ECON practice questions

positive externality

- beneficial side effect that affects an uninvolved third party - affects the demand - market quantity smaller than socially desirable

negative externality

- the harm, cost, or inconvenience suffered by a third party because of actions by others - affects the cost -market quantity larger than socially desirable

Tariff

A tax on imported goods

Private good

a good that is both rival and excludable (food)

Free rider

a person who receives the benefit of a good but avoids paying for it

Refer to Figure 2. Total surplus with trade exceeds total surplus without trade by a. $640. b. $1,280. c. $2,560. d. $3,840.

b. $1,280.

A tariff on a product makes a. domestic sellers worse off and domestic buyers worse off. b. domestic sellers better off and domestic buyers worse off. c. domestic sellers worse off and domestic buyers better off. d. domestic sellers better off and domestic buyers better off.

b. domestic sellers better off and domestic buyers worse off.

Celine buys a new MP3 player for $90. She receives consumer surplus of $15 on her purchase if her willingness to pay is a. $15. b. $90 c. $105. d. $75.

c. $105

After a recent spike in violent crime, the local police department wants to spend $550,000 on a new crime fighting initiative. If a human life is worth $9 million, the crime fighting initiative is worth the cost if it reduces the risk of someone dying from crime by at least a. 3.5 percentage points. b. 5.5 percentage points. c. 6.1 percentage points. d. 9.0 percentage points.

c. 6.1 percentage points.

What is the fundamental basis for trade among nations? a. shortages or surpluses in nations that do not trade b. misguided economic policies c. absolute advantage d. comparative advantage

d. comparative advantage

Club goods

goods that are excludable but not rival in consumption (cable TV)

common resources

goods that are rival in consumption but not excludable (fish in the ocean)

implicit costs

input costs that do not require an outlay of money by the firm

Explicit costs

input costs that require an outlay of money by the firm (paying money to workers)

Excludability

the property of a good whereby a person can be prevented from using it

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

WITH TAX

CS = A PS = F Tax Revenue = B + D TS = A + B + D + F DWL (dead weight loss) = C + E

On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers. d. Any of the above could be correct

a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.

Suppose the tax on gasoline is decreased from $0.60 per gallon to $0.40 per gallon. As a result, a. tax revenue necessarily decreases. b. the deadweight loss of the tax necessarily decreases. c. the demand curve for gasoline necessarily becomes steeper. d. the supply curve for gasoline necessarily becomes flatter.

b. the deadweight loss of the tax necessarily decreases.

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it a. maximizes costs of the seller. b. maximizes tax revenue for the government. c. maximizes the combined welfare of buyers and sellers. d. minimizes the expenditure of buyers.

c. maximizes the combined welfare of buyers and sellers.

Suppose your own demand curve for tomatoes slopes downward. Suppose also that, for the last tomato you bought this week, you paid a price exactly equal to your willingness to pay.Then a. you should buy more tomatoes before the end of the week. b. you already have bought too many tomatoes this week. c. your consumer surplus on the last tomato you bought is zero. d. your consumer surplus on all of the tomatoes you have bought this week is zero.

c. your consumer surplus on the last tomato you bought is zero.

Which of the following industries is least likely to exhibit the characteristic of free entry? a. bookstores b. hairstyling salons c. yoga studios d. satellite radio

d. satellite radio

WITHOUT TAX

CS = A + B + C PS = D + E + F TS = CS + PS = A + B + C + D + E + F

Public good

a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers - not excludable & not rival in consumption (national defense)

Refer to Figure 1. Suppose a $3 per-unit tax is placed on this good. The amount of deadweight loss resulting from this tax is a. $7.50. b. $15.00. c. $22.50. d. $45.00.

a. $2.70

Diana is a personal trainer whose client Charles pays $80 per hour-long session. Charles values this service at $100 per hour, while the opportunity cost of Diana's time is $75 per hour. The government places a tax of $10 per hour on personal trainers. Before the tax, what is the total surplus? a. $25 b. $20 c. $5 d. $0

a. $25

Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is a. $250. b. $500. c. $750. d. $1,000.

a. $250.

Refer to Figure 1 . Suppose a $3 per-unit tax is placed on this good. The loss of consumer surplus resulting from this tax is a. $35. b. $45. c. $70. d. $80.

a. $35

If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to a. $4. b. $16. c. $20. d. $36.

a. $4

Producer surplus measures the a. benefits to sellers of participating in a market. b. costs to sellers of participating in a market. c. price that buyers are willing to pay for sellers' output of a good or service. d. benefit to sellers of producing a greater quantity of a good or service than buyers demand.

a. benefits to sellers of participating in a market

For any country, if the world price of copper is higher than the domestic price of copper without trade, that country should a. export copper, since that country has a comparative advantage in copper. b. import copper, since that country has a comparative advantage in copper. c. neither export nor import copper, since that country cannot gain from trade. d. neither export nor import copper, since that country already produces copper at a low cost compared to other countries.

a. export copper, since that country has a comparative advantage in copper.

