Exam 2: Chapters 6, 8, 9, 10, & 13

Refer to Figure 6-18. Buyers pay how much of the tax per unit?

$1

Refer to Scenario 13-10. An accountant would calculate the total profit for one birdhouse to be

$15

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?

$2

Refer to Figure 6-18. The effective price sellers receive after the tax is imposed is

$3.50

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

$4,500; $3,500

A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $4,500. The marginal cost of producing the 101st unit of output is $300. What is the total cost of producing 101 units?

$4,800

Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?

$5,000

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

$7,500

Refer to Figure 9-5. Total surplus with trade exceeds total surplus without trade by

$75

Refer to Scenario 13-10. An economist would calculate the total cost for one birdhouse to be

$9

Refer to Figure 9-20. Vietnam's gains from trade in rice amount to

1,500

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 250 per month when there is no tax. Then a tax of $6 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the after-tax quantity of widgets is

125 per month

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L=6,Q=147) and (L=7,Q=174). The marginal product of the seventh worker is

27 units of output

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by

50 per month

Refer to Table 13-5. The marginal product of the fourth worker is

500 units

Assume, for Canada, that the domestic price of wheat without international trade is lower than the world price of wheat. This suggests that, in the production of wheat,

Canada has a comparative advantage over other countries and Canada will export wheat.

If a tax is imposed on the buyers of a product, then the tax burden will fall entirely on the buyers.

False

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.

False

Research into new technologies conveys neither negative externalities nor positive externalities.

False

Refer to Figure 10-4. Without government intervention, the equilibrium quantity would be

Q3.

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?

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

On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?

The farmer is able to produce 5,000 bushels of wheat when he hires 4 workers

Buyers and sellers rarely share the burden of a tax equally.

True

Refer to Figure 9-20. From the figure it is apparent that

Vietnam has a comparative advantage in producing rice, relative to the rest of the world.

When a country moves away from a free trade position and imposes a tariff on imports, it causes

a decrease in total surplus in the market

A price floor will be binding only if it is set

above the equilibrium price

A shortage results when a

binding price ceiling is imposed on a market

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the

buyers will bear a greater burden of the tax than the sellers.

Refer to Figure 9-5. If this country allows free trade in wagons,

consumers will gain and producers will lose.

In the long run, when marginal cost is above average total cost, the average total cost curve exhibits

diseconomies of scale

Refer to Figure 8-19. If the economy is at point B on the curve, then an increase in the tax rate will

increase the deadweight loss of the tax and decrease tax revenue.

Refer to Figure 8-19. If the economy is at point A on the curve, then a small increase in the tax rate will

increase the deadweight loss of the tax and increase tax revenue.

Externalities tend to cause markets to be

inefficient

The benefit to sellers of participating in a market is measured by the

producer surplus

Refer to Figure 6-18. Suppose the same supply and demand curves apply, and a tax of the same amount per unit as shown here is imposed. Now, however, the buyers of the good, rather than the sellers, are required to pay the tax to the government. After the buyers pay the tax, relative to the case depicted in the figure, the burden on buyers will be

the same, and the burden on sellers will be the same.

In the short run, a firm incurs fixed costs

whether it produces output or not

Economists normally assume that the goal of a firm is to

maximize its profits

A negative externality will cause a private market to produce

more than is socially desirable

Refer to Table 10-5. If the government charged a fee of $84 per unit of pollution, how many units of pollution would the firms eliminate altogether?

10

A deadweight loss is a consequence of a tax on a good because the tax

induces buyers to consume less, and sellers to produce less.

The deadweight loss from a tax of $8 per unit will be smallest in a market with

inelastic demand and inelastic supply

The tax burden will fall most heavily on buyers of the good when the demand curve

is relatively steep, and the supply curve is relatively flat.

Refer to Figure 9-20. With trade, Vietnam will

export 1,500 units of rice

Market failure can be caused by

externalities

Suppose that the government imposes a tax on dairy products. The deadweight loss from this tax will likely be greater in the

fifth year after it is imposed than in the first year after it is imposed because demand and supply will be less elastic in the first year than in the fifth year.

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

government regulation

A positive externality will cause a market to produce

less than is socially desirable

Economies of scale occur when a firm's

long-run average total costs are decreasing as output increases.

Diseconomies of scale occur when a firm's

long-run average total costs are increasing as output increases.

Constant returns to scale occur when a firm's

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

The long-run effects of rent controls are a good illustration of the principle that

people respond to incentives

Consider a good to which a per-unit tax applies. The greater the price elasticities of demand and supply for the good, the

greater the deadweight loss from the tax.

