Micro Exam Final Practice

Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q1 to Q2 is the area of

Q1ABQ2.

Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q1 to Q2 is the area of

Q1AEQ2.

Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q1 to Q2 is the area of

Q1CBQ2.

Refer to Exhibit 30-l. If the exhibit represents a negative externality situation, the benefit of expanding output from Q2 to Q1 is the area of

Q2BAQ1.

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, the social cost of expanding output from Q2 to Q1 is the area of

Q2BCQ1.

Suppose 60 percent of all households earn 60 percent of all income. Based on this information it follows that

There is not enough information provided to answer this question.

Lemon laws __________ the __________ problem in the used car market.

are meant to reduce; adverse selection

Refer to Exhibit 28-2. This graph depicts the Lorenz curve for two countries, country 1 (Lorenz curve 1) and country 2 (Lorenz curve 2). Although the Gini coefficient is __________ in country 1 than in country 2, the bottom quintile in ____________ receives a larger share of income compared to the bottom quintile in _______________.

higher; country 1; country 2

A nonexcludable public good is characterized by nonrivalry in

consumption and nonexcludability.

It seems quite possible that cigarette companies concealed information about the effects of smoking on health, causing cigarette prices to be __________ and cigarette sales to be __________ than would have been the case under symmetric information.

higher; higher

Refer to Exhibit 28-2. This graph depicts the Lorenz curve for two countries, country 1 (Lorenz curve 1) and country 2 (Lorenz curve 2). The Gini coefficient associated with Lorenz curve 1 appears to be ____________ than the Gini coefficient associated with Lorenz curve 2. This information indicates that the income distribution is ______________ equal in country 2 than in country 1.

higher; more

When negative externalities are involved, the market is said to

fail, because it overproduces the good connected with the negative externality.

In relative terms, poverty will always exist

given an unequal income distribution, unless there is absolute income equality.

The larger the Gini coefficient, the

greater the degree of income inequality.

It is argued that the market will

not produce a nonexcludable public good.

Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then

output will be at a higher level than if all benefits were not taken into account.

If we define poverty using absolute terms, it follows that

people are poor if they earn less than a specified income level.

A Gini coefficient of zero means there is

perfect income equality.

When the actual Lorenz curve is a 45-degree line, there is

perfect income equality.

A Gini coefficient of 1 means there is

perfect income inequality.

When the actual Lorenz curve is as far away from the 45-degree line as possible, there is

perfect income inequality.

One consequence of a negative externality is that

social costs are greater than private costs.

When a negative externality exists,

social costs are greater than private costs.

A negative externality is internalized when __________ until the socially optimum level of production is obtained.

supply shifts to the left

A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

increase; increase

The Lorenz curve is a graphical representation of

the distribution of income.

The government's provision of nonexcludable public goods such as national defense is accepted because

the market fails to produce nonexcludable public goods as a result of the free-rider problem.

Adverse selection exists when

the parties on one side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market.

Suppose the production of a good results in negative externalities. If output is at the intersection of the demand curve and the marginal social cost curve, then

the socially optimal level of output will be produced.

Suppose the production of a good results in positive externalities. If output occurs at the intersection of the supply curve and the marginal social benefits curve, then

the socially optimal level of output will be produced.

Asymmetric information exists when

the two parties to an exchange differ in what they know about the good being exchanged.

If the Gini coefficient is zero (0), this means that

there is perfect income equality.

A good is a nonexcludable if

it is impossible to prevent people from obtaining the benefits of the good once it has been produced.

A good is rivalrous in consumption if

its consumption by one person reduces its consumption by others.

Under an emission tax, polluters ________ what price they have to pay to pollute, __________________________ how much pollution will be generated.

know; but government doesn't know

Under a tradable pollution permits system (cap and trade), government _____________ the amount of pollution, ___________________ what the price to pollute will be.

knows; but polluters don't immediately know

The closer the Gini coefficient is to zero, the

less the degree of income inequality.

Refer to Exhibit 28-1. If the Gini coefficient equals 0, then the Lorenz curve is

line OB.

A negative externality is

linked to external costs.

Suppose the socially optimal output is 134 units of a good and the market output is 95 units of the good. A possible reason the market produces "too little" is that

marginal private benefits are less than marginal social benefits.

When negative externalities are connected with the production of a good,

market output will be greater than the socially optimal output.

A side effect of an action that adversely affects the well-being of others is called a

negative externality.

If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.

net social cost; costs; greater than; benefits

A __________ good is one that once produced and provided to one person, provides benefits to other persons.

Public

Which of the following is a definition of poverty in absolute terms?

A family is in poverty if it receives less than $10,000 a year in money income.

Costs of Eliminating: Firm A Firm B Firm C 1st ton of pollution $ 30 $ 50 $ 600 2nd Ton on of pollution $ 70 $ 90 $ 700 3rd ton of pollution $125 $150 $ 900 4th ton of pollution $200 $250 $1,300 Refer to Exhibit 30-3. What is the cost to Firm A of eliminating 2 tons of pollution?

$100

Costs of Eliminating: Firm A Firm B Firm C 1st ton of pollution $ 30 $ 50 $ 600 2nd ton of pollution $ 70 $ 90 $ 700 3rd ton of pollution $125 $150 $ 900 4th ton of pollution $200 $250 $1,300 Refer to Exhibit 30-3. What is the cost to Firm B of eliminating 2 tons of pollution?

$140 ($50+$90)

When positive externalities are involved, the market is said to

: fail, because it underproduces the good connected with the positive externality.

A tax may be used as a corrective device in the case of a negative externality because it will __________ marginal private costs and __________ supply.

