Exam 2 - Practice Problems, Quizzes

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The Social Planner

•A social planner is someone who takes the perspective of the entire market into account when making decisions. •"Benevolent dictator" •Doesn't favor any individual or group over any other individual or group •The incentives for the social planner can differ from the incentives of each of the individuals

QUIZ Question Refer to the above diagram. If a binding price floor is implemented at P=3 (the top horizontal dotted line), what two areas do you need to compare to determine if this price floor increased or decreased producer surplus? a) A vs. G b) A vs. F c) A vs. (B + G) d) F vs (B + G)

a) A vs. G - Gained A, but lost G

Netflix shows movies without commercial interruption to people who pay for their service. This is because Netflix a) can exclude nonpaying viewers. b) executives decided to differentiate themselves from traditional television networks. c) shows only movies that are very inexpensive to rent. d) is subsidized by the government.

a) can exclude nonpaying viewers.

Sven's vacation convinced him that a) even for activities he really enjoys, diminishing marginal utility eventually sets in. b) blueberry picking yields higher total utility than does water skiing. c) even for activities he really enjoys, total utility declines each time he engages in it. d) economic theory applies only to things you buy, not recreation

a) even for activities he really enjoys, diminishing marginal utility eventually sets in.

Sven likes to water ski, but can only water ski during the one week that he is on vacation. Therefore, he plans to ski every day, for eight hours a day. The first day, Sven skied for eight hours and enjoyed every hour. The second day, Sven slept in and then skied for seven hours, which was fun but not as much fun as the first day. The third day, Sven skied for six hours, but was starting to get a bit bored by the end. The fourth day, Svenskied for four hours and then took a nap. On the fifth day of Sven's vacation, Sven went blueberry picking all day. Sven's total utility _______with each hour that he skied. a) increased b) decreased c) remained constant d) first increased than decreased

a) increased

When Jeff goes from watching 3 to 4 movies a day, his total utility: a) increases b) decreases. c) does not change. d) gets close to zero.

a) increases - His marginal utility is still positive

Early settlers in the town of DryValley drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in DryValley, the aquifer level fell and new wells had to be drilled deeper at a higher cost. Residents of DryValley have a private incentive to ____ water because _____. a) over use; external costs aren't considered. b) under use; it is a scarce resource. c) over use; it is a scarce resource. d) under use; it is characterized by increasing marginal costs.

a) over use; external costs aren't considered. External costs are costs that are incurred in the process but not reflected in cost of product

The Coase Theorem

•If property rights are fully assigned, and •if people can negotiate costlessly with one another, •then decentralized markets will arrive at efficient solutions to problems caused by externalities.

Efficiency and Equilibrium

•Situations we want to avoid (inefficient): •Underproduction: Labeled by Q1 •Overproduction: whenever MC is greater than the price, a subsidy can make this make transaction make sense - labeled by Q2

Taxes and Subsidies

•Taxes and subsidies can shift around demand and supply curves •If there is a social benefit of $100 per unit, we want to subsidize purchase by exactly $100 per unit. •Make marginal private benefits/costs equal to marginal social benefits/costs using taxes and subsidies

Marginal Social Cost Curve - Negative Externality

•The marginal social cost curve is the combination of two curves: •1. the marginal cost curve of a firm - Private marginal cost curve (if there is no cost for dumping into the river, this cost would be 0) •2. the marginal cost of the externality to everyone else in the market - Leads to a Negative Externality = Marginal Social cost curve above the Private Marginal Cost

Welfare Analysis

•The tool we use to analyze the value of transactions is called economic surplus. - As long as the trade is between the Marginal cost and Reservation value, the outcome is efficient. •Two types: •Producer surplus: - For each unit produced, output price minus marginal cost - Total of Price received - Marginal Cost for each unit is total profit •Consumer surplus: reservation value minus the paid price - no matter the price, the total surplus for each transaction is the same (as long as the price is something that makes them trade) - TS = (P - MC) + (RV - P) - this is an inverse relationship

Markets and Allocation

•What do "decentralized" markets do to determine how much of a good is produced? •Markets equate private costs and private benefits •Social efficiency equates social costs with social benefits - sometimes the same but not always

Refer to the chart above. The total utility (ignoring monetary costs) from two dinners out is a) 75. b) 175. c) 185. d) 660.

b) 175.

QUIZ Question Refer to the above graph. If the price of the good is 3, consumer surplus is a) 0 b) 20 c) 15 d) 10

b) 20

Kyle proposes that all voters pay 68% of their marginal benefit in taxes to pay for the pool. Theoutcome of this proposal is __________ votes in favor, __________ votes opposed and the measure will__________. a) 4; 1; pass b) 5; 0; pass c) 0; 5; fail d) 3; 2; pass

b) 5; 0; pass -Since everyone pays less than their marginal benefit, everyone gets extra surplus if the plan passes. Additionally, 68% of the sum of benefits is 1013, so they can afford to build the pool as well.

QUIZ Question Which of the following statements about the usage of common-pool resources is true? a) Reallocating common-pool resources to being public goods can help us use them fairly. b) Assigning property rights of the common-pool good can solve the inefficiency problem. c) There is nothing to do about common-pool resource overuse as long as people are only self-interested d) Decreasing marginal utility of common-pool resources will lead to inefficiencies.

b) Assigning property rights of the common-pool good can solve the inefficiency problem.

QUIZ Question Assume that in a market where the supply and demand curves are equally elastic, initially the pre-tax equilibrium price is $10/unit. Then, suppose the government a $6/unit producer tax. What is the new price that consumers pay? What is the new price that producers receive? a) Consumers pay $14/unit and producers receives $8/unit. b) Consumers pay $13/unit and producers receives $7/unit. c) Consumers pay $16/unit and producers receives $10/unit. d) Consumers pay $16/unit and producers receives $16/unit.

b) Consumers pay $13/unit and producers receives $7/unit.

QUIZ Question In the graph shown, the price that will be paid by consumers after the tax is a) P b) P3 c) P2 d) impossible to determine

b) P3

6. Which of the following is the correct formula for consumer surplus after a price floor is implemented? a. ½ * 200 * 300 b. ½ * 50 * 100 c. ½ * 50 * 100 + 100 * 50 d. 100 * 50

b. ½ * 50 * 100

3.If the price of the good is $1, consumer surplus is: a.$45 b.$80 c.$125 d.$160

b.$80 0.5 x 40 x 4 = 80

10.Suppose that initially the above market is in equilibrium and the government decides to impose a minimum price of P = $30 (a price floor). The change in consumer surplus induced by this price floor policy can be measured as a(n) a.Decrease of (area A + area B + area F + area G) b.Decrease of (area A + area B) c.Increase of (area F -area B) d.Decrease of (area B + area C)

b.Decrease of (area A + area B)

QUIZ Question Refer to the above graph (the same as the last question). Say supply is perfectly inelastic at quantity 20. Which of the following values for a price ceiling would maximize consumer surplus? a) 3 b) 2 c) 0 d) 1

c) 0

QUIZ Question The table above shows the marginal utility from watching TV. What is the optimal number of hours to watch? a) 1 b) 0 c) 3 d) 5

c) 3

QUIZ Question Consider the same firm from the previous question: Now the government places a tax per millions of watts of output on this firm. Assume this tax is entirely borne by the firm. Which tax (in millions of $s) will lead to the socially optimal outcome? a) 16 b) 11 c) 7 d) 26

c) 7 - 7 per unit, so the total tax is 0, 7, 14, 21

QUIZ Question Which of the following best illustrates the concept of a negative externality? a) A janitor eats a pizza during her lunch break. b) A high school student plays a video game online with his friends. c) A college student wakes up his dorm-mates playing his new stereo system at 2:00 a.m. d) A flood wipes out a farmer's entire corn crop.

c) A college student wakes up his dorm-mates playing his new stereo system at 2:00 a.m.

Which of the following statements about the provision of public goods is true? a) Government must always provide public goods. b) The optimal amount of public good provision is that level at which all taxpayers receive some of the good. c) If the marginal benefit of the public good exceeds the marginal costs, more should be provided. d) The optimal amount of public good provision is when total benefits equal total costs.

c) If the marginal benefit of the public good exceeds the marginal costs, more should be provided. D is wrong because it says total benefits meet total costs. The optimal amount of a public good is when the marginal benefit equals the marginal cost.

If Salina has already spent 5 hours studying Economics and 5 hours studying Math, she should spend the next hour a) Studying Math for half an hour and Economics for half an hour b) Studying only Economics c) Studying only Math d) Studying Economics for 45 minutes and Math for 15 minutes

c) Studying only Math - The marginal benefit for an additional hour of Math is 10, while it's only 5 for economics. So she should choose the highest of the marginal utilities for that hour.

QUIZ Question Which is the best example of a non-rival good or service? a) Purchasing a new laptop. b) Send your child to childcare at a daycare. c) Watching a video on YouTube. d) Being served by a waiter at a restaurant.

c) Watching a video on YouTube.

