Micro testbank ch 18

B

10) Given the information in Figure 18.1, the competitive output in the corbomite industry is: A) Q0. B) Q1. C) Q2. D) any level as long as price is P0.

3) If a firm had a fixed proportions technology, then the pollution produced by this firm A) cannot be reduced. B) can be reduced only by lowering the level of output (holding technology constant). C) can be reduced by changing how the output is produced within the bounds of the existing technology. D) can be reduced only by increasing the number of firms in the industry. E) can be reduced only by changing the technology.

Answer: B

25) Having a refundable deposit for recyclable material A) raises the marginal private cost of disposal. B) raises the marginal social cost of disposal. C) lowers the marginal private cost of disposal. D) lowers the marginal social cost of disposal. E) does not affect disposal costs.

Answer: A

1) Use the following statements to answer this question: I. The efficient amount of recycling of scrap materials is the amount that equates the marginal social cost of scrap disposal to the marginal cost of recycling. II. The efficient amount of recycling of scrap materials occurs when society recycles all recyclable wastes. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Answer: B

18) A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plasticis, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward? A) Optimal price and quantity decrease B) Optimal price increases, optimal quantity remains unchanged C) Optimal price increases, optimal quantity decreases D) Optimal price and quantity decline

Answer: C

The demand for injections to immunize against a disease is given as: P = 13 0.0005Q, where P = price in dollars, and Q = quantity measured as number of shots per month. The marginal social benefit function has the same vertical intercept as the demand curve and one half the slope (one half in absolute value). The marginal cost of injections is a constant $8. a. With a competitive market, what price and quantity will prevail, assuming that there is no government intervention? b. Explain why the demand curve and marginal social benefit functions are different in this case. What is the socially optimal quantity in the market? c. What government policies could be used to bring about the optimal outcome?

a. Under competition P = MC 13 - 0.0005Q = 8 -0.0005Q = -5 Q = 10,000 P = $8 b. MSB differs from demand because there are benefits accruing to individuals other than the person immunized. MSB has the same intercept and one half the slope. MSB = 13 - 0.00025Q Optimality requires that MSB equal MC. 13 - 0.00025Q = 8 -0.00025Q = -5 Q = 20,000 c. In the case of external benefits, the appropriate government strategy is a subsidy

1) Externalities A) are not reflected in market prices, so they can be a source of economic inefficiency. B) do become reflected in market prices, so they can be a source of economic inefficiency. C) are not reflected in market prices, so they do not adversely affect economic efficiency. D) do become reflected in market prices, so they do not adversely affect economic efficiency. E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

Answer: A

10) To enforce the optimum level of emissions, a government could set an emissions fee, which would be A) the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted. B) the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted above the standard. C) the vertical intercept of the MSB curve. D) the vertical intercept of the MCA curve. E) the vertical distance between the intercepts of the MSB curve and the MCA curve.

Answer: A

9) To enforce the optimum level of emissions a government could set an emissions standard at the quantity A) where the MSB curve crosses the MCA curve. B) located at the vertical intercept of the MSB curve. C) located at the horizontal intercept of the MSB curve. D) located at the vertical intercept of the MCA curve. E) located at the horizontal intercept of the MCA curve.

Answer: A

7) As you move rightward on a marginal cost of abatement curve, emissions are A) falling, and the cost of eliminating the marginal unit falls. B) rising, and the cost of eliminating the marginal unit falls. C) falling, and the cost of eliminating the marginal unit rises. D) rising, and the cost of eliminating the marginal unit rises. E) rising, and the cost of eliminating the marginal unit is constant.

Answer: B

11) Given the information in Figure 18.1, the efficient output in the corbomite industry is: A) 0. B) Q0. C) Q1. D) Q2.

Answer: D

15) A positive externality is shown by a marginal social benefit (MSB) curve that is A) above and to the right of the demand curve for the good that generates it. B) below and to the left of the demand curve for the good that generates it. C) above and to the left of the supply curve for the good that generates it. D) below and to the right of the supply curve for the good that generates it. E) positively related to both the supply curve and the demand curve for the good that generates it.

