Econ 202 Exam 4

What is the appropriate label for the downward-sloping line on the graph?

"Demand for pollution rights"

The line labeled "Corrective tax" could accurately be re-labeled as

"Price of pollution."

This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are

$1.60 and 42 units, respectively.

This graph represents the tobacco industry. The socially optimal price and quantity are

$1.80 and 35 units, respectively.

Which quantity represents the social optimum for this market? a. Q1. b. Q2. c. Q3. d. Q4.

Q3

When one firm sells its pollution permit to another firm,

a. both firms benefit. b. the total amount of pollution remains the same.

Which of the following is an example of an externality?

a. cigarette smoke that permeates an entire restaurant b. a flu shot that prevents a student from transmitting the virus to her roommate c. a beautiful flower garden outside of the local post office

Negative externalities occur when one person's actions

adversely affect the well-being of a person (or persons) who is not party to a market exchange

The average fixed costs curve

always declines with increased levels of output

foregone investment opportunities are an example of

an implicit cost

the value of a business owner's time is an example of

an opportunity cost

fixed costs can be defined as costs that

are incurred even if nothing is produced

average total cost tells us the

cost of a typical unit of output, if total cost is divided evenly over all the units produced.

The difference between social cost and private cost is a measure of the

cost of an externality.

The supply curve for a product reflects the

cost to sellers of producing the product.

Variable cost divided by quantity produced is a. average total cost. b. marginal cost. c. profit. d. None of the above is correct.

d. None of the above is correct.

An externality is the impact of

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

the things that must be forgone to acquire a good are called

opportunity cost

an example of an explicit cost of production would be the

lease payments for the land on which a firm's factory stands

Constant returns to scale occur when a firm's

long-run average total costs do not vary as output increases.

Economies of scale occur when

long-run average total costs fall as output increases.

Diseconomies of scale occur when

long-run average total costs rise as output increases.

total cost is the

market value of the inputs a firm uses in production

Economists assume that the typical person who starts her own business does so with the intention of

maximizing profits

Which of the following is the best example of a variable cost?

monthly wage payments for hired labor

A negative externality will cause a private market to produce

more than is socially desirable.

All remedies for externalities share the goal of

moving the allocation of resources toward the socially optimal equilibrium.

This graph represents the tobacco industry. The industry creates

negative externalities

When externalities exist, buyers and sellers

neglect the external effects of their actions and the market equilibrium is not efficient

Tsintah weaves traditional Navaho rugs. She weaves and sells 50 rugs. Her average cost of production per rug is $50. She sells each rug for a price of $65. Tsintah's total revenues are

$3250

Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are

$7500

What is the difference between command-and-control policies and market-based policies toward externalities?

Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decision makers to change their behavior.

Market failures can be caused by

Externalities

A positive externality occurs when

Jack receives a benefit from John's consumption of a certain good.

Which price and quantity combination represents the social optimum?

P2 and Q1.

Which of the following statements is correct? a. The marginal benefit of the positive externality is measured by P3 - P1. b. The marginal cost of the negative externality is measured by P3 - P2. c. The marginal cost of the negative externality is measured by P3 - P1. d. The marginal cost of the negative externality is measured by P3 - P0.

The marginal cost of the negative externality is measured by P3 - P1.

Which of the following statements is correct? a. To induce firms to internalize the externality in this market, the government should impose a tax measured by P2 - P0. b. To induce firms to internalize the externality in this market, the government should offer a subsidy measured by P2 - P0. c. To induce firms to internalize the externality in this market, the government should impose a tax measured by P2 - P1. d. There is no externality in this market.

To induce firms to internalize the externality in this market, the government should impose a tax measured by P2 - P0.

Which of the following would not be considered a negative externality?

You have an adverse reaction to a medication your doctor prescribed for you.

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because

a. the market-based solution is less costly to society. b. the market-based solution can result in a greater reduction in pollution. c. the market-based solution raises revenue for the government.

Sonia opened a yoga studio where she teaches classes and sells yoga clothing. Fixed costs for Sonia's yoga studio include the cost of the (i) tank tops. (ii) wages paid to the other yoga instructors. (iii) lease on the studio space. (iv) insurance that the landlord requires Sonia to carry for the studio.

c. (iii) and (iv) only

Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible. (ii) set the price of the product as high as possible. (iii) maximize profit.

c. (iii) only

Which of the following statements is not correct? a. Fixed costs are constant. b. Variable costs change as output changes. c. Average fixed costs are constant. d. Average total costs are typically U-shaped.

c. Average fixed costs are constant.

a firm's opportunity costs of production are equal to its

explicit cost + implicit cost

some costs do not vary with the quantity of output produced. these are called

fixed costs

Total cost can be divided into two types of costs:

fixed costs and variable costs

Corrective taxes

give factory owners an economic incentive to reduce pollution.

