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134)
What does the phrase "internalizing an external cost" mean?
134)
A)
limiting the extent to which domestic firms can outsource production
B)
prohibiting economic activities that create externalities
C)
finding a way to address cross-border pollution
D)
forcing producers to factor into their production costs, the cost of the externalities created in
the production of their output
Figure 4-6
Figure 4-6 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0.
135)
Refer to Figure 4-6. What is the area that represents consumer surplus after the imposition of the
ceiling?
135)
A)
A +B+C
B)
A +B+D
C)
A +B+D+F
D)
A+B+D+F+G
136)
Two economists from the University of Chicago estimated the benefit households received from
subscribing to satellite television. The economists found that
136)
A)
most consumers of satellite television were not willing to pay more than $81 per month.
B)
one year's benefit to consumers who subscribe to satellite television is about $2 billion.
C)
the average consumer of satellite television received a marginal benefit equal to $81.
D)
the consumer surplus from cable television exceeded the consumer surplus from satellite
television.
137)
Anyone can purchase sulfur dioxide emissions allowances on the Chicago Mercantile Exchange.
Several environmental groups have raised money to buy allowances (which they subsequently
destroy). As part of their fund-raising, these groups have urged contributors to buy the allowances
as gifts. As one newspaper story put it, "For the environmentalist in your life, here's a gift that is
sold by the ton, fits in an envelope and will last forever."
Source for quote: Randall Edwards, "Dear Santa: Please Bring Me Sulfur Dioxide for Christmas," Columbus
Dispatch, December 19, 1999.
What would be the impact on the price of the emission allowances in the market?
137)
A)
The price falls to zero.
B)
The price rises.
C)
The price falls but not to zero.
D)
The price remains unchanged because the allowances purchased by the environmental
groups are destroyed.
138)
Which of the following conditions holds in an economically efficient competitive market
equilibrium?
138)
A)
There are no positive and no negative external effects from consumption and production.
B)
The deadweight loss is positive but at a minimum.
C)
The marginal benefit of the last unit produced and consumed is maximized.
D)
Producer and consumer surplus are exactly equal in size.
Figure 4-14
Figure 4-14 shows a market with a positive externality.
139)
Refer to Figure 4-14. The private profit-maximizing output level is
139)
A)
Qo -Qm.
B)
Qm.
C)
Qn.
D)
Qo.
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.
140)
Refer to Figure 4-16. What is the value of the net gain to society as a result of subsidizing chicken
pox vaccinations?
140)
A)
value equal to the area of QFFGQE
B)
$(PF x QF)
C)
$(PE x QE)
D)
value equal to the area of FEG
141)
A negative externality exists if
141)
A)
the marginal private cost of producing a good or service exceeds the social cost.
B)
there are price controls in a market.
C)
the marginal social cost of producing a good or service exceeds the private cost.
D)
there are quantity controls in a market.
Figure 4-13
Figure 4-13 shows a market with an externality.
142)
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 D1 represent?
142)
A)
the demand curve reflecting the sum of private and social benefits
B)
the demand curve reflecting social benefits
C)
the demand curve reflecting external benefits
D)
the demand curve reflecting private benefits
143)
Which of the following is not a consequence of minimum wage laws?
143)
A)
Low skilled workers are hurt because it reduces the number of jobs providing low skilled
workers with training.
B)
Producers have an incentive to offer workers non-wage benefits such as healthcare benefits
and convenient working hours rather than a higher wage.
C)
Employers will be reluctant to offer low-skill workers jobs with training.
D)
Some workers benefit when the minimum wage is increased.
144)
Which of the following criteria should be used to evaluate if government intervention in a market
for the purpose of environmental protection is justified?
144)
A)
Is the damage to the environment from government intervention as small as possible?
B)
Does the intervention program reduce pollution to zero using the least costly method?
C)
Is the intervention program economically efficient?
D)
Does the intervention program make the amount of consumer surplus as large as possible?
Table 4-3
Hourly Wage
(Dollars)
Quantity of
Labor Supplied
Quantity of
Labor
Demanded
$6.00 350,000 390,000
6.50 360,000 380,000
7.00 370,000 370,000
7.50 380,000 360,000
8.00 390,000 350,000
8.50 400,000 340,000
Table 4-3 shows the demand and supply schedules for the low-skilled labor market in the city of Westover.
145)
Refer to Table 4-3. Suppose that the quantity of labor demanded increases by 40,000 at each
wage level. What are the new free market equilibrium hourly wage and the new equilibrium
quantity of labor?
145)
A)
W = $6.50; Q = 380,000
B)
W = $8.00; Q = 390,000
C)
W = $6.00; Q = 390,000
D)
W = $7.50; Q = 380,000
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.
146)
Refer to Figure 4-7. What area represents the deadweight loss after the imposition of the price
floor?
