Cal Poly Pomona, EC Bruce Brown NAME (please clearly print your family name with all capital letters)

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1 Cal Poly Pomona, EC Bruce Brown NAME Exam 2, February 25, 2002 (please clearly print your family name with all capital letters) - You should mark your answers on the exam, it will be returned. - You may use an ordinary language dictionary (not electronic or economics dictionary). Use of a calculator is also allowed, but can not be shared by students. You may leave when finished. - You may ask clarifying questions about definitions or wording of the questions. If the question regards definition of a term presented in this course, it will not be answered. - This exam has 50 questions, all of equal weight. Clearly fill in the bubble on your scantron form which corresponds to the best answer. No points are deducted for incorrect answers, so each of 50 questions should be marked with one answer. - You may leave when finished. Hand in both this exam and your scantron form. I. Multiple Choice mark the best answer on your scantron form 1) If the demand for insulin is perfectly inelastic (price elasticity of demand = 0); then: a. economic incidence of an excise tax would be entirely be on the buyers. b. economic incidence of a sales tax would be entirely be on the buyers. c. there would be no Deadweight Loss (= excess burden ) from an excise tax or sales tax on this good. d. all of the above are true 2) Consumer Surplus is represented by: a. the area above a supply curve and below equilibrium price b. the area above a demand curve and above equilibrium price c. the area below a supply curve and above equilibrium price d. the area below a demand curve and above equilibrium price 3) Which of the following are caused by binding ( effective ) rent control laws? a. increase in the number of apartment units supplied in the future. b. a decrease in discrimination against minorities or those with characteristics that managers dislike. c. fall (reduction) in the quality of existing apartments. d. all of the above. 4) Which of the following is an efficiency-based reason for government intervention presented in class? a. markets where price is high because of a natural disaster that has shifted supply. b. markets for goods where it is impossible to exclude those who did not pay from consuming. c. markets where no external benefits exist. d. excessive competition in a market. 5) Deadweight Loss from a tax occurs because: a. the government will spend the tax revenue in a way that will create less social benefit than if spent by the private consumers and producers. b. money is transferred from the consumers to the government c. money is transferred from both the consumers and producers to the government d. the distortion in prices causes an inefficiently low quantity to be consumed 6) If there are positive consumption externalities. a. Marginal private benefit (MPB) will be above marginal social benefit (MSB) b. Marginal private benefit (MPB) will be below marginal social benefit (MSB) c. Marginal private cost (MPC) will be above marginal social cost (MSC) d. Marginal private cost (MPC) will be below marginal social cost (MSC)

2 Wage $/hour Supply of labor $ 8.00 $6.00 $5.00 Demand for labor Quantity of unskilled labor (thousands) Use the above graph to answer the following five questions. 7) Who supplies and demands labor in the above graph? a. households supply and firms demand labor b. firms supply labor and households demand labor c. government supplies and firms demand labor d. firms supply and government demands labor 8) The free market wage: a. is $8.00 per hour b. is $6.00 per hour c. is $5.00 per hour d. depends on if a price floor or ceiling exists. 9) Which of the following is true in the standard analysis presented in class? a. a price floor (minimum wage) of 6.00 will cause unemployment of 25 thousand workers per period. b. a price floor (minimum wage) of 8.00 will cause unemployment of 10 thousand workers per period. c. a price floor (minimum wage) of 5.00 will cause unemployment of 8 thousand workers per period. d. a price ceiling (minimum wage) of 5.00 will cause unemployment of 8 thousand workers per period 10) The government can increase the wage of unskilled workers without a minimum wage by: a. shifting demand for labor left and supply of labor right. b. shifting demand for labor left and supply of labor left. c. shifting demand for labor right and supply of labor right. d. shifting demand for labor right and supply of labor left. 11) In this standard analysis: a. a binding price floor causes unemployment b. a non-binding price floor causes unemployment c. a binding price ceiling causes unemployment d. a non-binding price ceiling causes unemployment.

