is called
an externality
If the cross elasticity of demand is -5 between french fries and orange drink, then french fries
and orange drink are substitutes
One way to overcome the problem of the commons is to
assign property rights so that someone owns the resource
Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will decrease the quantity of newspapers demanded by 8 percent. According to Dan, the demand for newspapers is _____
elastic
The price of demand for furniture is estimated at 1.3. This value means a one percent increase in the
price of furniture will decrease the quantity of furniture demanded by 1.3 percent
The Coase theorem states that if transaction costs are low, the number of parties is small, and property rights are well established
private transactions are efficient
The free-rider problem is the inability of private markets to achieve the efficient level of production of
public goods
When consumption of a good is nonrival and nonexcludable, the good is a
pure public good
If you are in the inelastic portion of the demand curve and you wish to increase total revenue. You should (ceteris paribus):
raise price
Unit elastic demand means that the
ratio of a percentage change in the quantity demanded to a percentage change in the price equals 1
Elasticity generally measures
responsiveness of a variable to a change in another variable
Elasticity generally measures the
responsiveness of a variable to a change in another variable
Food is an example of a _____ good
rival and excludable
To two hunters, a deer in a forest is
rival and nonexcludable
A common resource is ______ and _____
rival; nonexcludable
The price elasticity of demand measures
the responsiveness of the quantity demanded to changes in price
Susan thinks the only fair outcome is one in which she has three slices of pizza a week. Susan is using a ________ concept of fairness.
"it's not fair if the result isn't fair"
Suppose a rise in the price of peaches from $5.50 to $6.50 per bushel decreases the quantity demanded from 12,500 to 11,500 bushels. The price elasticity of demand is
0.5
*chart Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox).The marginal social benefit of the 4 millionth varicella vaccination is
$12
Consider the production of some industrial good that involves air pollution. The table below gives the marginal social cost (MSC), the marginal cost (MC), and the marginal social benefit (MSB) for each level of output (Q). *chart To arrive at the efficient market equilibrium the government could impose a tax of
$3
Property rights
*all of the answers are correct* -can be part of a solution to the problems of an externality -apply to factors of production and to goods and services -are legally established titles of ownership that are enforceable in the courts
If a rightward shift of the supply curve leads to a 6 percent decrease in the price and a 5 percent increase in the quantity demanded, the price elasticity of demand is
0.83
Total revenue for skis is at a maximum when the price of demand is
1
The price elasticity of demand for a good is 0.8, then a
1 percent rise in the price leads to a 0.8 percent decrease in the quantity demanded
Total revenue is maximized at which price elasticity
1.0
When the price of a movie ticket increases from $5 to $7, the quantity of tickets demanded decreases from 600 to 400 per day. What is the price elasticity of demand for movie tickets?
1.20
*chart In the figure above, if the market is unregulated, the output will be
250 units
*chart The schedules in the table give the marginal social benefit and marginal social cost of a DVD. If there are no external benefits or external costs, the efficient number of DVDs to produce is ________ a week.
3
*chart Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox). If the marginal cost of a varicella vaccination is $10, then the unregulated competitive equilibrium will have
3 million vaccinations
*chart In the above table, if the market is perfectly competitive and unregulated, the equilibrium output will be
3,000 units
The tragedy of the commons is the absence of incentives to
prevent overuse and depletion of the common resource
Equality of opportunity is the focus of which economic school of thought
Classical
When production of a good results in an external cost, the unregulated competitive market equilibrium is inefficient because
MSC > MSB
The incidence of sales tax is determined by the
price elasticities of supply and demand
The assertion that if resources are allocated efficiently, they also are allocated fairly is made by
Robert Nozick, who believes that equality of opportunity is fair
If the marginal social cost of a television exceeds the marginal social benefit if a television, it would increase society's total surplus to decrease production of televisions
True
Which of the following episodes would most likely contain an externality?
