ECO 201 Exam 2- Sample Questions

The Coase Theorem says

Two parties can bargain privately to solve problems related to externalities, absent transaction costs

The Laffer Curve shows us that

as the size of the tax increases, tax revenue increases but then eventually starts to decrease.

Tradable pollution permits

will be more valuable to firms that can reduce pollution only at high costs.

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

Markets fail to produce the maximum total benefit to society when positive or negative externalities are present.

Refer to Table 7-3. If there is only one unit of the good and if the buyers bid against each other for the right to purchase it, then the consumer surplus will be

$10 or slightly less. Since Ming-la will win the bid by bidding at or just over $35, her consumer surplus will be at or just under $10, since $45 (her willingness to pay) - $35 = $10.

Roller blades have recently come back into style in Lexington, and several people in our class are considering buying them. For a new pair of roller blades, John is willing to pay $150, Jill is willing to pay $100, Ruth is willing to pay $90, Gretchen is willing to pay $60. If new roller blades are currently selling for $80 per pair, what is the total amount of consumer surplus that will result for these customers?

$100 John is willing to pay $150. 150-80 = 70 in surplus Bill is willing to pay $100. 100-80 = 20 in surplus Ruth is willing to pay $90. 90-80 = 10 in surpluse Gretchen is willing to pay $60. this person will not buy skates at a price of $80 Total surplus adds up to $100.

The equlibrium price of burritos in Lexington is $8. At this price 800 burritos are sold in a day. A $2 dollar tax is then levied on burritos in Lexington. With this tax output is reduced to 600 burritos per day, sold at a price of $9. What is the revenue generated by the tax?

$1200 For every unit sold, tax revenue collected is $2. For 600 units sold, the total tax revenue collected = 600 * 2 = $1200 Tax revenue = Number of units sold X Tax per unit

If Chelsea makes $100,000 a year and the income tax rate is 10% for income earned up to %50,000 and 20% for income greater than $50,000, then what is her total tax liability?

$15,000 If Ashley makes $100,000 a year and the income tax rate is 10% for income earned up to $50,000 and 20% for income greater than $50,000, then what is her total tax liability? $15,000 = 50,000X.1 + 50,000X.2 = 5,000+10,000=$15,000

Table 1 contains the 2017 tax brackets for singles. If your friend Patricia makes $85,000 what is his total tax liability?

$16,988 This is found by the following formula: 9325*.10+(37950-9325)*.15+(85000-37950)*.25=16,988.75

The per unit economic burden (actual incidence) of the tax to consumers is

$2

What is the value of the producer surplus after the tax?

$2,000 The producer surplus after the tax is represented by the area e. Find the area of this triangle. The formula for the area of a triangle is (1/2)*Base*Height. Area = (1/2)*(7-3)*(1,000-0) = (1/2)*4*1,000 = $2,000.

The equilibrium price of burritos in Lexington is $8. At this price 800 burritos are sold in a day. A $2 dollar tax is then levied on burritos in Lexington. With this tax output is reduced to 600 burritos per day, sold at a price of $9. What is the deadweight loss of the tax?

$200 A deadweight loss is a cost to society created by market inefficiency. In this scenario, the market is losing out on 200 burritos after the tax of $2. Deadweight loss is calculated as the change in quantity (the base of the deadweight loss triangle), times the tax amount (the height of the deadweight loss triangle), multiplied by one-half, so we have (800-600)*2*.5 = 200.

Refer to Figure 7-1. If the price of the good is $150, then consumer surplus amounts to

$250

What is the dollar amount of the excise tax?

$3 The tax is the distance the supply curve shifts up vertically. We can see this on the Y axis as the difference between P1 and P2.

What is the dollar value of the deadweight loss generated by this tax?

$300

Refer to Table 7-3. If the price is $20, then consumer surplus in the market is

$45, and Quilana, Wilbur, and Ming-la purchase the good.

What is the total value of consumer surplus AFTER the imposition of the tax?

$450

Refer to Figure 7-1. If the price of the good is $250, then consumer surplus amounts to

$50

What is the value of the deadweight loss from taxation?

