MicroEcon 247 Practice Mid-term Exam part 2, Units 1 to 5 (from quizzes-for-grade)
Which method could Banff National Park use to correct for overcrowding?
Increase entrance fees, and ensure that they keep pace with inflation each year
Why is trade beneficial?
It allows each nation to specialize in doing what it does best
Once it becomes obvious that a common resource is being overused, what happens?
It continues to be overused because individuals have no incentive to reduce their use of the good
What does it mean when a good is excludable?
People can be prevented from using the good
What is the role of price controls in the market economy?
Price controls are used by governments to reallocate resources more equitably
Market demand is given as Qd = 300 - 2P. Market supply is given as Qs = 2P + 100. In a perfectly competitive equilibrium, what will be price and quantity?
Price will be $50, and quantity will be 200
Why does the government provide public goods?
Private markets would not produce the efficient quantity of the good
Regan grows flowers and makes vases. Jayson also grows flowers and makes vases, but Regan is better at producing both. Who has an absolute or comparative advantage in what activity?
Regan has an absolute advantage in both activities
Why are production possibilities frontiers usually bowed outward?
Resources are specialized; that is, some are better at producing particular goods rather than other goods.
Which statement about slope is NOT correct?
Slope can be computed by delta x divided by delta y
What is the difference between slope and elasticity?
Slope measures actual changes, and elasticity measures percentage changes
What are the forces that make market economies work?
demand and supply
What is one definition of equity?
fairness
If a good is a necessity, demand for the good would tend to be
inelastic
Market demand is given as Qd = 200 - 6P. Market supply is given as Qs = 4P. What would result if the market price were $30?
surplus of 100
When studying how some event or policy affects a market, elasticity provides information on
the direction and the magnitude of the effect on the market
What is the x-coordinate?
the first number of an ordered pair, which represents the point's horizontal location
What does the tax incidence depend on?
the forces of supply and demand
When evaluating the size of the deadweight loss due to a tax, what do we know?
the greater the elasticities of supply and demand, the greater the deadweight loss
What is an externality?
the impact of a person's actions on the well-being of a bystander
What does willingness to pay measure?
the maximum amount that a buyer will pay for a good
Wheat is the main input in the production of flour. All other things being equal, if the price of wheat increases, we would expect
the supply of flour to decrease
Wheat is the main input in the production of flour. All other things being equal, if the price of wheat decreases, we would expect
the supply of flour to increase
What is the opportunity cost of going to university?
the value of the best opportunity a student gives up to attend university
John faces a progressive tax structure that has the following marginal tax rates: 0% on the first $10,000, 10% on the next $10,000, 15% on the next $10,000, 25% on the next $10,000, and 40% on all additional income. If John earns $60,000 per year, what would be his tax liability?
$13,000
Bill has noticed that increases in unemployment insurance claims are associated with recessions, and therefore he advocates limits on unemployment insurance so as to prevent recessions. Martha has noticed that most drug addicts once attended schools, and therefore she advocates getting rid of schools so as to prevent drug addiction. What do we know about the reasoning of Bill and Martha?
Bill's reasoning suffers from the reverse causality problem, and Martha's reasoning suffers from the omitted variable problem
When a tax is placed on the buyer of a product, what is the result?
Buyers pay more, and sellers receive less
If a seller in a competitive market chooses to charge more than the market price, what is likely to happen?
Buyers will tend to make purchases from other sellers
Two firms, A and B, each currently dump 50 tonnes of chemicals into the local river. From now on, both firms will require a pollution permit for each tonne of pollution dumped. The government gives each firm 20 tonnes' worth of pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each tonne of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each tonne of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that
Firm A will dump 10 fewer tonnes of pollution into the river, and Firm B will dump 50 fewer tonnes of pollution into the river
Critics of free trade sometimes argue that allowing imports from foreign countries costs jobs domestically. What would an economist argue?
Foreign competition may cause unemployment in import-competing industries, but the increase in consumer surplus due to free trade is more valuable than the lost jobs
What is one disadvantage of government subsidies over price controls?
Subsidies require higher taxes
If the number of buyers in the housing market decreases
demand in the market will decrease
What does the term tax incidence refer to?
the division of the tax burden between buyers and sellers
The benefits principle is used to justify
the gasoline tax.
The market supply curve shows
the total quantity supplied at any price
Tax incidence refers to
who bears the tax burden
A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.70, the bakery would be willing to supply 900. Using the midpoint method, what is the elasticity of supply for bagels?
1.71
Suppose a gardener produces both green beans and corn in her garden. If she must give up 15 bushels of corn to get five bushels of green beans, what is the opportunity cost of one bushel of green beans?
3 bushels of corn
McKenna earns income of $80,000 per year. Her average tax rate is 40%. McKenna paid $5500 in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?
53%
What does inelastic demand mean?