In a competitive market, the actions of any single buyer or seller will a. have a negligible impact on the market price. b. have little effect on market equilibrium quantity but will affect market equilibrium price. c. affect marginal revenue and average revenue but not price. d. adversely affect the profitability of more than one firm in the market.

a. have a negligible impact on the market price.

When there is a technological advance in the pork industry, consumer surplus in that market will a. increase. b. decrease. c. not change, since technology affects producers and not consumers. d. not change, since consumers' willingness to pay is unaffected by the technological advance.

a. increase.

Consider a good for which the number of people who benefit from the good is large and the exclusion of any one those people is impossible. In this case, the market for this good will likely a. be provided by a private firm rather than the government. b. have a free-rider problem. c. not exist. d. be limited to a small number of units of production.

b. have a free-rider problem.

Refer to Figure 1. Suppose a $3 per-unit tax is placed on this good. The tax causes the price paid by buyers to a. decrease by $3. b. increase by $2. c. decrease by $1. d. increase by $6.

b. increase by 2

Honduras is an importer of goose-down pillows. The world price of these pillows is $50. Honduras imposes a $7 tariff on pillows. Honduras is a price-taker in the pillow market. As a result of the tariff, the price of goose-down pillows in Honduras a. increases to a new price above $57 and the quantity of goose-down pillows purchased in Honduras remains the same. b. increases to $57 and the quantity of goose-down pillows purchased in Honduras decreases. c. remains at $50 and the quantity of goose-down pillows purchased in Honduras decreases. d. increases to a new price between $50 and $57 and the quantity of goose-down pillows purchased in Honduras decreases.

b. increases to $57 and the quantity of goose-down pillows purchased in Honduras decreases.

Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should a. operate his business as long as he rents at least 7 boats per month. b. operate his business as long as he rents at least 1 boat per month. c. operate his business as long as he rents all 10 boats each month. d. raise the price he charges per boat rental.

b. operate his business as long as he rents at least 1 boat per month.

Assume, for Colombia, that the domestic price of coffee without international trade is higher than the world price of coffee. This suggests that a. Colombian coffee buyers will become worse off if international trade is allowed. b. other countries have a comparative advantage over Colombia in producing coffee. c. Colombia will export coffee if international trade is allowed. d. Colombia has an absolute advantage over other countries in producing coffee.

b. other countries have a comparative advantage over Colombia in producing coffee.

Abraham drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.55 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Abraham is rational in deciding how many cans to buy. His consumer surplus is a. $0.50. b. $0.60. c. $0.70. d. $1.00.

c. $0.70

Refer to Figure 2. Without trade, consumer surplus amounts to a. $810. b. $1,620. c. $3,240. d. $6,480.

c. $3,240.

If Bradley's Butcher Shop sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that Bradley's Butcher Shop produces and sells because the firm's demand curve is downward sloping. b. Bradley's Butcher Shop's total cost must be a constant multiple of its quantity of output. c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output. d. Bradley's Butcher Shop's total revenue must be equal to its average revenue.

c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output.

In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50. Which of the following will occur? a. In the short run firms will shut down, and in the long run firms will leave the market. b. In the short run firms will continue to operate, but in the long run firms will leave the market. c. New firms will likely enter this market to capture some of the economic profits. d. The firm will earn zero profits in both the short run and long run.

c. New firms will likely enter this market to capture some of the economic profits.

Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c. The after-tax equilibrium quantity is less than the socially optimal quantity.

On holiday weekends thousands of people picnic in state parks. Some picnic areas become so overcrowded the benefit or value of picnicking diminishes to zero. Suppose that the Minnesota State Park Service institutes a variable fee structure. On weekdays when the picnic areas get little use, the fee is zero. On normal weekends, the fee is $8 per person. On holiday weekends, the fee is $14 per person. The fee system corrects a problem known as the a. Coase theorem. b. free rider problem. c. Tragedy of the Commons. d. public goods problem.

c. Tragedy of the Commons.

Consumer surplus is the a. amount of a good consumers get without paying anything. b. amount a consumer pays minus the amount the consumer is willing to pay. c. amount a consumer is willing to pay minus the amount the consumer actually pays. d. value of a good to a consumer.

c. amount a consumer is willing to pay minus the amount the consumer actually pays.

Resources tend to be allocated inefficiently when goods a. are private goods. b. are rival in consumption and excludable. c. are available free of charge. d. are available only at very high prices.

c. are available free of charge.

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. It depends on the firm's labor productivity.

c. exactly triple.

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 101st unit of output must increase the firm's profit by more than $3.

c. firm's profit-maximizing level of output is less than 100 units.

