Microeconomics Test 2
If a negative externality such as pollution is not internalized by private market suppliers or buyers, then the A) quantity of the product produced will be too high compared to the social optimum. B) quantity of the product produced will be too low compared to the social optimum. C) price of the product produced will be too high compared to the social optimum. D) private demand will be higher than the social benefit. E) both A) and D) are correct.
E) both A) and D) are correct.
Refer to Figure 24. If the government imposes a price ceiling at $12, then producer surplus is a. CDI. b. BDF. c. BCIF. d. HGCD.
a. CDI.
If the demand curve is linear and downward sloping, which of the following statements is not correct? a. Demand is more elastic on the lower part of the demand curve than on the upper part. b. Different pairs of points on the demand curve can result in different values of the price elasticity of demand. c. Different pairs of points on the demand curve result in identical values of the slope of the demand curve. d. Starting from a point on the upper part of the demand curve, an increase in price leads to a decrease in total revenue.
a. Demand is more elastic on the lower part of the demand curve than on the upper part.
Elasticity is: a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects economic well-being. c. the maximum amount that a buyer will pay for a good. d. the value of everything a seller must give up to produce a good.
a. a measure of how much buyers and sellers respond to changes in market conditions.
The price elasticities of supply and demand affect a. both the size of the deadweight loss from a tax and the tax incidence. b. the size of the deadweight loss from a tax but not the tax incidence. c. the tax incidence but not the size of the deadweight loss from a tax. d. neither the size of the deadweight loss from a tax nor the tax incidence
a. both the size of the deadweight loss from a tax and the tax incidence.
Deadweight loss is the a. decline in total surplus that results from a tax. b. decline in government revenue when taxes are reduced in a market. c. decline in consumer surplus when a tax is placed on buyers. d. loss of profits to business firms when a tax is imposed.
a. decline in total surplus that results from a tax.
Marcus says that he would smoke one pack of cigarettes each day regardless of the price. If he is telling the truth, Marcus's a. demand for cigarettes is perfectly inelastic. b. price elasticity of demand for cigarettes is infinite. c. income elasticity of demand for cigarettes is 0. d. More than one of the above is correct
a. demand for cigarettes is perfectly inelastic.
The price elasticity of demand measures how much a. quantity demanded responds to a change in price. b. quantity demanded responds to a change in income. c. price responds to a change in demand. d. demand responds to a change in supply.
a. quantity demanded responds to a change in price.
For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is a. $1,750. b. $2,250. c. $3,000. d. $4,500.
b. $2,250.
If Martin sells a shirt for $40, and his producer surplus from the sale is $8, his cost must have been a. $48. b. $32. c. $8. d. $40
b. $32.
Refer to Figure 6. At the equilibrium price, consumer surplus is a. $1,600. b. $800. c. $1,400. d. $700.
b. $800.
Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is a. 0. b. 1. c. 6. d. 36.
b. 1.
When the price of a bracelet was $28 each, the jewelry shop sold 128 per month. When it raised the price to $32 each, it sold 112 per month. Using the midpoint method, the price elasticity of demand for bracelets is a. 1.14. b. 1. c. 0.25. d. 0.13
b. 1.
Refer to Figure 24. If the government imposes a price floor at $18, then consumer surplus is a. ABF. b. AGH. c. HGCD. d. HGBF.
b. AGH.
Suppose the demand for peaches decreases. What will happen to producer surplus in the market for peaches? a. It increases. b. It decreases. c. It remains unchanged. d. It may increase, decrease, or remain unchanged
b. It decreases.
An optimal tax on pollution would result in which of the following? a. Producers will choose not to produce any pollution. b. Producers will internalize the cost of the pollution. c. Producers will maximize production. d. The value to consumers at market equilibrium will exceed the social cost of production.
b. Producers will internalize the cost of the pollution.
The difference between social cost and private cost is a measure of the a. loss in profit to the seller as the result of a negative externality. b. cost of an externality. c. cost reduction when the negative externality is eliminated. d. cost incurred by the government when it intervenes in the market
b. cost of an externality.
The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently a. even if private parties experience substantial costs of bargaining. b. even if the initial distribution of legal rights is skewed in favor of some private parties over others. c. only when there is a large number of private parties that engage in bargaining. d. All of the above are correct.
b. even if the initial distribution of legal rights is skewed in favor of some private parties over others.