$600 Find the area of the two triangles, c and f, and add them together. The formula for the area of a triangle is (1/2)*Base*Height. Area of c = (1/2)*(10-9)*(1,400-1,000) = (1/2)*1*400 = 200. Area of f = (1/2)*(9-7)*(1,400-1,000) = (1/2)*2*400 = 400. Area of c +Area of f = 200+400 = $600.

Refer to Table 11-4. Suppose the cost to plant each tree is $120 and the 4 homeowners have agreed to split all tree-planting costs equally. How many trees would Adams prefer to plant?

2

Refer to Figure 7.1. What is consumer surplus at the market price?

22.5 Consumer surplus is the area of the triangle above price, below the demand line and to the right of the y axis. Thus Consumer surplus is 15*3*.5 = 22.5.

Table 1 contains the 2017 tax brackets for singles. If Seth makes $140,000, what is his average tax rate? Tax Rate I Single 10%. I Up to $9,325 15% I $9,326 to $37,950 25% I $37,951 to $91,900 28% I $91,901 to $191,650 33% I $191,651 to $416,700 35% I $416,701 to $418,400 39.6% I $418,401 or more

23% (9325*.10+(37950-9325)*.15+(91900-37950)*.25+(140000-91900)*.28)/140,000 = 0.23

Refer to Table 11-4. Suppose the cost to plant each tree is $90. How many trees should be planted to maximize the total surplus of the four homeowners?

4

Refer to Table 7.1. If the price of the good is $28, how many units will be sold

4

A good has a price elasticity demand as 1.5, which of the following is likely the good?

A BMW Elasticity that is greater than 1 implies elastic good. From the four choices, BMW is more likely to have greater number of substitutes relative to the other options. BMW is a luxury good, which likely has an elastic demand. Doctors visits is a necessity (fewer substitutes) so is likely to have a more inelastic demand. Eggs has no close substitutes, since eggs are not easily substituted in most recipes and so has more inelastic demand. Secondary education has a broad market definition that includes community college and four year colleges as varied as Berea, UK, and UL, meaning it has a more inelastic demand.

The UK Bookstore assumes that T-shirts and books are substitutes. Which of the following measures would confirm their assumption?

A positive cross-price elasticity Substitutes are characterized by positive cross-price elasticities, that is the percentage change in quantity of books sold should be positive when the percentage change in price of T-shirts is positive, that is the price of T-shirts and quantity demanded of Books move in the same direction (and vice versa).

Refer to Table 11-4. Suppose the cost to plant each tree is $340 and the 4 homeowners have agreed to split all tree-planting costs equally. Which homeowner(s) would be in favor of planting at least 1 tree?

Adams, Benitez, Chen, and Davis

What areas on the graph represent the deadweight loss that results from the tax?

Areas U+V

Jess and Herbert work in the LEAP Lab and are paid $200 per week. The earnings of tutors rise to $250 per week and Iris and Jake decide to also work in the LEAP lab. By how much has total producer surplus risen following the raise?

Between $100 and $200 After the raise, Jess and Herbert each receive $50 more of producer surplus. Iris and Jake decide to work when the pay is $250 but not when it is $200, so their willingness to sell their tutoring services is between $200 and $250, meaning they each receive between $0 and $50 of producer surplus, meaning total producer surplus for the four students rises between $100 and $200.

Price of Bagels I Quantity sold of Bagels $5. I 0 $4 I 2 $3 I 4 $2 I 6 $1 I 8 $0 I 10 At what point in Table 1 does a Brioche Doree first face inelastic demand for bagels?

Between $2 and $1 There is unit elastic demand between $3 and $2, elastic demand between $5 and $4 and between $4 and $3, and inelastic demand between $2 and $1 and between $1 and $0, so a Brioche Doree will first face inelastic demand for bagels between $2 and $1. You should use the midpoint method to determine these price elasticity of demands. Practice calculating the elasticities at the different price ranges.

Cengage produces textbooks that students purchase. Currently there is a 10% tax on textbooks in the State of Kentucky. Governor Bevin is considering abolishing the tax. If the tax is abolished, who will gain surplus from this?

Both Cengage and Students Since taxes affect buyers and sellers and both lose surplus when additional taxes are levied, both will gain surplus when taxes decrease or are abolished.

