103midterm2. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.

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1 103midterm2 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus of that purchase would be a. zero. b. negative and the consumer would not purchase the product. c. positive and therefore the consumer would purchase the product. d. There is not enough information given to answer this question. Table 7-3 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $ Refer to Table 7-3. If the market price is $1,000, the producer surplus in the market would be a. $700. b. $750. c. $2,250. d. $3,700. Figure Refer to Figure 8-4. The price sellers receive after the tax is a. P 1. b. P 2. c. P 3. d. impossible to determine. Scenario 9-1

2 The before-trade domestic price of tomatoes in Canada is $500 per ton. The world price of tomatoes is $600 per ton. Canada is a price-taker in the tomatoes market. 4. Refer to Scenario 9-1. If trade in tomatoes is allowed, Canadian consumers of tomatoes a. will be better off. b. will be worse off. c. will be unaffected. d. could be helped or hurt. Figure Refer to Figure Producer surplus plus consumer surplus in this market before trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. 6. Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If this market is not required to internalize this externality, a. the supply curve would adequately reflect the marginal social cost of production. b. consumers will be required to pay a higher price for steel than they would have if the externality were internalized. c. the market equilibrium would not be the socially optimal quantity. d. producers will produce less steel than they otherwise would have if the externality were internalized. 7. A local laundry advertises that clothes it washes smell "sunshine fresh" because it line dries everything outside. Then a steel factory moves in next door and emits black smoke which stains the clothes drying at the laundry. According to the Coase Theorem, granting the a. steel factory the right to pollute would be efficient, but granting the laundry the right to clean air would be equitable. b. laundry the right to clean air would be efficient, but granting the steel factory the right to pollute would be equitable. c. steel factory the right to pollute has the same effect on equity as granting the laundry the right to clean air. d. steel factory the right to pollute has the same effect on efficiency as granting the laundry the right to clean air. 8. Which of the following is NOT a reason why government agencies subsidize basic research?

3 a. The private market devotes too few resources to basic research. b. The general knowledge developed through basic research can be used without charge. c. The social benefit of additional knowledge is perceived to be greater than the cost of subsidies. d. The government attempts to attract the best and the brightest researchers. 9. The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the a. town could allow individual shepherds to chose their own flock sizes. b. externality could be internalized by subsidizing the production of sheep's wool. c. town could auction off a limited number of sheep-grazing permits. d. All of the above are correct. 10. Excessive fishing occurs because a. each individual fisherman has little incentive to maintain the species for the next year. b. fishermen rely on government managers to worry about fish populations. c. fishermen are concerned about the population dynamics of fish biomass, not current harvest rates. d. fishermen have other marketable skills and do not fear exploitation of fish reserves. 11. As government debt increases, a. evidence suggests that spending on social insurance programs will be reduced. b. government must spend a larger share of its revenue on interest payments. c. a trade-off with government deficits is inevitable. d. taxes must rise to cover the deficit. 12. Deadweight loss from taxes in a market represents the a. inefficiency that taxes create. b. shift in benefit from producers to consumers. c. part of consumer and producer surplus that is now revenue to the government. d. loss in profit to producers when quantity demanded falls as a result of higher prices. 13. If marginal tax rates increase, the a. deadweight loss from taxes is unaffected. b. deadweight loss from taxes will be reduced. c. deadweight loss from taxes will rise. d. average tax rate will be falling. 14. Using a toll to reduce traffic when congestion is greatest is an example of a a. regulation solution. b. command-and-control policy. c. Pigovian tax. d. Coase theorem solution. 15. Which of the following statements is most correct? a. As a nation gets richer, the government has larger tax revenue, but typically takes a smaller share of income in taxes. b. Poor countries usually have relatively large tax burdens. c. As a nation gets richer, the government typically takes a larger share of income in taxes. d. There is little evidence of a relationship between income and taxes for most countries. Figure 7-7

4 16. Refer to Figure 7-7. At the equilibrium price, total surplus would be a. $480. b. $640. c. $1,120. d. $1, Buyers of a product will pay the majority of a tax placed on a product when a. the tax is placed on the seller of the product. b. the demand is more elastic than supply. c. supply is more elastic than demand. d. the tax is placed on the buyer of the product. Figure Refer to Figure 8-6. The reduction in consumer surplus caused by the tax would be a. $100. b. $80. c. $70. d. $60.

