final

Gasoline and bicycles are substitutes in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. Initially, the gasoline price rises due to the tax, and the demand curve for bicycles shifts rightward because these goods are substitutes. Then, the bicycle price rises, and the demand curve for gasoline shifts rightward. Assuming the general equilibrium is achieved in both markets after these two steps, which of the following statements is NOT true? A) Partial equilibrium analysis only focuses in the first-round changes in the gasoline market (ignoring the secondary effects that arise from changes in the bicycle market). B) Partial equilibrium analysis would predict a larger shift in the price and quantity demanded for gasoline than a general equilibrium analysis. C) The price increase in gasoline is larger under the general equilibrium approach, but the change in the quantity of gasoline demanded is smaller than under partial equilibrium analysis. D) All of these statements are true.

B

Common property resources tend to be A) overused. B) underused. C) not used at all. D) efficiently used. E) used by the government only.

a

Suppose the supply of land is infinitely inelastic and the demand for land is downward sloping but inelastic at the current equilibrium. If the supply curve shifts rightward (e.g., previously unusable land is cleared for production), what happens to the aggregate economic rents in this market? A) Decrease B) Increase C) Remain the same D) We do not have enough information to answer this question.

a

The egalitarian view of equity would lead to: A) equal allocations of goods across all persons. B) maximizing the utility of the least-well-off person. C) maximizing the total utility of all society members. D) none of the above

a

Why does perfect competition guarantee a Pareto optimal distribution of goods between two people? Under perfect competition, A) everyone has the same preferences. B) everyone faces the same prices. C) everyone consumes the same quantity of both goods. D) goods are homogeneous.

b

A competitive equilibrium is efficient in the production and exchange of two goods X and Y when A) MRSXY = MRTLK (where L = labor input and K = capital input). B) MRTXY = MRSLK (where L = labor input and K = capital input). C) MRSXY = MRTXY. D) MCX/MCY = PY/PX.

c

A positive externality is shown by a marginal social benefit (MSB) curve that is A) above and to the right of the demand curve for the good that generates it. B) below and to the left of the demand curve for the good that generates it. C) above and to the left of the supply curve for the good that generates it. D) below and to the right of the supply curve for the good that generates it. E) positively related to both the supply curve and the demand curve for the good that generates it.

a

All of the payment to a factor of production will be economic rent when the factor of production has: A) an infinitely inelastic supply curve. B) an infinitely elastic supply curve. C) a constant, unit elastic supply curve. D) an infinitely inelastic demand curve.

a

Coffee and donuts are complements in consumption. Suppose bad weather in the coffee producing regions of the world, which shifts the coffee supply curve leftward. How do the general equilibrium price and quantity outcomes compare to the partial equilibrium outcomes for this situation? A) General equilibrium price and quantity are higher B) General equilibrium price is higher and quantity is lower C) General equilibrium price is lower and quantity is higher D) General equilibrium price and quantity are lower

a

Externalities A) are not reflected in market prices, so they can be a source of economic inefficiency. B) do become reflected in market prices, so they can be a source of economic inefficiency. C) are not reflected in market prices, so they do not adversely affect economic efficiency. D) do become reflected in market prices, so they do not adversely affect economic efficiency. E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

a

Having a refundable deposit for recyclable material A) raises the marginal private cost of disposal. B) raises the marginal social cost of disposal. C) lowers the marginal private cost of disposal. D) lowers the marginal social cost of disposal. E) does not affect disposal costs.

a

Refer to Table 16.1. Use the following statements to answer this question. I. Mexico has an absolute advantage in the production of tomatoes and beer. II. Mexico has a comparative advantage in the production of tomatoes. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

a

Suppose MRS is not the same across all consumers. In this case, the economic outcome is not fully efficient because: A) exchange is inefficient. B) the use of inputs in production is inefficient. C) the mix of outputs in inefficient. D) none of the above

a

Suppose the labor market is perfectly competitive, but the output market is not. When the labor market is in equilibrium, the wage rate will: A) be less than price times the marginal product of labor. B) equal price times the marginal product of labor. C) be greater than price times the marginal product of labor. D) None of the above is necessarily correct.