The deadweight loss from a tax of $2 per unit will be smallest in a market with a. inelastic supply and elastic demand. b. inelastic supply and inelastic demand. c. elastic supply and elastic demand. d. elastic supply and inelastic demand.
b. inelastic supply and inelastic demand.
Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to a. stop her messy habits or else move out. b. pay you at least $60 but less than $80 to live with the clutter. c. continue to be messy and force you to move out. d. demand payment of at least $60 but no more than $80 to clean up after herself
b. pay you at least $60 but less than $80 to live with the clutter.
A tax on a good a. raises the price that buyers effectively pay and raises the price that sellers effectively receive. b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive. c. lowers the price that buyers effectively pay and raises the price that sellers effectively receive. d. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive.
b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive.
Efficiency in a market is achieved when a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs. b. the sum of producer surplus and consumer surplus is maximized. c. all firms are producing the good at the same low cost per unit. d. no buyer is willing to pay more than the equilibrium price for any unit of the good.
b. the sum of producer surplus and consumer surplus is maximized.
Refer to Figure 6. If the government imposes a price floor of $110 in this market, then consumer surplus will decrease by a. $200. b. $400. c. $600. d. $800
c. $600.
Refer to Figure 10. Suppose that the production of plastic creates a social cost which is depicted in the graph above. What is the socially optimal quantity of plastic? a. 200 units b. 450 units c. 500 units d. 650 units
c. 500 units
Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, how much plastic will be produced? a. 200 b. 500 c. 650 d. 900
c. 650
Refer to Table 1. If the price of the product is $110, then who would be willing to purchase the product? a. Calvin b. Calvin and Sam c. Calvin, Sam, and Andrew d. Calvin, Sam, Andrew, and Lori
c. Calvin, Sam, and Andrew
In recent years, the links between poor health outcomes and over consumption of sugary drinks has resulted in policy makers proposing regulations on soft drinks. Suppose an additional $0.75 per bottle tax on buyers of vended soda is implemented. If the price increases to $2 per bottle from $1.50, provide the best description of the tax burden. a. The buyer pays $.75 more, and the government receives $0.50 b. The seller receives $1.50, and the government receives $0.50 c. The buyer pays $0.50 more, the seller receives $0.25 less d. Both a and b are correct
c. The buyer pays $0.50 more, the seller receives $0.25 less
A tax levied on the buyers of a good shifts the a. supply curve upward (or to the left). b. supply curve downward (or to the right). c. demand curve downward (or to the left). d. demand curve upward (or to the right).
c. demand curve downward (or to the left).
Consumer surplus a. is closely related to the supply curve for a product. b. is represented by a rectangle on a supply-demand graph when the demand curve is a straight, downward- sloping line. c. is measured using the demand curve for a product. d. does not reflect economic well-being in most markets
c. is measured using the demand curve for a product.
The value of the price elasticity of demand for a good will be relatively large when a. there are no good substitutes available for the good. b. the time period in question is relatively short. c. the good is a luxury rather than a necessity. d. All of the above are correct.
c. the good is a luxury rather than a necessity.
Demand is said to be inelastic if a. buyers respond substantially to changes in the price of the good. b. demand shifts only slightly when the price of the good changes. c. the quantity demanded changes only slightly when the price of the good changes. d. the price of the good responds only slightly to changes in demand.
c. the quantity demanded changes only slightly when the price of the good changes.
Refer to Figure 18. The price that buyers pay after the tax is imposed is a. $8. b. $14. c. $16. d. $24.
d. $24.
In which of the following situations will total revenue increase? a. Price elasticity of demand is 1.2, and the price of the good decreases. b. Price elasticity of demand is 0.5, and the price of the good increases. c. Price elasticity of demand is 3.0, and the price of the good decreases. d. All of the above are correct.
d. All of the above are correct.
Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, a. the quantity of physicals demanded increases. b. there is shortage of physicals. c. the quantity of physicals supplied decreases. d. All of the above are correct.
d. All of the above are correct.
Which of the following represents a way that a government can help the private market to internalize an externality? a. taxing goods that have negative externalities b. subsidizing goods that have positive externalities c. The government cannot improve upon the outcomes of private markets. d. Both a and b are correct.
d. Both a and b are correct.
