Econ test 2
If a buyer's willingness to pay for a new Honda is $30,000 and she is able to actually buy it for $28,000, her consumer surplus is
$2,000.
Suppose that the price of a new bicycle is $300. Sue values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike?
$200
Suppose that requiring motorcycle riders to wear helmets reduces the probability of a motorcycle fatality from 0.3 percent to 0.2 percent over the lifetime of a motorcycle rider and that the cost of a lifetime supply of helmets is $500. It is efficient for the government to require riders to wear helmets if human life is valued at
$500,000 or more
If a tax is placed on the product in this market, consumer surplus is the area
A
If free trade is allowed, consumer surplus is the area
A
If free trade is allowed, consumer surplus is the area
A + B + C + D + E + F
If there is no tax placed on the product in this market, total surplus is the area
A + B + C + D + E + F
If a tax is placed on the product in this market, total surplus is the area
A + B + C + D.
If there is no tax placed on the product in this market, consumer surplus is the area
A + B + E.
Which of the following statements is true if the government places a price ceiling on gasoline at $4.00 per gallon and the equilibrium price is $3.00 per gallon?
A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint
Which of the following statements about a tariff is true?
A tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and reduces total surplus
If a tariff is placed on this good, consumer surplus is the area
A+B
If trade is not allowed, consumer surplus is the area
A+B
If a market is efficient, then
All of the above are true
If a tax is placed on the product in this market, tax revenue paid by the buyers is the area
B
If free trade is allowed, producer surplus is the area
B + C + D.
If a tax is placed on the product in this market, tax revenue paid by the sellers is the area
C
If trade is not allowed, producer surplus is the area
C
If there is no tax placed on the product in this market, producer surplus is the are
C + D + F.
Which of the following is true regarding tradable pollution permits and corrective taxes?
Corrective taxes and tradable pollution permits create an efficient market for pollution.
If a tax is placed on the product in this market, producer surplus is the area
D
The gains from trade correspond to the area
D
The deadweight loss from the tariff is the area
D+F
Government revenue from the tariff is the area
E
If a tax is placed on the product in this market, deadweight loss is the area
E + F.
Which of the following statements about import quotas is true?
For every tariff, there is an import quota that could have generated a similar result
Which of the following is not employed as an argument in support of trade restrictions?
Free trade harms both domestic producers and domestic consumers and therefore reduces total surplus.
If a tariff is placed on this good, producer surplus is the area
G+C
Bob and Tom live in a university dorm. Bob values playing loud music at a value of $100. Tom values peace and quiet at a value of $150. Which of the following statements is true?
It is efficient for Bob to stop playing loud music regardless of who has the property right to the level of sound
Suppose each of 20 neighbors on a street values street repairs at $3,000. The cost of the street repair is $40,000. Which of the following statements is true?
It is efficient for the government to tax the residents $2,000 each and repair the road.
Which of the following statements about free trade between the United States and Canada is true?
The United States will export pencils, and Canada will export pens.
Which of the following statements about the burden of a tax is correct?
The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation
Suppose the equilibrium price for apartments is $800 per month and the government imposes rent controls of $500. Which of the following is unlikely to occur as a result of the rent controls?
The quality of apartments will improve.
Which of the following is true with regard to the burden of the tax in Exhibit?
The sellers pay a larger portion of the tax because supply is more inelastic than demand
Which of the following statements about a binding price ceiling is true?
The shortage created by the price ceiling is greater in the long run than in the short run
Bob and Tom live in a university dorm. Bob values playing loud music at a value of $100. Tom values peace and quiet at a value of $150. Which of the following statements is true about an efficient solution to this externality problem if Bob has the right to play loud music and if there are no transaction costs?
Tom will pay Bob between $100 and $150 and Bob will stop playing loud music
Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay $30 for one, buyer 2 is willing to pay $25 for one, and buyer 3 is willing to pay $20 for one. If the price is $25, how many vases will be sold and what is the value of consumer surplus in this market?
Two vases will be sold, and consumer surplus is $5.
A negative externality affects market efficiency in a manner similar to
a common resource
If the world price for a good exceeds the before-trade domestic price for a good, then that country must have
a comparative advantage in the production of the good.
A person who regularly watches public television but fails to contribute to public television's fund-raising drives is known as
a free rider
Which of the following is an example of a common resource?
a national park
When an individual buys a car in a congested urban area, it generates
a negative externality.
A negative externality generates
a social cost curve that is above the supply curve (private cost curve) for a good.
A positive externality generates
a social value curve that is above the demand curve (private value curve) for a good.
Which of the following would likely cause the greatest deadweight loss?
a tax on cruise line tickets
If free trade is allowed, a country will export a good if the world price is
above the before-trade domestic price of the good
Producer surplus is the area
above the supply curve and below the price.
Taxes on labor income tend to encourage
all of the above
Which of the following are potential solutions to the problem of air pollution?
all of the above
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should
allow the market to seek equilibrium on its own
The gas-guzzler tax that is placed on new vehicles that get very poor mileage is an example of
an attempt to internalize a negative externality.
hen wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of
an attempt to internalize a positive externality.
which of the following takes place when a tax is placed on a good?
an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold
If a market generates a side effect or externality, then free market solutions
are inefficient.
If a producer has market power (can influence the price of the product in the market) then free market solutions
are inefficient.
