Exam Ch. 6, 7, 9, 10, 11 Review
Public goods are difficult for a private market to provide due to
free rider problem
Consider a good for which the number of people who benefit from the good is large and the exclusion of any one those people is impossible. In this case, the market for this good will likely
free-rider problem
If the Korean steel industry subsidizes the steel that it sells to the United States, the..
harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel.
Governments can grant private property rights over resources that were previously viewed as public, such as fish or elephants. Why would governments want to do so?
to prevent overuse
Which of the following is an example of government intervention to solve a Tragedy of the Commons problem?
toll charges on congested roads
Positive externalities
result in an efficient equilibrium quantity.
Moving production from a high-cost producer to a low-cost producer will...
raise total surplus.
The old lyric "the best things in life are free"
refers to goods provided by nature or the government.
Suppose a hog farm creates a negative externality equal to $2 per hog. Further suppose that the government imposes a $2 per hog tax on the hog farmers. What's the ideal corrective tax?
The current tax is the ideal corrective tax because the ideal corrective tax equals the external cost ($2 per hog)
Suppose that in a particular market, the supply curve is relatively inelastic and the demand curve is relatively elastic. If a tax is imposed in this market, then the...
sellers will bear a greater burden of the tax than the buyers because the burden of tax falls more heavily on the side of the market that is more inelastic
Suppose a tax of $2 per unit is imposed on this market. How much will sellers receive per unit after the tax is imposed? a. $3 b. between $3 and $5 c. between $5 and $7 d. $7
b. between $3 and $5
Goods that are not rival in consumption include both
club goods and public goods.
Welfare economics is the study of how...
the allocation of resources affects economic well-being.
The figure below illustrates a tariff. On the graph, Q represents quantity and P represents price. The area C + D + E + F represents...
the decrease in consumer surplus caused by the tariff.
Efficiency in a market is achieved when...
the sum of producer surplus and consumer surplus is maximized
Caroline sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.95 per knife for as many knives as Caroline is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.50. Assume Caroline is rational in deciding how many knives to sharpen. Her producer surplus is...
$1.85 Explanation: .95 +.70 +.20 = 1.85
If the price of the product is $122, then the total consumer surplus is...
$41 Explanation: 150+135=285-(2*122)=$41
Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be achieved in this market is
$46
What causes the Tragedy of the Commons? (i)Social and private incentives differ. (ii)Common resources are not rival in consumption and are not excludable. (iii) Common resources are not excludable but are rival in consumption.
(i) and (iii) only
If a 15% change in price results in the 20% change in quantity supplied, then the price elasticity of supply is about...
-1.33, and the supply is elastic -explanation: Price Elasticity of Supply = % change in quantity supplied / % change in price (20/15=1.33)
Corrective tax vs Regulation
-a corrective tax is more efficient than a regulation because it encourages firms to further reduce pollution whereas a regulation provides no incentive to reduce pollution below the target
The marginal seller is the seller who...
would leave the market first if the price were any lower.
In recent years, the Canadian province of British Columbia has increased its carbon tax. Which of the following statements is correct?
Along with the increase in the carbon tax, British Columbia has decreased income-tax rates on individuals and corporations.
Which of the following is not a characteristic of a public good?
Because it is a free good, there is no opportunity cost. there is always an opportunity cost
What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income?
Consumer surplus... consumer surplus does not increase nor decrease
Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will...
increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles.
You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve?
Explanation: make sure the first price of 400 starts at 0 on the x-axis and not at 1.
If the government removes a binding price ceiling from a market, then the price received by sellers will....
increase, and the quantity sold in the market will increase
The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by
P3a - P3b.
An alternative label for the quantity would be...
Q optimum
Assume the nation of Teeveeland does not trade with the rest of the world. By comparing the world price of televisions to the price of televisions in Teeveeland, we can determine whether
Teeveeland has a comparative advantage in producing televisions.
On the Fourth of July, there is no fireworks display in the small town of Yankeeville, even though it would be efficient for such a display to be produced. Which of the following statements is correct?
The lack of a fireworks display in Yankeeville arises because of an externality.
Suppose that a $3 tax per pack is imposed on cigarettes. Which of the following is consistent with the demand being relatively inelastic and the supply being relatively elastic?
The price buyers pay increases more than $1.50 and the price sellers receive decreases by less than $1.50.
"Owners of firms in young industries should be willing to incur temporary losses if they believe that those firms will be profitable in the long run." This observation helps to explain why many economists are skeptical about the...
infant-industry argument.
A tax on fur coats, a luxury good is not likely to redistribute income from the rich to the poor because demand is more elastic than supply. T/F?