QUIZ Question A per‐unit tax on the seller and a price floor policy have a similar effect on a market because a) both increase the quantity of the good demanded b) both decrease the price at which the good sells c) both increase the price at which the good sells d) both increase the consumer surplus

c) both increase the price at which the good sells

Newspaper dispensing devices often allow the consumer to open the door and take all newspapers even if they have paid for only one. To the uninitiated, it may seem that the newspaper vending company "trusts" people to take only a single paper upon payment for one newspaper. An economist would more likely say that the vending company is actually relying on the law of: a) supply. b) increasing opportunity costs. c) diminishing marginal utility. d) demand. e) none of the above.

c) diminishing marginal utility.

Sven likes to water ski, but can only water ski during the one week that he is on vacation. Therefore, he plans to ski every day, for eight hours a day. The first day, Sven skied for eight hours and enjoyed every hour. The second day, Sven slept in and then skied for seven hours, which was fun but not as much fun as the first day. The third day, Sven skied for six hours, but was starting to get a bit bored by the end. The fourth day, Svenskied for four hours and then took a nap. On the fifth day of Sven's vacation, Sven went blueberry picking all day. On the fifth day of Sven's vacation, he had decided that another hour of skiing would yield a) more utility than the day before b) the same level of utility as the day before c) less utility than blueberry picking d) no utility at all

c) less utility than blueberry picking

QUIZ Question The picture above shows private cost, social cost, and demand for outdoor concerts in a city. In this figure, the social cost curve lies above the private cost curve because a) municipalities always impose noise restrictions on concerts in parks surrounded by residential neighborhoods. b) there are some non-attendees who still hear the concert from outside and enjoy it. c) the social cost curve takes into account the external costs (e.g. noise, traffic) imposed on society by the concert organizers. d) concert tickets are likely to cost more than the concert actually costs the organizers.

c) the social cost curve takes into account the external costs (e.g. noise, traffic) imposed on society by the concert organizers.

Practice Exam 3. What type of externality is evident from the picture below? a. Negative externality of consumption b. Positive externality of consumption c. Negative externality of production d. Positive externality of production

c. Negative externality of production

Practice Exam 15. The government decides to impose a tax on producers as shown in the graph below: How much of the tax is being paid by consumers? How much is being paid by producers? a. $.30; $.20 b. $.20; $.30 c. $0; $.50 d. $.50; $0

a. $.30; $.20

The table below shows some utility values associated with eating dinners out a certain number of times per week for some consumer. Assume total utility from food consumption is zero for zero dinners out per week. Each dinner out has an additional (not yet included in the table) monetary opportunity cost of 50 utils. Refer to the chart above. The marginal utility gained from eating the 4th dinner out is. a) 75. b) 250. c) cannot be determined from given information. d) 15.

d) 15. - Here we are focused on the utility gained from eating, and the utility cost from the money will be included later.

The very small city of Pleasantville is considering building a public swimming pool that costs $1,000. The table shows the five voters in the city and their marginal benefit of a swimming pool. It takes a 4/5 majority to pass any tax measure and all voters must vote. Fran proposes that the city build the pool and finance it with a $200 tax from each voter. The outcomeof this proposal will be __________ votes in favor and __________ votes opposed and the measure will__________. a) 5; 0; pass b) 4; 1; pass c) 2; 3; fail d) 3; 2; fail

d) 3; 2; fail

Answer the next three questions based on the following two schedules which show the amounts of additional satisfaction (marginal utility) which a consumer would get from successive quantities of products J and K. Refer to the above data. If the opportunity cost (in utils) of buying each unit of J were always 22, the optimal consumption of J would be. a) 1 b) 2 c) 3 d) 4

d) 4

Say you started with 7 units of good K and 0 units of good J and could trade between J and K at a 1-for-1 rate. Optimally, you would end up with a) 0 J, 7 K b) 6 J, 1 K c) 2 J, 5 K d) 4 J, 3K

d) 4 J, 3K •At 4 units of J and 3 of K, getting one more unit of K (getting 20 utility) would require giving up one unit of J and losing 24 utility, so you wouldn't do that. •And getting one more unit of J (and getting 20 more utility) would require giving up one unit of K and giving up 24 utility, so again you wouldn't do that.

How many times will this individual have dinner out in a week? a) 0. b) 1 c) 2 d) 3

d) 3 •Here we include everything including monetary marginal opportunity costs of 50 per dinner.

QUIZ Question Refer to the supply and demand graph above. The government has imposed a $5/unit consumer tax (shown in the graph), then what is the price that consumers pay and what is the price that producers receive? a) Consumers pay $6/unit and producers receives $11/unit. b) Consumers pay $6/unit and producers receives $8/unit. c) Consumers pay $6/unit and producers receives $6/unit. d) Consumers pay $11/unit and producers receives $6/unit.

d) Consumers pay $11/unit and producers receives $6/unit.

Deadweight Loss caused by Negative Externality

in figure - can be fixed with taxes and subsidies

6. Refer to the figure above. With no subsidy, what is the producer surplus? (a) $0 (b) $6,000 (c) $7,200 (d) $14,700

(a) $0 - Supply is perfectly elastic, so there is no PS - Marginal costs are constant (since you can import as much as you want at a fixed marginal cost), so no firm makes any (economic) profits.

17. In order to achieve a socially optimal level of output, production that generates positive externalities should be: (a) required. (b) subsidized. (c) conducted by the government. (d) deregulated.

(b) subsidized.

3. Suppose the government fines the firm an amount equal to the damage imposed on the fish. This government action (a) reduces efficiency in the market. (b) increases dead weight loss. (c) increases efficiency in the market. (d) violates Pareto efficiency.

Price Floor

- Above equilibrium is a binding price floor

Marginal Social Cost Curve - Positive Externality

- Marginal social benefit is greater than private marginal benefit - MSB is the reservation value for the social planner

Sticker Price

- We will use the following terminology: - The sticker price of a good is the price ignoring taxes - For a tax on consumers: ▪the total amount a consumer pays is the sticker price plus taxes ▪The total amount a firm receives is the sticker price - For a tax on producers, vice versa

Market with Negative Spillovers: Graphical Representation

- the value of the externality is the distance between the Private MC curve and SMC curve - The market outcome is at the private equilibrium. - A social planner would choose the Social Optimum

CL Session 5 Using the graph, determine how much equilibrium quantity supplied and equilibrium prices would have to change so that the market was again in equilibrium after the subsidy.

Where the subsidy supply curve hits the demand curve is the new equilibrium quantity, since that that price (plus the subsidy) 62.5 units will be produced and 62.5 demanded. The end price consumers will end up paying is 150, and then of course producers will end up receiving 150 plus the 100 subsidy for a total of 250.

QUIZ Question If factories in the imaginary state of East Indiana produce an inefficiently high level of pollution that blows over into Indiana, but Indiana can't pass any laws regulating or taxing those factories, which of the following statements is true? a) As pollution is a public good, we will necessarily have inefficient outcomes if the government cannot intervene. b) Pollution is a common-pool resource and we should simply request that East Indiana do less of it. c) If the businesses in East Indiana are producing according to their marginal costs, the situation is already efficient even if it is not good for Indiana. d) Since the level of pollution is inefficient, Indiana can bribe East Indiana to reduce pollution and make both states better off.

d) Since the level of pollution is inefficient, Indiana can bribe East Indiana to reduce pollution and make both states better off.

A Sales (Consumer) Tax

Same situation, but tax consumers by t Same outcome! Consumers would demand less after the tax, inducing firms to cut prices

A Sales (Producer) Tax With Equal Elasticities

The S + D curves are equally elastic Consumers pay the pre-tax price plus 1/2 the tax - Producers receive the pre-tax price minus 1/2 the tax Equal incidence: Tax is equally split between consumers and producers

CL Session 5 What is the total size of subsidy that the government ends up paying? Is this greater or less than the total gain in welfare in the market?