Which of the following is not a characteristic of a monopoly? a. the seller has market power b. one seller c. free entry and exit d. a product without close substitutes

c. free entry and exit

Suppose that you want to build a community garden for your neighborhood, which has 500 residents. The cost of the garden is $2,000, and each person values the garden at $3. After a month, you have only received 75 donations at $3 each. The result is that a. either you or the local government should build the garden. b. you should still build the garden, but the local government should not. c. neither you nor the local government should build the garden. d. the local government should build the garden, but you should not.

c. neither you nor the local government should build the garden.

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because a. social costs equal private costs at the private market solution. b. private costs exceed social costs at the private market solution. c. social costs exceed private costs at the private market solution. d. they internalize externalities.

c. social costs exceed private costs at the private market solution.

For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which a. average revenue is zero. b. profit is maximized. c. total revenue is maximized. d. marginal cost is zero.

c. total revenue is maximized.

What happens to the total surplus in a market when the government imposes a tax? a. Total surplus increases by the amount of the tax. b. Total surplus increases but by less than the amount of the tax. c. Total surplus decreases. d. Total surplus is unaffected by the tax.

c. total surplus decreases

Suppose Rebecca needs a dog sitter so that she can travel to her sister's wedding. Rebecca values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as she receives at least $150. Rebecca and Susan agree on a price of $175. Suppose the government imposes a tax of $10 on dog sitting. The tax has made Rebecca and Susan worse off by a total of a. $50. b. $40. c. $20. d. $10

d. $10

Highway engineers want to improve a dangerous stretch of highway. They expect that it will reduce the risk of someone dying in an accident from 5.3 percent to 2.1 percent over the life of the highway. If a human life is worth $10 million, then the project is worth doing as long as it does not cost more than a. $53,000. b. $2.1 million. c. $210,000. d. $320,000.

d. $320,000.

A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of output for $9.98 per unit. The marginal revenue of the 151st unit of output is a. $3. b. -$0.02. c. $2.45. d. $6.98.

d. $6.98.

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit a. 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. b. 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. c. 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air. d. 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

d. 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that a. Wally pays Corrine $600 for her inconvenience. b. Corrine pays Wally $550 to give the dog to his parents who live on an isolated farm. c. Corrine pays Wally $400 to give the dog to his parents who live on an isolated farm. d. The current situation is efficient.

d. The current situation is efficient.

Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes? a. There is not enough information to answer the question. b. The after-tax equilibrium quantity is less than the socially optimal quantity. c. The after-tax equilibrium quantity is greater than the socially optimal quantity. d. They are equal.

d. They are equal.

Dee loves to landscape her yard, but her neighbor Marvin places a low value on his landscaping. When Marvin's grass is neglected and gets long, Dee will mow it for Marvin. This is an example of a. an improper allocation of resources. b. a situation in which the Coase theorem fails to explain the lawn mowing arrangement. c. an exploitation of a common resource. d. a private solution to a negative externality problem.

d. a private solution to a negative externality problem.

A demand curve reflects each of the following except the a. willingness to pay of all buyers in the market. b. value each buyer in the market places on the good. c. highest price buyers are willing to pay for each quantity. d. ability of buyers to obtain the quantity they desire.

d. ability of buyers to obtain the quantity they desire.

With trade, this country a. exports 160 tricycles. b. exports 320 tricycles. c. imports 160 tricycles. d. imports 320 tricycles.

d. imports 320 tricycles.

When a tax is levied on a good, the buyers and sellers of the good share the burden, a. provided the tax is levied on the sellers. b. provided the tax is levied on the buyers. c. provided a portion of the tax is levied on the buyers, with the remaining portion levied on the sellers. d. regardless of how the tax is levied.

d. regardless of how the tax is levied.

Suppose the socially-optimal quantity of good x is 2,500 units and the market-equilibrium quantity of good x is 3,000 units. When 2,500 units of good x are produced, the a. external cost of good x equals the private value of good x b. external cost of good x exceeds the private value of good x c. social cost of good x exceeds the private value of good x. d. social cost of good x equals the private value of good x.

d. social cost of good x equals the private value of good x.

Which of the following will cause a decrease in consumer surplus? a. an increase in the number of sellers of the good b. a decrease in the production cost of the good c. sellers expect the price of the good to be lower next month d. the imposition of a binding price floor in the market

d. the imposition of a binding price floor in the market

In a market, the marginal buyer is the buyer a. whose willingness to pay is higher than that of all other buyers and potential buyers. b. whose willingness to pay is lower than that of all other buyers and potential buyers. c. who is willing to buy exactly one unit of the good. d. who would be the first to leave the market if the price were any higher.

d. would be the first to leave the market if the price were any higher.

Market-based policies

provide incentives so that private decision makers will choose to solve the problem on their own -corrective taxes and subsidies -tradable pollution permits

Command and control policies

regulate behavior directly - limits on quantity of pollution emitted - requirements that firms adopt a particular technology to reduce emissions