Which of the following is not a determinant of Elasticity of Supply: A. Ease of acquiring and utilizing inputs B. Time required to produce the good C. Ability to store output D. Definition of market

Definition of market The definition of market is a determinant of the elasticity of demand. The missing determinant of the elasticity of supply is availability of infrastructure facilities

When a market allocation of resources maximizes the total surplus received by all members of society we say there is

Efficiency Efficiency is the property of resource allocation that maximizes the total surplus received by all members of society. Equality is the property of distributing economic prosperity uniformly among the members of society. Market failure is the inability of some regulated markets to allocate resources efficient and market power is the ability of firms or consumers to influence prices.

Which of the following is likely to have more elastic demand?

Goods with narrow market definitions Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly-defined goods. ie: food (broad category) has a fairly inelastic demand b/c there are no good substitutes for it

Toyota is considering building another manufacturing plant in Kentucky. Its operations will be taxable by the Kentucky state business tax. Why would the state government care whether or not Toyota locates within its boundaries?

If it does, it will increase tax revenues since it will increase the tax base. The Kentucky tax base is made up of all of the households and firms within the state.

Which of the following is not a reason that Kentucky should impose a tax according to the "three reasons for taxation"?

In order to alter behavior or activity that generates positive externalities. It would want to alter behavior that generates negative externalities.

Which of the following is not true?

In the US a person's marginal tax rate is less than their average tax rate a person's marginal tax rate will be MORE than their average tax rate. All the other choices reflect true statements about taxes.

John Calipari has seen that revenues increase from basketball tickets when prices are raised. He has asked you why this is the case. You tell him, that of course the Wildcats face _____________demand for basketball tickets.

Inelastic The Wildcats face inelastic demand, when price increases total revenue increases, that is, quantity demanded will face a smaller percentage decrease than the percentage increase in price.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The change in consumer surplus is equal to

K+I

Refer to Table 7.1. If the price of the good is raised from $25 to $35 what is the change in total consumer surplus?

Loss of $30 dollars

Woodford Reserve sells some quantity of bourbon at a price of $40. If Woodford Reserve increases their price by $1 and people no longer buy their Bourbon, what kind of price elasticity of demand does Woodford Reserve face?

Perfectly Elastic Demand In this situation Woodford is facing perfectly elastic demand, since when the price is raised they go from facing some positive demand for their product to facing zero demand for their product.

Which of the following is most likely to cause a negative externality experienced by students?

Phones going off during lecture

Which of the following is not a determinant of deadweight loss due to taxation?

Price Tax size, price elasticity of supply, and price elasticity of demand are all determinants of deadweight loss, however, the price of the good does not determine the deadweight loss due to taxation.

When the Chik-fil-a at Bowman's Den increases the price of Chik-in sandwiches from $4 to $5 the number of sandwiches sold in a day decreases from 150 to 100. What is the price elasticity of demand. (Use the midpoint method(also called arc elasticity)) Is the good inelastic or elastic?

Price elasticity of demand is 1.8, Chik-in sandwiches are elastic Since the elasticity is greater than 1 the good is elastic.

The area below the equilibrium price and above the supply curve is known as:

Producer surplus Producer surplus is the area above the supply curve and below the equilibrium price. Consumer surplus is the area below the demand curve and above the equilibrium price. Consumer willingness to pay lies along the demand curve and consumer willingness to sell lies along the supply curve.

Refer to Figure 10-4. The socially optimal quantity would be

Q2

Refer to Table 7.1 If there are two units of the good for sale and they are sold through an auction, what will be the price paid for the good?

Slightly more than $30 If there are only two units of the good, those with the two highest willingness to pay will purchase the good. They will continue bidding until the bid is at or above the person with the next (third) highest willingness to pay and thereby exclude everyone else from buying the good. So Edgar and Felicia will pay slightly more than $30 for the good.

Based on the "actual incidence" of the tax, between supply and demand, which is relatively more ELASTIC?

Supply Since the burden on the producer is less, the supply curve is more elastic, as the producers are able to decrease production and push the tax off to consumers.

Suppose that a University of Kentucky MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies to the University of Kentucky for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.