Answer: A

23) If households could be charged differently for different types of garbage, A) the total amount of garbage would be reduced. B) recycling would be more difficult. C) costs of collecting garbage could be kept much lower. D) billing for garbage collection would be much easier. E) there would be a change in the types of items that are disposed of as garbage.

v

16) Under a transferable emissions permit system, A) the firms with the lowest marginal abatement cost curves will reduce emissions most. B) the firms with the highest marginal abatement cost curves will reduce emissions most. C) the firms with the lowest marginal social cost curves will reduce emissions most. D) the firms with the highest marginal social cost curves will reduce emissions most. E) all firms will reduce emissions equally.

Answer: A

2) Use the following statements to answer this question. I. The bubble concept allows an emitter to sum emission limits for all sources of pollutants within a particular firm, and to set emissions reductions from each source as it pleases as long as the total pollutant limit at the plant is not exceeded. II. Under an emissions offsets program, a new source of emissions can locate in a region only if their new emissions are accompanied by reduced emissions from existing sources by at least as much. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Answer: A

20) When new technologies make cleaner production possible, A) emissions would fall under a system of fees, but would not fall under a system of transferable emissions permits unless the government bought back some of the permits. B) emissions would fall under a system of permits, but would not fall under a system of fees unless the government raised them. C) the price of transferable permits would rise. D) the quantity of transferable permits would rise. E) the quantity of transferable permits would fall.

Answer: A

15) In equilibrium, the price of a transferable emissions permit A) is constrained to the amount the government first charged for it. B) equals the marginal cost of abatement for all firms. C) equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms. D) equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms. E) equals the marginal social cost of emissions.

Answer: B

22) If households pay a fixed annual fee for trash disposal, A) households will all tend to produce the same amount of garbage. B) households have no incentive to cut back on the amount of garbage they generate. C) that fee will provide households with an incentive to cut back on the amount of garbage they generate. D) that fee will discourage households from throwing out reusable materials. E) that fee will discourage households from throwing out toxic or otherwise harmful materials.

Answer: B

5) Because trucking as an industry involves the generation of pollutants in engine exhaust, A) the supply curve of trucking services overstates the true cost of providing those services. B) the supply curve of trucking services understates the true cost of providing those services. C) the demand curve for trucking services overstates the true benefit of providing those services. D) the demand curve for trucking services understates the true benefit of providing those services. E) the market for trucking services will always be away from equilibrium by an amount equal to the value of the externality.

Answer: B

6) Because air cargo as an industry involves the generation of pollutants in engine exhaust, the equilibrium price of air cargo services A) is above the optimal level, and quantity is below the optimal level. B) is below the optimal level, and quantity is above the optimal level. C) and quantity of trucking services are both above the optimal level. D) and quantity of trucking services are both below the optimal level. E) must fall in order for the market to reach equilibrium.

Answer: B

6) When emissions are measured on the horizontal axis, the marginal cost of abating emissions is A) downward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. B) downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. C) upward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. D) upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. E) horizontal because the technology to remove emissions is assumed constant.

Answer: B

8) Which of the following is a negative externality connected to automobile transportation? A) Driving faster than the 65 mph speed limit is not allowed, even though individuals are able to do it, and many want to. B) In an accident, a person who chooses not to wear a seatbelt becomes an object moving around the inside of the car, possibly hitting other, belted-in, passengers with lethal force. C) Gasoline is taxed on a per-gallon basis. D) Gasoline is imported, and thus increases the trade deficit. E) While stuck in traffic, you have a chance to listen to your favorite CD, which you haven't had the time to do in other places.

Answer: B

11) If the MSB/MCA graph indicates that an emissions fee of $10 per unit would lead to the optimum level of emissions, but the government set a fee of $5 per unit, emissions would A) not be reduced at all. B) not occur at all. C) be above the optimum level, but curtailed somewhat from what they would have been with no fee at all. D) be above the optimum level by 50%. E) be below the optimum level by 50%.

Answer: C

13) Which is NOT an advantage of emissions fees over standards? A) Fees can give a firm the incentive to reduce emissions below the standard when new technology allows. B) Fees can reduce the cost of attaining some goal level of emissions when firms all have the same abatement costs. C) Fees can reduce the cost of attaining some goal level of emissions when firms have different abatement costs and different standards can be assigned to different firms. D) Fees can reduce the cost of attaining some goal level of emissions when firms have different abatement costs and different standards cannot be assigned to different firms. E) Fees may provide an incentive for a firm to investigate emissions-reduction technology that will reduce emissions below existing standards.

