Econ Final 201
Where demand is less elastic, the imposition of a binding price ceiling yields a smaller difference between market prices and a consumer's willingness to pay. Therefore, it is in such markets that we would expect black markets to arise. (a) True. (b) False.
(a) True. A binding price ceiling is a government-imposed limit on how high a price can be charged for a particular good or service. When the price ceiling is set below the equilibrium price, it creates a shortage of the good, as the quantity demanded exceeds the quantity supplied. In this situation, sellers may ration the scarce good using non-price methods such as waiting in line, first come first served, or other non-monetary allocation methods. However, in markets where the demand is less elastic, consumers may be willing to pay a higher price for the good, and the difference between the market price and the consumer's willingness to pay is smaller. In such a situation, even a small decrease in supply due to a price ceiling can lead to a significant shortage of the good. As a result, consumers may be willing to pay even higher prices to obtain the good, leading to the emergence of a black market where the good is sold illegally at higher prices.
If property rights were defined such that individuals received marginal benefits from their actions (e.g., benefiting from using a public golf course) but didn't pay any of the marginal costs of such use, we would predict that (a) public golf courses would be "over used." (b) public golf courses would be "under used."
(a) public golf courses would be "overused". This is because when individuals are not required to pay for the marginal costs associated with their use of a public good, they are more likely to consume it beyond the socially optimal level. Since individuals do not pay for the costs associated with their actions, they have an incentive to use the public good as much as possible to maximize their own benefits, without considering the costs to others. In the case of a public golf course, for example, if individuals are allowed to use the course without paying any of the maintenance or upkeep costs, they may use the course excessively, leading to overcrowding, damage to the course, and inconvenience to other users. As a result, the public golf course may become "overused" beyond the socially optimal level.
Companies will tend to "over pollute" when (a) they don't pay all of the marginal costs associated with the pollution. (b) the costs of pollution are shared with society and not borne entirely by the firm. (c) the government attaches a fine to the existence of pollution, not to the level of pollution. (d) All of the above.
(d) All of the above. Companies will tend to "over-pollute" when they do not bear all the costs of pollution. When companies do not pay all of the marginal costs associated with pollution, they have an incentive to pollute more than what is socially optimal. This happens because they are not fully accounting for the negative externalities that their pollution imposes on society. Additionally, when the costs of pollution are shared with society and not borne entirely by the firm, there is a disconnect between the private cost and the social cost of pollution. In this case, the company may not have enough incentive to reduce pollution to the socially optimal level because they are not bearing the full cost. Lastly, if the government attaches a fine to the existence of pollution and not to the level of pollution, then the company may not have enough incentive to reduce pollution to the socially optimal level. The fine may not be enough to discourage the company from polluting more than what is optimal
Where property rights are not well defined (a) the decision maker must bear all of the marginal benefits of any decision. (b) the decision maker must bear all of the marginal costs of any decision. (c) society does not bear all of the marginal costs and marginal benefits of any deci- sion. (d) None of the above.
(d) None of the above. Where property rights are not well defined, it means that it is unclear who has the right to use or benefit from a particular resource or property. In such situations, the decision maker may not bear all the marginal costs or benefits of their decision, and society may also be affected by the decision. In the absence of well-defined property rights, the decision maker may not bear all the marginal costs of any decision because they may impose negative externalities on others. Similarly, the decision maker may not capture all the marginal benefits of their decision because others may also benefit from the decision. Moreover, society may not bear all the marginal costs and benefits of any decision where property rights are not well defined. This is because there may be externalities associated with the decision that affect people beyond the decision maker and those who are benefiting from the decision.
Consumers' total expenditures (or a firm's total revenue) is maximized where (a) the price is relatively high and the quantity is relatively low. (b) price-elasticity of demand is equal to -1. (c) price-elasticity of demand is more-negative than -1 (e.g., -1.4, -2.7) (d) None of the above.
Consumers' total expenditures (or a firm's total revenue) is maximized where price-elasticity of demand is equal to -1. Therefore, the correct answer is (b) price-elasticity of demand is equal to -1. When the price-elasticity of demand is equal to -1, it means that the percentage change in quantity demanded is equal to the percentage change in price. In other words, the increase in revenue from selling an additional unit of the good is exactly offset by the decrease in revenue from lowering the price of all units sold. At this point, the firm has found the optimal price to charge to maximize its total revenue. If the price-elasticity of demand is greater than -1 (i.e., more negative), then a decrease in price will result in an increase in total revenue, indicating that the firm has been charging too high of a price. On the other hand, if the price-elasticity of demand is less than -1, then an increase in price will result in an increase in total revenue, indicating that the firm has been charging too low of a price.
Suppose a manufacturing firm earns $1 billion in economic profit each year, but pollution is a by-product of their production process. If this firm is fined $10 million per year for as long as they continue to pollute, we would expect them to (a) increase pollution rates. (b) decrease pollution rates. (c) continue producing the same amount of pollution.
If a manufacturing firm earns $1 billion in economic profit each year but is fined $10 million per year for as long as they continue to pollute, we would expect them to (b) decrease pollution rates. The fine imposed on the firm for polluting creates a cost for the firm, reducing their economic profit. If the cost of the fine exceeds the benefit of polluting, then the firm has an incentive to reduce pollution levels to minimize the fine and maximize their economic profit. In this scenario, the economic profit earned by the firm is much higher than the cost of the fine. Therefore, the firm can afford to pay the fine and still make a significant profit. However, the fine still creates an additional cost for the firm, reducing their overall profit margin. Thus, the firm would have an incentive to reduce pollution levels to minimize the cost of the fine and increase their profit margin.
