Figure 4–12
Figure 4–12 shows a market with a negative externality.
39)
Refer to Figure 4–12. The efficient output level is
39)
A)
Qa.
B)
Qd.
C)
Qb– Qd.
D)
Qb.
40)
Which of the following is an example of a positive externality?
40)
A)
banning the sale of candy in elementary schools
B)
forbidding the use of cell phones in public
C)
planting trees along a sidewalk which add beauty and creates shade
D)
banning street parking in all residential neighborhoods
41)
A demand curve shows
41)
A)
the relationship between the price of a product and the total benefit consumers receive from
the product.
B)
the willingness of consumers to buy a product at different prices.
C)
the willingness of consumers to substitute one product for another product.
D)
the relationship between the price of a product and the demand for the product.
42)
Which of the follow is not a result of imposing a rent ceiling?
42)
A)
a reduction in the quantity supplied of apartments
B)
an increase in the quantity demanded of apartments
C)
the marginal benefit of the last apartment rented is greater than the marginal cost of
supplying it
D)
some consumer surplus is converted to producer surplus
Figure 4–7
Figure 4–7 shows the demand and supply curves for the almond market. The government believes that the equilibrium price
is too low and tries to help almond growers by setting a price floor at Pf.
43)
Refer to Figure 4–7. What area represents the portion of consumer surplus that has been
transferred to producer surplus as a result of the price floor?
43)
A)
E
B)
B
C)
B+E
D)
B+C
44)
The difference between the lowest price a firm would have been willing to accept and the price it
actually receives from the sale of a product is called
44)
A)
profit.
B)
price differential.
C)
producer surplus.
D)
marginal revenue.
Figure 4–1
Figure 4–1 shows Kendra‘s demand curve for ice–cream cones curve.
45)
Refer to Figure 4–1. If the market price is $2.50, what is the maximum number of ice cream cones
that Kendra will buy?
45)
A)
4
B)
1
C)
2
D)
3
46)
Economists are reluctant to state that price controls are desirable or undesirable because
46)
A)
it is impossible to evaluate the impact on quantity demanded and quantity supplied as a
result of price controls.
B)
whether the gains from the winners exceed the losses from the losers is not strictly an
economic question.
C)
economists are reluctant to conduct positive analysis of price controls.
D)
sometimes price controls result in increases in economic efficiency and sometimes they result
in decreases in economic efficiency.
47)
What is a “social cost” of production?
47)
A)
the total costs of producing a product, both implicit and explicit costs
B)
the cost of the environmental damage created by production
C)
the sum total of all costs to individuals in society, regardless of whether the costs are borne by
those who produce the products or consume the product
D)
the cost of the natural resources used up in production
Figure 4–7
Figure 4–7 shows the demand and supply curves for the almond market. The government believes that the equilibrium price
is too low and tries to help almond growers by setting a price floor at Pf.
48)
Refer to Figure 4–7. What area represents consumer surplus after the imposition of the price floor?
48)
A)
A+B
B)
A
C)
A + B + E
D)
A+B+E+F
49)
Suppose there are two cities that have rent controlled apartments. In one city (Albany) all
apartments are subject to rent control; in the other city (Halftrack) one–half of the apartments are
rent controlled. Which of the following is most likely to be true?
49)
A)
It will be easier to find an affordable apartment in Albany since rents will be low across the
board.
B)
It will be difficult to find a rent–controlled apartment in Albany or Halftrack; rents for the
Halftrack apartments not subject to controls will be higher than they would be without rent
control.
C)
It will be impossible to rent an apartment in either city at any price.
D)
It will be easier to find an affordable apartment in Halftrack, either a rent–controlled
apartment or another apartment, at a reasonable price.
50)
When there is a positive externality, at the free market equilibrium,
50)
A)
the marginal private benefit is less than the marginal social benefit.
B)
the marginal private costs are minimized.
C)
the marginal private benefit is equal to the marginal social benefit.
D)
the marginal private benefit is greater than the marginal social benefit.
A
B
Figure 4–15
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and
causes substantial environmental damage. Figure 4–15 illustrates this situation in the toilet paper market.