146)
A)
C+D+F+G
B)
C+D+G
C)
F+G
D)
C+D
147)
When a competitive equilibrium is achieved in a market
147)
A)
economic surplus equals the deadweight loss.
B)
the total net benefit to society is maximized.
C)
the total benefits to consumers are equal to the total benefits to producers.
D)
all individuals are better off than they would be if a price ceiling or price floor were imposed
by government.
148)
If an externality exists, it will be experienced by
148)
A)
the government only.
B)
the consumers of the product only.
C)
some people not directly involved in the production or consumption of the product.
D)
the producers of the product only.
Table 4-3
Hourly Wage
(Dollars)
Quantity of
Labor Supplied
Quantity of
Labor
Demanded
$6.00 350,000 390,000
6.50 360,000 380,000
7.00 370,000 370,000
7.50 380,000 360,000
8.00 390,000 350,000
8.50 400,000 340,000
Table 4-3 shows the demand and supply schedules for the low-skilled labor market in the city of Westover.
149)
Refer to Table 4-3. What is the equilibrium hourly wage (W*) and the equilibrium quantity of
labor (Q*)?
149)
A)
W* = $6.50; Q* = 380,000
B)
W* = $7.00; Q* = 740,000
C)
W* = $7.00; Q* = 370,000
D)
W* = $6.50; Q* = 360,000
150)
New York City has about two million apartments. Of this number
150)
A)
all are subject to price floors.
B)
about 10 percent are subject to rent control.
C)
about one-half are subject to rent control.
D)
all are subject to rent control.
Figure 4-14
Figure 4-14 shows a market with a positive externality.
151)
Refer to Figure 4-14. At the competitive market equilibrium, for the last unit produced
151)
A)
the size of the external cost is Pn -Po.
B)
the size of the external cost is Pm -Po.
C)
the size of the external benefit is Pn -Po.
D)
the size of the external benefit is Pm -Po.
152)
Some economists believe that giving Christmas gifts results in deadweight losses for gift recipients.
Which of the following helps to explain this belief?
152)
A)
Many people resent receiving cash for presents rather than gifts.
B)
Economists have found that deadweight losses occur when people receive the same gifts from
different people.
C)
Many people who give gifts do so because they feel they have to, not because they want to.
D)
In many cases people would have chosen different gifts for themselves than the ones they
received.
153)
When a negative externality exists, the private market produces
153)
A)
less than the economically efficient output level.
B)
products at a high opportunity cost.
C)
more than the economically efficient output level.
D)
products at a low opportunity cost.
154)
Which term refers to a legally established minimum price that firms may charge?
154)
A)
A tariff.
B)
A price floor.
C)
A subsidy.
D)
A price ceiling.
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.
155)
Refer to Figure 4-7. What is the area that represents producer surplus after the imposition of the
price floor?
155)
A)
B+C+D+E
B)
B+E
C)
A+B+E
D)
B+E+F
Table 4-3
Hourly Wage
(Dollars)
Quantity of
Labor Supplied
Quantity of
Labor
Demanded
$6.00 350,000 390,000
6.50 360,000 380,000
7.00 370,000 370,000
7.50 380,000 360,000
8.00 390,000 350,000
8.50 400,000 340,000
Table 4-3 shows the demand and supply schedules for the low-skilled labor market in the city of Westover.
156)
Refer to Table 4-3. If a minimum wage of $7.50 an hour is mandated, what is the quantity of labor
supplied?
156)
A)
340,000
B)
380,000
C)
370,000
D)
390,000
157)
Economic efficiency in a competitive market is achieved when
157)
A)
consumers and producers are satisfied.
B)
producer surplus equals the total amount firms receive from consumers minus the cost of
production.
C)
the marginal benefit equals the marginal cost from the last unit sold.
D)
economic surplus is equal to consumer surplus.
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
158)
Producer surplus is the difference between the highest price someone is willing to pay and the
price he actually pays.
158)
159)
When a tax on output is imposed to internalize the external costs of pollution, the supply curve
shifts down by the amount of the tax.
159)
160)
The difference between consumer surplus and producer surplus in a market is equal to the
deadweight loss.
160)
161)
Government intervention in agriculture began in the Untied States during World War I.
161)
162)
Suppose the government mandates the installation of certain type of pollution abatement
equipment for the leather tannery industry. For some firms in the industry, installing this
equipment may not be the most cost effective method of reducing pollution.
162)
163)
An externality refers to economic events outside a market.
163)
164)
The total amount of consumer surplus in a market is equal to the area below the demand curve.
164)
165)
When there is a positive externality in a free market, too much of the good is produced and
consumed.
165)
166)
Shortage means the same thing as scarcity.