: increase; decrease

Which of the following statements is true?

A good can be rivalrous in consumption and nonexcludable, too.

Which of the following statements is not an example of the use of persuasion to correct (or adjust for) an externality?

A judicial court imposes a fine on a reckless driver.

Which of the following statements is false?

A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality.

Which of the following statements is true?

A tax applied to an activity that generates a negative externality may bring about the socially optimal level of output.

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, the net social cost of expanding output from Q2 to Q1 is the area of

ABC.

Costs of Eliminating: Firm A Firm B Firm C 1st ton of pollution $ 30 $ 50 $ 600 2nd ton of pollution $ 70 $ 90 $ 700 3rd ton of pollution $125 $150 $ 900 4th ton of pollution $200 $250 $1,300 Refer to Exhibit 30-3. What is the cost to Firm C of eliminating 2 tons of pollution?

ANSWER: 1,300 (add $600+$700 from Firm C)

In which of the following situations would a negative externality most likely be involved?

Alyson lives near an airport. At five o'clock in the morning every day she can hear the airplanes taking off and it awakens her.

Which of the following statements is false?

Asymmetric information only exists after a transaction takes place.

Which of the following statements is false?

It would be a relatively easy matter to establish property rights in the air.

Refer to Exhibit 30-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?

Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve.

Refer to Exhibit 30-5. If a positive externality exists, then the external benefits associated with the positive externality equal the distance between points ____________ and the socially optimal output is

D and B; Q2.

Which of the following statements is false?

Education differences are generally not reflected in income differences.

Which of the following statements is true?

If the government succeeds in decreasing income inequality, then the Gini coefficient will decrease.

Which of the following statements is false?

Internalizing externalities is not the same as adjusting for externalities.

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, then what is Q1?

It is the market output; it is the quantity of output that exists if the external costs associated with the negative externality are not taken into account.

Which of the following is not an example of human capital?

Leisure

Which of the following was not given in the textbook as a factor that contributes to income inequality?

Location

If an asymmetry of information is removed and laborers' preferences change against employment, this will shift the equilibrium in the labor market to the

Northwest.

Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal

P3 - P1.

Which of the following statements is false?

The Gini coefficient is a number between 0 and 100.

Which of the following statements is false?

The uneducated and poorly educated are less likely to be poor than the educated.

In which of the following situations would a positive externality most likely be involved?

There are eight houses in the neighborhood where Rodney lives. Rodney likes nice-looking yards, and last week his neighbors began to beautify their yards.

The Gini coefficients for countries A and B are 0.25 and 0.30, respectively. We can definitely conclude that

There is not enough information provided to determine the portion of income received by family income groups in these countries.

Differences in income within an economy result from differences in all of the following except

This is a trick question because all of these factors contribute to differences in income.

Which of the following statements is false?

Under a tradable pollution permits system, a price of pollution is set and then the quantity of permissible pollution is determined based upon that price.

Which of the following statements is false?

When a positive externality exists, marginal social benefits are greater than marginal private benefits.

The side effect of an action that increases the well-being of others is called

a positive externality.

Which of the following goods is least likely to be rivalrous in consumption?

a sunset

The __________ problem in the market for used cars is capable of collapsing the market for __________.

adverse selection; good used cars

Some pollution may be preferable to zero pollution because

attempting to decrease the level of pollution to zero may cause significant losses in society's welfare.

If the Gini coefficient is one (1), this means that there is

complete income inequality.

In the case of a positive externality, the entire demand curve lies

below the entire marginal social benefit curve.

A negative externality can be internalized

by persuasion, the imposition of a tax, the assignment of property rights, or a voluntary agreement.

Smith and Jones are different when it comes to taking risk. Smith will assume much more risk than Jones. It follows that

c.Smith has a higher probability than Jones of earning a higher income. d.Smith has a higher probability than Jones of earning a lower income.

If an asymmetry of information is removed and laborers' preferences change against employment in a labor market, it would __________ employment and __________ the wage at the equilibrium in the market.

decrease; raise

Refer to Exhibit 30-5. If a positive externality exists, then curve 1 represents the __________, curve 2 represents the __________, curve 3 represents the __________ and Q1 represents the __________.

demand curve; marginal social benefit curve; supply curve; market output

A positive externality is internalized when

demand shifts to the right until the socially optimal level of output is obtained.

Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a

positive externality.

The excludability versus nonexcludability issue of the provision of goods is

relevant to the free-rider problem.

Given a positive externality, the marginal social benefits curve lies to the __________ of the demand curve, with the market output __________ the socially optimal output.

right; less than

The Coase theorem is significant because it

shows that under certain conditions externalities can be corrected in the market without resorting to nonmarket means.

When a positive externality exists,

social benefits are greater than private benefits.

Externalities can be internalized through voluntary agreements as long as

transaction costs are low relative to expected benefits.

Refer to Exhibit 30-5. If a positive externality exists, then the market ____________ output by the amount ________________.

underproduces; Q2 - Q1

Which of the following is not a method to internalize or adjust for externalities?

unilateral transfers

An externality is internalized

when the person(s) or group that generated the externality incorporate into their own private cost-benefit calculations the external benefits (in the case of a positive externality) or the external costs (in the case of a negative externality) that third parties bear.

If fewer cigarettes are consumed with symmetric information than asymmetric information, it follows that

with symmetric information the demand for cigarettes is lower than with asymmetric information.

A Gini coefficient of 2,

would be impossible because the Gini coefficient cannot be greater than 1.

The Gini coefficient would bE

zero if there were perfect income equality.