Consumer surplus is the area
below the demand curve and above the price.
Total surplus is the area
below the demand curve and above the supply curve.
For a price ceiling to be a binding constraint on the market, the government must set it
below the equilibrium price.
A private good is
both rival in consumption and excludable
The surplus caused by a binding price floor will be greatest if
both supply and demand are elastic.
Deadweight loss is greatest when
both supply and demand are relatively elastic.
A tax on gasoline is likely to
cause a greater deadweight loss in the long run when compared to the short run.
When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has
caused a deadweight loss
The Tragedy of the Commons is a parable that illustrates why
common resources are over consumed
Suppose the world price is below the before-trade domestic price for a good. If a country allows free trade in this good,
consumers will gain and producers will lose
Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?
costs incurred to reduce the pollution
the reduction of a tax
could increase tax revenue if the tax had been extremely high.
An increase in the price of a good along a stationary demand curve
decreases consumer surplus
Studies show that a 10 percent increase in the minimum wage
decreases teenage employment by about 1 to 3 percent.
Within the supply-and-demand model, a tax collected from the buyers of a good shifts the
demand curve downward by the size of the tax per unit.
The burden of a tax falls more heavily on the sellers in a market when
demand is elastic and supply is inelastic.
The burden of a tax falls more heavily on the buyers in a market when
demand is inelastic and supply is elastic.
When a country allows trade and exports a good,
domestic producers are better off, domestic consumers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.
Joe has ten baseball gloves and Sue has none. A baseball glove costs $50 to produce. If Joe values an additional baseball glove at $100 and Sue values a baseball glove at $40, then to maximize
efficiency, Joe should receive the glove.
For which of the following products would the burden of a tax likely fall more heavily on the sellers?
entertainment
A negative externality (that has not been internalized) causes the
equilibrium quantity to exceed the optimal quantity
If a person can be prevented from using a good, the good is said to be
excludable
A tax placed on a good that is a necessity for consumers will likely generate a tax burden that
falls more heavily on buyers
When a tax on a good starts small and is gradually increased, tax revenue will
first rise then fall
If buyers are rational and there is no market failure,
free market solutions are efficient, free market solutions maximize total surplus
Because producers are better able to organize than consumers are, we would expect there to be political pressure to create
import restrictions
if a tax on a good is doubled, the deadweight loss from the tax
increases by a factor of four.
An increase in the price of a good along a stationary supply curve
increases producer surplus.
The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a
laffer curve
Adam Smith's "invisible hand" concept suggests that a competitive market outcome
maximizes total surplus
Which of the following is an example of a public good?
national defense
A public good is
neither rival in consumption nor excludable.
A club good is
not rival in consumption but excludable.
A positive externality (that has not been internalized) causes the
optimal quantity to exceed the equilibrium quantity
A tax of $1.00 per gallon on gasoline
places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive.
A congested toll road is
private good
A positive externality affects market efficiency in a manner similar to a
public good
A free rider is a person who
receives the benefit of a good but avoids paying for it.
When governments employ cost-benefit analysis to help them decide whether to provide a public good, measuring benefits is difficult because
respondents to questionnaires have little incentive to tell the truth.
If one person's consumption of a good diminishes other people's use of the good, the good is said to be
rival in consumption
A common resource is
rival in consumption but not excludable.
Tradable pollution permits
set the quantity of pollution
A price floor
sets a legal minimum on the price at which a good can be sold.
A corrective tax on pollution
sets the price of pollution
A binding price ceiling creates
shortage
Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a
small deadweight loss and the burden of the tax would fall on the seller of diamonds
To internalize a positive externality, an appropriate public policy response would be to
subsidize the good.
Within the supply-and-demand model, a tax collected from the sellers of a good shifts the
supply curve upward by the size of the tax per unit.
To internalize a negative externality, an appropriate public policy response would be to
tax the good
A buyer's willingness to pay is
that buyer's maximum amount he is willing to pay for a good
When markets fail to allocate resources efficiently, the ultimate source of the problem is usually
that property rights have not been well established
Medical care clearly enhances people's lives. Therefore, we should consume medical care until
the benefit buyers place on medical care is equal to the cost of producing it
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then
the cost of production on the last unit produced exceeds the value placed on it by buyers.
Public goods are difficult for a private market to provide due to
the free-rider problem
When politicians argue that outsourcing or offshoring of technical support to India by Dell Computer Corporation is harmful to the U.S. economy, they are employing which of the following arguments for restricting trade?
the jobs argument
The seller's cost of production is
the minimum amount the seller is willing to accept for a good.
Which of the following is an example of a price floor?
the minimum wage
The most efficient pollution control system would ensure that
the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount
Which side of the market is more likely to lobby government for a price floor?
the sellers
When a tax is collected from the buyers in a market,
the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers
An externality is
the uncompensated impact of one person's actions on the well-being of a bystander
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then
the value placed on the last unit of production by buyers exceeds the cost of production.
According to the Coase theorem, private parties can solve the problem of externalities if
there are no transaction costs.
The government engages in an industrial policy
to internalize the positive externality associated with technology-enhancing industries.
Suppose an industry emits a negative externality such as pollution, and the possible methods to internalize the externality are command-and-control policies, corrective taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would likely rank them in the following order (from most favored to least favored):
tradable pollution permits, corrective taxes, command-and-control policies.