Suppose that the demand for a good is more elastic than the supply. What does this imply?

The incidence of the tax falls more heavily on producers than consumers When demand is more elastic than supply the incidence of the tax falls more heavily on producers than consumers.

The state of Kentucky has decided to increase the 6 percent state sales tax so that businesses must now send in 8 percent of their sales revenues to the state. What is most certainly true as a result?

The legal incidence will fall on the businesses. While there is not enough given information to determine who will pay the actual incidence, the businesses, since they have to send in the tax, must pay the legal incidence.

A classic example of a binding price floor is

The minimum wage The minimum wage is above the equilibrium price for unskilled labor and so will bind and result in a surplus of labor supplied at that price.

If the USE of a good by consumers produces a negative externality what do we expect?

The social cost of the good is more than the private cost

Which of the following statements is NOT true with regard to taxes?

The state with the highest cigarette tax is California. The state with the highest cigarette tax is NEW YORK

When a tax is imposed on producers

The supply curve shifts upward If a tax is imposed on producers the supply curve will shift upwards. Producers will react the same way as if a price of an input changes, in this case, for each unit it sells it has to pay tax, which is the same thing as if it had to pay for an additional input to produce the good

When Hurricane Sandy hit the Jersey Shore, there was a shortage of gasoline. Many consumers were forced to wait in line at the pump. The local government considered imposing a price ceiling on gasoline temporarily. Why might they do this?

To decrease the price of gasoline. The local government was attempting to keep gas stations from charging higher than normal prices.

Which of the following is NOT one of the goals of taxation?

To finance political campaigns Taxes are used for the rest of the possible answers.

Which of the following is not a reason we tax goods?

To redistribute income although some people receive benefits from some government programs, taxes on goods are not designed to take income from some and give to others. The other three choices are all reasons government levies taxes on goods.

Which of the following government interventions sets a quantity limit in the face of a negative externality and allows the market to determine the price?

Tradable permits

An example of the benefit principle of taxation is

When travelers pay a toll to cross a bridge. The toll helps to pay for the bridge.

The demand for beer is more elastic than the demand for milk. The supply of beer and the supply of milk are similar in steepness. Which would generate a larger deadweight loss?

a $1 per unit excise tax imposed on beer

Which of the following goods or services will most likely have the most elastic demand?

a Southwest Airlines ticket on a Boeing 747 from Lexington to Storrs, Connecticut.

The tax on cigarettes is an example of

a corrective tax.

When the social cost curve is above a product's supply curve,

a negative externality exists in the market.

The Adams Family buys 20 Big K Pops, (2-litre bottles of a Kroger brand soft drink), per week. The Adams Family yearly income changed from $20,000 to $30,000 and at the same time they started buying 12 more Big K Pops per week. This tells us that the Adams Family sees Big K Pops as

a normal good As their income rose, their demand for K-pop rose as well.

The impact of one person's actions on the well-being of a bystander is called

an externality.

If income increases by 10% and the demand for Hamburger Helper decreases by 20% then Hamburger Helper is

an inferior good. The more income you have, the less you buy something implies that it is an inferior good. With most goods, when you have more income, you buy more of them. However, with certain goods, you may buys less as your income rises. Most people would probably substitute away from Hamburger Helper as their incomes rise.

Emission controls on automobiles are an example of a

command-and-control policy to increase social efficiency.

Refer to Figure 7-15. When the price falls from P2 to P1, producer surplus

decreases by an amount equal to A+B

Suppose the demand curve for UK basketball tickets is perfectly elastic but the supply curve for UK basketball tickets is not perfectly elastic or perfectly inelastic. If the equilibrium price of UK basketball tickets is initially $2, a downsizing of Rupp arena in the number of seats that causes a decrease in supply will:

have no effect on the equilibrium price. If demand is perfectly elastic and supply shifts, the equilibrium price will not change.

In a market economy, government intervention

may improve market outcomes in the presence of externalities.

Reaching an efficient bargain is difficult when the

number of interested parties is large.

Honey producers provide a positive externality to orchards because

the orchard owner does not have to purchase bees to pollinate his flowers.