51)
Refer to Figure 4–15. An efficient way to get the firm to produce the socially optimal output level is
51)
A)
for government to set a quota on the quantity of toilet paper that the toilet paper industry can
produce.
B)
to grant a subsidy to enable the industry to internalize the external costs of production.
C)
to assign property rights to the firms in the industry.
D)
to impose a tax to make the industry bear the external costs it creates.
Figure 4–2
52)
Refer to Figure 4–2. What area represents producer surplus at a price of P2?
52)
A)
A+B+C
B)
A+B
C)
A+B+C+D+E
D)
B+D
Figure 4–16
Chicken pox vaccination for toddlers benefits society by protecting young children and by preventing an epidemic of the
disease. Thus, the social benefits of chicken pox vaccination exceed the private benefit for any quantity of vaccinations. This
is illustrated in Figure 4–16.
53)
Refer to Figure 4–16. One way to obtain the economically efficient amount of chicken pox
vaccinations is for governments to subsidize these vaccinations. What is the size of the
per–vaccination Pigovian subsidy that the government must provide to internalize the external
benefits?
53)
A)
$PE
B)
$(PF – PG)
C)
$(PE – PG)
D)
$(PE – PF)
54)
The additional benefit to a consumer from consuming one more unit of a good or service
54)
A)
is equal to economic surplus.
B)
is equal to marginal benefit.
C)
is equal to the opportunity cost of consuming the good or service.
D)
is equal to consumer surplus.
55)
Marginal cost is
55)
A)
the difference between the lowest price a firm would have been willing to accept and the
price it actually receives.
B)
the additional cost to a firm of producing one more unit of a good or service.
C)
the total cost of producing one unit of a good or service.
D)
the average cost of producing a good or service.
Figure 4–14
Figure 4–14 shows a market with a positive externality.
56)
Refer to Figure 4–14. In the absence of any government intervention, the private market
56)
A)
under produces by Qo –Qm units.
B)
over produces by Qn –Qm units.
C)
over produces by Qo –Qm units.
D)
under produces by Qn –Qm units.
Figure 4–15
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and
causes substantial environmental damage. Figure 4–15 illustrates this situation in the toilet paper market.
57)
Refer to Figure 4–15. Suppose the government wants to use a Pigovian tax to bring about the
efficient level of production. What should the value of the tax be?
57)
A)
$(P2–P0) per ton of output
B)
$P1 per ton of output
C)
$(P2–P1) per ton of output
D)
$(P1–P0) per ton of output
58)
A free market fails when
58)
A)
firms that produce goods which create positive externalities go bankrupt.
B)
firms that produce goods which create negative externalities earn high profits.
C)
there is an external effect in either production, consumption, or both.
D)
there is government intervention.
Figure 4–12
Figure 4–12 shows a market with a negative externality.
59)
Refer to Figure 4–12. The private profit maximizing quantity for the firm is
59)
A)
Qa.
B)
Qb– Qd.
C)
Qd.
D)
Qb.
60)
If your neighbor burns auto tires in the yard and you can smell them and cannot see sunlight
because of the black smoke, you are experiencing
60)
A)
a negative externality.
B)
a private benefit.
C)
a private cost.
D)
a positive externality.
61)
Which of the following represents the economic benefit of production when firms produce goods
that create positive externalities?
61)
A)
the sum of private benefits from consumption.
B)
the difference between social benefits and private benefits created by the goods.
C)
the sum of private benefits and external benefits created by the goods.
D)
the external benefits created by the goods.
62)
What is a market failure?
62)
A)
It refers to a breakdown in a market economy because of widespread corruption in
government.
B)
It refers to the inability of the market to allocate resources efficiently up to the point where
marginal social benefit equals marginal private cost.
C)
It refers to a situation where an entire sector of the economy (for example, the airline
industry) collapses because of some unforeseen event.
D)
It refers to the inability of the market to allocate resources efficiently up to the point where
marginal social benefit equals marginal social cost.
Figure 4–4
Figure 4–4 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now
suppose producers decide to cut output to Q2 in order to raise the price to P2.
63)
Refer to Figure 4–4. At the price P2 consumers are willing to buy the Q2pounds of granola. Is this
an economically efficient quantity?
