ECON 202 Test 2

The problem with the protection-as-a-bargaining-chip argument for trade restrictions is

if it fails, the country faces a choice between two bad options

Refer to Figure 8-2. The imposition of the tax causes the price paid by buyers to

increase by $3

Why do some policymakers support a consumption tax rather than an earnings tax?

A consumption tax would encourage people to save earned income.

An externality is the uncompensated impact of

one person's actions on the well-being of a bystander

A good is excludable if

people can be prevented from using it

When negative externalities are present in a market

social costs will be greater than private costs.

A tax levied on the sellers of a good shifts the

supply curve upward by the size of the tax ****

Concerning the labor market and taxes on labor, economists disagree about

The size of deadweight loss of the tax on labor

A tax on a imported good is called a

tariff

Refer to Figure 11-1. Emma's use of good x does not affect anyone else's use of a good x. Neither Emma nor anyone else can be prevented from using the good. Good x is an example of the type of good that belongs in

Box D, which represents public goods.

Refer to Figure 9-5. Producer surplus in this market after trade is

C

Who among the following is a free rider?

Ernie listens to National Public Radio, but does not contribute to any fundraising efforts. ****

Which of the following statements regarding a Laffer curve is the most plausible?

Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate

Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss?

The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon.

Suppose a tax is imposed on bananas. In which of the following cases will the tax cause the equilibrium quantity of bananas to shrink by the largest amount?

The response of buyers and sellers to a change in the price of bananas is strong.

What happens to the total surplus in a market when the government imposes a tax?

Total surplus decreases.

The deadweight loss from a tax per unit of good will be smallest in a market with

inelastic supply and inelastic demand.

The infant-industry argument

is based on the belief that protecting industries when they are young will pay off later

A country is using a proportional tax when

its marginal tax rate equals its average tax rate

A tax system based on the ability-to-pay principle claims that all citizens should

make an equal sacrifice

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

may increase, decrease, or remain unchanged

Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus

might increase or decrease

Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

negative externalities

As a result of a decreases in price

new buyers enter the market, increasing consumer surplus

Because public goods are

not excludable, people have an incentive to be free riders.

A textbook is a

private good and the knowledge that one gains from reading the book is a public good.

Because of the free-rider problem,

private markets tend to undersupply public goods

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by M represents

producer surplus after the tax

A demand curve reflects each of the following except the

quantity that each buyer will ultimately purchase

A tax on a good

raises the price that buyers pay and lowers the price that sellers receive

One tax system is less efficient than another if it

raises the same amount of revenue at a higher cost to taxpayers.

A free rider is a person who

receives the benefit of a good but avoids paying for it

The goal of requiring licenses for hunting and fishing is to

reduce the use of a common resource.

Which of the following events would increase producer surplus?

seller's costs stay the same and the price of the good increases

A supply curve can be used to measure producer surplus because it reflects

sellers' cost

Many economists believe that the U.S. tax system would be made more efficient if the basis of taxation were changed so that people paid taxes, more so than they do now, based on their

spending rather than their income

One reason that deadweight losses are so difficult to avoid is that

taxes affect the decisions that people make.

The overuse of a common resource relative to its economically efficient use is called

the Tragedy of the Commons

As tax laws become more complex,

the administrative burden of taxes will increase.

Producer surplus is

the amount a seller is paid for a good minus the seller's cost of production ****

A consumption tax is a tax on

the amount of income that people spend.

According to the Coase theorem, private parties can solve the problem of externalities if

the cost of bargaining is small.

If a sawmill creates too much noise for local residents,

the government can raise economic well-being through noise-control regulations

Efficiency is a market is achieved when

the sum of producer surplus and consumer surplus is maximized

A simultaneous increase in both demand for the tablets and the supply of tablets would imply that

the value of tablets to consumers has increased, and the cost of producing tablets has decreased

Private companies are most likely to invest in medical research if

they will produce a specific product for which they may receive a patent.

A seller's opportunity cost measures the

value of everything she must give up to produce a good

Refer to Figure 8-2. The amount of the tax on each unit of the good is

$5

Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in deciding how many hours to tutor. His producer surplus is

$64

Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

$8

Refer to Figure 9-1. In the absence of trade, the equilibrium price of coffee in Guatemala is

$90

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

****

Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are

****

Zaria and Hannah are roommates. Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Zaria pays Hannah $16 so that Zaria can smoke

A city street is

a common resource when it is congested, but it is a public good when it is not congested.

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

a transaction cost

A tax affects

buyers, sellers, and the government

Refer to Figure 7-1. Area C represents the

consumer surplus to new consumers who enter the market when the price falls from P2 to P1.****

An efficient tax system is one that imposes small

deadweight losses and administrative burdens

Refer to Figure 8-2. The imposition of the tax causes the price received by sellers to

decrease by $2

Steak and chicken are substitutes. A sharp reduction in the supply of steak would

decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken

Refer to Figure 7-1. When the price rises from P1 to P2, consumer surplus

decreases by an amount equal to B+C

The U.S. income tax

discourages saving

If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should

encourage the production of computer chips with subsidies

Dioxin emission that results from the production of paper is a good example of a negative externality because

self-interested paper producers will not consider the full cost of the dioxin pollution they create.

Refer to Figure 9-5. Consumer surplus in this market before trade is

A

Refer to Figure 7-1. When the price is P1, consumer surplus is

A+B+C

Refer to Figure 9-5. Consumer surplus in this market after trade is

A+B+C

Refer to Figure 9-5. Producer surplus plus consumer surplus in this market before trade is

A+B+C

Producer surplus plus consumer surplus in this market after trade is

A+B+C+D

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?

At the current output level, the marginal social benefit exceeds the marginal private benefit.

Refer to Figure 11-1. A member at a gym that always has space in classes and on machines is an example of the type of good represented by Box

B

Refer to Figure 8-4. The tax causes consumer surplus to decrease by the area

B+C

Refer to Figure 9-5. Producer surplus in this market before trade is

B+C

In which of the following tax systems does total tax liability increase as income increases?

Both proportional and progressive

Refer to Figure 11-1. For which two boxes is it the case that externalities arise because something of value has no price attached to it?

Box C and Box D

What is the fundamental basis for trade among nations?

Comparative advantage

All else equal, what happens to consumer surplus if the price of a good increases?

Consumer surplus decreases

Refer to Figure 8-4. The tax causes surplus to decrease by the area

D + F

in which of the following cases is the Coase theorem most likely to solve the externality?

Ed is allergic to his roommate's cat.

Import quotas and tariffs produce some common results. Which of the following is not one of those common results?

Equal revenue is always raised by the domestic government

Refer to Figure 9-1. From the figure it is apparent that

Guatemala has a comparative advantage in producing coffee, relative to the rest of the world.

Refer to Figure 9-1. From the figure is it apparent that

Guatemala will export coffee if trade is allowed

When a country allows trade and becomes an exporter of a good, which of the following is not a consequence?

The losses of domestic consumers of the good exceed the gains of domestic producers of the good.

Private goods are both

excludable and rival in consumption

negative externalities lead markets to produce

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

An example of positive analysis is studying

how market forces produce equilibrium

Private decisions about consumption of common resources and production of public goods usually lead to an

inefficient allocations of resources and external effects

Tax incidence refers to

who bears the tax burden

A cost-benefit analysis of a highway is difficult to conduct because analysts

will have difficulty estimating the value of the highway.