The government pays 100 per unit, and now 62.5 are produced in equilibrium - So, 100 * 62.5 = 6250 Government Transfer (total expenditure) - You can also see the transfer in the following rectangle on the S+D graph, since the base is the number of units sold and the height is the size of the subsidy. - Comparing the size of the subsidy rectangle to the change in CS and PS, we see that the increases in CS and PS are less together than the cost of the subsidy, so there is inefficiency. The deadweight loss is now on the right-hand side of the original equilibrium point:

Taxes Incidence

The overall message of basic tax incidence analysis: - The effect of a sales tax doesn't depend on whom it is levied - The tax burden falls on the less elastic side of the market

Practice Exam 17. Look at the following graph which displays a subsidy given to producers by government: Which of the following shows the total cost of the subsidy to taxpayers? a. A+B+C+F+G b. C+F+G c. H d. B+C+E+F+G+H

d. B+C+E+F+G+H

Practice Exam 2. Tornado sirens are alarms that sound loudly if there is a risk of tornados in a certain area. Which of the following classifications is the best for tornado sirens? a. Private Good b. Common-pool resource c. Club good d. Public good

d. Public good

11.What is the Deadweight Loss from this new minimum price rule a.Area A + Area B + Area F + Area G b.Area H + Area I c.Area A + Area B d.Area B + Area G

d.Area B + Area G

4.If the price of the good decreases from $3 to $2, consumer surplus will: a.decrease by $10 b.decrease by $25 c.increase by $10 d.increase by $25

d.increase by $25 CS before = 20 CS after = 45

16. If the flu vaccine is provided by markets without intervention, deadweight loss will be _______. (a) zero (b) [1/2 x (90 - 60) x (75 - 50)] = $375 (c) [1 x (80 - 50) x (75 - 50)] = $750 (d) [1/2 x (80 - 60) x (75 - 0)] = $750

(b) [1/2 x (90 - 60) x (75 - 50)] = $375

13. If Taylor's neighbors pay Taylor $5 to maintain his lawn, Taylor will have a net benefit of ___ and the neighbors will have a net benefit of _____. (a) +$5; -$5 (b) +$4; +$5 (c) +$9; 0 (d) +$5; $4

(b) +$4; +$5

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Equilibrium Price with a Producer Tax

Because of this, firms will get Price - tax that is below the pre-tax P*, but not by the full t amount - Consumer and Producer Surpluses are labeled with vertical lines in figure

Different Elasticities

Demand is much more elastic than supply. Only a small change in the price charged to consumers gets them to the post-tax quantity Almost all the tax is borne by the producers, because the demand is elastic to price, and the producers are relatively inelastic

CL Session 5 At the original equilibrium price, would there be oversupply, excess demand, or would the market still be in equilibrium after this subsidy? What would the incentives for sellers' prices be?

Excess supply of 25 units, since at price of 200 firms would now be producing 75 but consumers are only demanding 50. -> 75 Qs - 50 Qd = 25 excess supply There's a surplus of supply, so there would now be competition among sellers to lower prices to move items that are not otherwise bought.

Labeled Post Tax Surplus Split

Government Revenue = t x Q2* - Positive Deadweight loss, so inefficient

CL Session 5 Say the government implemented a subsidy of $100 per unit for producers. Sketch how this would shift the supply curve.

Marginal costs of firms fall by $100, moving the market supply curve down by 100 units

The Payoffs: Bribery - Enforcement of Contracts

There exists a costly coal filter that JPP could use, but is not required to

Practice Exam 7. Of the four policies listed below, in general which maximizes producer surplus? a. Price floors b. Price ceilings c. Taxes on consumers d. Taxes on producers

a. Price floors

7. Suppose the government implements a price ceiling in the market for the soybeans and this price ceiling is set at $400. Which of the following is correct? a.The price ceiling has no effect. b.There is excess supply. c.There is excess demand. d.The consumer surplus increases.

a. The price ceiling has no effect. above the equilibrium price, no effect

2.Consider the market for coffee. An increase in the consumer surplus may result from: a. an increase in the supply of coffee b. a decrease in the supply of coffee c. a price floor in the market for coffee d. an increase in the price of coffee

a. an increase in the supply of coffee this shifts the supply curve down and to the right, increasing quantity and reducing price

12.Which of the following would decrease quantity supplied, increase quantity demanded and decrease the price that consumers pay? a. the imposition of a binding price ceiling b. the removal of a binding price ceiling c. the passage of a tax levied on producers d. the repeal of a tax levied on producers

a. the imposition of a binding price ceiling

5.Suppose the government implements a price floor in the market for the soybeans and this price floor is set at $400. Which of the following is correct? a. The price floor has no effect. b. There is excess supply. c. There is excess demand. d. The consumer surplus increases.

b. There is excess supply.

Practice Exam 10. Why does a subsidy to a market lead to inefficiencies? a. It doesn't: since more gets produced, everyone is better off b. We end up with high marginal cost producers selling to lower reservation value consumers c. We end up with low marginal cost producers selling to higher reservation value consumer d. We end up with dead weight loss from underproduction

b. We end up with high marginal cost producers selling to lower reservation value consumers - These transactions are inefficient from the perspective of society, since you effectively end up with the lower value person getting the good

Practice Exam 4. If my consumption of a good and this has no impact on your ability to consume the same good, then this good is: a. a free good. b. non-rival c. both non-rival and non-excludable d. non-excludable

b. non-rival

Practice Exam 1. When dealing with externalities, the free-market equilibrium can be moved closer to the optimum a. taxing positive externalities and subsidizing negative externalities b. taxing negative externalities and subsidizing positive externalities c. taxing both positive and negative externalities d. subsidizing both positive and negative externalities

b. taxing negative externalities and subsidizing positive externalities

QUIZ Question A tax has a deadweight loss because (choose the best answer) a) it causes an incorrect price in the market. b) it induces the government to spend more. c) it induces buyers to consume less and sellers to produce less. d) the loss to buyers is greater than the loss to sellers.

c) it induces buyers to consume less and sellers to produce less.

QUIZ Question #5 Producer surplus is a) the area between the demand curve and the equilibrium price to the left of the equilibrium quantity. b) largest with an effective price ceiling. c) larger in markets that are inelastically supplied. d) always at least as big as dead weight loss.

c) larger in markets that are inelastically supplied.

Clean air is an example of a good that is a) neither nonrival nor nonexcludable. b) largely nonrival and nonexcludable. c) only nonexcludable. d) only nonrival.

c) only nonexcludable.

If marginal utility is positive, then a) total utility must be decreasing. b) total utility must be below zero. c) total utility must be increasing. d) none of the above would be necessarily true.

c) total utility must be increasing.

Equity

•An intuitive definition of equity is that it is how fair allocation rule is. •Results-based equity: after the allocation happens, how widely dispersed are the resulting values? •Rule-based equity: if you knew the rule, would you prefer to be any particular participant?

7. The deadweight loss from imposing the tax on the seller is (a) 50 cents. (c) $3. (d) $4.50. (e) 25 cents.

(a) 50 cents. • The DWL triangle has base of 1 and height of 1, so the overall loss is 1/2 * 1 * 1 = 0.50 (b) $1.

7. Which of the following is not an example of an activity with external benefits? (a) Eating a sandwich in the dining hall (b) Planting flowers in the front yard (c) Staying home from class when you have the flu (d) Having your smoking car repaired.

(a) Eating a sandwich in the dining hall

10. Refer to the figure above. The supply and demand for parking spaces on the campus of Green U is illustrated in the figure. Suppose the administration chooses to other parking spaces for free on first come first served basis (i.e., parking permits are free) in the interests of poor students. Quantity demanded will be ______ and quantity supplied will be _____. (a) Q4, Q1 (b) Q1, Q1 (c) Q2, Q1 (d) Q4, Q4

(a) Q4, Q1 - Supply is perfectly inelastic at Q1, and demand at a price of 0 is Q4.

Consumer surplus is (mark all that are true): (a) The area between the demand curve and the equilibrium price to the left of the equilibrium quantity (b) The area between the demand curve and the supply curve to the left of the equilibrium quantity (c) The total amount consumers would be willing to pay minus what they actually paid for their purchases (d) A measure of how sensitive consumers' demand is to changes in the equilibrium price. (e) A measure of how valuable the existence of the market is for consumers.

(a) The area between the demand curve and the equilibrium price to the left of the equilibrium quantity (c) The total amount consumers would be willing to pay minus what they actually paid for their purchases (e) A measure of how valuable the existence of the market is for consumers.

CL Session 6 Students A, B, C, and D are all competing for a single space in a university's study-abroad program. Their reservation values for this spot are given by the figure - The university does not care which of the four students gets the spot. (a) Would you consider the spot in the study-abroad program primarily a private good, a common pool resource, a club good, or a public good? (b) What does your answer to part (a) suggest about the efficiency of using prices to allocate the spot? (c) What would be to most efficient price (or range of prices) for the university to set to sell the spot?

(a) The spot is rivalrous and excludable, so it's a private good. (b) This suggests that setting a market price such that supply equals demand will allocate the good in a way consistent with social efficiency. (c) Anything between $250 and $260 would guarantee the spot goes to D, which is efficient.

CL Session 6 The marginal utility you get from watching Hulu can be described by the equation: u = 8 − h where h is the number of hours you watch. (a) What is the optimal number of hours to watch? (b) To try to reduce your TV watching, now for every hour you watch your mom makes you pay a dollar, which you value at 1 util. What is your optimal amount to watch now?

(a) You want to get your marginal utility as close as possible to 0 without it going negative. So both 7 or 8 hours are correct answers if you can only watch whole hours of TV, while 8 is the ideal answer if you can watch partial hours as well. (b) This change decreases your marginal utility by 1 per hour, so the equation becomes 7 − h, and your optimal choice falls to either 6 or 7 hours depending on your approach to the previous problem.