3 Price per Mango G Supply $1.20 $1.00 $.90 L H J I K A B C Quantity of Mangos The above graph shows the effect of a tax. It will be used for the next seven questions. 12) $1.20 is: a. the price buyers pay before tax b. the price sellers receive before tax c. the price buyers pay after tax d. the price sellers receive after tax 13) The economic incidence per unit of this tax is a. $.30 per unit on the sellers and $.30 per unit on the buyers b. $.10 per unit on the sellers and $.20 per unit on the buyers c. $.20 per unit on the sellers and $.10 per unit on the buyers d. $1.20 per unit on the buyers and $.90 per unit on the sellers. 14) If the posted or sticker price in the above market was $1.20, then the tax shown is a: a. $.20 per unit sales tax b. $.10 per unit excise tax c. $.30 per unit sales tax d. $.30 per unit excise tax 15) What is the elasticity of demand as between points A and B? a. 4/40.2/1.1 =.55 b. 4/40.1/1.1 = 1.1 c. 4/40.1/.95 =.95 d. 4/40.2/.95 = ) What is the elasticity of supply between points B and C? a. 4/40.2/1.1 =.55 b. 4/40.1/1.1 = 1.1 c. 4/40.1/.95 =.95 d. 4/40.2/.95 =.475 Demand 17) The area representing the deadweight loss from this tax is given by: a. H + I + J + K b. I c. K d. I + K

4 18) The area representing the tax revenue received by government is given by: a. H + I + J + K b. H + J c. J d. I + K 19) If the market price is $10 per unit and a price floor of $12 is applied by government: : a. shortages will occur b. demand will shift rightward to reestablish equilibrium at the higher price. c. the price will not change as the floor is ineffective. d. surpluses will occur 20) Which of the following will result from rent controls that reduce rents below market equilibrium? a. The quality of existing apartments will improve. b. The future supply of rental housing will increase. c. Discrimination against minorities or those with characteristics that managers dislike (noisy young students?) will be more likely in the housing market. d. All of the above are correct. For the following three questions consider a market with three potential buyers and three potential sellers with the following marginal benefit (MB) and marginal cost (MC): Buyer 1: MB=$20; Buyer 2: MB=$15; Buyer 3: MB=$12 Seller 1: MC=$8; Seller 2: MC=$10; Seller 3: MC=$16 21) Which of the following is the equilibrium, efficient, quantity bought and sold in this market? a. three units, since if buyer 1 and seller 3 trade $4 of surplus is obtained; if buyer 2 and seller 2 trade $5 of surplus is obtained; and if buyer 3 and seller 1 trade $4 of surplus is obtained. b. one unit, since the difference between MB and MC is the greatest c. two units, since the MB of buyer 2 >MC of seller 2; but MB of buyer 3 < MC of seller 3 d. three units, since then all three buyers and sellers can participate in the market. 22) What is the sum of consumer surplus and producer surplus when this market is in competitive equilibrium? a. $12 b. $17 c. $35 d. $13 23) If a tax of $6 per unit exists in this market, in competitive equilibrium: a. one unit will be bought; and the deadweight loss (=excess burden) will be $6 b. one unit will be bought; and the deadweight loss (=excess burden) will be $10 c. two units will be bought and sold and there will be no deadweight loss (=excess burden) d. one unit will be bought; and the deadweight loss (=excess burden) will be $5 24) If production or consumption of a good creates negative externalities, without government action: a. the quantity bought will exceed the quantity sold in a competitive market b. the quantity sold will exceed the quantity bought in a competitive market. c. the quantity bought and sold in a competitive market will be larger than the efficient quantity d. the quantity bought and sold in a competitive market will be smaller than the efficient quantity