You decide to grow flowers in your front yard where everyone else can see them
A positive production externality is
a benefit that arises from production and falls on someone other than the producer
To maximize its revenue
a firm facing inelastic demand should always raise its price
Air pollution that comes from someone smoking in your car while you dive on a vacation is
a negative consumption externality
Public universities, by charging tuition ____ the marginal cost of education, ______ the number of students
below; increase
The demand and the supply for a good are each neither perfectly elastic nor perfectly inelastic. If a sales tax on sellers of the good is imposed, the tax is paid by
both buyers and sellers
A political equilibrium can never be reached without voters, firms, politicians and
bureaucrats
Factors that influence the elasticity of demand
closeness of substitutes, time, and proportion of income spent on the good
When the marginal social benefit of Good A is greater than the marginal private benefit of Good A, then
competitive, unregulated markets will produce a quantity of Good A that is less than the efficient quantity
A free rider is someone wh
consumes a good without paying for it
Suppose Clyde always eats ice cream and chocolate syrup together. If the price of syrup increases by 10 percent, and the cross elasticity of demand is -2, the demand for ice cream
decreases by 20 percent
In general, a fine on buying a product leads to the
demand curve shifting leftward
A good has a perfectly inelastic supply and a downward sloping demand curve. Imposing a sales tax of $1 per unit on the sellers of the good
does not change the price paid by demanders
According to the total revenue test, a price cut increase total revenue if demand is
elastic
The seller pay the entire sales tax levied on a good when demand is perfectly _____ or supply is perfectly _____
elastic; inelastic
A free rider is someone who
enjoys the benefit of a good without paying for it
The price elasticity of demand _____ in value when moving downward along a ____ line demand curve.
falls; straight
When scarce resources can serve only one user at a time in sequence, which method works well for allocating the scarce resources?
first come, first served
A rent ceiling creates a shortage. As result, there is a deadweight loss
from both lost consumer and producer surplus
When government action leads to inefficiency, it is know as
government failure
Governments often intervene in agricultural markets by
granting subsidies
According to your textbook, which of the following food products is price elastic demand?
grapes
When producers are hard to monitor and marginal costs differ across producers, ____ are an effective method to achieve efficient use of a _____
individual transferable quotas, common resource
If a 20 percent increase in the price of a used car results in a 10 percent decrease in the quantity of used cars demanded, then the demand for used cars is
inelastic
If a consumer is relatively insensitive to changes in the price of a good, then the consumer's demand for the good is
inelastic
The buyers pay the entire sales tax levied on a good when demand is perfectly _____ or supply is perfectly ______
inelastic; elastic
At the midpoint of a downward sloping straight-line demand curve, the demand
is unit elastic
A good or service or a resource or a resource is nonexcludable if
it is not possible to prevent someone from benefiting from it
Demand is price inelastic if a relatively _____ price increase leads to a relatively ______ in the quantity demanded
large; small decrease
Public choice theory suggests that in the presence of rational ignorance, the size of government is
larger than the efficient size
The less elastic the supply, the
larger the fraction of any tax imposed on the product that is paid by the suppliers
The resource allocation method that is used to allocate scarce resources between private use and government use is
majority rule
The cost of producing an additional unit of a good or service that falls on people other than the producer of that good or service is called the
marginal external cost
To eliminate the inefficiency resulting from an external cost of production, the government can impose a tax on producers that is equal to the
marginal external cost
The cost of producing an additional unit of a good or service that is borne by the producer or that good or service is called the
marginal private cost
The marginal social cost of production is the
marginal private cost plus the marginal external cost
Efficiency in the provision of a pure public good is achieved when its
marginal social benefit equals its marginal social cost
Resources use is efficient when
marginal social benefit equals marginal social cost
Underproduction compared to the efficient amount implies that for the last unit produced
marginal social benefit exceeds marginal social cost
Overproduction compared to the efficient amount implies that for the last unit produced
marginal social costs exceeds marginal social benefit
When markets leads to inefficiency, it is know as
market failure
In the United States, resources are most often allocated by
market price
According to your textbook, a product that has a price elastic demand is:
metals
At current quantity of pizza, the marginal social benefit is greater than the marginal social cost. Then
more pizzas must be produced to reach the efficient level
According to the Coase theorem, part of what is needed for private transactions to be efficient is that property rights
must be defined, but it does not matter who owns the property
An example of a pure public good is
national defense services
A school of tuna swimming in the ocearn is
nonexcludable and rival
If the consumption of Good A by one person does not decrease the quantity of Good A available for another person's consumption, then the good is said to be
nonrival
What are the two features of a public good?