The tax depicted on the graph

gives polluting firms an incentive to develop cleaner technologies.

If an externality is present in a market, economic efficiency may be enhanced by

government intervention.

A command-and-control policy is another term for a

government regulation

A difference between explicit and implicit costs is that

implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

When an externality is present, the market equilibrium is

inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

In the long run,

inputs that were fixed in the short run become variable.

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

internalize the negative externality.

When externalities are present in a market, the well-being of market participants

is directly affected, and market bystanders are indirectly affected.

In some cases, selling pollution permits is a better method for reducing pollution than imposing a corrective tax because

it is hard to estimate the market demand curve and thus charge the "right" corrective tax.

Which of the following is the most effective way to internalize a technology spillover?

patents

Technology spillover is one type of

positive externality

total revenue equals

price x quantity

To internalize the externality in this market, the government should

provide a subsidy for this product.

In a certain city, the local government regulates the destruction of historic buildings and provides tax breaks to owners of historic buildings who restore them. These government policies

reflect the fact that restored historic buildings convey a positive externality.

explicit costs

require an outlay of money by the firm

Positive externalities

result in smaller than efficient equilibrium quantity.

If education produces positive externalities, we would expect

the government to subsidize education

In the presence of negative externalities,

the social cost of a good is greater than the private cost by the amount of the external cost

In the presence of positive externalities

the social value of a good is greater than the private value by the amount of the external benefit

In the absence of externalities, the "invisible hand" leads a market to maximize

total benefit to society from that market

Average total cost is equal to:

total cost/output

the amount of money that a firm receives from the sale of its output is called

total revenue

profit is defined as

total revenue minus total cost

if a firm produces nothing, which cost will be zero?

variable cost

When a negative externality exists in a market, the cost to producers

will be less than the cost to society.

Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business?

$170

The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog be sold for a price of $65. The Three Amigo's total costs are

$25000

The efficient scale of production occurs at which quantity?

C

. Jane owns a dog whose barking annoys Jane's neighbor John. Suppose that the benefit of owning the dog is worth $700 to Jane and that John bears a cost of $500 from the barking. A possible private solution to this problem is that

Jane pays John $600 for his inconvenience

Jane owns a dog whose barking annoys Jane's neighbor John. Suppose that the benefit of owning the dog is worth $500 to Jane and that John bears a cost of $700 from the barking. A possible private solution to this problem is that

John pays Jane $650 to get rid of the dog.

The difference between a corrective tax and a tradable pollution permit is that

a corrective tax sets the price of pollution and a permit sets the quantity of pollution.

In the presence of positive externalities, the invisible hand of the marketplace leads to

a less than socially optimal market outcome.

The term market failure refers to

a market that fails to allocate resources efficiently

In the presence of negative externalities, the invisible hand of the marketplace leads to

a more than socially optimal market outcome

When the social cost curve is above a product's supply curve,

a negative externality exists in the market

In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry to

a shift to the right

A negative externality arises when a person engages in an activity that has

a. an adverse effect on a bystander who is not compensated by the person who causes the effect.

Which of the following expressions is correct? a. accounting profit = total revenue - explicit costs b. economic profit = total revenue - implicit costs c. economic profit = total revenue - explicit costs

accounting profit= tr- ex costs

The firm's efficient scale is the quantity of output that maximizes

average total cost

When marginal cost is less than average total cost,

average total cost is falling

When a firm is experiencing diseconomies of scale, long run

average total cost is less than long-run marginal cost.

When marginal cost exceeds average total cost

average total cost must be rising

The cost of producing the typical unit of output is the firm's

average total cost.

If a firm experiences constant returns to scale at all output levels, then its long-run average total cost curve would

be horizontal

Positive externalities occur when one person's actions

beneficially affect the well-being of another person (or persons) who is not party to a market exchange.

Emission controls on automobiles are an example of a

command-and-control policy to increase social efficiency

In the long run, a firm that produces and sells textbooks gets to choose a. how many workers to hire. b. the size of its factories. c. which short-run average-total-cost curve to use. d. All of the above are correct.

d. all of the above are correct

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing

economies of scale

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will

emit a higher level of smoke than is socially efficient.

Private markets don't account for externalities because

self-interested buyers and sellers have no incentive to consider the effects of their behavior on others

Internalizing a negative production externality will cause the supply curve faced by an industry to

shift to the left (upwards).

Internalizing a positive consumption externality will cause the market demand curve to

shift to the right (downwards)

In the absence of negative externalities, the external cost of a good is ________ and the social cost is ________ the private cost.

zero; the same as

In the absence of positive externalities, the external benefit of a good is ________ and the social value is ________ the private value.

zero; the same as