15. The dollar value of the external ______ per vaccine is _____. (a) benefit; $30 (b) cost; $20 (c) benefit; $20 (d) benefit; $75

(a) benefit; $30 - The vertical difference between the private and social demand curve gives you the social benefit of that unit.

CL Session 6 Students Elie, Brian, Johan, and Amanda are all competing for a single parking spot on campus. Their reservation values for the spot, as well as the times they can each get to the spot, are given by - The university (who owns the spot) does not care which of the four students gets the parking space, and has a rule against using any sort of parking allocation system (payment, reserved parking spots, etc.) (a) Would you consider the parking space primarily a private good, a common-pool resource, a club good, or a public good? (b) The current system is first-come, first-serve, and assume the students can't negotiate with each other. What is the dead weight loss associated with this system? (c) Explain how assigning ownership of the spot to Brian could lead to efficient outcomes if the four students can negotiate costlessly.

(a) common-pool resource - The spot is rival (once one student gets it, the others cannot) but non-excludable (the university can't stop anyone who gets there from using it). (b) Dead-weight loss is the efficiency loss from transactions that would have taken place but could not. Since Elie ends up with the spot instead of Johan, there could be $12 - $10 = $2 of additional surplus generated, so the dead-weight loss is $2. (c) Brian would sell the spot to Johan for something between $5 and $12 because he'd gain $7, and Johan would gain the difference between $12 and the price, making them both better off.

3. All else equal, government revenues from a sales tax will be smaller when (a) demand and supply are highly elastic. (b) demand and supply are highly inelastic. (c) demand is highly elastic and supply is highly inelastic. (d) demand is highly inelastic and supply is highly elastic.

(a) demand and supply are highly elastic. • If both demand and supply are highly elastic, even slight increases in prices greatly reduce quantity produced or consumer. So for a given tax, someone has to pay it, and however it ends up split, new output must be a lot lower than equilibrium output.

12. Refer to the figure above. Under the first come, first served pricing policy for parking at Green U, i.e., free parking, the deadweight loss can be as low as (a) zero (b) Q2CD (c) Q1AQ4 (d) EAC

(a) zero - The competitive market equilibrium is given by price P1 and quantity supplied Q1. If somehow the people who get the spots are all the ones with the highest reservation values, the consumer surplus for each unit would be the height of the demand curve (reservation value) down to 0 (the price). This would be exactly the same total surplus as before, but the rectangle P1- >A->Q1->origin->P1 is transferred from the seller to the buyers. See one example unit's surplus in the figure below:

The following figure gives the supply and demand curves for sugar. 1500 is the "world price" (that any firm can import sugar at, as much as they desire), and the government decides to subsidize these local producers by paying them $400 per ton produced, which moves the marginal cost curve and thus supply curve down by 400. 5. Refer to the figure above. With no subsidy, what is the consumer surplus? (a) $1,000 (b) $7,500 (c) $10,100 (d) $14,700

(b) $7,500 - The area of the upper left triangle: 1/2 * base * height = 1/2 * 10 * 1500 = 7500

CL Session 4 Consider a market with the following supply and demand curves: (a) Label the axes, the supply curve, the demand curve, and the equilibrium quantity and price (b) Say the government implemented a price floor of $300 per unit sold. Show graphically would happen to prices, quantities demanded and supplied, and consumer and producer surplus. (c) What is the dead weight loss from this policy? (d) Determine whether this policy makes firms (as a whole) better off, worse off, or just as well off (e) If each unit is produced by one individual firm, what % of firms are "winner" versus "losers" due to the price floor?

(b) Labeled in the graph, excess supply, and shortage in demand. This is a surplus. (c) 1/2 * (25) * (200) = Dead Weight Loss = 2500 (d) Before PS was 2 entire grid squares (one whole square plus two half-squares), now it is 2.5 grid squares, so producer surplus has risen. - This can also be solved by calculating the exact area before and after (this is shown in the figure) (e) 50 firms produced before the price floor. After, only 25 produce. - Now only 25 units are produced by 25 firms, but those 25 make more money than they did before. But also 25 firms no longer produce at all and make 0, so 50% of firms are helped and 50% are hurt.

3. Can consumer surplus ever be negative? (a) Yes (b) No

(b) No - With downward sloping demand curves, the smallest the triangle above price can be is 0. A more economic perspective is that people will not pay more than their reservation price for a good (or else we deined their reservation price incorrectly!).

13. Refer to the gure above. Green U tries charging the free market price but faces student protests that a free market solution causes price to be "too high". So it sets the permit price at P2. Now the cost of a parking space at Green U is (a) P2. (b) P2 plus the extra time spent leaving early to ensure getting a space. (c) P2 minus the extra time spent leaving early to ensure getting a space. (d) P1-P2.

(b) P2 plus the extra time spent leaving early to ensure getting a space. there is still a shortage at P2

8. Imposing a 10% tax on land owners may be justified by the following economic argument: (a) Land owners are typically wealthy and can better afford to be heavily taxed. (b) The supply of land is almost perfectly inelastic and so taxing it will likely lead to a small dead weight loss. (c) Land is remarkably unequally distributed across the population. (d) Land owners can pass the tax on to their tenants and thus lead to a more equitable share of the tax burden.

(b) The supply of land is almost perfectly inelastic and so taxing it will likely lead to a small dead weight loss. • In the case of perfectly inelastic supply, the supply side bears the entire cost and there is no dead weight loss since there's no decrease in output from equilibrium. Answers (a) or (c) may or may not be true, but they aren't written as economic arguments without more details. (d) is incorrect, it has the relationship between tax incidence and elasticity backwards.

12. Which of the following statements best characterizes the inefficiency caused by a sales tax? (a) Consumers are encouraged to consume too much. (b) Trades that have positive economic surplus don't take place. (c) Producers are encouraged to produce too little. (d) The enforcement of the tax is extremely costly. (e) The wrong producers are induced to produce and wrong consumers induced to consume.

(b) Trades that have positive economic surplus don't take place.

2. Refer to the figure above. If a tax of one dollar per unit is imposed on the producers of this commodity, the price consumers will pay in the market will (a) increase by exactly one dollar. (b) increase by less than one dollar. (c) increase by more than one dollar. (d) remain the same as the price before the tax.

(b) increase by less than one dollar. • Not all of the tax can be passed through since there is still some reaction of demand to price.

2. Assume restaurants and bars are substitutes. Introducing a new restaurant on Kirkwood Ave will likely ______ the elasticity of demand for bars, and therefore ______ consumer surplus in the bar market. (a) increase; increase (b) increase; decrease (c) decrease; increase (d) decrease; decrease

(b) increase; decrease - A new restaurant would make people more likely to substitute away from bars with an increase in the price of bars, thus increasing the elasticity of demand for bars. An increased elasticity of demand makes the demand curve more horizontal, decreasing consumer surplus.

11. Refer to the figure above. Under the Green U's administration's first come, first served policy, instead of price-determining who gets a parking space, ______ determines who gets a space. (a) income (b) opportunity cost of time (c) reservation price for a permit. 12.

(b) opportunity cost of time - whoever has the most time to show up first will get the spot

1. The existence of a negative externality will result in (a) economic efficiency if there is no government intervention in the market. (b) production that exceeds the socially optimal level. (c) prices that are artificially high. (d) elimination of deadweight loss. (e) production that is less than the socially optimal level.

(b) production that exceeds the socially optimal level.

4. We would expect that long run (informally speaking) supply and demand curves are more elastic than they are on a day-to-day basis, since there is more time for consumers and producers to find substitutes for a given good. This implies that (a) revenue from a given per-unit tax t on a good rises over time (b) revenue from a given per-unit tax t on a good falls over time (c) revenue from a given per-unit tax t on a good stays the same over time

(b) revenue from a given per-unit tax t on a good falls over time - Finding more substitutes over time, makes the price more elastic. More elastic means that taxing that good will result in a greater drop in quantity because the price is increasingly sensitive. This drop-in quantity due to greater elasticity will reduce the revenue from the tax. • As people find more substitutes, the quantity produced and demanded after a tax will fall more dramatically, leading to less revenue and more dead-weight loss.

10. Suppose x% represents the consumer's share of the tax burden and y% represents the producer's share of the burden. What are the values of x and y? (a) x = CH; y = BH (b) x = 0; y = 100 (c) x = CB; y = BA (d) x = CH; y = HA (e) x = 100; y = 0.

(b) x = 0; y = 100 • Demand is perfectly elastic: if firms tried to pass through any of the tax burden, no consumers would buy.

