ECO 2023 Exam 2 Review (Mod 5-7)

If a $1.00 tax per unit is placed on a good, then the new equilibrium quantity

decreases slightly when the supply and demand are both highly inelastic.

A progressive income tax is likely to do which of the following?

Increase the percentage of income taxed as income rises

Tastes change so that demand for a product increases. At the same time, taxes on the product paid by the producer are lowered. Given that output increased, which change had the largest effect?

It is impossible to tell.

In the short-run, a price ceiling on gasoline will create a ______ ______ than in the long run.

greater shortage

In Section 13.5, we saw that farm subsidies generally lack an economic justification. What are the unintended consequences of these subsidies? The quantity of goods produced with the subsidy is ______________ and efficiency is ______________ than the market without a subsidy.

too high; lower

The allocatively efficient amount of pollution is the amount where the marginal benefit of pollution control is ______________ the marginal cost of pollution control.

just equal to

A tax on consumers would case the market price to _______ and the market quantity to ________.

decrease; decrease

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

increase; decrease

An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

increase; increase

Prices should be ___________ (increased/decreased/not changed) in the winter and ___________ (increased/decreased/not changed) in the summer. ​[Image description: The two tables below show the demand (prices and quantities) for movie tickets in the winter and summer.]

increased; decreased

The earth's environment is an example of a common resource because:

it is provided for all to use without a cost, but one person's use (or abuse) of it affects the ability of others to use it.

Deadweight loss is important to consider when analyzing a tax because:

it represents inefficiency caused by the tax.

Assume the following goods are all supplied in perfectly competitive markets. Therefore, supply is perfectly elastic in each of the markets. Given the elasticities of demand presented in the attached table, in which market will a $1 excise tax be most efficient?

legal services

Suppose that there are external benefits in an otherwise perfectly competitive market. The market will produce ______________ the allocatively efficient level of output.

less than

The most popular options for Nashville to reduce pollution are the issuance of permits to pollute and a regulation requiring all companies to reduce pollution. Both options will reduce pollution by the same amount. In terms of the resources devoted to reducing pollution, the permits will likely cost ______________ the regulation.

less than

If societies rely on private (competitive) markets to provide public goods, the amount of the public goods will be what is allocatively efficient and the market price will be what is allocatively efficient.

less; equal to

A change in demand will cause the equilibrium price to change by ______________ and the equilibrium quantity to change by ______________ with an elastic supply than if supply were inelastic.

less; more

Consider a good produced in a competitive market, but one with external benefits. The market price will result in too ______________ of the good for economic efficiency. The market price will be ______________ than the price that would convince producers to produce the efficient amount.

little; lower

If the goal of a local government is to have the least effect on spending patters of taxpayers, the taxes should be placed on goods, services, or activities:

that have the most inelastic demands.

The goal of a local government is to raise the most income in order to provide the best possible education for residents. Several different types of taxes are being considered. In order to raise the most funds for a given tax level, the taxes should be placed on goods, services, or activities:

that have the most inelastic demands.

To pay for a public good that not everyone uses, the most equitable tax for most people is likely one that is based on _____________.

the benefit principle

When a excise tax is placed on the seller of a good:

the buyer is likely to pay a higher price and the seller is likely to receive a lower price from the sale of the good once the tax is considered.

When price decreases, quantity increases. Price elasticity of demand measures how much ___________.

the quantity increases when price decreases

One outcome of a sales tax is:

the total amount of taxes collected will increase as the price of the good increases.

A change in supply will have a (greater, lesser, the same) effect on price for a relatively more inelastic demand curve than a relatively more elastic one.

A greater

A change in supply will have a (greater, lesser, the same) effect on quantity for a relatively more elastic demand curve than a relatively less elastic one.

A greater

Markets for goods and services that fall into a category of common goods and services are characterized by:

costs of the goods and services that are too low

Common resources involve externalities. The consumption of common resources results in external ______________ and the free market quantity produced and consumed is ______________.

costs; too high

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues.

decrease

A tax on producers would cause the market price to _______ and the market quantity to ________.

increase; decrease

If the income elasticity of a good is 0.8, what do we know about the good?

It is a normal good.

Most observers would claim that a regressive income tax will ________ equity.

decrease

Using the attached table, the equilibrium price before the tax is imposed is ______________. The equilibrium price after the tax is imposed is ______________. The amount of the tax is ______________.

