ECO 201 Exam 2

Negative externalities are created when A) a driver drives recklessly on a busy highway. B) an increase in the price of butterfat drives up the price of ice cream. C) a driver leaves his car in a parking space after the meter expires and receives a ticket. D) a driver pulls over to help a stranded motorist fix a flat tire.

A) a driver drives recklessly on a busy highway.

Which of the following scenarios is consistent with the Laffer curve? A. The tax rate is 1 percent, and tax revenue is very low. B. The tax rate is 1 percent, and tax revenue is very high. C. The tax rate is 99 percent, and tax revenue is very high. D. The tax rate is moderate (between very high and very low), and tax revenue is very low.

A. The tax rate is 1 percent, and tax revenue is very low.

Keeneland wants to increase the total revenue generated by the horse racing in order to more easily cover operating expenses. The CEO suggests that decreasing the price of general admission ticket could increase total revenue. The student intern believes that increasing the price of general admission ticket could increase total revenue. Based upon this information it appears as if the CEO believes that demand is ________ while the student intern believes demand is . A. elastic; inelastic. B. elastic; unit elastic. C. inelastic; elastic. D. inelastic; unit elastic.

A. elastic; inelastic.

Consider a market in which the unique efficient level of trade is 12,000 units. If 9,400 units are traded, then Deadweight Loss A. will be positive. B. will be equal to zero. C. will be negative. D. may be positive or negative (it depends upon "how elastic" demand and supply are).

A. will be positive.

Fred's income has just risen from $940 per week to $1,060 per week. As a result, his consumption of steak increased from 5 to 6 steaks per week. The income elasticity of Fred's demand for steak is A) 0.8. B) 1.5. C) 0.9. D) 1.00.

B) 1.5.

The route from Dallas to Mexico City is served by more than one airline. The demand for tickets from American Airlines for that route is probably A) elastic and more elastic than the demand for all tickets for that route. B) inelastic and less elastic than the demand for all tickets for that route. C) elastic but less elastic than the demand for all tickets for that route. D) inelastic but more elastic than the demand for all tickets for that route.

B) inelastic and less elastic than the demand for all tickets for that route.

Airbnb is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in that locale. AirBnb guests are having issues with hosts cancelling the reservation hours before check in and transferring them to a subpar substitute. AirBnb does not take any action on this. When market fails such where one party (Hosts) has more information than the others (guests), we refer the situation as _______________ and due to its presence the actual market output level will be____________ A. negative externality; lower than the true socially optimal output level. B. asymmetric information; higher than the true socially optimal output level. C. asymmetric information; the same as the true socially optimal output level. D. positive externalities; determined by the government.

B. asymmetric information; higher than the true socially optimal output level.

Consider demand for "DVD's of the movie Farce of the Penguins" (directed by the comedic genius Bob Saget) and demand for "DVD's (in general)." If the price elasticity of demand for "DVD's (in general)" is -1.374, then it would be reasonable to expect that the price elasticity of demand for "DVD's of the movie Farce of the Penguins" is: A. exactly equal to zero. B. less than (i.e., "more negative than") -1.374. C. also equal to -1.374. D. somewhere between -1.374 and zero.

B. less than (i.e., "more negative than") -1.374.

At a price of $5/hour, Crank N Boom wants to hire 3 workers. When the price rises to $7/hour, Crank N Boom wants to hire only 2workers. Crank N Boom's price elasticity of demand for workers is: A. −0.83 B. −1.20 C. −0.33 D. −0.40 E. −0.10

B. −1.20

When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates that the cross- price elasticity between tortilla chips and dips is ________, so the two are ________. A) 0.8; substitutes B) -0.4; complements C) -0.8; complements D) 0.4; substitutes

C) -0.8; complements

Positive externalities are created when A) farmers spray pesticide in their fields and it washes into the local river after the first rainstorm. B) you purchase the "Mona Lisa" and lock it in a vault. C) your neighbor plants beautiful trees and flowers in her yard. D) other consumers reduce their demand for coffee and price thereby declines.

C) your neighbor plants beautiful trees and flowers in her yard.

Dr. Patel asked students in our class how much they would have to be paid to be willing to lead the class in the chicken dance. Nora was willing for $5, Lucas was willing for $20, and Reginald was willing for $50. Based on these three students, if Dr. Patel paid $30 to students to do the chicken dance, then the total amount of PRODUCER SURPLUS would be A. $20 B. $25 C. $35 D. $55

C. $35

The price elasticity of demand for Gatorade is -1.6. This implies A. If price increases by 10%, quantity demanded will increase by 16% B. If price increases by 10%, quantity demanded will decrease by 1.6% C. If price decreases by 10%, quantity demanded will increase by 16% D. If price decreases by 10%, quantity demanded will decrease by 1.6%

C. If price decreases by 10%, quantity demanded will increase by 16%

Suppose you live in a community with no price controls. What do you expect to happen if your town borders a community where there is a binding price floor on most products? A. Prices in the legal market in the community with a binding price floor would fall. B. There would be smaller surpluses in the community with a binding price floor. C. More consumers would purchase the product in the community without a price floor. D. The black market in the community with a binding price floor would be larger. E. Sales of the product in the community with a binding price floor would increase.

