Question;1. What is total producer surplus;in the market depicted below?;A. $100;B.$125;C. $200;D. $625;2. In the absence of market;failures (e.g. externalities or imperfect competition) the market equilibrium;is considered efficient because;A. prices are low.;B. the price consumers pay equals;the profit producers receive.;C.no more trades;remain that benefit some without harming others.;D. it assures that both the buyer;and seller earn equal surplus.;3. The market equilibrium is only;efficient when;A. buyers and sellers each earn;equal surplus from the transaction.;B. consumer surplus and producer;surplus are both zero.;C.all relevant;costs, including those imposed on others, are accounted for.;D. income is distributed;equitably.;4. Which of the following statements;expresses the justification for making efficiency the first goal of economic interaction?;A. Efficiency gives the poor an;incentive to improve their economic status.;B. Efficiency guarantees that the;poor are always made better off.;C. People are not really;concerned about the problems of the poor.;D.Efficiency;maximizes total economic surplus and thereby allows other social goals to be;more fully achieved.;5. Suppose that jeans initially;sell for $60 in the market depicted above. If sellers lower their price to $40;it;would create an extra __ of;economic surplus. Thus, selling jeans for $60 is __.;A.$160;inefficient;B. $80, efficient;C. $80, the equilibrium price;D. $160, efficient;Suppose that a firm uses water;from a nearby river to cool its machinery and returns the water to the river;several degrees warmer, leading;to a decline in the fish population downstream from the firm.;6. The damage to the downstream;fish is a(n);A.relevant cost of;production to society.;B. relevant cost of production only;if the firm is charged a fine for the damage done.;C. relevant cost of production;only if there are commercial fishing activities downstream.;D. implicit cost of production;which the firm will take into account in determining profit maximizing output.;7. If the firm does not have to;pay for the damage to the downstream fish population, the equilibrium quantity;in the market for the firm?s;output will be;A. efficient;B. inefficiently low;C.inefficiently;high;D. profitable;8. Suppose that the government;fines the firm an amount equal to the damage imposed on the fish for each;degree increase in the;temperature of water in the river. This government action;A. reduces efficiency in the;market.;B. increases dead weight loss.;C.increases;efficiency in the market.;D. violates the definition of;efficiency.;9. The cumulative difference;between the price producers actually receive for their output and their;reservation;price (i.e. their marginal cost;of production) is;A.producer surplus.;B. deadweight loss.;C. total economics surplus.;D. consumer surplus.;10. Compared to the first come;first served allocation scheme airlines used in the past, the voluntary;compensation scheme now in place;A. discriminates against the;poor.;B. improves efficiency for only;the wealthy.;C. tricks the poor into;unnecessarily delaying their travel.;D.improves;efficiency for all travelers.;11. Except in the extreme cases;of perfectly inelastic or perfectly elastic demand and/or supply curves, where;will the burden of a per unit (ad;valorem) taximposed on sellersfall?;A. Equally on consumers and;producers.;B.Partially on;consumers and partially on producers.;C. Entirely on producers.;D. Entirely on consumers.;12. Except in the extreme cases;of perfectly inelastic or perfectly elastic demand and/or supply curves, where;will the burden of a per unit (ad;valorem) taximposed on consumersfall?;A. Equally on consumers and;producers.;B.Partially on;consumers and partially on producers.;C. Entirely on producers.;D. Entirely on consumers.;13. The more inelastic is demand;the ______ the burden of the tax borne by ______.;A. smaller, consumers;B.larger;consumers;C. larger, producers;D. smaller, consumers and;producers;14. If a per unit tax is imposed;the more inelastic is demand, the;A.smaller the;deadweight loss.;B. larger the deadweight loss to;producers.;C. less likely the deadweight;loss will be affected.;D. larger the deadweight loss.;Suppose that the Pennsylvania;state legislature is considering increasing the sales tax on two different;commodities: prescription drugs;and restaurant meals. The price elasticity of demand for prescription drugs is;estimated to be -0.08 and the;price elasticity of demand for restaurant meals is estimated to be -0.95.;15. If the legislature's primary;goal in increasing taxes is to raise money most efficiently, it should tax;A. both prescription drugs and;restaurant meals equally.;B.prescription;drugs because demand is relatively more price inelastic than for meals.;C. restaurant meals because they;are not a necessity.;D. only those prescription drugs;that are not life-saving.;16. In a perfectly competitive;industry, economic profits;A. include