Econ 202 Exam 2

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Consider the production of some industrial good that creates air pollution. The table below gives the marginal social cost (MSC), the marginal cost (MC), and the marginal social benefit (MSB) for each level of output (Q). *chart The inefficient market quantity is _____ and the efficient market quantity is _____

4; 3

Which of the following is true?

A command system works well when the lines of authority and responsibility are clear

An example of a negative production externality is

a traffic jam that occurs when a new shopping mall is built on an already busy road

Rational ignorance is the decision to not

acquire information if the cost if it exceeds the expected benefit

According to your textbook, which of the following is income elastic demand?

airline travel

A cost that arises from the production of a good that is paid by someone who did not participate in the production is called

an externality

If the cross elasticity of demand is -5 between french fries and orange drink, then french fries

and orange drink are substitutes

One way to overcome the problem of the commons is to

assign property rights so that someone owns the resource

Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will decrease the quantity of newspapers demanded by 8 percent. According to Dan, the demand for newspapers is _____

elastic

The price of demand for furniture is estimated at 1.3. This value means a one percent increase in the

price of furniture will decrease the quantity of furniture demanded by 1.3 percent

The Coase theorem states that if transaction costs are low, the number of parties is small, and property rights are well established

private transactions are efficient

The free-rider problem is the inability of private markets to achieve the efficient level of production of

public goods

When consumption of a good is nonrival and nonexcludable, the good is a

pure public good

If you are in the inelastic portion of the demand curve and you wish to increase total revenue. You should (ceteris paribus):

raise price

Unit elastic demand means that the

ratio of a percentage change in the quantity demanded to a percentage change in the price equals 1

Elasticity generally measures

responsiveness of a variable to a change in another variable

Elasticity generally measures the

responsiveness of a variable to a change in another variable

Food is an example of a _____ good

rival and excludable

To two hunters, a deer in a forest is

rival and nonexcludable

A common resource is ______ and _____

rival; nonexcludable

The price elasticity of demand measures

the responsiveness of the quantity demanded to changes in price

Susan thinks the only fair outcome is one in which she has three slices of pizza a week. Susan is using a ________ concept of fairness.

"it's not fair if the result isn't fair"

Suppose a rise in the price of peaches from $5.50 to $6.50 per bushel decreases the quantity demanded from 12,500 to 11,500 bushels. The price elasticity of demand is

0.5

*chart Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox).The marginal social benefit of the 4 millionth varicella vaccination is

$12

Consider the production of some industrial good that involves air pollution. The table below gives the marginal social cost (MSC), the marginal cost (MC), and the marginal social benefit (MSB) for each level of output (Q). *chart To arrive at the efficient market equilibrium the government could impose a tax of

$3

Property rights

*all of the answers are correct* -can be part of a solution to the problems of an externality -apply to factors of production and to goods and services -are legally established titles of ownership that are enforceable in the courts

If a rightward shift of the supply curve leads to a 6 percent decrease in the price and a 5 percent increase in the quantity demanded, the price elasticity of demand is

0.83

Total revenue for skis is at a maximum when the price of demand is

1

The price elasticity of demand for a good is 0.8, then a

1 percent rise in the price leads to a 0.8 percent decrease in the quantity demanded

Total revenue is maximized at which price elasticity

1.0

When the price of a movie ticket increases from $5 to $7, the quantity of tickets demanded decreases from 600 to 400 per day. What is the price elasticity of demand for movie tickets?

1.20

*chart In the figure above, if the market is unregulated, the output will be

250 units

*chart The schedules in the table give the marginal social benefit and marginal social cost of a DVD. If there are no external benefits or external costs, the efficient number of DVDs to produce is ________ a week.

3

*chart Vaccinations provide both private benefits and external benefits. The table above gives information on the marginal private benefit and marginal external benefit associated with vaccination against varicella (chicken pox). If the marginal cost of a varicella vaccination is $10, then the unregulated competitive equilibrium will have

3 million vaccinations

*chart In the above table, if the market is perfectly competitive and unregulated, the equilibrium output will be

3,000 units

The tragedy of the commons is the absence of incentives to

prevent overuse and depletion of the common resource

Equality of opportunity is the focus of which economic school of thought

Classical

When production of a good results in an external cost, the unregulated competitive market equilibrium is inefficient because

MSC > MSB

The incidence of sales tax is determined by the

price elasticities of supply and demand

The assertion that if resources are allocated efficiently, they also are allocated fairly is made by

Robert Nozick, who believes that equality of opportunity is fair

If the marginal social cost of a television exceeds the marginal social benefit if a television, it would increase society's total surplus to decrease production of televisions

True

Which of the following episodes would most likely contain an externality?