6. Refer to the table above. Suppose the owner charges an entry fee to the lake, and at any price, only those with reservation value over that will wish to fish. What will he have to charge to get exactly 5 fishers? Also, what is the total surplus; that is, the total fishers' surplus plus the owners surplus with this new payment policy? (a) $4.00; $29 (b) $3.00; $36 (c) $4.00; $40 (d) $5.00; $25

(c) $4.00; $40 - Notice this is actually the same problem, since not taking a $4.00 payoff to not fish has an opportunity cost of $4.00, and this question has a direct cost of $4.00. The same people will fish and get the surplus, but now the owner of the lake gets to profit off of it instead of the volunteers who were paid to not fish.

5. Refer to the table above. Suppose the owner solicits volunteers to postpone fishing that day by offering cash compensation so that only 5 people will still wish to fish. How much money will he have to offer each volunteer to generate the required number of volunteers? What is the economic surplus (for the people served) under the compensation scheme, assuming fishing is free? (a) $4.00; $29 (b) $3.00; $36 (c) $4.00; $40 (d) $5.00; $25

(c) $4.00; $40 - With an offer of 4, Dan, Tanya, Scott, Aaron, and Frank will fish. Adding up across them, you get a surplus of $40.

8. Refer to the figure above. The cost of subsidy, which must be borne by taxpayers, is (a) $6000 (b) $7200 (c) $8400 (d) $10,400

D is the demand curve; S is the pre-tax supply curve; S+T is the post-tax supply curve; a $T unit tax is imposed on the seller (producer); P is price of the product and Q is quantity. Answer the next three questions based on the figure below. 9. Which area represents the government's tax revenue? (a) Area OKEC (b) Area OKGH (c) Area HGEC (d) Area AGEC (e) Area BEC.

(c) Area HGEC • K units are produced after the tax, so we know length HG is the total number of units produced, and the tax level T is given by EG, so HGEC gives the right revenue.

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine, so that there are positive externalities from consumption. Assume there are no externalities associated with production/supply. Answer the next three questions based on the graph below. 14. Private benefits are measured by ______ and social benefits are measured by _____. (a) D-1; MC (b) D-2; MC (c) D-1; D-2 (d) D-2; D-1

(c) D-1; D-2 - D-1 is private benefits since you add the dollar value of the social benefits vertically on top of the demand curve.

4. When can changes in supply affect consumer surplus? (a) Changes in supply always affect consumer surplus because they shift demand. (b) They cannot affect consumer surplus because consumer surplus is about the buyers, not the sellers. (c) It can only affect it through changes in the equilibrium price and quantity. (d) Consumer surplus depends on the entire supply curve (not just equilibrium price and quantity) since markets have two sides.

(c) It can only affect it through changes in the equilibrium price and quantity. - Consumers don't directly care about the supply side except that it affects the price they will have to pay in equilibrium. If there were a change in supply that left P* unchanged, nothing about consumers' welfare would change, but once price changes their welfare will go up (if the price drops) or down (if the price rises).

1. Refer to the figure above. The tax burden is mainly _______________ because _____________. (a) borne by the producers; it is imposed by law on producers (b) borne by consumers; at the market price consumer demand is more price elastic (c) borne by consumers; at the market price consumer demand is less price elastic (d) borne by the producers; producers cannot pass on taxes to consumers

8. Laws that regulate the behavior of firms and of individuals are often enacted in order to (a) eliminate all negative externalities. (b) convert private bene ts into positive externalities. (c) correct resource misallocation due to externalities. (d) redistribute income more equitably.

Suppose that a firm is located along a river. The firm uses water from the river to cool its machinery and returns the water to the river several degrees warmer, which has led to a decline in the fish population downstream. 2. If the firm does not have to pay for the damage to the downstream fish, the market equilibrium price will be ________ and the market equilibrium quantity will be _____. (a) inefficiently high; inefficiently low (b) inefficiently high; efficient (c) inefficiently low; inefficiently high (d) efficient; inefficiently low

9. If the market equilibrium quantity is less than the socially optimal quantity, one can infer that (a) the private supply curve for the activity is below the socially optimal supply curve. (b) the private demand curve for the activity is above the socially optimal demand. (c) the production of this good has a positive externality. (d) the production of this good has a negative externality.

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns. Taylor's neighbor's find that the collective marginal benefit of someone else's well-groomed lawn is $10. Taylor, however, dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn - the cost of maintaining the lawn is a dollar more than the private benefit of having a well-groomed lawn. Unkempt Well-groomed Net Value to Taylor 0 -1 Net Value to Taylor's neighbors 0 +10 10. If Taylor acts independently, Taylor's lawn will be __________ and total economic surplus to the neighborhood will be __________. (a) well groomed; $10 (b) well groomed; $9 (c) unkempt; 0 (d) unkempt; - $1

Use the graph below to answer the next three questions. S is an initial (pre-tax) supply curve; S+Tax is a post-tax supply curve (the tax is per unit of output and is collected from the seller); D is the demand curve. 5. What is the (per unit) amount of the tax and what is the total amount of tax revenue raised in equilibrium? (a) $9.20; $9.20 x 7. (b) $8.80; $8.80 x 8. (c) $8.20; $8.20 x 7. (d) $1; $1 x 7. (e) $1; $1 x 8.

(d) $1; $1 x 7. • Total tax is the difference between the consumer's price and the producer's price, here $1, and 7 units are produced post-tax.

4. Refer to the table above. If fishing is "free" and the owner operates it on a first come, first served basis, what will the total economic surplus (for the people that were served) be for that day? (a) $12 (b) $36 (c) $25 (d) $26

(d) $26 - Just add up the first 5 people, Dan through Scott.

6. In terms of price changes, the share of the tax burden per unit borne by consumers is _____ and the share of the tax burden borne by producers is _______ (a) 50 %; 50 %. (b) 80 %; 20 %. (c) 70 %; 30 %. (d) 40 %; 60%.

(d) 40 %; 60%. • Total tax is $1, and you can see that consumers are paying $0.40 above the old equilibrium price while producers are receiving $0.60 less than before.

9. Refer to situation in the figure above. The net effect of the subsidy program ______ total economic surplus by _____. (Here you can't just use the picture, but also want to include the cost of the subsidy in your calculation.) (a) increased; $7200 (b) decreased; $7200 (c) increased; $8400 (d) decreased; $1200

(d) decreased; $1200 - Consumer surplus rose by 7200, but the taxpayers (whoever they are) had to pay an extra 8400. Total surplus fell (but of course surplus was transferred around.)

7. Refer to the figure above. After the subsidy, consumer surplus ______ by ______ per day. (a) stays the same; $0 (b) decreased; $1200 (c) increased; $1200 (d) increased; $7200

(d) increased; $7200 - The additional consumer surplus is the new rectangle with base from 0 to 10 and height from 900 to 1500, PLUS the small triangle to the right of that. The rectangle's size is 6000, and the size of the triangle is 1/2 * 4 * 600 = 1200, so total consumer surplus rises by 7200.

11. If Taylor's lawn is unkempt, the situation is __________ because the total economic surplus is __________. (a) efficient; nonnegative (b) inefficient; zero (c) efficient; as large as possible (d) inefficient; smaller than it could have been

(d) inefficient; smaller than it could have been

12. Taylor's neighbors would be willing to pay Taylor ______ to keep a well groomed lawn. (a) $1. (b) more than $1 but less than $9. (c) $5. (d) no more than $10.

(d) no more than $10.

11. Which area represents the deadweight loss from the tax? - Perfectly Elastic Demand Chart Labeled (a) There is no deadweight loss from the tax (b) Area HGEC (c) Area HGA (d) Area JEG (e) Area EGF.

(e) Area EGF.

CL Session 4 1.Students A, B, C, D, and E are all competing for a two spaces in a study -abroad program. Their reservation values for this problem are given by the figure. - Now rank (a)-(d) from problem 1 in terms of revenue (or costs) for the school. Are more efficient allocations always higher revenue for the school? (a) Randomize the first spot among the five students and the second spot among the remaining four, with the students not having to pay anything. (b) Charge a price of 220 and let any student buy a spot if they would like. If multiple students want to buy, randomize (with equal probabilities) across them. (Only those who gets the spots have to pay.) (c) Offer a scholarship of size 255 that can be used if the students decline the spot. If multiple students still want to go, randomize (with equal probabilities) across them. (All students who don't end up with spots get the subsidy.) (d) Give the spots to student "A" and student "B", in exchange for "A" and "B" both paying the school $50 and students "C" through "E" $10 each.

Answer: In order from highest to least revenue: (b), (d), (a), (c) - (b), two students end up buying at 220, making the school $440. - (d), the school received $50 from A and B, making $100 total - (a), the school gets nothing. - (c), the school pays 255 to each of the three students not going, for revenue of -$765 Notice the most efficient of the listed scenarios is the lowest-revenue. (Generally speaking there does not have to be a close connection between efficiency and revenue.)