C. More consumers would purchase the product in the community without a price floor.

Your professor's income doubled and but his consumption for bud light beer went down. The income elasticity of demand for this beer is A. Equal to zero as beer and income has not relationship. B. Positive because bud light is an inferior good. C. Negative because bud light is an inferior good. D. Negative because bud light is a normal good.

C. Negative because bud light is an inferior good.

For which of the following goods would demand be most elastic (i.e., have a value of price elasticity furthest from zero)? A. soft drinks. B. cola. C. R.C. Cola. D. None of the above answers are correct (since the value of price elasticity would be the same for all three products, because they are so closely related to each other)

C. R.C. Cola.

"Rent Controls" are an example of ______; a "Minimum Wage" is an example of ________ . A. a price curtain; a price wall. B. a price wall; a price curtain. C. a price ceiling; a price floor. D. a price floor; a price ceiling.

C. a price ceiling; a price floor

Suppose that the value of Price Elasticity of Supply for pens is 2.5. This value would suggest that a 10% increase in the price of pens would result in quantity supplied A. increasing by approximately 4%. B. decreasing by approximately 4%. C. increasing by approximately 25%. D. decreasing by approximately 25%.

C. increasing by approximately 25%.

When the price of corn is $4, the quantity demanded of corn is 500. If an increase in supply causes the price of corn to drop to $3, Total Consumers' Surplus A. does not change. B. increases by less than $500. C. increases by exactly $500. D. increases by more than $500.

D. increases by more than $500.

Which of the following would be the most likely result of a binding price ceiling imposed on the market for rental cars? A. frequent rental programs such as "Rent nine times and the tenth rental is free!" B. enhanced maintenance programs to promote the high quality of the cars C. free gasoline given to people as an incentive to a rent a car D. slow replacement of old rental cars with newer ones

D. slow replacement of old rental cars with newer ones

Suppose that farmers decide individually whether or not to get their own cattle vaccinated against anthrax. Which of the following results? a. There is market failure because the equilibrium quantity of vaccine is too low. b. There is market failure because both the equilibrium price and quantity of vaccine are too high. c. There is no market failure because the market will tend toward equilibrium. d. There is no market failure, although both the equilibrium price and quantity of vaccine are too high.

a. There is market failure because the equilibrium quantity of vaccine is too low

Asymmetric information occurs when: a) Information is free b) Buyers and sellers have access to different information c) Community surplus is maximized d) Community surplus is minimized

b) Buyers and sellers have access to different information

Keeneland wants to increase the total revenue generated by the horse racing in order to more easily cover operating expenses. The CEO suggests that they should decrease the price of concessions (food and drinks). This should increase the number of attendees to Keeneland. CEO believes the cross price elasticity between the concessions and attending Keeneland to be a. positive b. negative c. zero d. CEO needs more information

b. negative

If the marginal rate of tax is 40% and consumers' income increases from $10,000 to $12,000: a) The amount of tax paid will increase by $4,800 b) The amount of tax paid will increase by $4,000 c) The amount of tax paid will increase by $800 d) The total tax paid will be $4,800

c) The amount of tax paid will increase by $800

All of the following are problems associated with rent ceilings except a. chronic excess demand for rental units b. an eventual decline in the number of rental units c. chronic excess supply of rental units d. landlords failing to maintain rent-controlled properties adequately

c. chronic excess supply of rental units

what theorem states that when conflicting property rights occur, bargaining between the parties involved WILL lead to an efficient outcome, as long as the transaction costs associated with bargaining are LOW

coase theorem

what regulations set specific limits on pollution

command and control regulations

All of the following are examples of "Command and Control" solutions to externalities except a. the "No Smoking" signs posted in public buildings b. automobile emissions testing requirements c. restrictions on the transportation of hazardous wastes d. trading in pollution rights between electrical utility companies e. the requirement that cars all use unleaded fuel

d. trading in pollution rights between electrical utility companies e. the requirement that cars all use unleaded fuel