If the labor supply curve is very elastic, a tax on labor

has a large deadweight loss

If the government removes a tax on a good, then the quantity of the good sold will

increase

The marginal product of labor is equal to the

increase in output obtained from a one unit increase in labor

Over time, housing shortages caused by rent control

increase, because the demand for and supply of housing are more elastic in the long run.

Unlike minimum wage laws, wage subsidies

raise the living standards of the working poor without creating unemployment.

Refer to Figure 9-5. Without trade, total surplus amounts to

$612.50

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality.

True

A production function describes

how a firm turns inputs into output

The benefit that government receives from a tax is measured by

tax revenue

Refer to Figure 6-18. The price paid by buyers after the tax is imposed is

$6.00

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when the firm hires 2 workers, the total cost of production is $100. When the firm hires 3 workers, the total cost of production is $120. In addition, assume that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired. What is the firm's fixed cost?

$60

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and decreases producer surplus by $4,400. The deadweight loss of the tax is

$600

Suppose a tax of $0.10 per unit on a good creates a deadweight loss of $100. If the tax is increased to $0.25 per unit, the deadweight loss from the new tax would be

$625

Refer to Figure 9-5. With trade, total surplus is

$687.50

Buyers of a good bear the larger share of the tax burden when the (i)supply is more elastic than the demand for the product. (ii)demand in more elastic than the supply for the product. (iii)tax is placed on the sellers of the product. (iv)tax is placed on the buyers of the product.

(i) only

Sellers of a good bear the larger share of the tax burden when a tax is placed on a product for which the (i)supply is more elastic than the demand. (ii)demand in more elastic than the supply. (iii)tax is placed on the sellers of the product. (iv)tax is placed on the buyers of the product.

(ii) only

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,

Firm A will spend $4,000

The average fixed cost curve

always declines with increased levels of output.

Refer to Table 13-5. Assume that fixed costs are $500, and variable costs are $100 per worker. For this firm, what are the shapes of the production function and the total-cost curve?

The production function is increasing at a decreasing rate, whereas the total-cost function is increasing at an increasing rate.

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government impose a $5 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?

They are equal

In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.

True

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

True

Whether a tax is levied on sellers or buyers, buyers and sellers usually share the burden of taxes.

True

Turkey is an importer of wheat. The world price of a bushel of wheat is $7. Turkey imposes a $3-per-bushel tariff on wheat. Turkey is a price-taker in the wheat market. As a result of the tariff,

Turkish consumers of wheat become worse off and Turkish producers of wheat become better off.

The incidence of a tax falls more heavily on

all of the above

Finland allows trade with the rest of the world. We can determine whether Finland has a comparative advantage in producing pork if we

all of the above are correct

Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things equal,

all of the above are correct

Which of the following is an example of an externality?

all of the above are correct

Fixed costs can be defined as costs that

are incurred even if nothing is produced

A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,

average fixed cost is 50 cents.

When marginal cost exceeds average total cost,

average total cost must be rising

A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100,

average variable cost is $3

When a country allows trade and becomes an exporter of a good,

consumer surplus decreases and producer surplus increases.

When a country allows trade and becomes an importer of a good,

consumer surplus increases and producer surplus decreases.

When a country abandons a no-trade policy, adopts a free-trade policy, and becomes an importer of a particular good,

consumer surplus increases and total surplus increases in the market for that good.

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

cost of an externality.

Refer to Figure 8-19. If the economy is at point A on the curve, then a decrease in the tax rate will

decrease the deadweight loss of the tax and decrease tax revenue.

If the government removes a binding price floor from a market, then the price paid by buyers will

decrease, and the quantity sold in the market will increase.

A decrease in the size of a tax is most likely to increase tax revenue in a market with

elastic demand and elastic supply.

Corrective taxes are unlike most other taxes because they

move the allocation of resources closer to the social optimum.

Wiladee used to work as an office manager, earning $25,000 per year. She gave up that job to start a tailoring business. In calculating the economic profit of her tailoring business, the $25,000 income that she gave up is counted as part of the tailoring firm's

opportunity costs

Assume, for Canada, that the domestic price of tomatoes without international trade is higher than the world price of tomatoes. This suggests that, in the production of tomatoes,

other countries have a comparative advantage over Canada and Canada will import tomatoes.

For a large firm that produces and sells automobiles, which of the following costs would be a variable cost?

the cost of the steel that is used in producing automobiles

If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price,

the country will be an importer of the good.

If a price floor is not binding, then

the equilibrium price is above the price floor

If a price ceiling is not binding, then

there will be no effect on the market price or quantity sold.

The nature of a firm's cost (fixed or variable) depends on the

time horizon under consideration.