CL Session 4 1.Students A, B, C, D, and E are all competing for a two spaces in a study -abroad program. Their reservation values for this problem are given by the figure. The university does not care which of the five students gets the spots. Rank the following methods for determining who gets the spots in order of economic efficiency (a) Randomize the first spot among the five students and the second spot among the remaining four, with the students not having to pay anything. (b) Charge a price of 220 and let any student buy a spot if they would like. If multiple students want to buy, randomize (with equal probabilities) across them. (Only those who gets the spots have to pay.) (c) Offer a scholarship of size 255 that can be used if the students decline the spot. If multiple students still want to go, randomize (with equal probabilities) across them. (All students who don't end up with spots get the subsidy.) (d) Give the spots to student "A" and student "B", in exchange for "A" and "B" both paying the school $50 and students "C" through "E" $10 each.

Answer: In order from most to least efficient: (c), (b), (a), (d) (c) - For (c), only D and E will turn down the scholarships, so they will get the spots, which is efficient since they value them the highest. (b) - For (b), C, D, and E pay, so there is a chance that C will get one of the spots, making this less efficient than (c). (a) - (a) is like (c) in practice but also potentially allocates the spots to A or B, which is even worse (possibly the worst outcome, to possibly the best outcome) (d) - (d) is bad because A and B get the spots, the least efficient outcome.

CL Session 5 Using a copy of this new graph, label the change in consumer surplus from before the subsidy if any

Consumers now pay a lower price and more of them are buying, so their surplus must rise as indicated in the following picture

CL Session 5 Find the deadweight loss due to the subsidy

Here the DWL results from trades taking place that should not have taken place: - firms that are producing at a marginal cost higher than 200 are trading with consumers with reservation values below 200, which means you are basically inducing goods to be transferred to people who value the good less. = 1/2 * (12.5) * (100) = 625 DWL

Key Utility Concepts

Utility maximization: -Utility is maximized when marginal utility is zero -If MU can't equal 0, you should stop the last time your MU is positive -(The old way we learned this: -Marginal benefits = Marginal costs -Is the same as -Marginal utility = 0)

Allocation Rule

We need some way (rule) of determining who gets a good and who doesn't. - You agree on a price, and trade at that price •A few common non-price allocation rules: •Lottery: choose who gets seats and who doesn't get seats randomly •First-Come, First-Served: first 250 to the gate get the seats •A few common price-based allocation rules: •Fixed price: offer $100 for volunteers to not leave the flight; if this doesn't work, use the non-price method •Ascending Auction: offer $100, then $200, then $300, until you get enough volunteers. •Descending Auction: start by offering a price so high that more than 10 people volunteer to stay, then lower the price until it's exactly 10 people.

Salina studied 5 hours for her first Economics test and her test score was 85; 6 hours for her second Economics test and scored 90; and 7 hours for her third Economics test and scored 95. She also studied 5 hours for her first Math test and her test score was 68; 6 hours for her second Math test and scored 78; and 7 hours for her third Math test and scored 88. Assume Salina's utility equals her total score across her two exams: utility = math score + econ score, and all the exams were identical in terms of difficulty, benefits of studying, etc. She has no utility cost of studying. Salina's marginal utility from the seventh hour spent studying Economics is a) 5 b) 10 c) 15 d) 45

a) 5

QUIZ Question Due to a large-scale social movement, everyone in the US becomes more environmentally aware, raising the reservation values people put on electric cars. Mark the correct statement about the effect of this on the surplus in the electric car market. a) Both consumer and producer surplus rise. b) Producer surplus rises, consumer surplus stays the same. c) Consumer surplus rises, producer surplus stays the same d) Neither consumer nor producer surplus rises.

a) Both consumer and producer surplus rise.

QUIZ Question Which of the following is the best example of the free-rider problem? a) I skip getting a flu vaccine this year since everyone else will be getting one anyway. b) A frat party runs out of pizza within 10 minutes with many people still hungry. c) Netflix allows entire families to share a single account. d) Sarah tries to find the best possible deal on a new apartment even though she could afford a better one.

a) I skip getting a flu vaccine this year since everyone else will be getting one anyway.

QUIZ Question Choose the inefficient scenario from the list below. a) IBM does not produce a computer at marginal cost $300, and the lowest reservation value consumer remaining in the market has an RV of $500. b) The equilibrium price and quantity for apples both increase after an increase in demand for apples. c) Chevy produces a truck for $15,000 and sells it to a consumer for $16,000 when the consumer would be willing to pay up to $20,000 for it. d) Insulin is inelastically demanded.

a) IBM does not produce a computer at marginal cost $300, and the lowest reservation value consumer remaining in the market has an RV of $500.

Showing a sporting event as a pay-per-view event, so viewers are charged a fee to watch programming,is__________ because __________. a) efficient; prices will allocate the resource to those who value it most b) inefficient; firms will have an incentive to over-charge for a good that people value c) inefficient; pay-per-view results in a gain in surplus d) inefficient; pay-per-view results in a loss in surplus

a) efficient; prices will allocate the resource to those who value it most

The very small city of Pleasantville is considering building a public swimming pool that costs $1,000. The table shows the five voters in the city and their marginal benefit of a swimming pool. It takes a 4/5 majority to pass any tax measure and all voters must vote. It is _____ to build the public swimming pool because it leads to an economic ______. a) efficient; surplus of $490 b) efficient; surplus of $1490 c) inefficient; shortage of $1000 d) inefficient; shortage of $490

a) efficient; surplus of $490 - the total sum of values for the citizens if 1490, and the cost to the city is 1000. Since social value (sum of everyone's values) exceeds cost, producing is efficient, and the surplus is 1490-1000 = 490.

QUIZ Question If total utility is falling as you perform more of an activity, that means your marginal utility is a) negative b) zero c) increasing d) positive

a) negative

QUIZ Question Say the quantity demanded of insulin is the same no matter the price of insulin. If the government passes a sales tax on producers of insulin, a) the burden of a tax falls entirely on the buyer b) the burden of a tax falls entirely on the seller c) the dead weight loss will be extremely high d) the burden of a tax is shared equally

a) the burden of a tax falls entirely on the buyer

Practice Exam 16. The table below shows the equilibrium quantity, consumers' surplus, and producers' surplus in a competitive industry before and after a tax of $2 a unit. What is the dead weight loss from the tax? (Hint: Draw a graph and label) a. $5 b. 10 c. $15 d. $20

a. $5 Two ways to solve: Before Tax = 40 + 40 = 80 TS After Tax = 22.50 + 22.50 + 30 = 75 80 - 75 = $5 DWL 20 - 15 = 5 quantity length h * 15 units = 30 (tax revenue) height = 2 So, 1/2 * (5) * (2) = $5 DWL

Practice Exam 5. The graph below shows the market for apartment rentals in Indianapolis without any government regulations. If the government imposes a price ceiling of $200, which of the following would we not expect to occur? (You might need to check quantities here; you can compare areas below by counting the grid squares they contain.) a. An increase in consumer surplus b. A decrease in efficiency c. A decrease in producer surplus d. The market price to fall

a. An increase in consumer surplus i. At a price ceiling of 200, Q=100, and consumer surplus becomes as shown in the picture below: - You can see that consumer lost 2 squares of surplus into the DWL triangle but picked up 2 from producer surplus, so they have the exact same level of CS as before

Practice Exam 18. Which of the following statements is untrue? a. As demand becomes less elastic, equilibrium prices must rise b. As supply becomes more elastic, more of a tax will be borne by consumers c. Government revenue from a per-unit sales tax is negatively related to the elasticity of demand and supply d. A price ceiling may not lead to an increase in consumer surplus

a. As demand becomes less elastic, equilibrium prices must rise

Practice Exam 8. Refer to the figure above. The supply and demand for seats in Econ B251 for next semester are illustrated in the figure. Suppose the university chooses to offer spots for free (e.g. spots in the class are free) on a first come first served basis in the interests of poor students. Under the first come, first served pricing policy for spots in the class, the deadweight loss can be as low as a. Zero b. Q2-C-D c. Q1-A-A4 d. E-A-C

a. Zero - If the good went to all the highest RV individuals, then Q1 is getting produced and given to the correct people, so we would be efficient and have 0 DWL.

13.Suppose that the government of Aaland decides that there is a need to reduce cigarette smoking in their country. The cigarette market in Aaland can currently be described by the following demand and supply equations: Demand for cigarettes: Q = 1350 -10P Supply of cigarettes: Q = 40P -1000 The government proposes implementing a quantity control of 500 units: this quantity control would limit the number of cigarettes that could be sold in Aaland to exactly 500 units. What price must consumers pay in order to only demand 500 cigarettes, and what value of the deadweight loss after the quantity control is imposed? a.85 ---9,025 b.85 ---23,750 c.37.5 ---9,025 d.37.5 ---23,750

a.85 ---9,025 Plug in the 500 units into the demand equation in order to find the what price consumers will pay. Then, fill out the rest of the graph using both equations to calculate the dead weight loss. This is all shown in the figure.