$140, $160, $70

Abby is ready to buy 8 apple pies at the price of $25 each, while her favorite baker is willing to sell each apple pie for $12. If a tax of $15 per apple pie is added, how many apple pies will Abby buy in the end?

0

The following table presents the amount of pollution that comes from two businesses and the marginal cost to reduce pollution. How much pollution would be released if there was no attempt on the part of either business to reduce pollution?

1,700 tons of pollution

This table shows the supply and demand for socks. If the government imposes a price floor of $10, how many pairs of socks will be exchanged on this market?

2

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease?

4%

Milk producers know that the elasticity of demand for milk is 0.1. If they want to increase sales by 5%, by how much will they need to lower price?

50%

The following graph presents the marginal cost and marginal benefit information for tons of steel produced. If the external costs are included in the market price, the allocatively efficient equilibrium quantity will be and the market equilibrium price will be .

500; 225

Using the attached table, the equilibrium quantity before the tax is imposed is ______________. The equilibrium quantity after the tax is imposed is ______________. The change in equilibrium quantity is ______________.

550, 525, -25 units

Which of the following examples represents a positive production externality?

A beekeeper's bees pollinate flower as they make honey.

Which of the following examples represents a positive production externality?

A beekeeper's bees pollinate flowers as they make honey.

Which of the following examples represents a negative production externality?

A coal-fired power plant emits sulfur dioxide while producing electricity.

Which of the following statements about the effects of a government setting maximum prices is true?

A maximum price will cause a shortage of a good to be produced only if the maximum is below the equilibrium price.

Which of the following statements about the effects of rent control is true?

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?

A price ceiling with a maximum price below equilibrium price

Which of the following is likely to have the largest elasticity of supply?

A producer of vanilla ice cream

If the government imposes an effective price ceiling in a market, what will be the result?

A shortage

Using the table above, if the government imposes a price floor of $10, what will the effect be?

A surplus of 6 units

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?

I do not know because I cannot tell how much costs would change in relationship to revenues.

Suppose the government chooses to provide a public good at a zero price, and the increased consumption makes it so that one person's use begins to interfere with others' use. Think of a crowded road or a crowded park. What should the government do now to keep this market efficient?

Add prices that reflect the costs of an individual's use of the good.

Rank the following in order from the least elastic demand to most elastic.

Allergy medicine that is prescribed by a physician Any over the counter allergy medicine Sudafed Cold and allergy medicine

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?

An increase in demand, but no change in quantity supplied.

When the federal government subsidizes higher education in the form of Pell grants to students, it results in

An increase in the demand for higher education

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in:

An increase in the supply of higher education

Which of the following individuals might be considered a free rider?

An individual who lives near an airport and chooses to watch the local air show from his own yard rather than pay the admission fee next door.

A quasi-public good shares all characteristics of a public good except that access to the good can be limited, at least somewhat, so that there are no free riders. Which of the following products best fits the definition of a quasi-public good?

An underused museum

A price floor of 89 cents per bushel of cranberries was recently increased to $1.00 per bushel. Before the increase, the market price of cranberries was 89 cents. What will happen to the quantity sold in the market?

It will decrease.

If supply increases, what will happen to the total amount spent on a product with an inelastic demand?

It will decrease.

Your local government is considering building a new highway bypass to circumvent your city. The bypass will traverse private property as it makes its way around the city and may even require some individuals to move residences. Which of the following is NOT a justifiable concern regarding the decision-making process or the construction of the bypass?

Because private contractors are often licensed and bonded, but the government is not, if the government builds the new bypass themselves, there is likely to be a greater number of safety violations.

If the government is trying to raise as much revenue as possible, which of the following goods would be the most likely to be subject to a government-imposed tax?

Bottles of alcohol, such as whiskey and gin

Which of the following descriptions best characterizes common resources?

Common resources are those where it is hard to keep non-payers from using the good, and their use of the good negatively impacts others' ability to use it.

A government may impose a price ceiling if which of the following is true?

Consumers can persuade legislators that lower prices are needed

Rank the following from the least elastic (most inelastic) to most elastic.

Demand for food Demand for dessert Demand for cookies Demand for oreos

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?

Demand will increase by 3.2%

Match each of the following goods to their characterization using concepts from this chapter.

Diesel automobiles contributing to smog Goods with external costs Trees in a natural forest¸ usable for making wood floors Common resources Yellowstone National Park Public goods Higher education Goods with external benefits

Which of these is an economically efficient manner of producing basic medical research?