Answer: C

14) If error in setting the policy is possible, A) a standard generates smaller welfare losses than a fee when the MSC and MCA are both relatively flat. B) a standard generates smaller welfare losses than a fee when the MSC and MCA are both relatively steep. C) a standard generates smaller welfare losses than a fee when the MSC is relatively steep and the MCA is relatively flat. D) a standard generates smaller welfare losses than a fee when the MSC is relatively flat and the MCA is relatively steep. E) errors in standards and fees have equal welfare losses, so long as the errors are the same in percentage terms.

Answer: C

16) Loud music from a neighbor's party is A) a negative externality whether or not you like it. B) a positive externality whether or not you like it. C) a positive externality if you like the music, and a negative externality if you don't. D) a negative externality if you like the music, and a positive externality if you don't. E) not an externality.

Answer: C

17) A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics and the marginal external cost of the pollutants are both constant with respect to the quantity of plastics produced. If the demand for plastics is downward sloping, what happens to the socially optimal level of output and market price if the demand curve for plastics shifts rightward? A) Optimal price and quantity increase B) Optimal price increases, optimal quantity remains unchanged C) Optimal price remains unchanged, optimal quantity increases D) Optimal price and quantity remain unchanged

Answer: C

19) Transferable permits allow emission reduction to be achieved A) without any impact on the industrial sector, just as a standard would. B) without any impact on the industrial sector, just as fees would. C) at the lowest possible cost. D) with firms monitoring each other, rather than having the government do the monitoring. E) Both C and D are true.

Answer: C

2) Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, A) the marginal social cost curve is above and to the right of the demand curve. B) the marginal social cost curve is below and to the left of the demand curve. C) the marginal social cost curve is above and to the left of the supply curve. D) the marginal social cost curve is below and to the right of the supply curve. E) there is a gap between quantity supplied and quantity demanded in equilibrium.

Answer: C

24) The efficient level of recycling equates the A) marginal cost of scrap disposal to the marginal benefit from not using virgin materials. B) marginal cost of recycling to the marginal benefit from not using virgin materials. C) marginal cost of scrap disposal to the marginal cost of recycling. D) marginal private cost of disposal to the marginal cost of recycling. E) per-unit refund from recycled materials to the marginal benefit from not using virgin materials.

Answer: C

3) Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price A) and output are too low to be optimal. B) and output are too high to be optimal. C) is too low to be optimal, and equilibrium quantity is too high. D) is too high to be optimal, and equilibrium quantity is too low. E) is optimal, but there is an excess supply.

Answer: C

7) The presence of pollution in the trucking industry leads in the long run to dynamic inefficiencies because A) marginal external cost rises over time. B) marginal external cost is constant over time. C) average private cost in trucking is lower than average social cost, so that some trucking firms remain in the industry (or are induced to enter) when efficiency calls for them to leave (or stay out). D) average private cost in trucking is higher than average social cost, so that some firms trucking firms exit the industry when efficiency calls for them to stay (or for more firms to enter). E) fewer resources are devoted to transportation than the economy really needs.

Answer: C

9) The marginal benefit and marginal private cost curves for aphrodisiacs are given as follows: MB = 200 - Q MPC = Q In addition to private costs, there is a marginal external cost of $10 per unit of output. What is the efficient level of output? A) 0 B) 55 C) 95 D) 100 E) none of the above

Answer: C

12) A firm will avoid producing additional emissions whenever the fee is A) less than the MSB. B) greater than the MSB. C) less than the MCA. D) greater than the MCA. E) equal to the distance between MSB and MCA.

Answer: D

12) Which of the following is a negative externality connected to attending college? A) The fact that completion of a college degree acts as a signaling mechanism to employers. B) The fact that other costs, such as books and materials, are incurred in addition to tuition and fees. C) The fact that your college has required that all individuals living in student housing either get or show they have already obtained vaccinations against all communicable diseases. D) The fact that the people in the next room play loud music at hours you want to sleep. E) The fact that you will get benefits from college that you don't currently anticipate.

Answer: D

13) Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D A) is above the optimal level, and quantity is below the optimal level. B) is below the optimal level, and quantity is above the optimal level. C) and quantity of R&D are both above the optimal level. D) and quantity of R&D are both below the optimal level. E) must fall in order for the market to reach equilibrium.