9. Consider the computer market. The market demand for computers is given by P = -2Q + 12. The market supply of computers is given by P = Q. P is price and Q is the amount of computers. The government mandates a price floor for computers of $6 each. Holding everything else constant, which of the following statements is true? a.There will be a surplus of 3 computers. b.There will be a shortage of 3 computers. c.4 computers are traded in this market. d.There will be no exchange of computers in this market when this price floor is implemented.

a.There will be a surplus of 3 computers. Graph it, and then draw in the price floor.

The actual monthly gain in surplus to A and B from living together after addressing the snoring problems in the least costly way is a) $200. b) $150. c) $100. d) $50

b) $150. -Living apart, total costs were 1000, and now total costs are 850 from option C above.

QUIZ Question Consider the following table summarizing how a power plant makes money and pollutes the local environment (valued in millions of dollars). Say the owner of the power plant only gets utility from making money and values 1 million dollars at 1 util, and does not care at all about the environmental costs of their decision. How many millions of watts of output will this firm make? a) 1 b) 2 c) 3 d) 0

b) 2

QUIZ Question Compared to a market operating at equilibrium price and quantity, we typically see that government interventions like price floors and price ceilings have what effects? a) An increase in efficiency due to underproduction. b) Transfers from consumers to producers or vice versa. c) Both producers and consumers being made better off at the same time. d) A decrease in dead weight loss leading to the efficient outcome.

b) Transfers from consumers to producers or vice versa.

An Internet site that maintains a database of product reviews that anyone can access and that has advertisement banners is a) a private good. b) a privately provided public good selling its byproduct to advertisers. c) a government-provided public good. d) a privately provided public good in search of donations.

b) a privately provided public good selling its byproduct to advertisers. - We didn't discuss this in class, but privately provided public goods are those put out by companies, and they have to recoup their costs by bundling this public good with a "byproduct" they can sell

QUIZ Question Consider the market for supercomputers. An increase in the producer surplus in this market may result from: a) a decrease in the demand for supercomputers. b) an increase in the demand for supercomputers. c) a decrease in the price of supercomputers. d) a price ceiling in the market for supercomputers.

b) an increase in the demand for supercomputers.

Lane and Riley are the only two residents in a neighborhood, and they share the same driveway. They would like to have the driveway paved. The value of the paved driveway is $1500 to Lane and $1000 to Riley. Irrespective of who pays for the paving both people will benefit from it. Suppose the cost of paving the driveway is $2000, it is _____ for them to share its cost because then they will have a total economic _______. a) inefficient; shortage of $500 b) efficient; surplus of $500 c) efficient; shortage of $500 d) efficient; surplusof $1000

b) efficient; surplus of $500

Assume you have $5,000 to invest. Assume stock in IBM costs $50 per share and pays a yearly dividend of $10 per unit of stock. Assume stock in TI costs $20 per share and pays a yearly dividend of $5 per unit of stock. Ignoring all other factors, to maximize your investment return you should: a) invest $5,000 in IBM. b) invest $5,000 in Tl. c) split your investment so that the ratio of your shares of TI relative to IBM is 2.5 to 1. d) split your investment so that the ratio of your shares of IBM relative to TI is 2.5 to 1.

b) invest $5,000 in Tl. •TI has a 25% return per share (since if you spend $20 you get 5) vs 20% for IBM. Here there is no issue of decreasing marginal utility since (as long as the marginal utility of money is positive) you just want to get as much money out of this as possible - $5000 in TI returns $1250 - $5000 in IBM returns only $1000

Unlike newspaper dispensing devices, soft drink dispensing machines do not permit people to take more than one can with each payment. The reason is that the: a) opportunity cost of an additional can of soft drink increases very rapidly. b) marginal utility of an extra soft drink declines fairly slowly, particularly because they are storable and can be consumed later. c) marginal utility of an extra soft drink can decline quite rapidly. d) opportunity cost of an additional can of soft drink increases very slowly.

b) marginal utility of an extra soft drink declines fairly slowly, particularly because they are storable and can be consumed later.

The swing set at a popular and unfenced public park is a) nonrival. b) nonexcludable. c) a common-pool good. d) a public good.

b) nonexcludable. - the number of people on the swing set is limited, so it is rival, but only while someone is using it. Once someone stops using the swingset, It becomes non-rivalrous and able to be used by someone else. When the good is used, this doesn't permanently prevent someone else from using it, so it cannot be a common-pooled good (like oil). On top of that, you can't prevent people from trying to get on (non-excludable).

Early settlers in the town of DryValley drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in DryValley, the aquifer level fell and new wells had to be drilled deeper at a higher cost. The town council has proposed putting a meter on each household's pump, and charging residents for each gallon of water used. This would a) not change water use. b) price an un-priced resource, increasing incentives to avoid wasting water. c) convert private property to public property. d) reduce total economic surplus.

b) price an un-priced resource, increasing incentives to avoid wasting water.

Practice Exam 13. Consider the setup from problem 12 again. How would you describe, in our language, the rule "give the offices to C and D for free"? a. Inefficient and unequal (both in rule and outcome) b. Efficient and unequal (both in rule and outcome) c. Inefficient and equal (both in rule and outcome) d. Efficient and equal (both in rule and outcome)

b. Efficient and unequal (both in rule and outcome)

Practice Exam 20. Which of the following statements about the use of common-pool resources is true? a. Government must always manage the use of common-pool resources. b. In the marginal social costs of extraction exceed the private costs, there must be some way to increase private costs to restore efficiency. c. The optimal use of common-pool resources is the level where the private costs to use match the private benefits. d. The optimal consumption of common-pool resources is when total benefits equal total costs.

b. In the marginal social costs of extraction exceed the private costs, there must be some way to increase private costs to restore efficiency. - Tragedy of the commons

Practice Exam 19. We would expect that "long run" (informally speaking) supply and demand curves are more elastic than they are on a day-to-day basis, since there is more time for consumers and producers to find substitutes for a given good. This implies that a. It's harder to fix inefficient production over the long run than the short run b. Taxes become more effective over time at discouraging undesirable behaviors c. The revenue from a given per-unit tax t on a good rises over time d. The revenue from a given per-unit tax t on a good stays the same over time

b. Taxes become more effective over time at discouraging undesirable behaviors - Finding more substitutes over time, makes the price more elastic. More elastic means that taxing that good will result in a greater drop in quantity because the price is increasingly sensitive. This drop-in quantity due to greater elasticity will reduce the revenue from the tax.

1.Which of the following is true of the market for medical masks if there is an increase in the demand for the masks? a. There is no change in producer surplus. b. There is an increase in producer surplus. c. There is a decrease in producer surplus. d. There is a decrease in consumer surplus.

b. There is an increase in producer surplus. the demand curve shifts outward, increasing-price and quantity

Practice Exam The graph below (same as problem 5) shows the market for apartment rentals in Indianapolis without any government regulations. Say the government imposes a price ceiling of $200, but would like to switch to a tax-based regulation system and maintain the same quantity (100) without changing the sticker price consumers pay. Is this achievable? a. Yes, tax producers at 800 per home b. Yes, tax consumers at 800 per home c. No, the sticker prices for consumers must rise d. No, you can't get to 100 quantity only using taxes

b. Yes, tax consumers at 800 per home - With this tax, you would see something like the following (in figure) - This gets you to 100 production, and the sticker price falls to 200. (The total price, of course, must be 1000 for the consumers after the tax is added)

QUIZ Question The dollar value of the negative externality generated by paper production in the figure above is a) $0 per ton because no externality is produced. b) $13 per ton c) $2 per ton d) $12 per ton

c) $2 per ton

If A pays for the snore-eliminating device and they share the surplus equally, A's share of the rent will be____ and B's share of the rent will be ____. a) $450; $350 b) $350; $450 c) $375; $425 d) $425; $375

c) $375; $425 Solution : One bedroom, one bath apartment Cost = $500/month. $150 surplus is shared by both, it means that $75 for each and if only A pays $50 for snore eliminating device then both rent shares can be calculated as follows ; A's share = $500-$50-$75 = $375 A's share = $375 Since B does not pay for the snore eliminating device, B's share = $500-$75 = $425 B's share = $425