a

The industry demand curve for labor is the A) horizontal sum of individual firm labor demand curves. B) vertical sum of individual firm demand curves. C) representative firm's demand curve multiplied by the number of firms. D) none of the above

a

The provision of an education in public school is A) exclusive and rival. B) exclusive and non-rival. C) nonexclusive and non-rival. D) nonexclusive and rival. E) a public good, regardless of exclusivity and rivalness

a

To find the social marginal benefit of public goods, one needs to A) sum the consumers' demand curves vertically. B) sum the consumers' demand curves horizontally. C) sum the marginal private benefit and the marginal external benefit for each unit. D) sum the marginal private cost and the marginal external cost for each unit. E) subtract the individual portion of the tax burden necessary for the government to provide the good from the demand curve of each consumer who desires the good.

a

Use the following statements to answer this question: I. Under profit maximization, the quantity of labor used in production is optimal if MR = w/MPL. II. The expression MR = w/MPL implies that the revenue earned from the last unit of output produced equals the marginal cost of the last unit of output. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

a

n economy produces outputs X and Y using inputs L and K. Which of the following is NOT required for economic efficiency? A) MRTSLK = MRSXY for all producers and consumers. B) MRTXY = MRSXY for all producers and consumers. C) MRSXY is equal for all consumers. D) MRTSLK is equal for all producers. E) None of the above. All of these are required for economic efficiency.

a

An allocation in which one person can be made better off only by making someone else worse off is A) inefficient. B) efficient. C) a partial equilibrium. D) a general equilibrium.

b

As you move rightward on a marginal cost of abatement curve, emissions are A) falling, and the cost of eliminating the marginal unit falls. B) rising, and the cost of eliminating the marginal unit falls. C) falling, and the cost of eliminating the marginal unit rises. D) rising, and the cost of eliminating the marginal unit rises. E) rising, and the cost of eliminating the marginal unit is constant.

b

Assume that as the wage rate rises a worker's substitution effect for leisure is larger than the income effect. We can conclude that in this region, the worker's A) labor supply curve will be backward bending. B) labor supply curve will have the usual upward slope. C) labor supply curve will be completely inelastic. D) supply curve will be horizontal.

b

Because air cargo as an industry involves the generation of pollutants in engine exhaust, the equilibrium price of air cargo services A) is above the optimal level, and quantity is below the optimal level. B) is below the optimal level, and quantity is above the optimal level. C) and quantity of trucking services are both above the optimal level. D) and quantity of trucking services are both below the optimal level. E) must fall in order for the market to reach equilibrium.

b

Because trucking as an industry involves the generation of pollutants in engine exhaust, A) the supply curve of trucking services overstates the true cost of providing those services. B) the supply curve of trucking services understates the true cost of providing those services. C) the demand curve for trucking services overstates the true benefit of providing those services. D) the demand curve for trucking services understates the true benefit of providing those services. E) the market for trucking services will always be away from equilibrium by an amount equal to the value of the externality.

b

Corn flakes are A) a rival good because many firms produce them. B) a rival good because if another person wants some corn flakes society has to use additional resources to produce corn flakes for that person. C) a non-rival good because there are only a few firms in the industry. D) a non-rival good because even if another person wants some corn flakes so many corn flakes are produced that no additional resources are used to satisfy this new customer's needs. E) a public good.

b

From a point within the utilities possibilities frontier, A) movement to another point within the frontier can only increase one person's utility, but not both people's utility. B) it is possible to find another point within the frontier that generates higher utility for both people. C) it is possible to find another point within the frontier that involves higher output of both goods. D) any move to another point within the frontier will necessarily decrease someone's utility.

