Choose the single best answer for each question. Do all of your scratch-work in the side and bottom margins of pages.

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1 Econ 101, Sections 3 and 4, S11, Schroeter Exam #3, Special code = 0001 Choose the single best answer for each question. Do all of your scratch-work in the side and bottom margins of pages. 1. A tariff on a product makes domestic sellers of the product a. better off and domestic buyers of the product better off. *. better off and domestic buyers of the product worse off. c. worse off and domestic buyers of the product better off. d. worse off and domestic buyers of the product worse off. 2. Monrovia is a small country that prohibits international trade in textiles. The equilibrium price in the Monrovian domestic textile market is higher than the price in the world textile market. If Monrovia were to repeal its textile trade ban, the price of textiles in the domestic market would a. increase and Monrovia would become an importer of textiles. b. increase and Monrovia would become an exporter of textiles. *. decrease and Monrovia would become an importer of textiles. d. decrease and Monrovia would become an exporter of textiles. 3. When a country lifts its ban on international trade it becomes an exporter of steel. As a result of the lifting of the trade ban, the domestic steel producer surplus and domestic steel consumer surplus. a. increases; increases. *. increases; decreases. c. decreases; decreases. d. decreases; increases. 4. In September of 2010, China imposed a tariff on imports of U.S. a. tires. b. steel. c. textiles. *. poultry. 5. The "unfair-competition" argument for restrictions on imports into the U.S. alleges that *. foreign governments are unfairly subsidizing their export industries. b. U.S. producers are unfairly dumping low quality goods in foreign markets. c. foreign firms are unfairly charging higher prices to U.S. consumers than to their own domestic consumers. d. the U.S. government is unfairly limiting opportunities for U.S. firms to sell their products abroad.

2 2 Questions 6, 7, and 8 refer to the following figure. It depicts the domestic demand (D d ) and domestic supply (S d ) of cement, a homogeneous commodity, in Microlandistan, a small country. The world market price of cement is $100/ton. 140 ($/ton) 100 S d D d (tons/week) 6. If Microlandistan has a free trade policy, the surplus of domestic cement consumers is *. $10,000/week. b. $20,000/week. c. $30,000/week. d. $40,000/week. 7. If Microlandistan has a free trade policy, the surplus of domestic cement producers is a. $20,000/week. b. $40,000/week. c. $60,000/week. *. $80,000/week. 8. If Microlandistan abandons its free trade policy and imposes a ban on international trade in cement, the country's total (consumer + producer) surplus will a. increase by $15,000/week. b. increase by $30,000/week. c. decrease by $15,000/week. *. decrease by $30,000/week.

3 3 9. Which of the following is an example of a negative externality? a. After drinking way too much at his fraternity's party on Saturday night, Jason was hung-over on Sunday morning. b. Gabrielle's decision to get a flu shot makes it a little less likely that her roommate will get the flu. *. When he smokes in a public place, Ryan inflicts harmful second-hand smoke on others. d. Both a and c. 10. If a competitive market is subject to a negative externality then, at the market equilibrium quantity, marginal social cost is *. greater than marginal social value. b. equal to marginal social value. c. less than marginal social value. d. either a or c, depending on whether the externality is on the consumption side or the production side. 11. Altering incentives so that people take account of the impact of their actions on bystanders is called " an externality." a. marginalizing. b. transacting. *. internalizing. d. coordinating. Questions 12 and 13 are based on the following information. A railroad line passes through a farmer's field. The trains impose an externality on the farmer because sparks from the railroad cars start fires that result in $1500 in damage to the farmer's crop. There is a special soy-based grease that the railroad could use that would eliminate the damaging sparks. The grease costs $ Suppose that the farmer has the right to compensation for any damage that is done to his crops. Assume that there are no transaction costs. What outcome will occur in this case? a. The railroad will continue to operate without the special grease and will pay the farmer $1500 in damages. b. The railroad will continue to operate without the special grease but will pay no compensation to the farmer. *. The railroad will buy and use the special grease. No payment will be made between the railroad and the farmer. d. The farmer and the railroad will enter into a contract with the following terms: The farmer will pay the railroad some amount between $1200 and $1500 in exchange for the railroad's promise to buy and use the special grease.