nonrival and nonexcludable
An uncrowded toll road is _____ because it is _______
not a public good; nonrival but excludable
An external cost os a cost of producing a good or service that is
not paid by the producer but paid by other people
Bureaucratic over-provision of a public good could occur because
of rational ignorance among voters
If supply is perfectly inelastic, a sales tax imposed on sellers is paid by
only the buyers
The price elasticity of demand equals the magnitude of the
percentage change in the quantity demanded of a good divided by the percentage change in its price
If the quantity demanded changes by an infinitely large amount for a given change in price, then demand is
perfectly elastic
If a person will rent an apartment only to married couples over 30 years old, that person is allocating resources using a ________ allocation method.
personal characteristics
*chart You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, as a profit-minded business person who seeks to avoid taxes whenever possible, which good would you most prefer to have taxed?
pizza
The income elasticity of demand is
positive for a normal good and negative for an inferior good
Social interest theory differs from public choice theory is that
social interest theory predicts that the government only takes actions that increase efficiency
One way that government can increase the production of goods that have external benefits is to
subsidize the activity
If the cross elasticity of a demand for good x with respect to the price of good y is positive, then goods x and y are
substitutes
In general, a fine on selling a product leads to the
supply curve shifting leftward
The government imposes a sales tax on hot dogs. The tax would be paid entirely by hot dog sellers if the
supply is perfectly inelastic
When a government fines and/or imprisons convicted drug dealers, it is attempting to reduce the illegal drub trade by shifting the _____ curve for illegal drugs _____
supply; leftward
one of the problems associated with the utilitarianism is that it does not recognize that
taxing those with higher incomes results in less work effort
One common effect of rent ceilings in big cities is
that landlords charge "key money," high payments charged to new tenants for new locks and keys
If a tax is imposed on a market in which demand is perfectly inelastic
the buyers pay the entire tax
In an unregulated, competitive market, less than the efficient quantity of education is produced and consumed because
the decisions to produce and consume education are based on marginal private costs and marginal private benefits
A modified version of utilitarianism proposed by John Rawls states that
the fair distribution of the economic pie is the one that makes the poorest person as well off as possible
A market is allocatively efficient if
the sum of the consumer surplus and the producer surplus has been maximized
A sales tax is imposed on the sellers of gasoline, This tax shifts
the supply of gasoline curve leftward
the requirement that people in similar situations be treated similarly is called
the symmetry principle
The marketing people at Ben and Jerry's Ice Cream Company believe that if they lower the price of their Cherry Garcia flavor ice cream by 25 percent, the quantity demanded will increase by 5 percent. If they are correct in their belief, then
their total revenue from Cherry Garcia will decrease if they lower the price
A good with a positive externality is
under produced
Pure public goods are
under provided by the private market because people's willingness to pay for the good is less than the marginal benefit of the good
The principle that states that we should strive to achieve the greatest happiness for the greatest number is called
utilitarianism
The economy's marginal benefit curve for a *PUBLIC* good is found by ______ for all individuals
vertically summing the marginal benefit curves
In the political marketplace, firms do all of the following *EXCEPT*
vote
Which of the following is a likely outcome of rent ceilings?
waiting lists of potential renters of rent-controlled housing
The price elasticity of demand can range between
zero and infinity