b

If a firm had a fixed proportions technology, then the pollution produced by this firm A) cannot be reduced. B) can be reduced only by lowering the level of output (holding technology constant). C) can be reduced by changing how the output is produced within the bounds of the existing technology. D) can be reduced only by increasing the number of firms in the industry. E) can be reduced only by changing the technology.

b

In equilibrium, the price of a transferable emissions permit A) is constrained to the amount the government first charged for it. B) equals the marginal cost of abatement for all firms. C) equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms. D) equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms. E) equals the marginal social cost of emissions.

b

Suppose labor and capital are variable inputs. The wage rate is $20 per hour, the marginal product of labor is 30 units, the rental rate of capital is $100 per machine hour, and the marginal product of capital is 150 units. If the wage rate declines to $15 per hour, the firm employs more labor and the marginal product of labor declines to 20 units. Assuming the rental rate of capital remains the same, what happens to the amount of capital used by the firm? A) Decreases B) Increases C) No change D) We do not have enough information to answer this question.

b

Suppose the labor market is perfectly competitive, but the output market is not. When the labor market is in equilibrium, the wage rate will: A) be less than the marginal revenue product of labor. B) equal the marginal revenue product of labor. C) be greater than the marginal revenue product of labor. D) None of the above is necessarily correct.

b

Suppose the local market for legal services has an upward sloping supply curve, PL = 150 + 0.0001QL where PL is the price of legal services and QL is the number of hours of legal services. If the equilibrium price of legal services is $250 per hour and the average number of hours that a lawyer works per year is 2,500, what is the average economic rent earned per lawyer in this market? A) $10,000 B) $20,000 C) $50,000 D) $1,000,000

b

Suppose the supply of farmland is infinitely inelastic and the demand for land is downward sloping but inelastic at the current equilibrium. If the supply curve shifts leftward (e.g., some farmland is permanently converted to other uses), what happens to the aggregate economic rents in this market? A) Decrease B) Increase C) Remain the same D) We do not have enough information to answer this question.

b

The contract curve in an Edgeworth Box diagram illustrates A) the only efficient allocation of goods among individuals. B) all possible efficient allocations of goods among individuals. C) all equitable distributions of goods among individuals. D) the only equitable distribution of goods among individuals.

b

Under an upward sloping supply curve for land, the economic rents to land ________ as the demand for land shifts rightward. A) decrease B) increase C) remain the same D) We do not have enough information to answer this question.

b

Under what circumstances will the economic rent earned by a factor of production always be zero? A) Infinitely inelastic supply curve B) Infinitely elastic supply curve C) Somewhat inelastic supply curve D) Elastic demand curve

b

Use the following statements to answer this question: I. The first theorem of welfare economics refers to efficient allocation of goods across groups of consumers, and it does not consider the problem of efficient production of these goods. II. The only way to achieve an efficient allocation of goods is to use competitive markets. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are true.

b

Use the following statements to answer this question: I. The efficient amount of recycling of scrap materials is the amount that equates the marginal social cost of scrap disposal to the marginal cost of recycling. II. The efficient amount of recycling of scrap materials occurs when society recycles all recyclable wastes.

b

When emissions are measured on the horizontal axis, the marginal cost of abating emissions is A) downward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. B) downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. C) upward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. D) upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. E) horizontal because the technology to remove emissions is assumed constant.

b

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plasticis, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward? A) Optimal price and quantity decrease B) Optimal price increases, optimal quantity remains unchanged C) Optimal price increases, optimal quantity decreases D) Optimal price and quantity decline

c

All points within the utilities possibilities frontier are A) unattainable. B) efficient. C) inefficient. D) profitable.

c

Assume that labor and capital are complements in production and that the wage declines. Which of the following statements best describes the adjustment in the use of labor? A) Adjustments in labor use are not influenced by adjustments in capital use. B) The MRPL curve shifts downward in this case. C) More labor is used both because of the reduced wage and increased use of capital. D) Changes in labor use are indeterminate because the reduced wage and reduced use of capital have opposite influences on the use of labor.