Consumers hardly respond to a change in price
What happens as government debt increases?
Government must spend a larger share of its revenue on interest payments
Which of the following is NOT a characteristic of markets?
Government policies do not affect the decisions of firms and households
Which area identified in the answers below represents the total surplus in a market?
the total area between the demand and supply curves up to the point of equilibrium
When there is a surplus in a market
there is downward pressure on price
Suppose you make jewellery. If the price of silver increases, we would expect you
to be willing and able to produce less jewellery than before at each possible price
Suppose you wish to analyze the change in the equilibrium price of lumber as a result of fires that are destroying trees in the West. Your first step would be
to decide whether the fires shift demand or supply
Assume that your roommate, Linda, is very messy. Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you. What would the Coase theorem suggest would be an efficient solution for you?
to pay your roommate at least $100 but no more than $200 to clean up after herself
When the government intervenes in markets with externalities, it does so
to protect the interests of bystanders
How is the slope of a line calculated?
change in y/change in x
What is trade among nations ultimately based on?
comparative advantage
What does supply-and-demand analysis involve?
comparing the old equilibrium and the new equilibrium
A price floor is binding when it is
higher than the equilibrium market price
Which of the following outcomes will occur as a result of a tax, whether the tax is placed on the buyer or the seller?
the size of the market will be reduced
What is welfare economics?
the study of how the allocation of resources affects economic well-being
When the local used bookstore prices economics books at $100 each, they generally sell 70 per month. If they lower the price to $70 each, they sell 90. Given this information, what is the elasticity of demand for economics books, and what action should the store take?
0.714; the store should raise prices to raise total revenue
Using all available resources, if a farmer can produce either 65 cantaloupes or 70 watermelons, what is the opportunity cost of one cantaloupe to the farmer?
1.08 watermelons
Which statement best describes a price ceiling?
A price ceiling is a legal maximum on the price at which a good can be sold
What does a perfectly elastic demand imply?
Any rise in price above that represented by the demand curve will result in no output demanded
What can be said if Canada exports cars to France and imports cheese from Switzerland?
Canada has a comparative advantage in producing cars, and Switzerland has a comparative advantage in producing cheese
When Ford and General Motors import automobile parts from Mexico at prices below those they must pay in Canada, who is worse off?
Canadian companies that manufacture automobile parts
Australia is an importer of computer chips and is also a price taker in the chip market. The world price of these computer chips is $25. If Australia imposes a $5 tariff on chips, who will lose and/or gain?
Consumers will lose, and producers will gain
How do corrective taxes differ from most taxes?
Corrective taxes enhance economic efficiency
Why do private markets fail to account for externalities?
Decision makers in the market fail to take into account the external effects of their behaviour
How does total revenue change as one moves down a linear demand curve?
It first increases and then decreases
What is the main reason for using the midpoint method?
It gives the same answer regardless of the direction of change
What does an efficient tax system do?
It imposes small deadweight losses and administrative burdens
When technology improves in the ice cream industry, what happens to consumer surplus?
It increases
What effect does a tax on buyers of coffee have on the equilibrium price (for buyers) and quantity?
It increases the equilibrium price of coffee and reduces the equilibrium quantity
Moving up a linear demand curve, what happens to total revenue?
It increases, then decreases
If a 30% change in price causes a 10% change in quantity supplied, what do we know about the price elasticity of supply?
It is 1/3, and supply is inelastic
If a 5% increase in price causes a 15% decrease in quantity demanded, what might be said about this product?
It might be a luxury
What is the effect of a tariff on the market price?
It raises the price of the imported good above the world price
What does the Laffer curve do?
It relates income tax rates to total income taxes collected
Recent pine beetle infestations that are destroying trees in the western provinces are expected to cause the price of lumber to rise in the next six months. As a result, what can we expect to happen to the supply of lumber?
It will fall now.
What will happen when negative externalities are present in a market?
Social costs will be greater than private costs
Which of the following is an example of complementary goods?
cereal and milk
There are very few, if any, good substitutes for motor oil. What does this imply?
The demand for motor oil would tend to be price inelastic
Which of the following reflects the downward-sloping demand curve?
There is an inverse relationship between price and quantity demanded
What does it mean if an economy is producing efficiently?
There is no way to produce more of one good without producing less of the other.
A rancher can produce only beef, while a farmer can produce only potatoes. If the rancher and the farmer each like both foods, which of the following is most likely?
They could gain from trade because each would enjoy a greater variety of food
What happens when scientists make good assumptions?
They greatly simplify the problem without substantially affecting the answer
What does the saying "There is no such thing as a free lunch" mean?
