Exam 2 (practice problems)

b. Q2.

Refer to Figure 10-4. If all external costs were internalized, then the market's equilibrium output would be a. Q1. b. Q2. c. Q3. d. Q4.

c. Q3

Refer to Figure 10-4. Without government intervention, the equilibrium quantity would be a. Q1. b. Q2. c. Q3. d. Q4.

c. $300.

Refer to Figure 7-12. At the equilibrium price, consumer surplus is a. $150. b. $200. c. $300. d. $500

d. $500

Refer to Figure 7-12. If the government imposes a price ceiling of $120 in this market, then total surplus will be a. $0. b. $125. c. $375. d. $500.

a. total surplus would decrease.

Refer to Figure 7-18. If the government mandated a price increase from P1 to a higher price, then a. total surplus would decrease. b. consumer surplus would increase. c. total surplus would increase, since producer surplus would increase. d. total surplus would remain unchanged.

a. export 11 units of wool

Refer to Figure 9-1. With trade, New Zealand will a. export 11 units of wool. b. export 5 units of wool. c. import 15 units of wool. d. import 6 units of wool.

a. $24.

Refer to Figure 9-17. The deadweight loss caused by the tariff is a. $24. b. $72. c. $96. d. $150.

d. $607.50.

Refer to Figure 9-5. With trade, consumer surplus is a. $245. b. $362.50. c. $367.50. d. $607.50.

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. Quantity Private Value Private Cost External Cost 1 14 10 2 2 13 11 2 3 12 12 2 4 11 13 2 5 10 14 2 6 9 15 2 7 8 16 2 Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome? a. 2 b. 3 c. 9 d. 10

a. 2

As price elasticity of supply increases, the supply curve a. becomes flatter. b. becomes steeper. c. becomes downward sloping. d. shifts to the right.

a. becomes flatter.

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will a. give sellers the incentive to account for the external effects of their actions. b. increase demand. c. increase the amount of the commodity exchanged in market equilibrium. d. restrict the producers' ability to take the costs of the externality into account when deciding how much to supply.

a. give sellers the incentive to account for the external effects of their actions.

To increase safety at a bad intersection, you must decide whether to install a traffic light in your hometown at a cost of $15,000. If the traffic light reduces the risk of fatality by 0.4 percent, and the value of a human life is estimated to be $10 million, you should a. install the light because the expected benefit of $40,000 is greater than the cost. b. install the light because the expected benefit of $20,000 is greater than the cost. c. not install the light because the expected benefit of $15,000 is only equal to the cost. d. not install the light because the expected benefit of $4,000 is less than the cost.

a. install the light because the expected benefit of $40,000 is greater than the cost.

Goods with many close substitutes tend to have a. more elastic demands. b. less elastic demands. c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative.

a. more elastic demands

If a price floor is not binding, then a. the equilibrium price is above the price floor. b. the equilibrium price is below the price floor. c. it has no legal enforcement mechanism. d. More than one of the above is correct.

a. the equilibrium price is above the price floor

A $2.00 tax levied on the sellers of mailboxes will shift the supply curve a. upward by exactly $2.00. b. upward by less than $2.00. c. downward by exactly $2.00. d. downward by less than $2.00.

a. upward by exactly $2.00

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. Quantity Private Value Private Cost External Cost 1 14 10 2 2 13 11 2 3 12 12 2 4 11 13 2 5 10 14 2 6 9 15 2 7 8 16 2 Refer to Table 10-1. What is the socially-optimal quantity of output in this market? a. 1 unit b. 2 units c. 3 units d. 4 units

b. 2 units

Table 10-2 The following table shows the private value, private cost, and social value for a market with a positive externality. Quantity Private Value Private Cost Social Value 1 27 6 34 2 24 10 31 3 21 14 28 4 18 18 25 5 15 22 22 6 12 26 19 Refer to Table 10-2. What is the equilibrium quantity of output in this market? a. 3 units b. 4 units c. 5 units d. 6 units

b. 4 units

If a consumer places a value of $15 on a particular good and if the price of the good is $17, then a. consumer has consumer surplus of $2 if he or she buys the good. b. consumer does not purchase the good. c. market is not a competitive market. d. price of the good will fall due to market forces.

b. consumer does not purchase the good

Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue, he should a. increase the price of his jewelry boxes. b. decrease the price of his jewelry boxes. c. not change the price of his jewelry boxes. d. None of the above answers is correct.

b. decrease the price of his jewelry boxes

When a good is taxed, the burden of the tax a. falls more heavily on the side of the market that is more elastic. b. falls more heavily on the side of the market that is more inelastic. c. falls more heavily on the side of the market that is closer to unit elastic. d. is distributed independently of relative elasticities of supply and demand.

b. falls more heavily on the side of the market that is more inelastic

The government provides public goods because a. private markets are incapable of producing these types of goods. b. free-riders make it difficult for private markets to supply the socially optimal quantity. c. markets are always better off with some government oversight. d. external benefits will accrue to private producers.

b. free-riders make it difficult for private markets to supply the socially optimal quantity.

"Owners of firms in young industries should be willing to incur temporary losses if they believe that those firms will be profitable in the long run." This observation helps to explain why many economists are skeptical about the a. national-security argument. b. infant-industry argument. c. unfair-competition argument. d. jobs argument.

b. infant-industry argument.

The imposition of a binding price floor on a market causes quantity demanded to be a. greater than quantity supplied. b. less than quantity supplied. c. equal to quantity supplied. d. Both (a) and (b) are possible.

b. less than quantity supplied.