Answer: D

14) Due to externalities generated by home landscaping, its price A) is above the optimal level, and quantity that is below the optimal level. B) is below the optimal level, and quantity that is above the optimal level. C) and quantity traded are both above the optimal level. D) and quantity traded are both below the optimal level. E) must fall in order for the market to reach equilibrium.

Answer: D

18) If X transferable emissions permits are issued and there are n potential polluters, A) the government must initially assign each of the potential polluters X/n permits. B) the government must assign X/n permits to each potential polluter and check periodically that those permits have not moved. C) emissions will be the same whether or not the permits are split equally, so long as none of the permits are issued outside the group. D) emissions will be the same no matter who receives them first, so long as the recipient is willing and able to participate in the permit market. E) emissions will be less if the permits are given initially to firms with lower abatement costs.

Answer: D

4) The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because A) people will buy fewer clothes that need dry cleaning than they otherwise would have. B) people will develop substitutes for dry cleaning that are wasteful. C) firms will be induced to leave the industry because of artificially high costs. D) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price. E) firms whose average private cost exceeds the price will exit (or fail to enter) the dry cleaning industry even though their average social cost is less than price.

Answer: D

5) Given that MEC(q) = 2q2, what can be inferred about the total cost of pollution as output increases? A) The total cost of pollution is increasing. B) The total cost of pollution is positive. C) The total cost of pollution is growing at a positive rate. D) The total cost of pollution is growing at an increasing rate. E) The total cost of pollution is changing.

Answer: D

17) Under a transferable emissions permit system with n possible polluters, the government enforces the total amount of emissions allowable at X units by A) setting a different fee for each firm so that each firm chooses to emit X/n units. B) setting the same fee for each firm so that each is forced to emit X/n units. C) setting a different standard for each firm, with X/n being the average. D) setting the same standard for each firm at X/n. E) issuing X permits.

Answer: E

4) The optimum level of pollution emissions A) is zero. B) occurs where the marginal external benefit is zero. C) occurs where no damage to the environment is being done. D) occurs where the marginal external benefit equals the marginal external cost. E) occurs where the marginal external cost equals the marginal cost of abatement.

Answer: E

8) Left alone, with no government interference, a profit-maximizing firm will produce emissions A) where the MSB curve crosses the MCA curve. B) at the vertical intercept of the MSB curve. C) at the horizontal intercept of the MSB curve. D) at the vertical intercept of the MCA curve. E) at the horizontal intercept of the MCA curve.

Answer: E

21) When a man invests in controlling weeds and trash that tend to accumulate in his yard, both he and his neighbors benefit from his action. Is an externality associated with his private decision? If so, explain its effect, and determine whether the efficient level of weed control occurs when the individual invests in weed control.

Answer: When a man invests in weed and trash control and his neighbors benefit, but do not contribute to the effort, then too little investment will be made. The level of investment (weed and trash control) will be determined where his demand (marginal private benefit curve) intersects his marginal cost of control curve. Call this level of control q1. Since others benefit, there is a positive externality which means that the efficient level of weed and trash control q2 is above the actual level.

23) The food processing industry involves the canning of fruit products, among other things, and the canning process produces canned goods and waste products. The manufacturer of one kind of fruit product produces an external cost for third parties. This external cost is expressed as: MEC = 0.00005Q, where MEC represents marginal external cost (dollars/unit), and Q represents cases produced per week. The marginal cost of production (supply), ignoring MEC, at the industry level is: MC = 2 + 0.000175Q. The industry demand for the product is: P = 10 - 0.00025Q, where price P is in dollars per unit. a. Determine the output rate and price that would be established by profit maximizing firms. b. Determine the efficient output rate and price. c. Determine the cost to society of firms producing at the profit maximizing rate rather than at the efficient output rate.