Which of the following is likely to have the most price elastic demand? a. dental floss b. milk c. salt d. diamond earrings
d. diamond earrings
Demand is elastic if the price elasticity of demand is a. less than 1. b. equal to 1. c. equal to 0. d. greater than 1.
d. greater than 1.
If a price ceiling is not binding, then a. there will be a surplus in the market. b. there will be a shortage in the market. c. the market will be less efficient than it would be without the price ceiling. d. there will be no effect on the market price or quantity sold.
d. there will be no effect on the market price or quantity sold.
"Dead-Weight loss" A) exists where the optimal price is different than the market price. B) measures the social benefits of an externality. C) is another term for economic profit. D) is always present in unregulated markets.
A) exists where the optimal price is different than the market price.
The demand for ipods increases as income increases. Producer surplus A) increases. B) remains the same. C) decreases. D) needs more information to make a forecast regarding its expected change
A) increases.
Efficiency is attained when A) total surplus is maximized. B) consumer surplus is maximized. C) all resources are being used. D) consumer surplus is maximized and producer surplus is minimized
A) total surplus is maximized.
Refer to Figure 24. At equilibrium, consumer surplus is measured by the area a. AHG. b. AFB. c. ABD. d. BDF.
b. AFB.
Total surplus a. can be used to measure a market's efficiency. b. is the sum of consumer and producer surplus. c. is the value to buyers minus the cost to sellers. d. All of the above are correct.
d. All of the above are correct.
In recent years, an additional $2 per gallon tax per gallon of gasoline has been proposed. Suppose the market price for gasoline is $4 per gallon. After the government implements the $2 per gallon tax on sellers, the market price is $5.50 per gallon. Give the best description of the tax incidence. a. The government receives $1.50, and the retailer receives $0.50 b. The retailer receives $1.50, and the government receives $0.50 c. The consumer pays $5.50, and the retailer receives $4 d. The consumer pays $5.50, and the retailer receives $3.50
d. The consumer pays $5.50, and the retailer receives $3.50
13. A legal maximum on the price at which a good can be sold is called a price a. floor. b. subsidy. c. support. d. ceiling.
d. ceiling.
The socially optimal quantity of output is A) 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by the seller of the 120th unit. B) 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by society of the 120th unit. C) 160 units, since the value to the buyer of the 160th unit is equal to the cost incurred by the seller of the 160th unit. D) 160 units, since the value to the buyer of the 160th unit is equal to the cost incurred by society of the 160th unit.
B) 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by society of the 120th unit.
To reduce air pollution, emission controls on automobiles are an example of a A) corrective tax. B) command-and-control policy to increase social efficiency. C) policy that reduces pollution by allocating resources through market mechanisms. D) policy to reduce congestion on urban freeways
B) command-and-control policy to increase social efficiency.
Market failure can be caused by A) too much competition. B) externalities. C) low consumer demand. D) scarcity
B) externalities.
Consumer surplus A) is the difference between the demand curve and the supply curve. B) is the extra amount consumers would be willing to pay if they had to. C) occurs when the price is too high. D) is not desired by economists.
B) is the extra amount consumers would be willing to pay if they had to.
You have two essentially identical extra tickets to the NCAA basketball tournament. The table shows the willingness to pay of the four potential buyers in the market for a ticket to the game. You hold an auction to sell the two tickets. Michael and Earvin each offer to pay $360 for a ticket, and you sell them the two tickets. What is the total consumer surplus in the market? A) $40. B) $140. C) $180. D) $720.
C) $180.
Private markets fail to account for externalities because A) externalities don't occur in private markets. B) sellers include costs associated with externalities in the price of their product. C) decision makers in the market fail to include the costs of their behavior to third parties. D) the government cannot easily estimate the optimal quantity of pollution.
C) decision makers in the market fail to include the costs of their behavior to third parties.
The maximum price that a buyer will pay for a good is called a. consumer surplus. b. willingness to pay. c. equilibrium. d. efficiency
b. willingness to pay.
Suppose good X has a negative income elasticity of demand. This implies that good X is a. a normal good. b. a necessity. c. an inferior good. d. a luxury.
c. an inferior good.
An externality arises when a person engages in an activity that influences the well-being of a. buyers in the market for that activity and yet neither pays nor receives any compensation for that effect. b. sellers in the market for that activity and yet neither pays nor receives any compensation for that effect. c. bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect. d. Both (a) and (b) are correct.
c. bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect.