c

Common property resources like fish stocks in open waters tend to be over-utilized because: A) the marginal social cost is less than the private marginal cost. B) the marginal social cost is always equal to the private marginal cost. C) the marginal social cost is greater than the private marginal cost. D) none of the above

c

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, A) the marginal social cost curve is above and to the right of the demand curve. B) the marginal social cost curve is below and to the left of the demand curve. C) the marginal social cost curve is above and to the left of the supply curve. D) the marginal social cost curve is below and to the right of the supply curve. E) there is a gap between quantity supplied and quantity demanded in equilibrium.

c

For some fisheries in the U.S., the state or federal government imposes "gear restrictions" that limit the size of boats, nets, or other equipment that may be used to harvest the fish in a given body of water. The purpose of the gear restrictions is to: A) prevent everyone from using the common property resource (fish). B) make it harder for other members of society to harvest the resource. This reduces the opportunity cost of the resource for other members of society, and the marginal social cost is closer to the private cost. C) increase the private cost of using the resource so that the private cost is closer to the marginal social cost. D) maintain traditional ways of harvesting fish, which is valuable for promoting tourism.

c

From any point within the production possibilities frontier, A) the only way to increase production of one good is to decrease production of the other. B) it is possible to increase both people's utility. C) it is possible to increase output of both goods. D) any move will necessarily decrease production of some good.

c

If the MSB/MCA graph indicates that an emissions fee of $10 per unit would lead to the optimum level of emissions, but the government set a fee of $5 per unit, emissions would A) not be reduced at all. B) not occur at all. C) be above the optimum level, but curtailed somewhat from what they would have been with no fee at all. D) be above the optimum level by 50%. E) be below the optimum level by 50%. Answer: C

c

Locating a point on a utilities possibilities frontier gives you information about A) both equity and efficiency. B) equity but not efficiency. C) efficiency but not equity. D) profitability but not efficiency.

c

Refer to Table 16.1. Which of the following statements is TRUE? A) Guatemala has an absolute advantage in producing tomatoes. B) Guatemala has an absolute advantage in producing beer. C) Guatemala has a comparative advantage in producing beer. D) Guatemala has a comparative advantage in producing tomatoes. E) all of the above

c

Suppose MRS does not equal MRT for all consumers. In this case, the economic outcome is not fully efficient because: A) exchange is inefficient. B) the use of inputs in production is inefficient. C) the mix of outputs in inefficient. D) none of the above

c

The efficient level of recycling equates the A) marginal cost of scrap disposal to the marginal benefit from not using virgin materials. B) marginal cost of recycling to the marginal benefit from not using virgin materials. C) marginal cost of scrap disposal to the marginal cost of recycling. D) marginal private cost of disposal to the marginal cost of recycling. E) per-unit refund from recycled materials to the marginal benefit from not using virgin materials. Answer: C

c

The presence of pollution in the trucking industry leads in the long run to dynamic inefficiencies because A) marginal external cost rises over time. B) marginal external cost is constant over time. C) average private cost in trucking is lower than average social cost, so that some trucking firms remain in the industry (or are induced to enter) when efficiency calls for them to leave (or stay out). D) average private cost in trucking is higher than average social cost, so that some firms trucking firms exit the industry when efficiency calls for them to stay (or for more firms to enter). E) fewer resources are devoted to transportation than the economy really needs.

c

The utilitarian view of equity would lead to: A) equal allocations of goods across all persons. B) maximizing the utility of the least-well-off person. C) maximizing the total utility of all society members. D) none of the above

c

What happens to the marginal revenue product curve of a factor as more of a complementary factor is hired? A) It shifts to the left, because its marginal product decreases. B) It shifts to the left, because its marginal product increases. c) It shifts to the right, because its marginal product increases. d) It shifts to the right, because its marginal product decreases.