Either (a) or (b) will work: Subsidize production of basic medical research by private producers Government production of basic medical research

A rural county in the U.S. has no broadband internet providers. A broadband provider from a neighboring county makes a proposal to the county government about building the infrastructure needed to bring broadband to individual businesses and households. The city asks for donations from its residents to cover the costs of the infrastructure (users would still be charged a monthly rate for access) and comes up short of the total amount needed. Which of the following is true if the county is interested in achieving the efficient outcome?

Either b) or c) can help the county reach the efficient outcome.

Assume demand is elastic. Click the corresponding arrow to indicate how quantity, revenues, costs, and profit will be affected if prices are increasing or decreasing. If there is not enough information to tell, do not select an answer for that section. ​[Image description: The table rows are price (increases) and price (decreases). The columns are quantity, revenues, costs, and profits, each with corresponding up and down arrows showing how they will be affected if prices are increasing or decreasing.]

Elastic Demand: Price Increases leads to: Quantity lower, Revenues lower, Costs lower, Profits ?. Price decreases leads to: Quantity higher, Revenues higher, Costs higher, Profits ?.

In the question above, if the city examined the elasticity of bus fares over this longer time period, what would they likely find?

Elasticity is now greater than 1

A property tax is most likely to do which of the following?

Encourage homeowners to consume less than the allocatively efficient amount of housing.

Consider a tax paid by consumers. Under which of the following circumstances would the tax cause the least effect on economic efficiency?

If the demand for the product is inelastic.

Consider a tax on producers. Under which of the following circumstances would the tax cause the least effect on economic efficiency?

If the supply of the product is inelastic.

The tradeoff between efficiency and equity is an important consideration in economies. How does taxation on income relate to this trade-off?

Income taxes promote equity and compromise efficiency

Now assume that the municipality decides to tax the same percentage of income for everyone regardless of income. Describe the tax in terms of the opportunity costs for individuals.

Individuals with a lower income will give up higher marginal utilities than those with higher incomes.

Assume demand is inelastic. Click the corresponding arrows to indicate how quantity, revenues, costs, and profit will be affected if prices are increasing or decreasing. ​[Image description: The table rows are price (increases) and price (decreases). The columns are quantity, revenues, costs, and profits, each with corresponding up and down arrows showing how they will be affected if prices are increasing or decreasing.]

Inelastic Demand: Price Increases leads to: Quantity lower, Revenues higher, Costs lower, Profits higher. Price decreases leads to: Quantity higher, Revenues lower, Costs higher, Profits lower.

Is the demand for a container of salt likely to be inelastic or elastic? Why? Select all that apply.

Inelastic because salt is a necessary dietary component

One difference between state spending and local government spending is which of the following?

Local governments spend more of their budget on k-12 education while state governments spend more of their budgets on higher education

If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's?

More

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what?

Negative

Would a good provided to the public at a price of zero be likely to be economically efficient?

No, it is likely that too much is produced.

Consider two goods. The first makes up a large part of one's spending; the second, a small part. The first does not have many substitutes, while the second has quite a few. What is likely true about the elasticity of demand for the first good compared to that of the second?

One cannot tell as the larger portion of spending makes demand elastic and the lower number of substitutes makes demand inelastic.

You have been charged with deciding on optimal fishing policies in order to both encourage growth in the salmon population in the Atlantic and allow fishermen to earn a living. You will need to allow some fishing, but not so much fishing that population counts are depleted for next year. Three proposals are on the table for you to choose from. Option 1: Institute a fishing "window" of 3 weeks wherein fishermen may fish as much as they wish, but after three weeks they must stop. Option 2: Institute a fishing "quota" that will limit the number of fish that any individual fisherman may harvest from the waters. Option 3: Sell a fixed number of licenses to harvest a certain number of fish. Which of these choices is most likely to produce the outcome you are interested in?

Option 3

An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor?

Price floor

Which of the following descriptions best characterizes public goods?

Public goods are those where it is hard to keep non-payers from using the good, but their use of the good does not negatively impact others' ability to use it.

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?

Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

Assume that the municipality decides to place a tax on individual incomes. Suppose that the tax is a fixed sum for everyone regardless of income. Explain how you might describe the tax. Select all that apply.

Regressive. Would tax a larger percentage of smaller incomes.

Which of the following taxes is most likely to be regressive?

Sales tax on food

If a business wants to increase its profits and it faces an elastic demand, should the managers raise or lower prices?

The business should lower prices.

Who is likely to be in favor of a price ceiling on a good?

