Econ ch. 11 active learning Q's
Which of the following is NOT an example of an activity with external benefits? • A) Eating a sandwich in the dining hall • B) Planting flowers in your front yard • C) Installing smoke alarms in your house • D) Having your car's faulty exhaust system repaired
Answer: A An external benefit is a benefit that falls on people other than those who pursue the activity. Eating a sandwich does not yield benefits for anyone other than the consumer.
Which of the following is an example of a positional arms control agreement? • A) Campaign spending limits • B) Highly selective admissions standards at colleges • C) Prohibiting speech that causes more harm than good • D) Public education
Answer: A Because elections are determined by relative votes, there is an incentive for candidates to spend ever-increasing amounts of money on campaigns. Spending limits can keep that tendency in check.
Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Declaring the card room a non-smoking area with no opportunity to negotiate would: • A) decrease total economic surplus. • B) increase total economic surplus. • C) leave total economic surplus unchanged, but redistribute benefits. • D) efficiently solve the externality problem.
Answer: A Because there is an opportunity for a negotiated trade that led to surplus, banning all smoking reduces total economic surplus.
Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the price of each dose is: • A) $50. • B) $60. • C) $70. • D) $80.
Answer: A D1 is the private demand curve, so at the private market equilibrium, the price of each dose is $50.
For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that • A) the marginal cost of pollution control is the same across all firms. • B) enforcement is vigorous. • C) all firms be the same size. • D) large polluters reduce emissions by more than small polluters.
Answer: A If all firms have the same marginal cost of pollution abatement, then it is efficient for all firms to reduce pollution by the same amount. Otherwise, it is efficient for firms with the lowest cost of pollution abatement to reduce pollution the most.
Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ________ externality, and burning tires generates ________ externality. • A) a positive; a negative • B) a negative; a positive • C) a positive, no • D) no; a negative
Answer: A Positive externalities yield benefits to others while negative externalities impose costs on others.
Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates: • A) a negative externality. • B) a positive externality. • C) neither a positive nor a negative externality. • D) both a positive and a negative externality.
Answer: A Since Carmen's music imposes a cost on Paul, it generates a negative externality.
The essential reason some species of whales have nearly been driven to extinction is that: • A) it is difficult to define and enforce property rights to whales. • B) the demand for whales is extremely high. • C) the price of whales is very low. • D) experienced whalers find it easy to catch whales.
Answer: A The fact that it is difficult to define and enforce the property rights to whales means that whalers do not adequately take into consideration the fact that harvesting an extra whale today reduces the breeding population, and hence the size of the future whale population.
The tragedy of the commons refers to the: • A) overuse of resources that have no price. • B) overuse of resources that have no cost. • C) under production of goods that have external benefits. • D) failure of the Coase theorem when negotiation is costly.
Answer: A The tragedy of the commons is the tendency for a resource that has no price to be used until its marginal benefit is zero.
The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die. This situation above illustrates a positional externality because: • A) using atomic weapons is a dominated strategy. • B) using atomic weapons improves each country's outcome but hurts the other country. • C) the game does not have a Nash equilibrium. • D) no matter what kind of weapons each country chooses, many people will die.
Answer: B A positional externality arises in situation in which reward depends on relative performance so that an increase in one person's (or country's) performance reduces the expected reward of another's.
This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Picking up the 20th bag of litter would: • A) be socially efficient. • B) increase total economic surplus. • C) create deadweight loss. • D) be socially efficient, but would not be consistent with the actions of self-interested individuals.
Answer: C The marginal benefit of removing the 20th bag is less than the marginal cost of removing the 20th bag.
Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then which of the following outcomes is consistent with the Coase theorem? • A) The cigar smoker will not be able to smoke because the majority of people in the room dislike the smell of cigar smoke. • B) The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking. • C) The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration. • D) The nine non-smokers will each pay the cigar smoker fifty cents and the cigar smoker will not smoke.