You decide to grow flowers in your front yard where everyone else can see them

A positive production externality is

a benefit that arises from production and falls on someone other than the producer

To maximize its revenue

a firm facing inelastic demand should always raise its price

Air pollution that comes from someone smoking in your car while you dive on a vacation is

a negative consumption externality

Public universities, by charging tuition ____ the marginal cost of education, ______ the number of students

below; increase

The demand and the supply for a good are each neither perfectly elastic nor perfectly inelastic. If a sales tax on sellers of the good is imposed, the tax is paid by

both buyers and sellers

A political equilibrium can never be reached without voters, firms, politicians and

bureaucrats

Factors that influence the elasticity of demand

closeness of substitutes, time, and proportion of income spent on the good

When the marginal social benefit of Good A is greater than the marginal private benefit of Good A, then

competitive, unregulated markets will produce a quantity of Good A that is less than the efficient quantity

A free rider is someone wh

consumes a good without paying for it

Suppose Clyde always eats ice cream and chocolate syrup together. If the price of syrup increases by 10 percent, and the cross elasticity of demand is -2, the demand for ice cream

decreases by 20 percent

In general, a fine on buying a product leads to the

demand curve shifting leftward

A good has a perfectly inelastic supply and a downward sloping demand curve. Imposing a sales tax of $1 per unit on the sellers of the good

does not change the price paid by demanders

According to the total revenue test, a price cut increase total revenue if demand is

elastic

The seller pay the entire sales tax levied on a good when demand is perfectly _____ or supply is perfectly _____

elastic; inelastic

A free rider is someone who

enjoys the benefit of a good without paying for it

The price elasticity of demand _____ in value when moving downward along a ____ line demand curve.

falls; straight

When scarce resources can serve only one user at a time in sequence, which method works well for allocating the scarce resources?

first come, first served

A rent ceiling creates a shortage. As result, there is a deadweight loss

from both lost consumer and producer surplus

When government action leads to inefficiency, it is know as

government failure

Governments often intervene in agricultural markets by

granting subsidies

According to your textbook, which of the following food products is price elastic demand?

grapes

When producers are hard to monitor and marginal costs differ across producers, ____ are an effective method to achieve efficient use of a _____

individual transferable quotas, common resource

If a 20 percent increase in the price of a used car results in a 10 percent decrease in the quantity of used cars demanded, then the demand for used cars is

inelastic

If a consumer is relatively insensitive to changes in the price of a good, then the consumer's demand for the good is

inelastic

The buyers pay the entire sales tax levied on a good when demand is perfectly _____ or supply is perfectly ______

inelastic; elastic

At the midpoint of a downward sloping straight-line demand curve, the demand

is unit elastic

A good or service or a resource or a resource is nonexcludable if

it is not possible to prevent someone from benefiting from it

Demand is price inelastic if a relatively _____ price increase leads to a relatively ______ in the quantity demanded

large; small decrease

Public choice theory suggests that in the presence of rational ignorance, the size of government is

larger than the efficient size

The less elastic the supply, the

larger the fraction of any tax imposed on the product that is paid by the suppliers