The profit maximizing production rate is based on demand and the industry's marginal cost of production, ignoring MEC. Thus we equate MC with demand to get Q: MC = demand 2 + 0.000175Q = 10 - 0.00025Q Q = (10 - 2)/0.000425 = 18,824 cases per week The selling price is: P = 10 - 0.00025(18,824) = $5.294 per case. b. The efficient output rate is based on the social costs and demand. MSC = MC + MEC = 2 + 0.000175Q + 0.00005Q = 2 + 0.000225Q MSC = demand 2 + 0.000225Q = 10 - 0.00025Q Q = (10 - 2)/0.000475 = 16,842 cases per week The selling price is: P = 10 - 0.00025(16,842) = $5.79 per case. c. The social cost of not producing at the efficient market rate is the area between MSC and demand between Q of 16,842 and 18,824. The average height, Havg, is: Height at Q = 18,824 = H1 = -8 + 0.000475(18,824) = 0.9414 Height at Q = 16,842 = H2 = -8 + 0.000475(16,842) = 0.0000 Havg = (H1 + H2)/2 = (0.9414 + 0)/2 = 933.52 Thus, the social loss is $933.52 per week.

19) The market for paper in a particular region has the supply and demand curves: QD = 160,000 - 2,000P QS = 40,000 + 2,000P, where Q is measured in hundred-pound lots, and P is price per hundred-pound lot. There is currently no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost associated with the paper production is given by the expression: MEC = 0.0002Q. a. Calculate the competitive price and output, assuming that no attempt is made to monitor or regulate the dumping of effluent. b. Determine the socially optimal levels for price and output. If your answers in (a) and (b) are different, explain the source of the difference. c. Sketch a diagram showing the costs or benefits to society of allowing the market to operate in an unregulated fashion.

a. Solve for P in the demand and supply equations P = 80 - 0.0005QD P = 20 + 0.0005QS Equate demand and supply 80 - 0.0005Q = 20 + 0.0005Q 60 = 0.001Q Q = 60,000 P = 20 + 0.0005(60,000) P = 20 + 30 P = 50 b. Socially optimal level is where demand intersects MSC MSC = MC + MEC MC is equal to supply MSC = (20 + 0.0005Q) + 0.0002Q MSC = 20 + 0.0007Q Equate demand to MSC 80 - 0.0005Q = 20 + 0.0007Q 60 = 0.0012Q Q = 50,000 P = 20 + 0.0005(50,000) P = 55 Optimal price is $55, quantity is 50,000. The difference between competitive outcome and the socially optimal outcome occurs because the private market is not capturing all of the costs. c. To determine social loss, sketch the free market outcome. The free market outcome (point C) must be compared to the socially optimal outcome at point A. ABC is the loss to society. It represents the difference between MSC and demand for the units of output between 50,000 (optimal output) and 60,000 (competitive output).

20) When peach canners process fresh peaches, they produce three products. The first, canned peaches, is sold in the marketplace. The others, liquid and solid wastes, are by-products that must be removed. The liquid is sometimes temporarily kept in holding ponds and later released into a nearby stream or sewer. Liquid dumped in the stream represents a negative externality to downstream users. In the peach growing region, the marginal external costs of the canning process have been estimated as: MEC = 0.000043Q, where Q represents output of canned peaches in cases per week. The marginal cost of canning peaches (ignoring MEC) is: MC = 2.00 + 0.000157Q, and the demand for canned peaches is: P = 9.00 - 0.000243Q. a. How many cases of peaches will be produced per week during the growing season, and what will the selling price per case be if producers ignore the costs imposed on others? b. If producers are forced to incorporate the marginal external costs into their production decisions, what will the new production rate and selling price be? c. In taking account of the external costs imposed on others (part b), what was the impact on the selling price and production rate of canned peaches? Explain the impact on market efficiency.

a. The output rate is determined where the marginal costs of production (supply) equal demand. Equilibrium output rate is: MC = demand 2.00 + 0.000157Q = 9.00 - 0.000243Q Q = (9 - 2)/0.00040 = 17,500 case/week The selling price is determined by demand. P = 9 - 0.000243(17,500) = 4.7475 = $4.75/case b. The MPC and MEC must be added (vertically) to determine the marginal social cost of production (MSC). This expression is equated to demand to determine the production rate. MSC = MC + MEC = 2 + 0.000157Q + 0.000043Q = 2 + 0.0002Q MSC = 2 + 0.0002Q = 9 - 0.000243Q = demand Q = (9 - 2)/0.000443 = 15,801 case/week The new selling price is: P = 9 - 0.000243(15,801) = $5.16/case c. As a result of internalizing the MEC, the canning industry produced fewer cases per week (17,500 - 15,801 = 1,699). Also, the selling price increased form $4.75/case to $5.16/case. Market efficiency was increased when the price increased by increasing price and reducing output. The market is efficient because MSC equals selling price.