To get something we like, we usually have to give up another thing we like
What does deadweight loss represent?
the reduction in total surplus that results from a tax
What might cause a movement along the supply curve?
a change in the price of the good or service
Rent control is best characterized as
a common example of a price ceiling
Four friends who love to ski decide to pool their financial resources and share (equally) the cost of a one-week time-share condominium in Banff, Alberta. Unfortunately, the condominium does not come with maid service. Everyone values clean dishes, but unwashed dishes pile up in the sink. An economist would best explain this as
a common resource problem
Which of the following displays a direct, or positive, relationship?
a country's productivity and its standard of living
What would an early frost in the vineyards of the Okanagan Valley cause?
a decrease in the supply of wine, increasing price
What is a free rider?
a person who receives the benefit of a good but avoids paying for it
A market that experiences a positive externality will also experience
a smaller market output and a lower market price than is optimal
Suppose donuts are currently selling for $14 per dozen, but the equilibrium price of donuts is $12 per dozen. What would we expect?
a surplus to exist and the market price of donuts to decrease
What is a tariff?
a tax on imported goods
What is a circular-flow diagram?
a visual model of how the economy is organized
What will result from an increase in resource costs to firms in a market?
an increase in equilibrium price and a decrease in equilibrium quantity
When evaluating differences or similarities between an increase in supply and an increase in quantity supplied, we know that
an increase in supply is a shift of the curve, and an increase in quantity supplied is a movement along the curve
How do most economists report the elasticity of demand?
as the absolute value of the actual number
Goods that are rival in consumption include
both common resources and private goods
In economics, capital refers to
buildings and machines used in the production process
To ensure the market reaches the social optimum in the presence of a technology spillover, how should the government subsidize producers?
by an amount equal to the value of the technology spillover
How is a market supply curve constructed?
by horizontally summing individual supply curves
How do prices direct economic activity in a market economy?
by influencing the actions of buyers and sellers
How is the benefit received by sellers in a market measured?
by producer surplus
How can the government internalize a positive externality?
by subsidizing production, which would increase supply
Which of the following will definitely cause equilibrium quantity to fall?
demand decreases and supply decreases
A primary function of prices in a market economy is to provide participants with
economic information
What is the unique point at which the supply and demand curves intersect?
equilibrium
If the demand for a product decreases, we expect
equilibrium price and equilibrium quantity to both decrease
To improve living standards, policymakers should
formulate policies designed to increase productivity
When demand is elastic, what is the price elasticity, and how do price and total revenue behave?
greater than 1, and price and total revenue will move in opposite directions
Which of the following would be most likely to increase the price of a new house?
higher wages for carpenters, higher wood prices, increases in consumer incomes, higher apartment rents, increases in population, and expectations of higher house prices in the future
What does microeconomics study?
how individual households and firms make decisions
What do economists study?
how people make decisions
For society, a good is NOT considered scarce
if all members of society can have all they want of the good
A production possibilities frontier will be linear and not bowed out
if the trade-off between the two goods is always at a constant rate
According to economists, people respond to
incentives
What are factors of production?
inputs into the production process
Inefficiency exists in any economy when a good
is not being consumed by the buyers who value it most highly
Internalizing an externality refers to
making buyers and sellers take into account the external effects of their actions
What is another term for equilibrium price?
market-clearing price
In which markets do deadweight losses occur?
markets in which the government imposes a tax
The equilibrium of supply and demand in a market
maximizes the total benefits received by buyers and sellers
Where is the initial effect of a tax on the buyers of a good?
on the demand for that good
What would be an optimal tax on pollution?
one for which producers internalize the cost of the pollution
What is the term that means "whatever must be given up to obtain an item"?
opportunity cost
What is the relationship between price and quantity supplied?
positive, or direct
The law of demand implies that
price and quantity demanded are inversely related
What should be used to analyze economic well-being in an economy?
producer and consumer surplus
What will a tariff and an import quota do to the quantity of imports and the domestic price?
reduce the quantity of imports and raise the domestic price
In a free market, who determines how much of a good will be sold and the price at which it is sold?
suppliers and demanders together
To correctly analyze the welfare effects of free trade on an economy, economists must assume
that the country is a price taker
Which concept suggests that the private market can be effective in dealing with externalities?
the Coase theorem
What is a key determinant of the elasticity of supply?
the ability of sellers to change the amount of the good they produce
What is the definition of productivity?
the amount of goods and services produced from each hour of a worker's time
Of the areas identified in the answers below, which area is producer surplus?
the area below the price and above the supply curve
New cars are normal goods. What will happen to the equilibrium price of new cars if the price of gasoline rises, the price of steel falls, public transportation becomes cheaper and more comfortable, auto workers accept lower wages, and automobile insurance becomes more expensive?
the price will fall
Social services primarily consist of
welfare programs for low-income people
When is demand said to be unit elastic?
when the quantity demanded changes by the same percentage as the price
When does scarcity exist?
when there is less of a good or resource available than people wish to have
When are externalities present in a market?
whenever private costs differ from social costs