5 25) An example of a good that is both excludable and rival in consumption, is: a. cable TV b. a park without a fence or lockable entrance gate c. an apple that s been picked and can be eaten by only one person d. a fish in the ocean (assume a permit or license is not required to catch it) 26) If each ton of steel produced creates pollution that harms society an amount worth $50, then the reasoning of economist A.C. Pigou suggests: a. government should close the steel factory. b. government should subsidize production of steel c. government should tax this steel firm $50 for each ton of steel produced d. government should subsidize this steel firm, paying it $50 for each ton of steel produced. 27) The Free-rider problem occurs for a. Private goods. b. Common resource goods and public goods. c. Natural monopoly goods. d. Private goods and natural monopoly goods. 28) The Laffer curve became well known because it was used as a justification for the: a. large Kennedy tax cut of 1964 (actually undertaken when Johnson was president) b. tax increase undertaken by Bill Clinton in the early 1990s c. tax cut undertaken in the early 1980s during Reagan s first term as president. d. interest rate cuts undertaken by the Fed following a steep drop in stock prices in ) The Laffer curve (depicted by Mankiw in Chapter 8), shows that: a. a decrease in the tax rate can sometimes cause an increase in tax revenue. b. the government can sometimes correct for market failure. c. when tax rates change, tax revenues always move in the same direction. d. when tax rates change, tax revenues always move in the opposite direction. 30) By definition, Public Goods: a. are produced by the government. b. are financed by government purchases. c. are rival and excludable d. are non-rival and non-excludable 31) The model of international trade presented in Chapter 9 shows a constant world price. This implies the country being considered: a. has perfectly inelastic supply for this good. b. has perfectly elastic demand for this good. c. is large relative to the world and can force other countries to sell their goods at a fixed price. d. is small relative to the world and will not change the world price by buying more of this good. 32) In his book, Progress and Poverty, Henry George advocated a single tax. This tax would be on: a. capital b. food c. labor d. land

6 33) Natural Monopoly Goods are: a. non-excludable and non-rival. b. excludable and non-rival. c. non-excludable and rival. d. excludable and rival. 34) The exact position of a Laffer curve for the U.S.: a. is not known by politicians and economists and does not change over time. b. is not known by politicians and economists and changes over time. c. is known by politicians and economists and does not change over time. d. is known by politicians and economists and changes over time. 35) An example of a good which creates positive consumption externalities is: a. paint on the exterior walls of a house. b. a drivers training class. c. an immunization against infectious diseases. d. all of the above 36) Uncontested, (un-crowded) non-toll roads are a good example of a a. public good. b. private good. c. common resource. d. natural monopoly good. 37) The fish in the ocean (away from the coastline and not owned or controlled by any government) are an example of a. a common resource. b. a public good. c. a private good. d. none of the above. 38) Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog; a possible private (Coase-type) solution to this problem is that a. Jane pays Dick $600 to get rid of the dog. b. Dick pays Jane $600 for her inconvenience. c. Dick pays Jane $400 for her inconvenience. d. Jane pays Dick $400 to get rid of the dog. 39) According to the Coase theorem, private parties can solve the problem of externalities if a. the cost of bargaining is small. b. the initial distribution of rights favors the person being adversely affected by the externality. c. the number of parties involved is sufficiently large. d. All of the above are true. 40) When a government puts on (institutes) a tariff on imported steel a. the domestic price of steel falls and consumer surplus shrinks relative to free trade. b. the domestic price of steel falls and consumer surplus increases relative to free trade. c. the domestic price of steel rises and consumer surplus increases relative to free trade. d. the domestic price of steel rises and consumer surplus shrinks relative to free trade.

7 41) As presented in Chapter 9 of our text, a tariff is a: a. tax on imported goods and will increase imports b. tax on imported goods and will reduce imports c. tax on exported goods and will increase exports d. tax on exported goods and will reduce exports 42) An import quota: a. restricts (limits) the number of imports that can enter an economy and increases domestic price of the good b. restricts (limits) the number of imports that can enter an economy and decreases domestic price of the good c. restricts (limits) the number of goods that can be exported and decreases domestic price of the good d. restricts (limits) the number of goods that can be exported and increases domestic price of the good Fill in T (or a ) for True; and F (or b ) for False: 43) A price ceiling above the equilibrium price will neither cause a shortage nor a surplus. 44) If the supply of land is perfectly inelastic, the economic incidence of a tax on land will fall entirely (100%) on the demanders of land (who do not own, but rent the land). 45) If a tax per unit on a good doubles, the deadweight loss (excess burden) resulting from this tax also doubles. 46) Coase s solution to the problem of externalities depends on government accurately determining who is the cause of the externality. 47) Immunizations are an excellent example of a good with positive externalities in consumption since the marginal social benefit of a person getting immunized is greater than the marginal private benefit. 48) A tax on a good that has perfectly inelastic demand will not cause any deadweight loss (excess burden) because the quantity bought and sold will not change as a result of the tax. 49) A corporate income tax will be shifted to individuals, such as stock holders, workers, and customers. 50) The free rider problem exists because a good is non-rival in consumption.