only explicit costs.;B. equal accounting profits plus;implicit costs.;C.serve to;motivate entry or exit.;D. are always greater than;accounting profits.;17. Refer to the figure above. If;a tax of one dollar per unit were imposed on the producers of this commodity;what would happen to the price;consumers would pay in the market?;A. increase by exactly one dollar;B.increase by less;than one dollar;C. increase by more than one;dollar;D. remain the same as the price;before the tax;18. Refer to the figure above.;The reason that the tax burden is _____________ is because _____________.;A. borne mostly by the producers;it is imposed by law on producers;B. borne mostly by consumers;consumer demand is relatively more elastic at the market price;C.borne mostly by;consumers, consumer demand is relatively less elastic at the market price;D. shared approximately equally;supply and demand are equally elastic at the market price;19. Suppose that instead of;taxing the producers, a tax of an equal dollar amount per unit were imposed on;consumers in the market shown;above. Relative to the tax on producers;A. the tax on consumers would;generate more deadweight loss.;B. the burden of the tax on;consumers would be more equally shared between consumers and producers.;C. consumers would bear a greater;share of the tax burden.;D.the effect on;deadweight loss and tax burdens would be the same.;20. Demand for cigarettes is;relatively price inelastic among adults, but relatively price elastic for;teenagers.;Therefore, a tax on cigarettes;will;A. not raise very much tax;revenue.;B.generate more;tax revenue from adults and have a greater effect on reducing the number of;cigarettes smoked;by teenagers.;C. have a greater effect on the;number of cigarettes smoked by adults than by teenagers.;D. generate more tax revenue from;teenagers than from adults.;21. Refer to the figure above. A;tax on Commodity A will generate _________ deadweight loss relative to an;equivalent tax on Commodity B.;A. more;B.less;C. equal;D. zero;22. If a firm is earning zero;economic profits;A. its revenues are sufficient to;pay explicit costs, but not implicit costs.;B. the owner will not be able to;pay himself or herself a salary.;C. it will shut down in the long;run, but will continue to operate in the short run.;D.the owners are;earning a return on their time and investment that is equal to the opportunity;costs of that time;and investment.;23. If all firms in a perfectly;competitive industry are earning positive economic profits, one would expect;that;over time, the number of firms;will _______ and the market price will _____.;A.rise, fall;B. fall, rise;C. rise, rise;D. rise, stay the same;24. In a perfectly competitive;industry over the long run;A. economic profits tend to;persist.;B. the number of firms in an industry;grows.;C. economic losses tend to;persist.;D.economic profits;and losses are driven towards zero by entry and exit.;25. An implication of entry and;exit in response to the profit incentive is that, for perfectly competitive;firms;A. no firm accepts zero economic;profits in the long run.;B. firms produce the quantity;that minimizes average variable costs in the short run.;C.firms produce;the quantity that minimizes average total costs in the long run.;D. demand is completely inelastic;26. Mary Jane is willing to;baby-sit for $6 an hour. Her neighbor called and asked her to baby-sit for $8;an;hour. Mary Jane will earn;A. consumer surplus of $2.;B.economic rent of;$2;C. economic profit of $8.;D. accounting profit of $8, but;economic profit of 0.;Assume that all firms in the;industry depicted below have identical cost functions.;27. What is roughly the long-run;equilibrium price in this industry?;A. $15;B.$10.;C. $5.;D. $5 for some firms and $10 for;others.;The following graphs depict a perfectly;competitive firm and its market. Assume that all firms in this industry;have identical cost functions.;28. What is the long run;equilibrium quantity in this industry, and how many firms will there be?;A. 300 units, 10 firms;B.500 units, 20;firms;C. 700 units, 10 firms;D. 25 units, 300 firms;29. You have just won the;lottery! You may take your winnings in either a single immediate payment of;$1,000,000 or in annual payments;of $25,000 forever into the future. At what interest rate would you be;indifferent between these two;choices?;A. 4%;B. 25%;C.2.5%;D. 0.25%;Suppose that the city of Austin;TX chooses to regulate the number of street vendors operating near the;University of Texas by requiring;each vendor to own a permit in order to operate. The city gives permits to all;existing vendors and announces;that no new permits will ever be issued. Prior to regulation, the costs;(including;implicit costs) of operating were;$85,000 and revenues were $150,000, and these costs and revenues are;expected to persist indefinitely;for all vendors. Once distributed, the city ordinance allows the permits to be;bought and sold without;restriction. The permits have no expiration date. The interest rate for the;indefinite;future is 10 percent.;30. Prior to this ordinance, how;much were street vendors earning?;A. Economic profits of zero.;B. Accounting profits of $65,000.;C. A normal profit.;D.Economic profits;of $65,000.;31. At what price will existing;street vendors be willing to sell their permits?;A.