63)
A)
No, the marginal cost of the last unit (Q2) exceeds the marginal benefit of the last unit.
B)
No, the marginal benefit of the last unit (Q2) exceeds the marginal cost of that last unit.
C)
Yes, because the price P2 shows what consumers are willing to pay for the product.
D)
Yes, otherwise consumers would not buy Q2 units.
Figure 4–5
64)
Refer to Figure 4–5. The figure above represents the market for iced tea. Assume that this is a
competitive market. If the price of iced tea is $1
64)
A)
not enough consumers want to buy iced tea.
B)
economic surplus is maximized.
C)
the quantity supplied is economically efficient but the quantity demanded is economically
inefficient.
D)
the quantity supplied is less than the economically efficient quantity.
65)
Which of the following is true when a negative external effect creates a deadweight loss?
65)
A)
The marginal benefit to consumers is below the marginal social cost of the last unit produced.
B)
The marginal benefit to society is below the marginal private cost of the last unit produced.
C)
The marginal benefit to consumers is equal to the marginal social cost of the last unit
produced.
D)
The marginal benefit to consumers is above the marginal private cost of the last unit
produced.
A
D
Figure 4–12
Figure 4–12 shows a market with a negative externality.
66)
Refer to Figure 4–12. What is the marginal benefit of the last unit produced?
66)
A)
$Pc
B)
$Pb
C)
$Pf
D)
$Pa
67)
The social cost of cutting trees for firewood in a government forest is
67)
A)
the increased likelihood of flooding as more trees are cut plus the private cost of cutting the
trees.
B)
opportunity cost to the individual of cutting the wood.
C)
the increased likelihood of flooding as more trees are cut.
D)
the marginal costs of cutting the last tree.
68)
An advantage of imposing a tax on the producer that generates pollution is that
68)
A)
a producer can pass the cost of the pollution on to consumers.
B)
it forces the polluting producer to internalize the external cost of the pollution.
C)
it will eliminate pollution.
D)
the government can keep tabs on exactly what is produced in an industry.
69)
In a competitive market the demand curve shows the ________ received by consumers and the
supply curve shows the ________.
69)
A)
marginal benefit; marginal cost
B)
economic surplus; opportunity cost
C)
net benefit; net cost
D)
utility; average cost.
70)
Economic efficiency is achieved when there is a market outcome in which the marginal benefit to
consumers of the last unit produced is equal to its marginal cost of production and
70)
A)
economic surplus is minimized.
B)
the difference between consumer surplus and producer surplus is maximized.
C)
economic surplus plus consumer surplus equals producer surplus.
D)
consumer surplus plus producer surplus is maximized.
71)
To affect the market outcome a price ceiling
71)
A)
must be set below the equilibrium price.
B)
must be set below the price floor.
C)
must be set below the black market price.
D)
must be set below the legal price.
72)
An externality is
72)
A)
a benefit realized by the purchaser of a good or service.
B)
a benefit or cost experienced by someone who is not a producer or consumer of a good or
service.
C)
anything that is external or not relevant to the production of a good or service.
D)
a cost paid for by the producer of a good or service.
73)
When there is a negative externality in a free market,
73)
A)
a productively efficient level of the good is produced and consumed.
B)
an economically efficient level of the good is produced and consumed.
C)
too much of the good is produced and consumed.
D)
too little of the good is produced and consumed.
Figure 4–13
Figure 4–13 shows a market with an externality.
74)
Refer to Figure 4–13. If, because of an externality, the economically efficient output is Q2 and
not the current equilibrium output of Q1, what does D2 represent?
74)
A)
the demand curve reflecting the sum of social and external benefits
B)
the demand curve reflecting social benefits
C)
the demand curve reflecting external benefits
D)
the demand curve reflecting private benefits
75)
In a competitive market equilibrium
75)
A)
the marginal benefit equals the marginal cost of the last unit sold.
B)
consumers and producers benefit equally.
C)
marginal benefit and marginal cost are maximized.
D)
total consumer surplus equals total producer surplus.
Figure 4–1
Figure 4–1 shows Kendra‘s demand curve for ice–cream cones curve.
76)
Refer to Figure 4–1. If the market price is $2.50, what is Kendra‘s consumer surplus?