Price ceilings on Canadian prescription drugs have resulted in lower prices for drugs produced by United States pharmaceutical companies causing a. chronic excess demand in Canada b. chronic excess demand in Canada and the United States c. U.S. companies to end shipments of drugs to Canada d. American consumers to purchase large quantities of drugs at the lower Canadian prices e. Canadian citizens to buy drugs at low prices in Canada, then smuggle them across the border to resell them at the higher U.S. prices

e. Canadian citizens to buy drugs at low prices in Canada, then smuggle them across the border to resell them at the higher U.S. prices

elastic or inelastic? price elasticity of demand 1 or greater

elastic

are hamburgers inelastic or elastic?

elastic, because it is specific

the optimal point that maximizes the areas of consumer and producer surplus

equilibrium

price ceilings help producers and price floors help consumers

false

suppose that the government places a $500 tax on luxury cars. If the demand curve for luxury cars were more inelastic that supply, the price paid by consumers will rise by exactly $500

false

the university of kentucky offers online courses and regular courses on campus. the graphs below depict the demand for these classes. currently, the tuition is the same for both courses. if the university wants to use a multi-tiered pricing system, with the goal of increasing revenue, they should charge HIGHER tuition rates in the regular courses and LOWER tuition rates for the online courses

false

true or false? deadweight loss can be positive or negative

false, deadweight loss can only be positive

true or false? tax revenue is always high

false, it is always low

when a price floor is binding, the price of a good is (higher, lower) than the equilibrium price

higher

a good that has a price elasticity of demand that is between 0 and 1 is (inelastic, elastic)

inelastic

elastic or inelastic? people will come no matter if the price is raised or not

inelastic

elastic or inelastic? price elasticity of demand less than 1

inelastic

on a graph, do inelastic or elastic goods have steeper slopes?

inelastic goods have steeper slopes than elastic

is food inelastic or elastic?

inelastic, because it is not specific

inferior, normal, or luxury good? income elasticity of demand less than 0

inferior

when the demand of a good DECREASES with income, the good is a/an (inferior, normal) good.

inferior

what shape is the Laffer curve

inverse U shape

do inelastic goods generate more or less deadweight loss?

less

inferior, normal, or luxury good? income elasticity of demand greater than 1

luxury

inferior, normal, or luxury good? income elasticity of demand between 0 and 1

normal

would a demand for drivers be a positive or negative externality?

positive

a legal maximum on theorize at which a good can be sold

price ceiling

legal minimums on the price a good can be sold

price floor

what type of tax structure is this an example of (progressive, regressive, proportional) $1,000 - $100 , $2000 - $500 , $3000 - $1000 , $4000 - $2000

progressive

what type of tax structure is this an example of (progressive, regressive, proportional) $1000 - $100 , $2000 - $100 , $3000 - $100 , $3000 - $100 , $4000 - $100

proportional

what type of tax structure is this an example of (progressive, regressive, proportional) $1000 - $2000 , $2000 - $1000 , $3000 - $500 , $4000 - $100

regressive

the sum of producer and consumer surplus

social welfare

how do you calculate producer tax burden?

total tax - consumer burden = producer burden

Antonio loves opera and hates rock n roll. Shen loves playing rock n roll music at high volume. unfortunately, they are next-door neighbors in an apartment building with paper-thin walls. in this case, Shen imposes a negative externality on his neighbor in the form of noise pollution. According to the coast theorem, Shen and Antonio might now be able to reach an agreement if the transaction costs are high

true

a tax on food leads to relatively little deadweight loss because people are not very sensitive to the price in this market

true

an example of a positive externality is recycling. the market fails because the social optimal quantity of recycling is greater than the market quantity

true

consider two ways of commuting in a crowded city: taking public transportation, such as subway and buses, or driving your own car. a person who chooses to take public transportation in a crowed city imposes a positive externality on drivers. a policy implication of the this result is a subsidy for those who take public transportation

true

price increases decrease consumer surplus

true

social welfare is maximized when the market reaches is equilibrium price and quantity

true

suppose that the government decided to issue tradable permits for a certain form of pollution. If the government chooses to distribute the tradable permits, the permits will eventually end up in the hands of the firms who value them most

true

true or false? Students using laptops in class not for note taking but rather to be on social media or watch videos is an example of negative externality because they create "visual pollution" - learning of students seated near the laptop users is negatively affected.

true

true or false? by taxing polluters an amount per unit of the good produced equal to the cost of the negative externality, the quality of pollution generated is reduced

true

true or false? imposing a price ceiling will generally make sellers worse off

true

true or false? more elastic = more specific

true

true or false? the more elastic, the more substitutes

true

true or false? the more specific, the more elastic.

true

true or false? the one (supply or demand) that is elastic, or more sensitive to changes in price, will face a lower tax than the other

true

in what circumstance do consumers bear all of the tax?

when the demand curve is perfectly inelastic

are firms allowed to trade pollution permits?

yes