4 4 13. Suppose that the railroad is not liable for any damage done to the farmer's crops. Assume that there are no transaction costs. What outcome will occur in this case? a. The railroad will continue to operate without the special grease and will pay the farmer $1500 in damages. b. The railroad will continue to operate without the special grease but will pay no compensation to the farmer. c. The railroad will buy and use the special grease. No payment will be made between the railroad and the farmer. *. The farmer and the railroad will enter into a contract with the following terms: The farmer will pay the railroad some amount between $1200 and $1500 in exchange for the railroad's promise to buy and use the special grease. Questions 14 and 15 refer to the following information and table. Three firms (A, B, and C) are currently responsible for 3 units of pollution each (for a total of 9 units of pollution). The following table shows the marginal abatement costs for each of the three firms. For example, it would cost firm A $39 to reduce its pollution by one unit, an additional $50 to reduce its pollution by a second unit, and an additional $72 to eliminate the third unit of pollution. Firm Unit of pollution A B C to be eliminated First unit Second unit Third unit Suppose that the government imposes a pollution tax of $55/unit. Firms would then have to pay a tax of $55 for each unit of pollution they created. How many units of pollution would be eliminated by the three firms combined? a. 5. b. 6. *. 7. d. none of the above. 15. Suppose that the government issued one pollution permit to each firm, for a total of three, but allowed the firms to trade permits. Firms are only allowed to pollute up to their holdings of permits; one unit of pollution per permit. Which of the following trades might occur? a. Firm C buys one permit from Firm B for a price between $38 and $40. b. Firm B buys one permit from Firm A for a price between $32 and $50. c. Firm C buys one permit from Firm A for a price between $46 and $72. *. Firm A buys one permit from Firm B for a price between $47 and $50.

5 5 16. If a competitive market is subject to a positive externality, the market equilibrium quantity will be a. greater than the socially desirable quantity. *. less than the socially desirable quantity. c. equal to the socially desirable quantity. d. either a or b, depending on whether the externality is on the consumption side or the production side. 17. A common resource is a. excludable and rival in consumption. b. excludable and non-rival in consumption. *. non-excludable and rival in consumption. d. non-excludable and non-rival in consumption. 18. Which of the following is an example of a public good? a. a candy bar. *. national defense. c. an uncongested toll road. d. none of the above. 19. The Ames Public Library has a large number of books that anyone with a library card may borrow. Anyone can obtain a card for free. Because the number of copies of each book is limited, not everyone can have the same book at the same time. The library books are what type of good? a. private goods. *. common resources. c. public goods. d. none of the above. 20. The feature of goods that gives rise to a free-rider problem is a. excludability. *. non-excludability. c. rivalry in consumption. d. non-rivalry in consumption. 21. Which of the following policies could help to avoid the tragedy of the commons? a. a subsidy to encourage use of the common resource. b. regulations to restrict use of the common resource. c. turning the common resource into a private good by establishing property rights. *. either b or c. 22. The largest source of revenue for the federal government is *. individual income tax. b. corporate profits tax. c. tariffs. d. excise taxes on gasoline.

6 6 23. The cost of complying with tax law is called the of the tax. a. auditing penalty. b. incidence of avoidance. c. certification requirement. *. administrative burden. 24. The national income tax in the country of Atlantis involves a 15% marginal tax rate on income up to $50,000 per year. Income over $50,000 per year is subject to a 0% marginal tax rate. The structure of income tax in Atlantis is for incomes up to $50,000 per year and for incomes over $50,000 per year. a. progressive; proportional. *. proportional; regressive. c. regressive; proportional. d. progressive; regressive. 25. Which of the following is true? a. The Bush tax cuts were allowed to expire on January 1, b. The recommendations of the National Commission on Fiscal Responsibility and Reform were approved by Congress and signed into law by President Obama. c. Iowa does not have a state sales tax. *. States currently do not have the authority to require out-of-state merchants to collect state sales tax on mail order purchases by their residents. Questions 26 and 27 refer to the hypothetical income tax structure described by the following schedule of marginal rates. On taxable income... the marginal tax rate is... Up to $7,000 10% From $7,000 to $30,000 15% From $30,000 to $76,000 25% Over $76,000 30% 26. If Bonnie has $55,000 in taxable income, how much does she owe in taxes? *. $10,400. b. $11,250. c. $12,800. d. $13, If the marginal rate applicable to the $30,000 - $76,000 tax bracket were reduced from 25% to 20%, and all of the other marginal rates remained unchanged, what would be the effect on the tax owed by someone with taxable income of $100,000? It would a. remain unchanged. *. decrease by $2300. c. decrease by $3800. d. decrease by $5000.

7 7 28. The idea that taxpayers with similar abilities to pay taxes should pay the same amount is called a. the benefits principle. b. the inverse progressive principle. c. vertical equity. *. horizontal equity. Questions 29 and 30 refer to Schedule Y-1 from the 2010 Instruction booklet for federal individual income tax form Alex and Taylor, a married couple, used the "married, filing jointly" tax status to file their 2010 federal income tax returns. They reported taxable income of $125,850. Schedule Y-1. Use if your filing status is married, filing jointly. If your taxable income is over but not over your tax is of the amount over $0 $16, % $0 16,750 68,000 $1, % 16,750 68, ,300 9, % 68, , ,250 26, % 137, , ,650 46, % 209, , , % 373, Based on their reported taxable income, Alex and Taylor's federal income tax for 2010 is a. $18, *. $23, c. $26, d. $31, Alex and Taylor's 2010 tax return is audited. As a result of the audit, the IRS disallows $1000 of deductions that they had claimed in their calculation of taxable income of $125,850. What effect will this IRS ruling have on their income tax for 2010? Compared to the tax based on their reported taxable income of $125,850, their actual taxes will be a. $1000 higher. b. $1000 lower. *. $250 higher. d. $250 lower.