76)
A)
$1.50
B)
$7.50
C)
$0
D)
$9.00
77)
Who was the economist who first proposed that governments use taxes and subsidies to correct for
externalities?
77)
A)
Adam Smith
B)
Ronald Coase
C)
A. C. Pigou
D)
David Hume
78)
Compared to the command and control approach to pollution control, the tradable emissions
allowance system is
78)
A)
less efficient, because the tradable emissions allowance system gives firms the right to pollute
a certain amount.
B)
more efficient, because firms with low costs of pollution control would pollute the least and
sell their extra permits to other firms with higher costs of pollution control.
C)
more efficient, because there are implementation and monitoring costs with the tradable
emissions allowance system.
D)
less efficient, because it does not raise funds for the government whereas under the command
and control approach, firms are penalized for non–compliance.
79)
Consider the following methods of pollution reduction:
a. the government sets a target for maximum emissions
b. the government mandates the installation of specific pollution abatement equipment
c. the government imposes a per unit tax on the good that creates pollution
d. the government gives firms a tax rebate for every unit of pollution abated
Which of the above is an example of a command and control approach to reducing pollution?
79)
A)
a only
B)
b only
C)
a, b, and d only
D)
a and b only
E)
a, b, c, and d
Explanation:
80)
An external cost is created when you
80)
A)
buy flowers for your mother on Mother’s Day.
B)
buy a sandwich for lunch.
C)
graduate from college.
D)
litter on the side of the road.
Explanation:
Explanation:
81)
Which of the following is a result of government price controls?
81)
A)
The deadweight loss from price ceilings is greater than the deadweight loss from price floors.
B)
Some people win and some people lose.
C)
Price controls increase economic efficiency
D)
Price controls benefit poor consumers but harm producers and wealthy consumers.
82)
Congress passed the Freedom to Farm Act in 1996. What was the purpose of this Act?
82)
A)
to phase out the use of price ceilings in agricultural markets
B)
to grant free land to farmers in order to produce crops that were particularly scarce
C)
to phase out price floors and return to a free market in agriculture
D)
to encourage more people to become farmers
83)
Each point on a demand curve shows
83)
A)
the willingness of consumers to purchase a product at different prices.
B)
the legally determined maximum price that sellers may charge for a given quantity of a
product.
C)
the economic surplus received from purchasing a given quantity of a product.
D)
the consumer surplus received from purchasing a given quantity of a product.
84)
Consumer surplus in a market for a product would be equal to the area under the demand curve if
84)
A)
the product was produced in a perfectly competitive market.
B)
the market price was zero.
C)
producer surplus was equal to zero.
D)
marginal cost was equal to the market price.
85)
A minimum wage law dictates
85)
A)
the highest wage that firms must pay for labor.
B)
the lowest wage that firms may pay for labor.
C)
the minimum quantity of labor that a firm must employ.
D)
the minimum qualifications for labor.
86)
A major problem with using a tradable emissions allowance system to control pollution is
86)
A)
that it does not eliminate pollution completely.
B)
the difficulty in determining the emissions target.
C)
it discourages firms from implementing cost–effective pollution control technology.
D)
that it grants firms a license to pollute.
87)
In 2004 New York City mayor Michael Bloomberg made a proposal concerning rent control in his
city. What was Mayor Bloomberg’s proposal?
87)
A)
He proposed that rents be increased by 50 percent on all apartments subject to rent control.
B)
He proposed that rent control be extended to all New York City apartments over a 20 year
period.
C)
He proposed that rent control be abolished over a 20 year period.
D)
He proposed that rent control be maintained on apartments that had been scheduled to be
free from rent control.
88)
Which of the following statements best describes the concept of consumer surplus?
88)
A)
“I sold my video tape copy of Ben–Hur for $18 at a garage sale even though I was willing to
sell it for $10.”
B)
“Safeway was having a sale on Dreyers ice cream so I bought 3 quarts.”
C)
“I was all ready to pay $300 for a new leather jacket that I had seen in Macy’s but I ended up
paying only $180 for the same jacket.”
D)
“I paid $130 for a printer last week. This week the same store is selling the same printer for
$110.”