The consumers of the good who can still purchase it after the ceiling is imposed

Suppose researchers find out that even a very high cigarette tax rate has only a small impact on cigarette consumption. What can we know about the supply and demand of cigarettes?

The demand is inelastic, but it is unclear how elastic supply is.

A U.S. company sends a lobbyist to Washington, D.C. to argue for increased tariffs on imported goods from China that compete with the company's own products. Which of the following represents an inefficiency in government due to misplaced incentives?

The lobbyist is successful at convincing legislators to pass the legislation, and American consumers pay higher prices.

Consider a good with external benefits. Which of the following best describes why the market does not produce an allocatively efficient amount?

The marginal private cost of production equals the marginal private benefit of production but is less than the marginal social benefit of production.

Consider a good with external costs. Which of the following best describes why the market does not produce an allocatively efficient amount?

The marginal social cost exceeds the marginal social benefit.

Compare the results of a tax levied on suppliers in a market with a tax levied on consumers in the same market.

The new equilibrium quantities and prices will be the same in both cases.

The government creates an effective price floor. Describe how the market adjusts by putting the following statements in order.

The new minimum price is now above the equilibrium price. Producers are willing to supply more‚ but consumers would be willing to buy less. The difference between quantity demanded and quantity supplied after the price floor comes into effect creates a surplus in the market. The size of the surplus depends on the elasticity of the producers and consumers‚ the more elastic either party is‚ the greater the surplus.

The current equilibrium price of a specific type of automobiles is $23,000. An increase of a price ceiling on automobiles from $20,000 to $25,000 will do what to the amount sold in the market and to the price of automobiles?

The price of automobiles will increase and more will be sold.

Consider a good with a price floor that is above the equilibrium price. If demand decreases, what will happen to the price in the market and the amount produced?

The price will stay the same and the amount produced will decrease.

If demand is elastic, should a producer raise or lower price if the producer wants to increase total revenues?

The producer should lower prices.

One market characterized by incomplete information for consumers is the used car market. In the used car market, consumers don't know the condition of the car being sold and therefore cannot accurately project their marginal benefit from consuming the car. Suppose that consumers distrust used car salesmen and expect the worst from the cars they sell. How will the quantity of used cars sold in the used car market compare to the efficient quantity and how will the price of used cars sold in the used car market compare to the price when the efficient quantity is sold?

The quantity in the used car market will be too low relative to the efficient quantity and the price will be too low.

Due to a price ceiling on gasoline, over 10,000 potential gasoline consumers cannot buy at the current price. Over time, the demand for gasoline adjusts as people start buying electric cars. What will happen to the shortage?

The shortage will be less than 10,000.

Suppose that the Federal government is imposing a nation-wide tax on alcohol. In one state the supply for alcohol is elastic. In another state the supply for alcohol is inelastic. Assume the elasticity of demand is the same across states. If the tax rate is the same across all states, in which state will the tax have a bigger effect on equilibrium quantity? And equilibrium price?

The state with elastic supply will see the tax have a bigger effect on equilibrium quantity. The state with inelastic demand will see the tax have a bigger effect on equilibrium price.

If the government taxes car producers, that will happen in the market for cars?

The supply curve will shift to the left.

A tax is placed on a good with externalities in an effort to create an allocatively efficient outcome. If the externality at each level of output decreases, what should happen to the tax?

The tax should be lowered, as more should be produced.

Suppose that there is currently a $2.00 per bottle tax on vodka that is levied on consumers. Legislators have decided to give consumers some relief by eliminating the tax. In order to keep tax revenues at their previous level, they decide to impose a $2.00 tax on producers. What is the net impact of these two actions?

There is no change in either consumers' or producers' well-being.

Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods?

These are luxury goods, so income elasticity would be greater than 1.

Consider a good with external costs. Which of the following descriptions characterizes quantities of goods between the market equilibrium quantity and the allocatively efficient quantity?

These quantities will be produced by the private market, but the government can eliminate these quantities from production using a tax, resulting in higher economic efficiency.

In general, why do governments raise tax revenue? Select all that apply.

To provide public goods To fund government operations To transfer wealth from some individuals to other individuals

If potential customers fail to recognize some costs associated with the consumption of a good before buying the good, what will happen in the otherwise perfectly competitive market for the good?

Too much for allocative efficiency will be produced.

A government project that once had benefits greater than costs continues to exist despite the benefits now being less than costs. A reason might be that:

a few people receive the benefits and many pay the costs.