True explanation: When a tax is imposed on a good with demand more elastic than supply, as is the case with luxury goods, the burden of the tax falls more heavily on the sellers and the buyers, so the tax cannot successfully redistribute income to the poor.
Firms that are involved in more than one type of business could be evidence of an attempt to
internalize some forms of positive externalities.
In some cases, selling pollution permits is a better method for reducing pollution than imposing a corrective tax because
it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
Which of the following statements is correct? a. gasoline taxes are an EPA Regulation b. Gasoline taxes are higher in many European countries than in the United States. c. gasoline taxes are a command-and-control policy
b. Gasoline taxes are higher in many European countries than in the United States. explanation: command and control policies are not taxes but instead caps and minimums, and the EPA doesn't do taxes, congress does
A $5 tax levied on the buyers of pants will cause the... a. demand curve for pants to shift up by $5 b. demand curve for pants to shift down by $5. c. supply curve by pants to shift down by $5
b. demand curve for pants to shift down by $5.
What is not an important question for economic policy raised by the experience of the textile industry? a. How do the gains from trade compare to the losses? b. Who gains and who loses from free trade among countries? c. Which argument for restricting free trade is politically feasible? d. How does international trade affect consumer well-being?
c. Which argument for restricting free trade is politically feasible?
President Bush imposed temporary tariffs on imported steel in 2002. The reasons for this trade restriction is most consistent with the
national defense argument because it's critical for national security
Lawmakers designed the burden of the FICA payroll tax to be split evenly between workers and firms. Labor economists believe that a. firms bear most of the burden of the tax b. the burden is equally divided c. workers bear most of the burden of the tax.
c. workers bear most of the burden of the tax.
What effect will the imposition of a nonbinding price ceiling in the market have on producer surplus?
no change in producer surplus
An ideal corrective subsidy equals the external _______ from an activity with a _______. a. cost; positive externality b. benefit; negative externality c. cost; negative externality d. benefit; positive externality
d. benefit; positive externality Explanation: An ideal corrective subsidy would equal the external benefit from an activity with a positive externality. An ideal corrective tax would equal the external cost from an activity with a negative externality.
A congested side street in your neighborhood is
not excludable and rival in consumption.
Other than OPEC, the shortage of gasoline in the US in the 1970s could also be blamed on...
the lack of substitutes for crude oil
The tax burden will fall most heavily on the sellers of the good when the demand curve...
demand curve is relatively flat, and the supply curve is relatively steep.
With free trade, this country will...
export 100 calculators
The following diagram shows the domestic demand and supply in a market. Assume that the world price in this market is $10 per unit. Suppose the government imposes a tariff of $5 per unit. The amount of revenue collected by the government from the tariff is...
$200 Explanation: World Price ($10), tariff ($5), 100-60 = 40, 40 * 5 = 200
What will cause an increase in consumer surplus?
a technological improvement in the production of the good
Market power refers to the...
ability of market participants to influence price.
On a graph, consumer surplus is represented by the area...
below the demand curve and above market price.
Tax incidence... a. is random b. depends on the legislated burden c. depends on the elasticities of supply and demand. d. falls on buyers or entirely on sellers
c. depends on the elasticities of supply and demand
A cheeseburger is a ______ good, fire protection is a ______ good
private; club
Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 59th unit of the good is produced and consumed, social well-being increases by
$33.60
The numbers reveal the opportunity costs of providing 10 piano lessons of equal quality. Refer to Table 7-12. The equilibrium market price for 10 piano lessons is $400. What is the total producer surplus in the market?
$400 is the producer surplus because Marcia, Jan, and Cindy will all give lessens for under $400
The following table shows the private value, private cost, and social value for a market with a positive externality. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?
$7 Explanation: find equilibrium quantity, Private cost 22 - Private value 15 = 7
Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?
$8
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i)Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii)Free markets allocate the demand for goods to the sellers who can produce them at the least cost.
(ii) only
The unfair competition argument
-companies think that the market is unfair if all markets are not equally regulated -ex. if France subsidizes wheat production and Germany does not, German producers will feel that this is unfair because their price is higher
Free markets
-increase variety of goods -lower costs through economy of scale (more production=lower price) -increased competition -enhanced flow of ideas
Efficient Allocation...