Refer again to the figure above. What is Jeff's optimal number of movies to watch per day? a) 0, because it maximizes marginal utility b) 3, because then the number of movies exceeds his marginal utility of 2.5 c) 4.5, because marginal utility is 0 d) 6, since it's the most movies you can see

c) 4.5, because marginal utility is 0

Refer to the above data. If the opportunity cost (in utils) of buying each unit of K were always 9, the optimal consumption of K would be a) 2 b) 5 c) 6 d) 7

c) 6

A and B are considering living alone or being roommates and splitting the rent for the next twelve months. A one bedroom, one bath apartment is $500 per month while a two bedroom, one bath apartment is $800. The one difficulty they have is that B snores very loudly. A estimates the cost of poor sleep due to B's snoring at $150 per month. B could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for a) A to endure B's snoring. b) both to live alone. c) B to eliminate his snoring. d) B to pay A for his discomfort

c) B to eliminate his snoring. -If A endures B's snoring, A ends up paying 400 in rent (half) plus 150 in snoring unhappiness (a total of 550), while B ends up paying 400, and their total costs are 950. -If they both live alone, their total costs are 1000 after they both pay 500 in rent. -If B eliminates his snoring, A pays 400 total (half rent) and B pays 450 total (half rent plus machine), for a total cost of 850. -If B pays A $150 for his discomfort, A pays 400 in rent and has net 0 in snoring unhappiness, and B pays 400 in rent and 150 to A for a cost of 550, and total costs for both roommates are 950. - The lowest-cost solution is also the efficient solution, and since A values B not snoring more than it costs B to eliminate it, we know B will eliminate snoring. - And notice that "A pays B $50 to buy the machine" would also be the same total costs and also be efficient.

c) a commons. The Tragedy of the Commons: when a good is rival and non-excludable, each person over consumes a common-pool resource, leading to worse outcomes for everyone in the future

Laws that regulate the behavior of firms and of individuals are often enacted in order to a) eliminate all negative externalities. b) convert private benefits into positive externalities. c) correct resource misallocation due to externalities. d) redistribute income more equitably.

c) correct resource misallocation due to externalities.

Consider the problem of how much coffee to drink. If the marginal utility of a 3rd cup of coffee is 23 utils (value in utility)and the marginal utility of the 4th cup is 15 utils (value in utility), then: a) it is optimal for the consumer to have 3 cups of coffee. b) the price of a cup of coffee must be 15 cents. c) the described situation is evidence of the law of diminishing marginal utility. d) total utility from 4 cups of coffee must be lower than the total utility from 3 cups

c) the described situation is evidence of the law of diminishing marginal utility.

One source of friction in the governmental provision of a pure public good is that voters receive__________ of the public good and have __________ for the public good. a) different amounts; different reservation prices b) different amounts; the same reservation price c) the same amount; different reservation prices d) the same amount; the same reservation price

c) the same amount; different reservation prices -if you have a low reservation price you will be tempted to free ride rather than contribute to helping create the public good, since if you help pay you don't get much surplus.

Practice Exam 12. When your firm moves buildings, there are two amazing offices to be assigned among four employees, A, B, C, and D. The reservation value are as follows. How would you describe the efficiency of a rule that says "we randomize the two offices between the four people"? a. This rule is inefficient because it does not make our firm the most money b. The rule is efficient because no one is worse off with this rule than they were before c. The rule is inefficient because we could design a system that everyone would prefer d. The rule is efficient because it ensures everyone has the same outcome on average

c. The rule is inefficient because we could design a system that everyone would prefer

8.Now, after opening this market to trade, the government decides to implement a quota of 50 in this market. The total surplus with the quota is equal to: a.$0 b.$5,000 c.$10,000 d.$15,000

c.$10,000 rectangle: 50 x 100 = 5000 CS triangle: 0.5 x 50 x 100 = 2500 PS triangle: 0.5 x 50 x 100 = 2500 = $10,000

QUIZ Question Refer to the above image. If the government instead sets a price ceiling of 200, consumer surplus in this market will be a) 1/2 * 100 * 50 b) 200 * 75 c) 1/2 * 300 * 75 d) 0

d) 0

QUIZ Question You manage four employees who must complete a project with four separate components, and each component requires a fixed amount of money. The logic of public goods provision would suggest that which of the following ways will lead to the most efficient completion of the project? a) Each employee is uniquely assigned to one task and given a task-specific budget, and all employees in the group are evaluated based on the overall quality of the project. b) Employees are instructed to work on all the parts as they see fit and use the budget how they would like, and they are evaluated as a group. c) Each employee is uniquely assigned to one task and told to use whatever resources from the overall budget they need, and each employee is evaluated on their task only d) Each employee is uniquely assigned to complete one part of the task, given a task-specific budget, and evaluated on that task only.

d) Each employee is uniquely assigned to complete one part of the task, given a task-specific budget, and evaluated on that task only.

QUIZ Question Refer to the above image. Suppose the government institutes a price ceiling in this market at $400. Which of the following is true? a) There is excess supply. b) The consumer surplus increases. c) There is excess demand. d) The price ceiling has no effect.

d) The price ceiling has no effect.

QUIZ Question Lane and Riley are the only two residents in a neighborhood, and they share the same driveway. They would like to have the driveway paved. The value of the paved driveway is $1500 to Lane and $1000 to Riley. The total cost of paving the driveway is $2000. Irrespective of who pays for the paving both people will benefit from it. Consider the following plan: Lane and Riley split the $2000 cost evenly and the driveway gets paved. This plan is ______, and generates a total surplus of ______. a) efficient; -500 b) inefficient; -500 c) inefficient; 2000 d) efficient; 500

d) efficient; 500

QUIZ Question When a firms provide free training to their employees, eventually those employees may leave that firm and use the training to benefit other firms. The logic of supply and demand with externalities would suggest that a) the government should tax firm training more heavily to restore efficiency. b) firms train workers too much relative to the socially optimal amount. c) firms always provide the optimal level of training because markets are efficient. d) firms train too little relative to what would be socially optimal.

d) firms train too little relative to what would be socially optimal. Explanation: Positive Externality. Under the socially optimal level.

If a good can be consumed by one person without reducing the availability of the good to others, this good is a(n) __________ good. a) nonexcludable b) public c) common-pool d) nonrival

d) nonrival

For many pure public goods like fireworks displays, weather forecasts, and television broadcasts the marginal cost of serving one more consumer is ____, and therefore the optimal quantity occurs when_______. a) zero; provision is infinite. b) determined by random factors; government provides the good c) greater than total costs; marginal costs equal the average private benefit d) zero; marginal benefit equals zero.

d) zero; marginal benefit equals zero. -once you broadcast a tv signal, the (social) marginal cost of another watcher is 0 because the broadcast is totally non-rival. Since we want to equate social marginal benefits to social marginal costs, we should just keep producing these goods until everyone has them so that the marginal benefit is 0.

Practice Exam 11. In which of the four markets would we expect the largest effect of a tax on equilibrium quantity? (You can assume identical and normal supply curves in each market.) a. Insulin b. Cigarettes c. Pizza d. Dominos Pizza (a brand of pizza)

d. Dominos Pizza (a brand of pizza) - Taxes on elastic goods have the largest effects on quantity. Specific brands are more elastic than general categories of goods.

Practice Exam 9. Refer again to the figure in Question 8. Now rather than offer spots in the class for free, the university sets a price of P2. What is the university's revenue now? a. Zero b. P1-A-E-P2 c. P2-C-Q2-0 d. P2-E-Q1-0

d. P2-E-Q1-0

Practice Exam 14. Say the equilibrium quantity produced in a market is 1000, and the government wants to increase that quantity to 1500. Which of the following could potentially achieve this goal? a. Per-unit tax on consumers of greater than $0 per unit b. Per-unit tax on producers of greater than $0 per unit c. Price floor d. Price ceiling e. None of the above

e. None of the above - Only a subsidy could achieve this.

Price Ceilings

legally established maximum prices for goods or services - Below equilibrium is binding - Excess Demand, leads to shortage. will effective price ceilings always increase CS, and will effective price floors always increase PS? - No, not always

Surplus with Smooth S & D

• Total market surplus • = CS + PS - Total surplus for the transaction labeled is $500 - if the equilibrium good is sold (marginal buyer/seller), this is the person that doesn't care about buying or selling. In this case the MC = RV (equilibrium price)

Economic Efficiency Definition

•An outcome is efficient if there is no alternative that improves outcomes for someone without harming at least one other person. •Sometimes it's easier to apply the definition of inefficiency: if it is possible to make one person better off without hurting anyone else. How to determine if something is inefficient - Is there something I can do to help everyone? if yes, this is inefficient •Efficiency examples: •I could build a laptop at a cost of $500 •A friend values a new laptop at $1000 •An efficient outcome: we trade at a price of $750 •Why is this efficient? •Think of every other possible outcome here •Not trading is always worse, and trading at some other price always hurts one of us

Market Failure - Rivalry, Excludability, and Types of Good

•If my smoking causes health problems in those around me, my consumption creates a negative externality •If you want to get specific about what an externality is, we need to dig a little deeper into rivalry and excludability. Each combination has a name: (all in the figure) Rival - Excludable: Private Non-Rival - Excludable: Club Non-Excludable - Rival: Common-pool resource Non-Rival - Non-Excludable: Public Goods Private - Common-pool resource - Pizza at a party Club - Netflix, they can charge you Public Goods - Tornado Siren

Why is there inefficiency?

•If we can design institutions to move goods from the right hand column to the left hand column (excludable), we can improve efficiency •Property rights •Enforcement of contracts

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