Farmer Wendell lives outside Lexington and grows corn. The state of Kentucky is considering whether or not to enact a new agricultural price support for corn. If it does

then Farmer Wendell will most certainly receive a higher price for his corn. A price support is a government intervention that arbitrarily increases the price of the given product. There are no guarantees that Farmer Wendell will sell the same amount of corn, but it is certain that he will receive a higher price

How much revenue does the government generate from this tax?

$900

The demand for Trader Joe's sesame chicken is most likely elastic. In order for this to be the case, what must be true?

% change in Q > % change in P For demand to be elastic, % change in Q must be > % change in P

The price of UK Wildcat's t-shirts at the campus bookstore was increased from $15.00 to $22.50. The quantity demanded fell from 100 t-shirts per week to 60 per week. Determine the elasticity coefficient for UK Wildcats t-shirts.

-5/4

The per unit economic burden (actual incidence) of the tax to producer is

$1

What is the total value of consumer surplus BEFORE the imposition of the tax?

$1,250

Suppose a price decrease from $2,500 to $2,000 for the new Apple Macbook Pro causes the quantity demanded to increase from 10,000 to 20,000. What is the arc price elasticity of demand?

3

The city government of Lexington is concerned with both efficiency and equality. They need an economist to help them understand what each of these concepts entail. How would you compare efficiency and equality?

Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society.

At a price of $4 we will have what?

Either a price floor that is binding or a price ceiling that is not binding If there is a price floor (mandatory minimum price) of $4 it will raise the price since it is more than the equilibrium price of $3 and thus be binding. If there is a price ceiling (mandatory maximum price) there will be no effect because the equilibrium price of $3 is below the price ceiling of $4 so it will not be binding.

Which of the following describes inelastic demand?

Elasticity is less than 1 Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus. The smaller the number the less responsive the demand is to changes in price.

If there is a rightward shift in the supply curve (supply increases) what will happen to total surplus?

It will increase

Which of the following is not a private solution to externalities?

Protected Wetlands

Refer to Table 7-3. If the market price for the good is $20, who will purchase the good?

Quilana, Wilbur, and Ming-la only

Which of the following would you expect the market to provide too little of from society's point of view?

Restored historic buildings

When a good can potentially harm consumers and producers are aware of this and consumers are not, then we would typically say that the market outcome is inefficient because

The actual market output level will be higher than the socially optimal output level.

It is illegal to buy cigarettes in Kentucky and drive to New York and sell them. Why would anyone want to do this?

The excise tax rate for cigarettes is much higher in New York than in Kentucky. New York imposes a $4.35 per pack excise tax on cigarettes, while Kentucky imposes only a $.60 per pack excise tax on cigarettes.

What area on the graph represents the deadweight loss from taxation?

c+f

The midpoint method is used to compute elasticity because it:

gives the same answer regardless of the direction of change. It is a type of approximation.

The supply of a good will be more elastic, the

longer the time period being considered Consumers will respond more the more time they have to adjust to the price change.

When New Circle Road is congested, then use of that road by an additional person would lead to a

negative externality.

Refer to Table 11-4. Suppose the cost to plant each tree is $380 and the 4 homeowners have agreed to split all tree-planting costs equally. Which homeowner(s) would be opposed to planting any trees?

only Davis

Economists compute the price elasticity of demand as the

percentage change in quantity demanded divided by the percentage change in price. It is important to know how to describe the formula for elasticity. It is simply a measure of the relative change of demand to a change in price.

Which of the following is not a negative externality associated with driving cars on New Circle road?

repairs

Kent owes money for taxes to the city of Lexington. This money is determined by the _____ and is called a ______.

tax rate, tax liability Kent's tax is a function of the tax rate that he pays, and the total amount of dollars he pays is his tax liability. He is part of the tax base of Lexington.

If taxed, which of the following markets is likely to experience a high deadweight loss:

the market for Mercedes-Benz cars The larger the elasticities, the larger the deadweight loss. Mercedes-Benz cars have a high price elasticity of demand due to being a luxury good and experience higher deadweight loss if taxed. The other options are generally considered necessities and so will have a lower price elasticity of demand and experience lower deadweight loss if taxed.

Which of the following increases the odds that a good has elastic demand?

the passage of time.