Exam 2 Review Questions
A
Each year, around Christmas, you decorate your home so elaborately that news crews come to film stories about your Christmas spirit. As a result, hundreds of people from all over the city drive by your house to see the "Christmas" home, creating noise and congestion that is a nuisance to your neighbors. As they have a right to not be bothered, you agree to pay your neighbors a modest sum to compensate them for the disturbance. This illustrates: A. the Coase theorem. B. a corrective tax. C. a corrective subsidy. D. the expendable argument theorem.
B
Which of the following statements is TRUE? A. Rational ignorance exists only in politics. B. Rational ignorance is bad because it leads to uninformed voters making decisions. C. It never makes sense for individuals to be rationally ignorant. D. Rational ignorance still leads to an efficient outcome.
D
A factor that is NOT a possible reason for market failure is: A. firms having the capacity to raise the market price. transactions that have side effects on the welfare of others. B. lack of information about C. the quality of a second-hand car. D. extremely high prices for prescription eyewear.
B
A familiar example of a negative externality is loud music in a busy park on a weekend. In principle, it should be possible to solve this externality by permitting park visitors to negotiate rights to play music in particular locations or at specific times. The most likely reason these negotiations do NOT occur is that: A. most people are unfamiliar with the Coase theorem. B. the bargaining costs of identifying and establishing communications between all affected parties would be high. C. music is an experience, not a good. D. some park goers do not view loud music as a negative externality.
B
A person that has the _____ opportunity cost of producing a particular good is said to have _____. A. lowest; an absolute advantage in the production of that good B. lowest; a comparative advantage in the production of that good C. highest; a production possibility frontier D. highest; increasing opportunity costs in the production of that good
A
Ang can mow the lawn in two hours. Bill takes three hours to mow the same lawn. What can you conclude from this information? A. Ang has an absolute advantage over Bill in mowing the lawn. B. Bill has an absolute advantage over Ang in mowing the lawn. C. Ang has a comparative advantage over Bill in mowing the lawn. D. Bill has a comparative advantage over Ang in mowing the lawn.
C
Assuming a normal upward-sloping supply curve and downward-sloping demand curve, if the government imposes a $25 tax on expensive handbags and collects the tax from the consumers, the price of expensive handbags will: A. increase by $25. B. increase by more than $25. C. increase by less than $25. D. increase, but we cannot determine by how much.
D
Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. The marginal cost of producing the boots is $70. How large is the economic surplus associated with her purchase of the boots? A. $50 B. $120 C. $40 D. $90
C
Beatrice loves to work in her magnolia garden, which provides pleasure to everyone in her neighborhood. To improve social welfare, the government could _____ Beatrice's gardening activities, since the market quantity of magnolias is _____ than the socially optimal quantity. A. subsidize; greater B. tax; less C. subsidize; less D. tax; greater
D
City police services and clean water are similar in that both are _____, but they differ in that clean water is _____, while city police services are not. A. rival in consumption; excludable B. nonrival in consumption; excludable C. excludable; rival in consumption D. nonexcludable; rival in consumption
B
Emissions from large pulp and paper factories create health risks for pedestrians and discomfort for residents of the city of Ashdown, Arkansas. In this case: A. too few of society's resources are used to produce paper. b. the externality can be solved by imposing a specific tax on the pulp and paper factories. C. there is an external benefit to society from the production of paper. D. the externality can be internalized by granting a specific subsidy to pulp and paper factories.
B
Every few months, public television asks viewers to contribute to their local public television station. Although they raise money during this time, it often falls short of the amount they wish to raise because: A. they do not make the pledge period long enough. B. viewers know they will be able to watch public television, even if they don't contribute. C. public television free-rides on the viewers. D. the marginal social cost equals the marginal social benefit of public television viewing.
B
If Bangladesh removes a tariff on imported shoes, the price of shoes in Bangladesh will likely _____, and the quantity of shoes purchased in the domestic market will likely _____. A. fall; fall B. fall; rise C. rise; fall D. rise; rise
B
If a product that generates a negative externality is priced so that the polluters bear the cost of the externality, the price of the product will likely: A. fall, and output will likely rise. B. rise, and output will likely fall. C. not change, but output will likely fall. D. rise, but output will likely stay the same.
B
If a special interest group represents 10% of society and there is a proposed public policy that will cost society $1 million and benefit that special interest group $1 million, which of the following is the MOST LIKELY outcome according to public choice theory? A. The special interest group will not be able to make any decision on the proposed policy because its benefits equal its costs. B. The special interest group will lobby for the proposed policy because the policy will benefit the group more than it will cost it. C. The special interest group will not lobby for the proposed policy because the policy will cost the group more than it will benefit it. D. This policy will never be passed because the total costs and benefits are the same.
B
If the cost to download a movie from the internet falls from $7.99 to $5.49 along an upward-sloping supply curve, producer surplus in the market for movie downloads is likely to: A. increase. B. decrease. C. not change. D. We cannot determine what producer surplus will do without information about consumer surplus.
