Econ Review #2

Bert is willing to pay $50 for a jacket that is on sale for $39. If Bert buys the jacket, his consumer surplus will be:

$11.

The efficient quantity in the market represented by the graph occurs when the marginal benefit of the last unit is equal to:

$3 and the marginal cost of the last unit is also equal to $3.

The efficient level of output in the market represented by the graph occurs at quantity:

10, where MB = MC.

If the price-elasticity of demand and the price-elasticity of supply coefficients for soda are both equal to 0.67, consumers will bear ____% of a per-unit tax imposed on soda.

50

Which of the following is the best example of a public good?

A fireworks display

Which of the following is not an example of government response to a market failure?

A privately-owned business that does not allow smoking

Asymmetric Information

Choices may be inefficient if based on incomplete or inaccurate information.

Providing legal framework

Government assigns and protects property rights and enforces contracts.

Redistributing income

Government attempts to achieve an equitable or fair outcome.

Promoting macroeconomic goals

Government attempts to maintain full employment and stable prices in a growing economy.

Regulating business

Government prohibits anticompetitive practices such as price-fixing.

Providing public goods

Government provides goods that the free market does not efficiently provide due to the free-rider problem.

Correcting externalities

Government taxes or regulates activities that lead to spillover costs and subsidizes or provides services that lead to spillover benefits.

All of the following are functions of government in the U.S. except:

Promoting a perfectly equal distribution of income

Imperfect competition

Sellers are able to earn higher profits by restricting output and raising product prices when they have market power.

Which of the following statements best illustrates the existence of consumer surplus?

Stan saved $50 to buy a cowboy hat he had been wanting. When he got to the store, the hat was on sale and he bought the hat for only $39 instead of $50.

Which of the following is a likely government response to a positive externality?

Subsidizing the consumption of the good in an attempt to take advantage of the benefits that spillover to society

Which of the following is a government solution to a positive externality?

The county uses tax revenue to fund public schools

Public Goods

The free market cannot efficiently provide goods that are non-excludable due to the free-rider problem.

Externalities

The free market equilibrium output is above or below the socially efficient level of output when there are spillover costs or benefits.

The tendency to use common resources more than is desirable from society's point of view is called the:

Tragedy of the Commons.

It is efficient to continue an activity as long as the marginal benefit exceeds the marginal cost.

True

Under which of the following scenarios would a park exhibit the characteristics of a pure public good?

Visitors can enter the park free of charge and the park is never crowded

Ceteris paribus, a decrease in the demand for soda leads to:

a decrease in the price of soda and a decrease in producer surplus.

Of the following, the best example of a public good is:

a fireworks display because many people can watch the display at the same time and it is difficult to prevent people who do not pay from enjoying the fireworks.

All of the following are true regarding an effective (binding) price floor for a good except:

a shortage of the good is likely to occur.

Ceteris paribus, when supply decreases, there is:

an increase in price and a decrease in consumer surplus.

Producer surplus occurs when:

an output sells for a price that is higher than its marginal cost to the seller.

A binding price ceiling is set:

below the equilibrium price and leads to a market shortage.

The economic burden (economic incidence) of a tax is borne by:

buyers if demand is highly inelastic and supply is elastic.

Negative externalities occur when:

costs associated with an activity are borne by a third party.

When output sells for a price that is higher than its marginal cost to the seller (the minimum price the seller is willing to accept), the seller:

enjoys a producer surplus.

Ceteris paribus, the more elastic the demand for a taxed commodity, the _ it is for sellers to shift the economic burden of the tax to consumers by _ the product price.

harder; raising

The economic burden of a tax:

is partially shifted to consumers through higher prices in most cases.

Buyers enjoy consumer surplus when the market price is _ than the highest price buyers would pay; sellers enjoy producer surplus when the market price is _ than the lowest price sellers would accept.

lower; higher

Assuming no market failures, an efficient level of an output exists when:

marginal benefit is equal to marginal cost.

Positive externalities occur when:

market activity creates benefits that spill over to third parties.

When some of the costs of a good spill over to a third party, a _ externality exists and the good tends to be ___ by private markets.

negative; overproduced.

Because a pure public good is:

nonexcludable, it is possible for some consumers to be free riders.

From society's perspective, outputs that generate negative externalities tend to be:

overproduced by private markets.

Products that generate negative externalities tend to be:

overproduced by private markets.

All of the following are possible sources of inefficiency except: taxes price ceilings negative externalities perfect competition

perfect competition.

If a positive externality is generated by the consumption of Product X, the free market will:

produce less than the efficient quantity of Product X.

Assuming no externalities exist, an output that is rival and excludable is likely to be:

produced in an efficient amount by private markets.

According to the Coase Theorem, private negotiation to correct for negative externalities is likely to produce an efficient outcome only if:

property rights are clearly defined and transaction costs are low.

According to the Coase Theorem, an efficient outcome can be achieved without any need for active government involvement as long as:

property rights are clearly defined and transaction costs are sufficiently low.

The purpose of a price floor is to:

protect sellers from low prices.

A marginal cost curve can be interpreted as a:

supply curve.

The free-rider problem occurs when:

the benefits associated with pure public goods cannot be denied to those who do not pay for them.

Ceteris paribus, if the marginal benefit of bananas decreases as the quantity of bananas consumed increases, then:

the demand curve for bananas will slope downward.

If the price of a cup of coffee is $2.40 in the absence of any tax, and a per-unit tax of $0.80 per cup is imposed as shown in the graph, then (ceteris paribus):

the economic burden of this tax is equally divided between buyers and sellers.

Many consumers may watch public TV and listen to public radio who do not contribute to fund-raising drives to help finance these organizations. This is an example of:

the free rider problem.

All of the following are true regarding an effective (binding) price ceiling for a good except:

the quantity bought and sold increases because the price has decreased.

The Tragedy of the Commons refers to:

the tendency to use common resources more than is desirable from society's point of view.

Products that generate positive externalities tend to be:

underproduced by private markets.

The statutory incidence (burden) of a tax refers to:

which party has the legal obligation to send the tax dollars to the government.