Which of the following is an example of a public good?

a lighthouse on a rocky shoreline

To put a price on a public good, regulators must:

add up vertically the demands of individuals because consumption is non-rivalrous

Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?

elastic

Economists have estimated the elasticity of demand for the following (fairly) common goods. If the same excise tax were imposed on the sale of each item, which market would experience the largest deadweight loss?

fresh tomatoes

If the government is trying to raise as much revenue as possible, then the suppliers of ____________are more likely to have a tax imposed on their production.

gasoline

In the aftermath of the financial crisis of 2008, several banking practices came into sharp focus for contributing to the crisis. One of those practices was the issuance of "subprime" mortgages - mortgages made to borrowers who were unlikely to be able to repay in the case of a recession or a decline in housing values. Banks defended their choice by arguing that if the mortgage holders defaulted on the payments, the banks themselves would be the ones taking a loss in profits. In the end, however, the default rate on these loans was so high that the country's entire financial system was at risk of collapse, and taxpayer dollars were used to keep banks solvent. This information indicates that subprime mortgages are _________.

goods with additional social costs

The market for baking flour has changed over time such that there are more substitutes on the market. If the price of baking flour goes up, the decrease in quantity demanded will be _____ as compared to before.

greater

The supply curve for hotels in Las Vegas is perfectly inelastic. If a $25 tax is placed per night on hotel rooms, then the:

hotel owners will pay all of the tax.

If a per unit tax is placed on a good, then:

if poor consumers pay a larger proportion of their income on the good than wealthy consumers, it would be considered a regressive tax.

An increase in a price ceiling will change the amount of a good sold in a market:

if the price ceiling is effective.

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.

increase

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares?

increase fares

In a perfectly competitive market, placing a tax on a good that produces an external cost will:

increase the price and decrease the equilibrium quantity in the market.

A tax placed on a good that already has an effective price ceiling will do which of the following in the market?

increase the size of the shortage

If a change has increased the costs of reducing pollution, the allocatively efficient amount of pollution will:

increase, and an existing pollution tax should be decreased.

A beekeeper's bees pollinate crops in the process of making honey. If the benefits of pollination are not part of the market for honey, the equilibrium quantity of honey will be too and the equilibrium price of honey will be too to be allocatively efficient.

low; low

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price?

lower price

For a single taxpayer, as his or her personal income increases, the:

marginal tax rate increases.

When will a minimum wage be an effective price control? When it is a _________.

minimum "price" that is above equilibrium price

The price elasticity of demand will be _________________ if demand is elastic.

more than one

If many individuals can consume a good at one time, how much should be produced in an allocatively efficient outcome?

more than what a normal competitive market would produce

A highway paid with entry fees (tolls) may be considered ______ fair based on the benefit principle but ______ equitable based on the ability to pay principle compared to an income tax used for the same purpose.

more; less

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4. Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2. Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR faces a _________ elastic demand than exists in Situation B.

more; less

Consider a good produced in a competitive market that has external costs. Too ______________ of the good will be produced for economic efficiency and the price will be ______________ than the price that will convince consumers to purchase the efficient amount.

much; lower

A tax on a good and a tax on income will result in which of the following effects on allocative efficiency? ______________ of the good will be produced for allocative efficiency. ______________ labor will be provided in the market.

not enough; not enough

Sales taxes may be regressive taxes if:

poor consumers pay a larger fraction of their income in taxes than wealthy consumers.

A flat tax that exempts the first $20,000 of income and taxes all income above $20,000 at a 15% rate is _________.

progressive

The Green River runs through Wyoming and is used free of charge by farmers for irrigation. When there is plenty of rain, the river is a ______________. But in low-rain years, the downstream farmers can experience water levels too low for irrigation and the river is a ______________.

public good; common resource

A firm wishes to increase profits. It knows that demand is inelastic. Therefore, it should do what to its prices?

raise them

A sales tax is normally viewed as a __________.

regressive tax

Suppose benefits of a program are received in the future and costs are paid now. Assuming the benefits are slightly greater than the costs, an existing government program will be:

relatively easy to eliminate.

An increase in prices of inputs will cause a ___ change in prices with an elastic demand as opposed to an inelastic demand. The change in input prices will cause a ___ change in quantity if demand is elastic as opposed to an inelastic demand.

relatively small increase; relatively large decrease

If the elasticity of supply and the elasticity of demand for tomatoes were exactly the same, then a $1 tax on tomatoes would:

result in the buyer and seller each paying $0.50 of the tax.

A common resource is a good that is:

rivalrous and non-excludable