The resource allocation method that is used to allocate scarce resources between private use and government use is

majority rule

The cost of producing an additional unit of a good or service that falls on people other than the producer of that good or service is called the

marginal external cost

To eliminate the inefficiency resulting from an external cost of production, the government can impose a tax on producers that is equal to the

marginal external cost

The cost of producing an additional unit of a good or service that is borne by the producer or that good or service is called the

marginal private cost

The marginal social cost of production is the

marginal private cost plus the marginal external cost

Efficiency in the provision of a pure public good is achieved when its

marginal social benefit equals its marginal social cost

Resources use is efficient when

marginal social benefit equals marginal social cost

Underproduction compared to the efficient amount implies that for the last unit produced

marginal social benefit exceeds marginal social cost

Overproduction compared to the efficient amount implies that for the last unit produced

marginal social costs exceeds marginal social benefit

When markets leads to inefficiency, it is know as

market failure

In the United States, resources are most often allocated by

market price

According to your textbook, a product that has a price elastic demand is:

metals

At current quantity of pizza, the marginal social benefit is greater than the marginal social cost. Then

more pizzas must be produced to reach the efficient level

According to the Coase theorem, part of what is needed for private transactions to be efficient is that property rights

must be defined, but it does not matter who owns the property

An example of a pure public good is

national defense services

A school of tuna swimming in the ocearn is

nonexcludable and rival

If the consumption of Good A by one person does not decrease the quantity of Good A available for another person's consumption, then the good is said to be

nonrival

What are the two features of a public good?

nonrival and nonexcludable

An uncrowded toll road is _____ because it is _______

not a public good; nonrival but excludable

An external cost os a cost of producing a good or service that is

not paid by the producer but paid by other people

Bureaucratic over-provision of a public good could occur because

of rational ignorance among voters

If supply is perfectly inelastic, a sales tax imposed on sellers is paid by

only the buyers

The price elasticity of demand equals the magnitude of the

percentage change in the quantity demanded of a good divided by the percentage change in its price

If the quantity demanded changes by an infinitely large amount for a given change in price, then demand is

perfectly elastic

If a person will rent an apartment only to married couples over 30 years old, that person is allocating resources using a ________ allocation method.

personal characteristics

*chart You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, as a profit-minded business person who seeks to avoid taxes whenever possible, which good would you most prefer to have taxed?

pizza

The income elasticity of demand is

positive for a normal good and negative for an inferior good

Social interest theory differs from public choice theory is that

social interest theory predicts that the government only takes actions that increase efficiency

One way that government can increase the production of goods that have external benefits is to

subsidize the activity

If the cross elasticity of a demand for good x with respect to the price of good y is positive, then goods x and y are

substitutes

In general, a fine on selling a product leads to the

supply curve shifting leftward

The government imposes a sales tax on hot dogs. The tax would be paid entirely by hot dog sellers if the

supply is perfectly inelastic

When a government fines and/or imprisons convicted drug dealers, it is attempting to reduce the illegal drub trade by shifting the _____ curve for illegal drugs _____

supply; leftward

one of the problems associated with the utilitarianism is that it does not recognize that

taxing those with higher incomes results in less work effort

One common effect of rent ceilings in big cities is

that landlords charge "key money," high payments charged to new tenants for new locks and keys

If a tax is imposed on a market in which demand is perfectly inelastic

the buyers pay the entire tax

In an unregulated, competitive market, less than the efficient quantity of education is produced and consumed because

the decisions to produce and consume education are based on marginal private costs and marginal private benefits

A modified version of utilitarianism proposed by John Rawls states that

the fair distribution of the economic pie is the one that makes the poorest person as well off as possible

A market is allocatively efficient if

the sum of the consumer surplus and the producer surplus has been maximized

A sales tax is imposed on the sellers of gasoline, This tax shifts

the supply of gasoline curve leftward

the requirement that people in similar situations be treated similarly is called

the symmetry principle

The marketing people at Ben and Jerry's Ice Cream Company believe that if they lower the price of their Cherry Garcia flavor ice cream by 25 percent, the quantity demanded will increase by 5 percent. If they are correct in their belief, then

their total revenue from Cherry Garcia will decrease if they lower the price

A good with a positive externality is

under produced

Pure public goods are

under provided by the private market because people's willingness to pay for the good is less than the marginal benefit of the good

The principle that states that we should strive to achieve the greatest happiness for the greatest number is called

utilitarianism

The economy's marginal benefit curve for a *PUBLIC* good is found by ______ for all individuals

vertically summing the marginal benefit curves

In the political marketplace, firms do all of the following *EXCEPT*

vote

Which of the following is a likely outcome of rent ceilings?

waiting lists of potential renters of rent-controlled housing

The price elasticity of demand can range between

zero and infinity


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