166)
167)
Economic efficiency is a market outcome in which the marginal benefit of consumers is equal to the
marginal cost of production and the sum of consumer surplus and producer surplus is maximized.
167)
168)
One problem with using a command and control approach to pollution reduction is that the
monitoring costs may be too high.
168)
169)
When products that create positive externalities are produced, at the market equilibrium
output, the social benefit generated by consuming the product exceeds the private benefit.
169)
170)
An externality is an example of a market failure.
170)
171)
When there is a negative externality, the competitive output is more than the economically
efficient output level.
171)
172)
The additional cost to a firm of producing one more unit of a good or service is equal to producer
surplus.
172)
173)
A market failure arises when an entire sector of the economy (for example, the airline industry)
collapses because of some unforeseen event.
173)
174)
An external benefit is created when you pursue a college education.
174)
175)
Issuing tradable emissions allowances to polluting firms will result in those firms polluting more
than is socially desirable.
175)
176)
All renters benefit from rent control and all landlords lose.
176)
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Figure 4-3
177)
Refer to Figure 4-3, which shows the market for vitamins. Suppose the government imposes a price ceiling of
PV. How will the price ceiling affect the quantity supplied, quantity demanded and quantity exchanged?
178)
The cities of Francistown and Nalady are five miles apart. Francistown enacts a rent control
law that puts a ceiling on rents well below their equilibrium market value. Predict the impact of this law on the
competitive equilibrium rent in Nalady, which does not have a rent control law.
a. Illustrate your answer with one demand and supply graph for the apartment market in Francistown and
another demand and supply graph for the apartment market in Nalady.
b. Make sure that your graphs clearly show (1) the initial equilibrium before rent control in both markets and
(2) what happens after the imposition of rent control.
c. Clearly show any shifts in the demand or supply curves, and the movement along the curves for each
market.
d. Label your graphs fully and provide written explanation for your graphs.
Figure 4-8
Figure 4-8 shows the market for taxi rides. The following question(s) are based on this figure.
179)
Refer to Figure 4-8. To legally drive a taxicab in New York City, you must have a medallion issued by the city
government. Assume that only 12,187 medallions have been issued. Let's also assume this puts an absolute limit
on the number of taxi rides that can be supplied in New York City on any day, because no one breaks the law by
driving a taxi without a medallion. Assume as well that each taxi provides 6 trips per day. In that case, the
quantity supplied of taxi rides is 73,122 (or 6 rides per taxi × 12,187 taxis). This is shown in the diagram with a
vertical line at this quantity. Assume that there are no government controls on the prices that drivers can charge
for rides.
a. What would the equilibrium price and quantity be in this market if there were no medallion requirement?
b. If there were no medallion requirement, indicate the area that represents consumer surplus.
c. If there were no medallion requirement, indicate the area that represents producer surplus.
d. If there were no medallion requirement, indicate the area that represents economic surplus.
e. What are the price and quantity with the medallion requirement?
f. With a medallion requirement in place, what area represents consumer surplus?
g. With a medallion requirement in place, what area represents producer surplus?
h. With a medallion requirement in place, what area represents the deadweight loss?
i. Based on your answers to parts (c) and (g) are taxicab drivers better off with the medallion requirement for
taxicabs than without?
j. Are consumers better off with or without the medallion requirement for taxicabs?
180)
Will equilibrium in a market always result in an outcome that is economically efficient? Explain.
Table 4-4
Price Per
Bushel
(Dollars)
Quantity
Demanded
(Bushels)
Quantity
Supplied
(Bushels)
$2 40,000 0
434,000 4,000
628,000 8,000
824,000 16,000
10 20,000 20,000
12 18,000 28,000
14 12,000 36,000
16 6,000 40,000
Table 4-4 above contains information about the corn market. Answer the following questions based on this table.
181)
Refer to Table 4-4. An agricultural price floor is a price that the government guarantees farmers will receive for
a particular crop. Suppose the federal government sets a price floor for corn at $12 per bushel.
a. What is the amount of shortage or surplus in the corn market as result of the price floor?
b. If the government agrees to purchase any surplus output at $12, how much will it cost the government?
c. If the government buys all of the farmers' output at the floor price, how many bushels of corn will it have to
purchase and how much will it cost the government?
d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to
consumers at whatever price it can get. Under this scheme, what is the price at which the government will be
able to sell off all of the output it had purchased from farmers? What is the revenue received from the
government's sale?
e. In this problem we have considered two government schemes: (1) a price floor is established and the
government purchases any excess output and (2) the government buys all the farmers' output at the floor price
and resells at whatever price it can get. Which scheme will taxpayers prefer?
f. Consider again the two schemes. Which scheme will the farmers prefer?
g. Consider again the two schemes. Which scheme will corn buyers prefer?
182)
What is consumer surplus? Why would policy makers be interested in consumer surplus?