A
If the marginal social benefit received from pollution is greater than its marginal social cost in a market: A. an increase in the quantity of pollution will be in society's best interest. B. a decrease in the quantity of pollution will be in society's best interest. C. the socially optimal level of pollution has been attained. D. the market is producing too little pollution.
A
In the importing country, the MOST likely effect of a tariff is to: A. raise the price and decrease the quantity demanded. B. raise the price and increase the quantity demanded. C. raise the price without affecting the quantity demanded. D. decrease the quantity supplied.
B
Marius and Jennifer are going to sell cupcakes and muffins at their third annual fundraiser bake sale. In one day, Marius can make 40 cupcakes or 20 muffins, and Jennifer can make 15 cupcakes or 15 muffins. Based on this information, _____ has the absolute advantage in cupcakes, and _____ has the absolute advantage in muffins. A. Marius; Jennifer B. Marius; Marius C. Jennifer; Marius D. Marius; neither Marius nor Jennifer
C
Marius and Jennifer are going to sell cupcakes and muffins at their third annual fundraiser bake sale. In one day, Marius can make 40 cupcakes or 20 muffins, and Jennifer can make 15 cupcakes or 15 muffins. With specialization, _____ cupcakes and _____ muffins will be made in one day. A. 15; 20 B. 40; 20 C. 40; 15 D. 55; 35
B
Mila is a dentist who employs an assistant, John. If Mila worked all day at the front desk, she could answer 40 emails. If she worked all day with patients, she could clean the teeth of 40 patients. If John worked all day at the front desk, he could answer 60 emails. If he worked all day with patients, he could clean the teeth of 20 patients. _____ has a(n) _____ advantage in _____. A. Mila; absolute; answering emails B. John; comparative; answering emails C. John; absolute; cleaning patients' teeth D. Mila; comparative; answering emails
A
Most neighborhood streets have traffic lights to help control the flow of traffic. Traffic lights are _____ and _____. Therefore, they will be _____ by the competitive market. A. nonrival; nonexcludable; underprovided B. nonrival; nonexcludable; overprovided C. rival; excludable; efficiently provided D. nonrival; excludable; underprovided
D
Prior to any taxes, the equilibrium price of bottled water is $5 per gallon. Then a $1-per-gallon tax is levied. As a result, the price of bottled water rises to $5.75 per gallon. The incidence of the $1 tax is _____ paid by consumers and _____ paid by producers. A. $0.25; $0.75 B. $0.50; $0.50 C. $0; $1.00 D. $0.75; $0.25
B
Raul works at a factory that produces wooden benches. The four main tasks are cutting the wood, constructing, sanding, and staining. Out of all the workers, Raul enjoys cutting the most, is the slowest at constructing, has the lowest opportunity cost for sanding, and is the fastest at staining. If his manager wants to maximize factory output, he will assign Raul to A. staining. B. sanding. C. constructing. D. cutting.
A
Sookie advertises her bicycle for sale on Craigslist for $1,000 but is willing to accept $700. The best offer she receives is $500. Why does she not sell her bicycle? A. Her marginal cost is more than the best offer she received. B. The opportunity cost is too high. C. Her consumer surplus is $200, which is not close enough to her reservation price. D. She would be paying $200 for someone to take the bicycle.
B
Sunday afternoon NFL football games on television are nonrival because: A. the provider cannot prevent people who do not pay for them from watching them. B. more than one person can consume the same unit of the good at the same time. C. individuals ignore the effect of their use on the amount of the resource remaining for others. D. the market suffers from inefficiently low consumption.
A
Suppose that a hurricane hits both North Carolina and South Carolina. North Carolina has severe price-gouging laws in place, while South Carolina has none. Both states have a shortage of ice. Which state will recover from its ice shortage more quickly? A. South Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production. B. North Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production. C. South Carolina will recover more quickly because the antigouging laws create incentives to invest in ice production. D. North Carolina will recover more quickly because the antigouging laws create incentives to invest in ice production.
B
Suppose the market for mini-scooters faces an upward-sloping supply curve. If there is a decrease in price, we would expect producer surplus to: A. increase. B. decrease. C. stay the same. D. We cannot determine what producer surplus will do without information about the demand curve.
B
The harvesting of corn generates external costs in the form of methane gas emissions. In equilibrium: A. too little corn will be harvested. B. the price of a bushel of corn will be less than the marginal social cost of the last bushel of corn sold. C. the price of a bushel of corn will be less than the marginal social benefit of the last bushel of corn sold. D. the price of a bushel of corn will be less than the marginal cost of the last bushel of corn sold to the corn farmer who sold it.
D
The high price for ice in hurricane-devastated areas: A. is not justified by the laws of supply and demand. B. makes it difficult for consumers to find ice to buy. C. provides an example of self-interested behavior in direct conflict with public interest. D. signals entrepreneurs around the country that it is profitable to supply ice to these devastated areas.