If demand is downward sloping, supply is upward sloping and the good in question is a normal good, an increase in income would result in (a) an increase in equilibrium price; an increase in equilibrium quantity. (b) an increase in equilibrium price; a decrease in equilibrium quantity. (c) a decrease in equilibrium price; a decrease in equilibrium quantity. (d) a decrease in equilibrium price; an increase in equilibrium quantity. (e) None of the above.
If demand is downward sloping, supply is upward sloping, and the good in question is a normal good, an increase in income would result in an increase in equilibrium price and an increase in equilibrium quantity. This is because as income increases, the demand for normal goods increases, causing the demand curve to shift to the right. As a result, the equilibrium price and quantity both increase as the new equilibrium point is established at the intersection of the new demand curve and the original supply curve. Therefore, the correct answer is (a) an increase in equilibrium price; an increase in equilibrium quantity.
If you are told that at the current level of production of a particular good the marginal value exceeds the marginal cost, you know that (a) the market allocation is efficient. (b) too much of the good is being produced and exchanged. (c) too little of the good is being produced and exchanged. (d) None of the above.
If you are told that at the current level of production of a particular good, the marginal value exceeds the marginal cost, you know that (c) too little of the good is being produced and exchanged. The marginal value of a good represents the additional value that a consumer derives from consuming one more unit of the good, while the marginal cost represents the additional cost of producing one more unit of the good. When the marginal value exceeds the marginal cost, it implies that the consumer is willing to pay more for an additional unit of the good than it costs to produce that unit. Therefore, there is a potential gain from trade, and producing more units of the good will increase total surplus in the economy. If the market is functioning efficiently, suppliers will increase production in response to the high marginal value, and consumers will purchase more of the good as long as the marginal value exceeds the price. This will continue until the marginal value equals the price, which represents the marginal cost in a competitive market. At this point, the market will be in equilibrium, and the allocation of resources will be efficient.
A recent research report demonstrated that the demand for cigarettes among older people is more "price inelastic" than younger people. An implication of this is that, (a) if cigarette taxes were increased cigarette smoking would decrease more (in per- centage terms) among older than younger people. (b) if cigarette taxes were increased cigarette smoking would decrease less (in per- centage terms) among older than younger people. (c) if income falls, an older person would be more likely to quit smoking than a younger person. (d) if income falls, an older person would be less likely to quit smoking than a younger person.
The correct answer is (b) if cigarette taxes were increased, cigarette smoking would decrease less (in percentage terms) among older than younger people. Price elasticity of demand refers to the responsiveness of the quantity demanded to a change in price. If a good has a more price inelastic demand, it means that consumers are less responsive to changes in price. In this case, the research report suggests that the demand for cigarettes among older people is less responsive to changes in price compared to younger people. Therefore, if cigarette taxes were increased, it would have a smaller effect on reducing cigarette smoking among older people compared to younger people. This is because older people are less sensitive to changes in the price of cigarettes, and thus would be less likely to quit smoking in response to a price increase.
Suppose that the route from Eugene to San Francisco is served by United and three other airlines but the route from Eugene to Seattle is served only by United. All else equal, the demand for tickets from Eugene to San Francisco is likely to be (a) less price elastic than the demand for tickets from Eugene to Seattle. (b) more income elastic than the demand for tickets from Eugene to Seattle. (c) less income elastic than the demand for tickets from Eugene to Seattle. (d) more price elastic than the demand for tickets from Eugene to Seattle.
The elasticity of demand measures the responsiveness of the quantity demanded to changes in the price or income of a good. In this case, the fact that the route from Eugene to San Francisco is served by United and three other airlines suggests that there are more substitutes available for this route compared to the route from Eugene to Seattle, which is served only by United. A As a result, we would expect the demand for tickets from Eugene to San Francisco to be more price elastic than the demand for tickets from Eugene to Seattle. Therefore, the correct answer is (d) more price elastic than the demand for tickets from Eugene to Seattle.
The market demand curve will always (a) be flatter than the individual demand curves that contribute to it. (b) be steeper than the individual demand curves that contribute to it. (c) have the same slope as the demand curves that contribute to it. (d) be unrelated to the individual demand curves that contribute to it.
The market demand curve is derived by horizontally summing the individual demand curves of all buyers in the market. The market demand curve reflects the total quantity of the good that all buyers are willing and able to purchase at each price, and it can have a different slope than the individual demand curves that contribute to it. The slope of the market demand curve depends on the relative responsiveness of buyers in the market to changes in price. If buyers in the market are relatively responsive to price changes, then the market demand curve will be relatively elastic (flatter), while if buyers are relatively unresponsive to price changes, then the market demand curve will be relatively inelastic (steeper). Therefore, the correct answer is (a) the market demand curve will always be flatter than the individual demand curves that contribute to it if buyers in the market are relatively responsive to price changes. However, if buyers in the market are relatively unresponsive to price changes, then the market demand curve may be steeper than the individual demand curves that contribute to it.
Where property rights are well defined (a) the decision maker bears all of the marginal costs and marginal benefits of any decision. (b) the decision maker bears all of the marginal costs of any decision. (c) society bears all of the marginal costs and marginal benefits of any decision.
Where property rights are well defined, the decision maker bears all of the marginal costs and marginal benefits of any decision. This means that the person or entity who owns the property or resource has the right to use it, and therefore, is responsible for all of the costs and benefits associated with its use. This creates an incentive for the decision maker to make efficient choices that maximize their own welfare while also taking into account the costs and benefits imposed on others. Therefore, the correct answer is (a) the decision maker bears all of the marginal costs and marginal benefits of any decision.