Answer: B According to the Coase theorem, if people can negotiate the purchase and sale of the right to perform activities that cause externalities, then they can always arrive at efficient solutions to the problems caused by externalities. In this case, it is socially optimal for the cigar smoker to smoke since the value to him of smoking is greater than the total value to the other nine people of clean air.
If the production of a good generates a negative externality, then at the market equilibrium quantity, the marginal cost to society of another unit of the good will be: • A) less than the marginal benefit of another unit. • B) greater than the marginal benefit of another unit. • C) equal to the marginal benefit of another unit. • D) negative due to the external cost.
Answer: B Firms do not consider negative externalities when making their production decisions. Thus, at the market equilibrium quantity, the marginal cost to society of another unit will be greater than its marginal benefit.
Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The actual monthly gain in surplus to Curly and Moe from living together after addressing the snoring problems in the least costly way is: • A) $200. • B) $150. • C) $100. • D) $50.
Answer: B It would cost Moe $50 per month to stop the snoring, so his total rent is $450, or $50 less than he would have to pay living alone (which he would have to do if didn't stop the snoring). Curly saves $100 in rent by sharing with Moe.
In the absence of environmental protection laws, firms pollute because: • A) business owners follow different norms than do environmentalists. • B) controlling emissions costs money, thereby reducing profits. • C) business owners do not believe that pollution is a problem. • D) the cost pollution imposes on society is small relative to the cost of reducing pollution.
Answer: B Reducing pollution is costly for firms.
In order to achieve the socially optimal level of output, goods that entail positive externalities should be: • A) required. • B) subsidized. • C) taxed. • D) deregulated.
Answer: B Subsidizing activities that yield positive externalities compensates the generator for the benefits generated.
Which of the following would be most vulnerable to the tragedy of the commons? • A) Restrooms in a restaurant • B) Timber on public land • C) Cattle on a ranch • D) Apples in Phoebe's apple orchard.
Answer: B The tragedy of the commons is most likely to arise when nobody owns a resource, so nobody has an incentive to use it optimally.
Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Is it socially optimal for Quick Burger to operate a drive-through window? • A) No, because The Sunshine Café's payoff is lower when Quick Burger operates a drive-through window. • B) No, because total payoffs are higher when Quick Burger does not operate a drive- through window. • C) Yes, because Quick Burger's payoff is higher when Quick Burger operates a drive- though window. • D) Yes, because total payoffs are higher when Quick Burger operates a drive-through window.
Answer: B When Quick Burger operates a drive-through window, total monthly payoffs are only $35,000, compared to $38,000 when Quick Burger does not operate a drive-through window.
Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by: • A) banning production of paper. • B) compensating those injured by the externality. • C) imposing a tax on paper equal to the external cost. • D) subsidizing paper by the amount of the the external benefit.
Answer: C A tax equal to the external cost would align the private MC with the social MC.
Which of the following is an example of an activity with an external cost? • A) Raising honeybees where neighbors on all sides grow apples. • B) Keeping your front yard clean. • C) Speeding on the interstate. • D) Having to buy batteries for the new remote that came with a TV.
Answer: C An external cost, also called a negative externality, is a cost of an activity that falls on people other than those who pursue the activity. One person's speeding imposes costs on others.
Refer to the figure below. At the private market equilibrium quantity, the marginal cost of the last unit produced is ________ the social marginal benefit of the last unit produced. • A) equal to • B) greater than • C) less than • D) more important than
Answer: C At the private market equilibrium quantity V, the marginal cost of the last unit produced is less than the social marginal benefit of the last unit produced.
Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, the quantity of diesel fuel sold after imposition of the regulation will: • A) remain the same. • B) increase. • C) decrease. • D) decrease only if diesel fuel is a normal good.
Answer: C With conventionally-sloped demand and supply curves, a vertical shift upward in cost will lead to a new equilibrium with a higher price and lower quantity.