5 Figure Refer to Figure 9-1. With trade, total surplus increases by a. $80. b. $ c. $ d. $ Figure Refer to Figure 9-4. If this country allows free trade in wagons, consumers will a. lose by $75. b. lose by $240. c. gain by $240. d. gain by $ A tariff and an import quota will both a. increase the quantity of imports and raise domestic price. b. increase the quantity of imports and lower domestic price. c. reduce the quantity of imports and raise domestic price. d. reduce the quantity of imports and lower domestic price. Figure 9-14

6 22. Refer to Figure The gain as a result of the quota to license holders who import birdhouses would be a. $100. b. $200. c. $400. d. $500. Figure Refer to Figure If this market currently produces Q 3, total economic well-being would be increased if a. production decreased to Q 2. b. production increased to Q 4. c. this product were no longer produced. d. Since well-being is maximized at Q 3 it cannot be increased. 24. Suppose a human life is worth $10 million. Installing a better lighting system in the city park would reduce the risk of someone being murdered there from 2.6 to 1.9 percent over the life of the system. The city should install the new lighting system if its cost does not exceed a. $70,000. b. $260,000. c. $190,000. d. $10,000,000. Scenario 12-1

7 Suppose Jim and Joan receive great satisfaction from their consumption of cheesecake. Joan would be willing to purchase only one slice and would pay up to $6 for it. Jim would be willing to pay $9 for his first slice, $7 for his second slice, and $3 for his third slice. The current market price is $3 per slice. 25. Refer to Scenario If a tax of $4 is levied on each slice of cheesecake, what is the deadweight loss of the tax? a. $3 b. $6 c. $8 d. $9 True/False Indicate whether the sentence or statement is true or false. 26. In a competitive market, sales go to those producers who are willing to supply the product at the lowest price. 27. The patent system gives firms greater incentive to engage in research and other activities that advance technology. 28. If Toby and Pete are the only two fishermen in town, and neither is bothered by the other's fishing, the lake they fish in is not a common resource. 29. According to the ability-to-pay principle, it is fair for people to pay taxes based on their ability to handle the financial burden. 30. Consumer surplus measures the benefit to buyers of participating in a market. 31. According to the principle of comparative advantage, all countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. 32. Government intervention is necessary to correct all externalities. 33. Despite the appealing logic of the Coase theorem, private actors often fail to resolve the problems caused by externalities on their own.

8 103midterm2 Answer Section MULTIPLE CHOICE 1. ANS: A DIF: Average REF: ANS: B DIF: Average REF: ANS: B DIF: Average REF: ANS: B DIF: Average REF: ANS: B DIF: Average REF: ANS: C DIF: Average REF: ANS: D DIF: Average REF: ANS: D DIF: Average REF: ANS: C DIF: Average REF: ANS: A DIF: Average REF: ANS: B DIF: Average REF: ANS: A DIF: Average REF: ANS: C DIF: Average REF: ANS: C DIF: Average REF: ANS: C DIF: Average REF: ANS: C DIF: Challenging REF: ANS: C DIF: Challenging REF: ANS: B DIF: Challenging REF: ANS: B DIF: Challenging REF: ANS: C DIF: Challenging REF: ANS: C DIF: Challenging REF: ANS: C DIF: Challenging REF: ANS: A DIF: Challenging REF: ANS: A DIF: Challenging REF: ANS: A DIF: Challenging REF: 252 TRUE/FALSE 26. ANS: T DIF: Average REF: ANS: T DIF: Average REF: ANS: T DIF: Average REF: ANS: T DIF: Average REF: ANS: T DIF: Average REF: ANS: T DIF: Average REF: ANS: F DIF: Challenging REF: ANS: T DIF: Challenging REF: 213