A
The main reason that government legislation on sugar quotas passes is that: A. a large number of consumers bear small economic costs, while a small number of domestic sugar producers receive its benefits. B. both consumers and producers are rationally ignorant. C. a small number of consumers bear its economic costs, while a large number of domestic sugar producers receive its benefits. D. its economic benefits totally offset its economic costs.
B
The measles vaccine provides both private benefits to individuals and positive external benefits to other members of society. In equilibrium: A. too many doses of the vaccine would be produced, since its external benefits would not be considered. B. too few doses of the vaccine would be produced, since its external benefits would not be considered. C. the optimal amount of the vaccine would be produced, since its external benefits would not be considered. D. too few doses of the vaccine would be produced, since its marginal social benefits would be overstated.
C
To encourage consumption of a good that generates a positive externality, the BEST option for policymakers is to: A. penalize firms through higher taxes unless they produce the socially optimal level of output. B. mandate consumption of the good at the socially optimal level of output. C. provide a subsidy to firms for each unit of the good consumed to achieve the socially optimal level of output. D. allow the market to reach equilibrium on its own.
B
Traffic congestion is a common example of a negative externality. In principle, it should be possible for drivers to negotiate the right to drive at particular times, thereby compensating those who would prefer not to drive at peak times and solving the externality. The most likely reason these negotiations do NOT occur is that: A. individuals are unfamiliar with the Coase theorem. B. the bargaining costs of such negotiations would be prohibitive, as there are (in large cities) many interested parties. C. such an agreement could not be enforced, since all individuals have free access to all public roads. D. the punitive nature of the negotiations for those not involved would ensure it cannot come to pass.
A
What is the function of the markets? A. Markets reallocate resources, goods, and services to better uses. B. Markets sell goods to make use of inputs. C. Markets produce output to cover costs. D. Markets create demand to earn profits.
C
Which is a private good? A. a police officer directing traffic B. hiking trails in a national forest C. a Wendy's hamburger D. free Wi-Fi in an internet hotspot
A
Which of the following best explains why special interest groups maintain so much power in the U.S. political process? A. Special interest groups stand to gain millions if particular laws are passed and lobby very hard for them, whereas voters stand to lose only a little and don't find opposing them worth their effort. B. Special interest groups have been powerful in the past because of their ties to wealth; however, their power has been dwindling in recent years. C. Special interest groups typically represent the largest U.S. companies, so they get a lot of media attention. D. Both special interest groups and voters lobby politicians hard regarding certain legislation; however, special interest groups typically win out because they have more money.
A
Which of the following is FALSE regarding public goods? A. The fact that something is a public good doesn't mean it is nonrival. B. The fact that the government should fund a public good doesn't mean that the government should produce it. C. The fact that something is a public good doesn't mean that the government should fund it. D. The fact that the government provides it doesn't mean that it is a public good.
D
Which of the following is NOT a reason for government failure? A. Elected officials are more concerned about reelection than efficiency. B. Regulators act in the interest of the industries they regulate. C. Government leaders are focused on enriching themselves. D. Regulators are overly focused on efficiency.
D
Which of the following is NOT a result of an efficient market? A. Goods go to the consumers who will gain the highest marginal benefit from the good. B. Goods are produced by the firms that can do so at the lowest marginal cost. C. Allocative efficiency is achieved. D. Economic surplus is minimized to reduce waste.
D
Which of the following statements is TRUE? I. Rationally ignorant people may favor price controls because they receive biased information. II. Rational ignorance may lead voters to have mistaken beliefs about the state of the economy. III. Rationally informed people can take advantage of the rationally ignorant by supporting policies that transfer wealth from the ignorant to the informed. A. II and III only B. I only C. I and II only D. I, II, and III
C
Which of these would illustrate a price floor? A. a rent-controlled apartment B. a maximum legal price that could be charged for taxi rides C. the minimum wage D. a government decree that capped the price of milk after a massive surge in prices in the aftermath of a devastating hurricane
C
Which statement is NOT an important function of an efficient market? A. It allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay. B. It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost. C. It ensures that every consumer who makes a purchase values the good less than every seller who makes a sale, so that all transactions are mutually beneficial. D. It ensures that every potential buyer who doesn't make a purchase values the good less than every potential seller who doesn't make a sale, so that no mutually beneficial transactions are missed.
C
Which statement(s) is(are) TRUE? I. In the long run, rent control laws create incentives to turn apartments into hotels or parking garages. II. Apartment owners are less likely to do routine maintenance when the government controls apartment rents. III. Rent-controlled apartments are more likely to be allocated by discrimination than non-rent-controlled apartments. A. I and II B. I only C. I, II, and III D. II only
B
Which would be the LEAST likely result of a price ceiling imposed in the market for rental cars? A. dirtier exteriors and interiors of rental cars B. free gasoline given to people as an incentive to rent a car C. slow replacement of old rental cars with new ones D. poor maintenance of rental cars