Two firms, Kegareta Inc. and Sucio Enterprises, have access to five production processes, each one of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. Suppose the government imposes a tax of $56 per day on each ton of smoke emitted. Assuming the revenue the government collects from the tax is used to offset other taxes, what's the total cost to society of this policy? • A) $120 per day • B) $180 per day • C) $205 per day • D) $225 per day
Answer: C Because the government uses the revenue from the tax on emissions to offset other taxes, the tax itself generates no additional cost to society. The only cost comes in the form of increased production costs. For Kegareta Inc., that will be $190 − $40 = $150; for Sucio Enterprises, that will be $175 − $120 = $55. So, the total cost to society will be $150 + $55 = $205.
Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The socially optimal quantity of the vaccine is ________ doses per day. • A)50 • B)75 • C)100 • D)125
Answer: C D2, the social demand curve, crosses the supply curve at 100 units per day.
Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way about Shel's consumption. Fran has bought a new Jaguar (a luxury car), and shortly thereafter, Shel bought a new Mercedes (also a luxury car). Shel and Fran seem to be: • A) making independent rational consumption decisions. • B) unaware of the other's actions. • C) involved in a positional arms race. • D) imposing external benefits on each other.
Answer: C Fran and Shel base their happiness on their relative position and each prefers to have more things than the other. When one buys a nice new car, the other one wants a nice new car.
A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ________ reduction in driving if demand is ________. • A) small; perfectly elastic • B) large; perfectly inelastic • C) small; relatively inelastic • D) large; relatively inelastic
Answer: C If demand is inelastic, a tax will increase price but will not change the quantity demanded by a large amount.
Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for: • A) Curly to endure Moe's snoring. • B) both to live alone. • C) Moe to eliminate his snoring. • D) Moe to pay Curly for his discomfort.
Answer: C It would cost Moe $50 per month to stop the snoring. It would cost Curly $150 a month to put up with the snoring. Renting a separate apartment would cost Curly $100 more than splitting an $800 per month rent bill.
The use of pollution permits by the government to reduce pollution is: • A) theoretically interesting, but untried in the United States. • B) workable in theory but unworkable in practice. • C) common in several parts of the United States. • D) common in the third world.
Answer: C Selling pollution permits is done in certain parts of the U.S.
Suppose Frank likes to snack on sugary candy. Frank knows that it's bad for his teeth to eat sugary candy, but he doesn't care. Frank's snacking habits have no impact on anyone other than Frank. In this case, Frank's consumption of sugary candy generates: • A) a negative externality. • B) a positive externality. • C) neither a positive nor a negative externality. • D) both a positive and a negative externality.
Answer: C Since Frank's consumption of candy has no impact on anyone other than Frank, it generates neither a positive nor a negative externality. That is, all of the costs and benefits of Frank's snacking habits, fall on Frank.
Your economics professor has announced that he or she will assign final grades as follows: the top 20 percent of students will get an A, the bottom 20 percent of students will get an F, and everyone else will get a C. You would expect that, as the semester progresses, students who really care about getting an A will: • A) study less and less to maintain low standards. • B) try to forget about the grading scheme. • C) engage in a positional arms race, studying more and more. • D) maintain a stable agreement to not study for exams.
Answer: C Students' final grades depend on their relative standing, so students who want an A have an incentive to study more and more.
Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. • The government could increase total economic surplus by: • A) taxing production of the vaccine. • B) encouraging people to pay each other to get the vaccine. • C) subsidizing production of the vaccine. • D) providing 250 doses of the vaccine for free.
Answer: C Subsidizing the vaccine would shift the private demand curve to the social demand curve.
Refer to the figure below. This graph suggests that the private market provides incentives to: • A) eliminate the externalities generated by paper production. • B) under-produce paper relative to the social optimum. • C) over-produce paper relative to the social optimum. • D) over-price paper relative to the social optimum.
Answer: C The private market would provide 350 tons; the socially optimal quantity is 300 tons.
Which of the following investments is part of a positional arms race? • A) Watching your friend train for a soccer game • B) Renting movies for the weekend • C) Studying hard for your economics exam because your professor grades on a curve • D) Playing golf for fun
Answer: C Trying to improve your position when relative performance counts is an investment in a positional arms race.
Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. When Erie Textiles operates without a filter, the total gain (in thousands of dollars) to all three parties is ________. With Filter Without Filter • A) $985 • B) $325 • C) $510 • D) $475
Answer: D Erie's benefits are $400, the fishermen's are $50 and the bird watchers' are $25.
A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. If each villager is purely self-interested, how many goats will be sent onto the commons? • A)2 • B)3 • C)4 • D)5
Answer: D An investment of $50 that earns 10 percent interest will be worth $55 in one year. If each villager sends a goat onto the commons then they can each be sold for $55, so 5 goats will be sent onto the commons.
The following data show the relationship between the number of drivers who leave for work at 8 a.m., their average commute time, and their marginal benefit of commuting. One way for the government to increase economic efficiency would be for it to: • A) require all 500 drivers to collectively decide when each should leave for work. • B) subsidize gasoline consumption. • C) require employers to allow workers to arrive late for work. • D) charge a toll to use the highway during rush hour.
Answer: D Charging the appropriate toll would align the private marginal cost of using the highway with the social marginal cost of using the highway.
Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The external benefit of each dose is: • A)$70 • B)$50 • C)$30 • D)$20
Answer: D D1 is the private demand curve and D2 is the social demand curve. D2 lies $20 above D1.
A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. • What will be the total village income if each villager decides how to invest based on his or her individual self-interest? • A) $5 • B) $125 • C) $75 • D) $25
Answer: D Each of 5 villagers will earn $5, so total village income will be $25.
An external benefit implies that private markets will provide ________ than the socially optimal quantity, and an external cost implies that private markets will provide ________ than the socially optimal quantity. • A) more; more • B) less; less • C) more; less • D) less; more
Answer: D External benefits and external costs are not considered by firms and consumers. Thus, if a good involves an external cost, then private markets will produce too much of the good, and if a good involves an external benefit, then private markets will provide too little of the good.
The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die. For the US, the dominant strategy is to have ________, and for Russia, the dominant strategy is to have ________. • A) atomic weapons; conventional weapons • B) conventional weapons; atomic weapons • C) conventional weapons; conventional weapons • D) atomic weapons; atomic weapons
Answer: D For each country, having atomic weapons is a dominant strategy.
Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. If pollution is unregulated, then a total of ________ tons of smoke will be emitted each day. • A)1 • B)2 • C) 4 • D)8
Answer: D If there is no requirement to reduce pollution, both firms will choose production process A (where costs are lowest), and each will emit 4 tons of smoke per day.
Which one of the following government actions is intended to generate positive externalities? • A) Taxing polluting industries • B) Speed limits on the highways • C) Requiring autos to meet minimum emissions regulations • D) Subsidies for planting trees on hillsides
Answer: D Only the landscape subsidy would generate positive externalities. The others address negative externalities.
On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music really annoying. In this case, Stan's saxophone playing generates: • A) a negative externality. • B) a positive externality. • C) neither a positive nor a negative externality. • D) both positive and negative externalities.
Answer: D Since Stan's music imposes a cost on some, but generates a benefit to others, it generates both positive and negative externalities.
Refer to the figure below. Private markets will provide ________ units of this good per day, and the socially optimal number of units per day is ________. • A)H;F • B)H;G • C)F;G • D)G;F
Answer: D The intersection of the private MC curve and the demand curve occurs at output level G, while the intersection of the social MC curve and the demand curve occurs at output level F.
Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. The cost (in thousands of dollars) of the filter to Erie Textiles is ________, and the net benefit (in thousands of dollars) of the filter to the fishermen and bird watchers is ________. With Filter Without Filter • A) $400; $310 • B) $310; $200 • C) $200; $75 D) $200; $235
Answer: D With the filter, Erie's benefits are $200 lower, the fishermen's benefits are $130 higher, and the bird watchers' benefits are $105 higher.