c

When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier, A) A may be more efficient than B. B) A is necessarily more equitable than B. C) B may be more equitable than A. D) B is necessarily more equitable than A.

c

When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier, A) both A and B are efficient. B) both A and B are equitable. C) both A and B may be equitable. D) neither A nor B could be efficient.

c

A firm will avoid producing additional emissions whenever the fee is A) less than the MSB. B) greater than the MSB. C) less than the MCA. D) greater than the MCA. E) equal to the distance between MSB and MCA.

d

Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D A) is above the optimal level, and quantity is below the optimal level. B) is below the optimal level, and quantity is above the optimal level. C) and quantity of R&D are both above the optimal level. D) and quantity of R&D are both below the optimal level. E) must fall in order for the market to reach equilibrium.

d

Coffee and donuts are complements in consumption. Suppose the economy expands so that consumer income increases, and coffee is a normal good. What impact does this change in the coffee market have on the donut market under a general equilibrium analysis? A) Donut demand shifts rightward and donut price and quantity increase B) Donut demand shifts rightward, donut price increases, and donut quantity declines C) Donut demand shifts leftward, donut price declines, and donut quantity increases D) Donut demand shifts leftward and donut price and quantity decline

d

Due to externalities generated by home landscaping, its price A) is above the optimal level, and quantity that is below the optimal level. B) is below the optimal level, and quantity that is above the optimal level. C) and quantity traded are both above the optimal level. D) and quantity traded are both below the optimal level. E) must fall in order for the market to reach equilibrium.

d

Given that MEC(q) = 2q2, what can be inferred about the total cost of pollution as output increases? A) The total cost of pollution is increasing. B) The total cost of pollution is positive. C) The total cost of pollution is growing at a positive rate. D) The total cost of pollution is growing at an increasing rate. E) The total cost of pollution is changing.

d

In a problem involving exchange, the contract curve shows A) all exchanges that make both parties better off. B) the one exchange that makes both parties better off. C) all possible allocations of goods between both parties. D) all possible efficient allocations between both parties.

d

Use the following statements to answer this question: I. Following the properties of indifference curves, the utility possibilities frontier should be convex to (bowed into toward) the origin. II. The slope of the utility possibilities frontier equals -1 times the slope of the contract curve. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

d

What does the negative slope of the production possibilities frontier imply? A) Diminishing marginal utility. B) The only way to increase one person's utility is to decrease the other's. C) Diminishing marginal rates of technical substitution. D) The only way to increase output of one good is to decrease output of another.

d

When new technologies make cleaner production possible, A) emissions fees rise. B) emissions fees fall. C) the price of transferable permits rises. D) the price of transferable permits falls. E) the quantity of transferable permits falls.

d

Which of the following is NOT true about the supply of labor to the firm in a competitive labor market? A) It is horizontal. B) It is perfectly elastic. C) It is equal to the marginal expenditure curve. D) It is upward sloping.

d

Menell's study showed that in terms of effectiveness, A) mandatory separation of recyclables was best, followed by curbside charges and finally refundable deposits. B) mandatory separation of recyclables was best, followed by refundable deposits and finally curbside charges. C) curbside charges were best, followed by refundable deposits and finally mandatory separation of recyclables. D) curbside charges were best, followed by mandatory separation of recyclables and finally refundable deposits. E) refundable deposits were best, followed by curbside charges and finally mandatory separation of recyclables.

e

The Acme Company is a perfect competitor in its input markets and a monopolist in its output market. Its average product of labor is 30, the marginal product of labor is 20, the price of labor is $20, and the price of the output is $5. For Acme Company, the marginal revenue product of labor A) is $100. B) is $150. C) is $400. D) is $600. E) cannot be determined with the information provided.

e

The optimum level of pollution emissions A) is zero. B) occurs where the marginal external benefit is zero. C) occurs where no damage to the environment is being done. D) occurs where the marginal external benefit equals the marginal external cost. E) occurs where the marginal external cost equals the marginal cost of abatement.

e