For a good that is a luxury, demand a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way.

b. tends to be elastic

The maximum price that a buyer will pay for a good is called the a. cost. b. willingness to pay. c. equity. d. efficiency.

b. willingness to pay

Table 10-2 The following table shows the private value, private cost, and social value for a market with a positive externality. Quantity Private Value Private Cost Social Value 1 27 6 34 2 24 10 31 3 21 14 28 4 18 18 25 5 15 22 22 6 12 26 19 Refer to Table 10-2. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output? a. $3 b. $5 c. $7 d. $9

c. $7

If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price elasticity of demand is a. 0.75. b. 1.25. c. 1.33. d. 1.60.

c. 1.33

If the price elasticity of supply is 1.5, and a price increase led to a 3% increase in quantity supplied, then the price increase amounted to a. 0.2%. b. 0.5%. c. 2%. d. 4.5%.

c. 2%

Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c. The after-tax equilibrium quantity is less than the socially optimal quantity.

A shortage results when a. a nonbinding price ceiling is imposed on a market. b. a nonbinding price ceiling is removed from a market. c. a binding price ceiling is imposed on a market. d. a binding price ceiling is removed from a market.

c. a binding price ceiling is imposed on a market.

Patterns of trade among nations are primarily determined by a. cultural considerations. b. political considerations. c. comparative advantage. d. differences in the income elasticity of demand among nations.

c. comparative advantage.

The supply curve for a product reflects the a. willingness to pay of the marginal buyer. b. quantity buyers will ultimately purchase of the product. c. cost to sellers of producing the product. d. seller's profit from producing the product.

c. cost to sellers of producing the product

A $2.00 tax levied on the buyers of lawnmowers will shift the demand curve a. upward by exactly $2.00. b. upward by less than $2.00. c. downward by exactly $2.00. d. downward by less than $2.00.

c. downward by exactly $2.00.

Demand is said to have unit elasticity if elasticity is a. less than 1. b. greater than 1. c. equal to 1. d. equal to 0.

c. equal to 1

Tom is a non-union employee at General Power. The majority of the employees at General Power are unionized. The union at General Power has negotiated very good benefits. Even though he is not a union member and he does not have to pay union dues, Tom receives all the benefits that the union has negotiated. Tom's behavior is an example of a. rivalry. b. a barrier to entry. c. free riding. d. Taft-Hartley opposition.

c. free riding

If the government levies a $500 tax per car on sellers of cars, then the price paid by buyers of cars would a. increase by more than $500. b. increase by exactly $500. c. increase by less than $500. d. decrease by an indeterminate amount.

c. increase by less than $500

Which of the following policies is the government most inclined to use when faced with a positive externality? a. taxation b. permits c. subsidies d. usage fees

c. subsidies

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then a. the demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20. b. the demand curve will shift upward by $20, and the price paid by buyers will decrease by $20. c. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20. d. the supply curve will shift downward by $20, and the effective price received by sellers will increase by $20.

c. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.

Trade enhances the economic well-being of a nation in the sense that a. both domestic producers and domestic consumers of a good become better off with trade, regardless of whether the nation imports or exports the good in question. b. the gains of domestic producers of a good exceed the losses of domestic consumers of a good, regardless of whether the nation imports or exports the good in question. c. trade results in an increase in total surplus. d. trade puts downward pressure on the prices of all goods.

c. trade results in an increase in total surplus.

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase revenue? a. 0 b. 0.2 c. 1 d. 2.1

d. 2.1

If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded.

d. 40 percent decrease in the quantity demanded

The following table represents the costs of five possible sellers. Seller Cost Abby $1,500 Bobby $1,200 Carlos $1,000 Dianne $750 Evalina $500 Refer to Table 7-6. If the price is $775, who would be willing to supply the product? a. Abby and Bobby b. Abby, Bobby, and Carlos c. Carlos, Dianne, and Evalina d. Dianne and Evalina

d. Dianne and Evalina

Altering incentives so that people take account of the external effects of their actions a. is called internalizing the externality. b. can be done by imposing a corrective tax. c. is the role of government in markets with externalities. d. all of the above.

d. all of the above

In the long run, the quantity supplied of most goods a. will increase in almost all cases, regardless of what happens to price. b. cannot respond at all to a change in price. c. can respond to a change in price, but the change is almost always inconsequential. d. can respond substantially to a change in price.

d. can respond substantially to a change in price.

The nation of Pineland forbids international trade. In Pineland, you can buy 1 pound of fish for 2 pounds of beef. In other countries, you can buy 1 pound of fish for 1.5 pounds of beef. These facts indicate that a. Pineland has a comparative advantage, relative to other countries, in producing fish. b. other countries have a comparative advantage, relative to Pineland, in producing beef. c. the price of beef in Pineland exceeds the world price of beef. d. if Pineland were to allow trade, it would import fish.

d. if Pineland were to allow trade, it would import fish.

If the use of a common resource is not regulated, a. no one can enjoy it. b. it will tend to be underused. c. property rights will be clearly defined. d. it will be overused.

d. it will be overused.

Both public goods and common resources are a. rival in consumption. b. nonrival in consumption. c. excludable. d. nonexcludable.

d. nonexcludable

When a tax is levied on a good, the buyers and sellers of the good share the burden, a. provided the tax is levied on the sellers. b. provided the tax is levied on the buyers. c. provided a portion of the tax is levied on the buyers, with the remaining portion levied on the sellers. d. regardless of how the tax is levied.

d. regardless of how the tax is levied.