microeconomics test 2
Why are there two different views on the effect of taxation on labor supply in the United States?
- The effect of a tax on labor supply depends on the elasticity of labor supply. - The effect of a tax on labor supply depends on the amount of deadweight loss created by the tax. - It depends on normative questions such as how much to tax or how much government intervention is necessary.
The table below shows the average salary for major league baseball players. As you can see, the average salary of $3,440,000 in 2012 is nearly 20 times larger than the average salary in 1970. Year Average Salary * 1970 $ 173,397 1980 $ 408,198 1990 $1,035,515 2000 $2,649,988 2010 $3,472,326 2012 $3,440,000 Why might ballplayers in 2012 be more likely to choose to play an extra year?
- The high average salary means that the opportunity cost of leisure has risen, giving players a strong incentive to play another year. - For many players, the high average salary exceeds the value of an extra year of leisure, inducing them to play another year. - Because the salary from playing is the price of a year of leisure, an increase in its price causes players to substitute away from leisure, which means playing another year.
Which of the following statements are true regarding externalities? (Check all that apply.)
- a negative externality occurs when an economic activity has a spillover cost to a bystander - deadweight loss can be either a foregone benefit or the total cost of the externality to society
How does the market for inputs like labor differ from the market for goods and services? (Check all that apply.)
- firms are buyers in the market for inputs, while individual are buyers in the market for goods and services - firms are sellers in the market for goods and services, while individuals are sellers in the market for inputs. - the demand for inputs is derived from the demand for final goods and services
Which of the following is the correct definition of marginal social cost? (Check all that apply.)
- marginal private cost + marginal external cost - marginal private cost + marginal cost of externality
In assessing the performance of a perfectly competitive market, we can say that ____________.
- no individual can be made better off without making someone else worse off. - any departure from the equilibrium necessarily reduces social surplus. - price efficiently allocates goods and services to buyers and sellers.
The Coase Theorem will will breakdown when ____________. (select all that apply)
- there are a large number of agents - when property rights are not clearly defined - transaction costs become high
Which of the following statements is not correct? A. Equilibrium is obtained at the intersection of the demand and supply curves. B. The work preference of labor affects the supply curve. C. An increase in the price of a product increases demand for labor. D. At all times an increase in wage increases labor supply.
D. At all times an increase in wage increases labor supply.
VMPK equals _________.
MPK x P
Compared to the market for electric drills, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for drills than in the vintage button market. Is it then correct to assume that the outcome in the drills market is Pareto efficient while in the vintage button market it is not? Explain.
No, market size has no bearing on the attainment of Pareto efficiency.
Does price gouging have the same effect as setting prices above equilibrium level?
No, price gouging is actually an equilibrium outcome, while the setting of prices above equilibrium is not.
Is the entire burden of the tax always borne by those on whom it is imposed?
Not necessarily, since the burden of the tax depends on price elasticity.
What is the intent of a Pigouvian tax?
To induce producers of a negative externality to reduce production to the socially optimal level.
Assume that some of the buyers in this market are now willing to pay more for a drill than they did earlier. Does this mean that the market for drills is Pareto efficient? Explain your answer.
Yes, as long as the market equilibrium still holds, the outcome is still Pareto efficient.
The market for electric drills in a certain country is characterized by a large number of buyers. The market for drills is in equilibrium. Does this also mean that it is Pareto efficient? Explain your answer.
Yes, with the market in equilibrium, no one participant can be made better off without someone else being harmed.
The substitution effect implies there is _____________ relationship between the wage rate and the quantity of labor supplied. While the income effect implies there is ___________ relationship between wage rate and the quantity of labor supplied.
a positive, an inverse
On the Production Possibilities Curve, possible production levels are represented:
at any point on or above the curve.
You accept a new job for a wage of $30,000 at a newspaper. You join the sales team, which consists of 10 people who try to sell online subscriptions. Each subscription sells for $200. When you talk to your boss, she says that you are the 11th worker, and that if you had not joined the team, she would have done okay with just 10 peoplelong dash—but "great to have you, we are more productive with you on board!" Assuming that the wage is determined by market forces, your boss must believe that your marginal product of labor is ____________ equal to _________. (Use the concept of the value of the marginal product of labor.)
at least, 150
The mercantilist economic doctrine was widely followed from the sixteenth to the eighteenth centuries in Europe. Mercantilists advocated the use of tariffs to restrict trade, as they believed that countries that export more than they import will increase wealth. What could be the problem with such an economic policy?
consumers pay a price that is higher that the world price, reducing consumer surplus.
The value of marginal product of capital (VMPK) is the ____________.
contribution that each additional unit of physical capital adds to a firm's revenues, all else equal.
One reason economists in general _________ favor protectionism is because it _____________ prices for consumers and ___________ social surplus.
do not, raises, lowers
The free-rider problem arises when an individual ____________.
does not pay for a good because nonpayment does not preventing consumption.
In a perfectly competitive market, a firm with multiple production plants will minimize total costs of production when
each plant produces where marginal revenue equals marginal cost.
A friend in your environmental economics study group suggests that taxes on pollution are ineffective because they do not eliminate all pollution. Based on your understanding of environmental economics, you argue against your friend's suggestion saying that taxes on pollution are effective. Which of the following reasons will strengthen your argument?
eliminating all pollution will eliminate all the benefits associated with the activities that create pollution
Suppose wages in the market for plumbers increase. Some plumbers start taking on extra plumbing jobs while others cut back on the number of hours they work. What could explain this?
for those plumbers who choose to work more, the substitution effect (on leisure) of the wage increase is stronger that the income effect. for those who decided to work less, the reverse is true.
Why might ballplayers in 2012 be less likely to choose to play an extra year?
if leisure is a normal good the higher incomes that players enjoy will cause them to increase their consumption of leisure, and this implies choosing not to play an extra year
Negative externalities impose an additional cost that:
is not explicitly recognized by the buyers and sellers in the market
All of the following are true of the demand for labor except:
it is not affected by the retail price.
In the case of the negative externality, the socially efficient output will be________ relative to the market quantity.
low
In a competitive market equilibrium, the allocation of the social surplus is such that ____________.
no individual can be made better off without making someone else worse off.
Suppose an identical tax is levied on capital, labor, and land. Would the tax have the same effect in each of these markets? Explain your answer.
no, an identical tax would yield similar effects but not the same effects, since it is rather unlikely that the relative demand and supply elasticities would be the same in each market
The Coase Theorem states that ____________.
private bargaining will result in an efficient allocation of resources
A country has two types of workers, skilled and unskilled. Workers can produce either chairschairs or sofassofas. Output per worker is as follows: Output per Worker ----------Chairs ----------Sofas Unskilled Workers: --------3 chairs --------2 sofas Skilled Workers: -------5 chairs -------3 sofas According to the data,______________ an absolute advantage in making either type of good. Based on comparative advantage, who should make chairs and who should make sofas? ______________________ a comparative advantage in making chairs. ______________________ a comparative advantage in making sofas.
skilled workers have, skilled workers have, unskilled workers have
The government runs a budget surplus when ____________.
tax revenue exceeds its spending.
John will continue to consume leisure up to the point at which ________
the marginal benefit of leisure is equal to the marginal cost.
The free-rider dilemma occurs because
the marginal benefit to a group is different than to that of the individual.
In equilibrium, an optimal mix of production factors is achieved when:
the marginal product from the last dollar spent on each input is equalized.
Which of the following statements is true regarding the goal of any policy on pollution abatement?
the policy should ensure that if any pollution is created it is overall worth it.
Tax incidence refers to ____________.
who bears the burden of tax.