-maximizes total surplus (well-being -measured via producer and consumer surplus
Protection as a Bargaining Chip Argument
-this involves the threat of a trade restriction to remove an already implemented trade restriction by another government -if successful, it can free up trade, but if unsuccessful, further restriction reduces economic welfare or backing down makes the country look bad to other governments
The Occupational Safety and Health Administration (OSHA) has determined that 100 workers are exposed to a hazardous chemical used in the production of diet soft drinks. The cost of imposing a regulation that would ban the chemical is $10 million. OSHA has calculated that each person saved by this regulation has a value equal to $10 million. If the benefits are exactly equal to the costs, what probability is OSHA using to assess the likelihood of a fatality from exposure to this chemical?
0.01 explanation: 100 workers x 10 million each = 1,000,000,000. divide the value 10 million by 1 billion = .01
Consider a small town with only three families, the Greene family, the Brown family, and the Black family. The town does not currently have any streetlights so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight. Suppose the cost to install each streetlight is $900 and the families have agreed to split the cost of installing the streetlights equally. To maximize their own surplus, how many streetlights would the Black's like the town to install?
2 because they are splitting it evenly, and while the Greene family is not willing to pay $300 for the second light, they have $40 extra in surplus from the first oneRefer to
How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?
An amount equal to the external cost.
Suppose the cost to erect a tornado siren in a small town is $15,000. In addition, suppose the value of a human life is $10 million. By what percentage would the siren need to reduce the risk of a fatality for the benefits of the siren to exceed the costs of the siren?
By at least 0.15 percentage points. explanation: 15,000/10,000,000=.0015 = .15%
Which of the following is an approach used by economists to calculate the value of a human life?
Calculating how much a person will make and for how many years to find the value of statistical life
Which of the Ten Principles of Economics does welfare economics explain more fully?
Markets are usually a good way to organize economic activity.
If all external costs were internalized, then the market's equilibrium output would be
Q2
Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
The equilibrium quantity is greater than the socially optimal quantity.
Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?
The social cost of producing good X includes the private cost plus the cost to bystanders of the externality.
In the US, before OPEC increased the price of crude oil in 1973, the was... a.a binding price ceiling on gasoline b. a nonbinding price ceiling on gasoline c. a nonbinding price floor on gasoline d. no price ceiling on gasoline
b. a nonbinding price ceiling on gasoline
For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. If the market price of an orange increases from $0.70 to $1.40, then consumer surplus... a. increases by $2.60 b. decreases by $2.50 c. decreases by $2.60
b. decreases by $2.50 Explanation: CS(0.70)=3.3 CS(1.40)=0.8 3.3-0.8=2.50
A decrease in supply will cause the largest increase in price when...
both supply and demand are inelastic
If total surplus is $240 and consumer surplus is... a. $100, price is $130 b. $130, price is $120 c. $160, price is $100 d. $120, price is $90
c. $160, price is $100 explanation: Total surplus ($240) - Consumer surplus ($160) = Producer surplus ($80). The first area is 60, the next is 60 also, but we must divide that by 3 to get an area of 20. 60 + 20 = 80 (our producer surplus) at the price of $100
Two types of private solutions to the problem of externalities are
charities and the Golden Rule.
Economists view the fact that Florida grows oranges, Texas pumps oil, and California makes wine as...
confirmation of the virtues of free trade.
Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the number of domestic jobs. An economist would argue that
foreign competition may cause unemployment in import-competing industries, but the increase in the variety of products due to free trade is more valuable than the lost jobs.
The Surgeon General announces that eating apples promotes healthy teeth. As a result, the equilibrium price of apples
increases, and producer surplus increases.
For quantities greater than equilibrium qty, the value to the marginal buyer is
less than the cost to the marginal seller, so decreasing the quantity increases total surplus
In a market with no externalities, supply is also called...
private cost and demand is also called private benefit
When a country that imports a particular good imposes an import quota on that good...
producer surplus increases and total surplus decreases -Explanation: an import quota is a restriction on imports which restricts free trade, this is beneficial for the producers, but total surplus decreases because free trade is always optimal
Since restored historic buildings convey a positive externality, local governments may choose to
provide tax breaks to people who restore them, and increase property taxes in historic areas
A benevolent social planner would prefer that the output of good x be decreased from its current level if, at the current level of output of good x,
social value = private value = private cost < social cost.
Elephant populations in some African countries have started to rise because
some elephants have been made a private good, and people are allowed to kill elephants on their own property.
Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then..
the equilibrium quantity of education will equal the socially optimal quantity of education.
One of the least regulated common resources today is
the ocean
The two basic approaches that a country can take as a means to achieve free trade are the...
unilateral approach and the multilateral approach -Unilateral approach is when a country removes its trade restrictions on its own. Multilateral approach which is when a country reduces its trade restrictions while other countries do the same
