Micro Homework 3 & 4

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

Ronald Coase

Assume there is a shortage in the market for digital music players. Which of the following statements correctly describes this situation?

Some consumers will be unable to obtain digital music players at the market price and will have an incentive to offer to buy the product at a higher price.

Economists generally favor the use of tradable emissions allowances to reduce pollution. However, the use of these allowances has been criticized by some environmentalists. Which of the following describes this criticism

Some environmentalists believe the allowances give firms a license to pollute

A quasi-public good differs from a public good in that unlike a public good, it is possible to keep out those who do not pay for the quasi-public good from enjoying the benefits of the good.

TRUE

If consumers believe the price of iPads will decrease in the future, this will cause the demand for iPads to decrease now

TRUE

When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society

TRUE

Refer to Figure above. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change?

The equilibrium point will move from A to E

The law of demand implies, holding everything else constant, that

as the price of bagels increases, the quantity of bagels demanded will decrease

If you burn your trash in the back yard in spite of regulations against it, then you

avoiding the private costs associated with disposing your trash some other way and creating a social cost

If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set

equal to the marginal external cost at the economically efficient level of pollution

Which of the following is a source of market failure?

incomplete property rights or inability to enforce property rights

It is difficult for a private market to provide the economically efficient quantity of a public good because

individual preferences are not revealed in the market for the good

If there is pollution in producing a product, then the market equilibrium price

is too low and equilibrium quality is too high

Which of the following activities create a negative externality

keeping a junked car parked on your front lawn

The demand by all the consumers of a given good or service is the ________ for the good or service.

market demand

Refer to Figure above. Assume that the graphs in this figure represent the demand and supply curves for bicycle helmets. Which panel best describes what happens in this market if there is a substantial increase in the price of bicycles

panel D

The market for smart phones has grown rapidly over the past few years, due in part to the overwhelming success of the Apple iPhone. Following the successful launch of the iPhone in 2007, companies such as Samsung, HTC, and LG have all introduced products to compete with the iPhone. The smart phones introduced to compete with the iPhone would be considered

substitutes for the iPhone

if the price of music downloads was to decrease, then

the demand for MP3 players would increase

What is a "social cost" of production?

the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product

In 2004, hurricanes destroyed a large portion of Florida's orange and grapefruit crops. In the market for citrus fruit

the supply curve shifted to the left resulting in an increase in the equilibrium price

If in the market for peaches, the supply curve has shifted to the left

the supply of peaches has decreased

Refer to Figure above. The marginal cost of reducing pollution curve is the same curve as

the supply of pollution reduction curve

Refer to Figure above. If the price is $10,

there would be a shortage of 600 units

In the past the federal government often employed what is called a "command and control" approach to the reduction of pollution emissions. Many economists are critical of this approach because

they believe a market-based approach will reduce pollution more efficiently.

Which of the following best illustrates the free rider problem?

All three homeowners in a quiet cul-de-sac have expressed the desirability of security lighting in the common parking area. One of the homeowners installs the lighting and asks you to contribute toward the cost. You choose not to contribute.

An increase in the number of firms in a market will cause the quantity of a good supplied to increase.

FALSE

An inferior good is a good for which the quantity demanded decreases as the price increases, holding everything else constant.

FALSE

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market. Refer to Figure above. The efficient output is

Q2

Which of the following must be present to reach a private solution to an externality problem?

The transaction costs to negotiate a solution must be relatively low

Danielle Ocean pays for monthly pool maintenance for her home swimming pool. Last week the owner of the pool service informed Danielle that he will have to raise his monthly service fee because of increases in the price of pool chemicals. How is the market for pool maintenance services affected by this

There is a decrease in the supply of pool maintenance services.

an externality is

a benefit or cost experienced by someone who is not a producer or consumer of a good or service

If, in response to an increase in the price of chocolate the quantity of chocolate demanded decreases, economists would describe this as

a decrease in quantity demanded

Government imposed quantitative limits on the amount of pollution firms are allowed to produce is an example of

command and control approach to pollution reduction

If a demand curve shifts to the right, then

demand has increased

Assume that the hourly price for the services of tarot card readers has risen and sales of these services have also risen. One can conclude that

the demand for tarot card readers has increased

Figure above shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. Refer to Figure above. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, diagram shows

the effect of a positive externality in the consumption of a good

If a firm expects that the price of its product will be higher in the future than it is today

the firm has an incentive to decrease supply now and increase supply in the future

A positive externality causes

the marginal social benefit to exceed the marginal private cost of the last unit produced

The income effect of a price change refers to the impact of a change in

the price of a good on a consumer's purchasing power

At a product's equilibrium price

the product's demand curve crosses the product's supply curve.