$650,000.;B. $150,000.;C. $65,000.;D. $6,500.;32. Generic Brands is expected to;earn a profit of $1 million each year forever into the future. If the interest;rate;is 5%, and there are 20,000;shares of company stock outstanding, how much will investors be willing to pay;for;a single share of Generic Brands;stock?;A. $50;B. $100;C. $500;D.$1000;33. The efficient-markets;hypothesis states that;A. all markets produce an;efficient outcome.;B. production is always;technically efficient.;C.all relevant;information about a company's current and future earnings prospects is embodied;in its stock;price.;D. most of the relevant information;about a company's current and future earnings prospects is embodied in its;stock price.;34. The existence of a negative;externality will result in;A. a less than optimal level of;production.;B.a greater than;optimal level of production.;C. prices that are artificially;high.;D. elimination of deadweight;loss.;Taylor lives in a residential;neighborhood that prides itself on well-groomed lawns. Taylor's neighbors find;that;the collective marginal benefit;of someone else's well-groomed lawn is $10. Taylor, however, dislikes yard;work and receives zero net;benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn ?;the cost of maintaining the lawn;is a dollar more than the benefit of having a well-groomed lawn.;35. If Taylor acts independently;Taylor's lawn will be __________ and total economic surplus to the;neighborhood will be __________.;A. well groomed, $10;B. well groomed, $5;C.unkempt, 0;D. unkempt, $5;36. Provided that bargaining is;costless, the Coase Theorem suggests that;A. the rest of the neighborhood;will have to tolerate Taylor's unkempt lawn.;B. Taylor could pay the neighbors;to stop complaining about the lawn, making everyone in the neighborhood;better off.;C.Taylor's;neighbors could pay Taylor to have a well-groomed lawn, making Taylor and the;neighbors better;off.;D. Taylor's neighbors could pay;Taylor to have a well-groomed lawn, making Taylor better off and the;neighbors worse off.;Curly and Moe are considering;living alone or being roommates and splitting the rent for the next twelve;months. A one bedroom, one bath;apartment is $500 per month while a two bedroom, one bath apartment is;$800. The one difficulty they;have is that Moe snores very loudly. Curly estimates the cost of poor sleep due;to;Moe's snoring at $150 per month.;Moe could obtain a snore-eliminating device for $50 per month.;37. The least costly solution to;the externality present in this situation is for;A. Curly to endure Moe's snoring.;B. both to live alone.;C.Moe to eliminate;his snoring.;D. Moe to pay Curly for his;discomfort.;Suppose that the EPA has proposed;strict controls on the amount of sulfur that diesel fuel can contain. These;controls are designed to fully;offset the cost of pollution generated by diesel fuel vehicles. The effect of;the;regulation is estimated to;increase the equilibrium price paid by consumers for a gallon of diesel fuel by;10;cents.;38. Assuming that the supply of;diesel fuel is upward sloping and demand is downward sloping, then one can;infer that;A. the external benefit of using;diesel fuel is less than 10 cents.;B.the external;cost of using diesel fuel is greater than 10 cents.;C. the external cost of using;diesel fuel is less than 10 cents.;D. the external cost of using;diesel fuel is equal to 10 cents.;39. Refer to the figure above.;From this graph, you can infer that paper production;A. generates no externalities at;quantities less than 300 tons per day.;B.generates negative;externalities equal to approximately $50 per ton per day.;C. generates negative;externalities equal to approximately $25 per ton per day.;D. should be prohibited.;40. Refer to the figure above.;Assume that Coasian bargaining is impractical for solving the externality;problem;illustrated. The efficient;equilibrium could be achieved by;A. banning production of the;good.;B. compensating those injured by;the externality.;C.taxing the good;by an amount equal to the external cost.;D. subsidizing the good by an;amount equal to the external benefit.;41. Refer to the figure above. If;the firm were forced to pay the external cost, the firm would;A. increase the price of paper by;the full amount of the external cost.;B. be unable to increase the;price of paper, and so would bear the entire burden of the increased cost.;C. produce more paper than it;does at the private market equilibrium;D.share the burden;of the higher cost with paper consumers.;42. An imperfectly competitive;firm is one;A. that attempts but fails to;compete perfectly.;B. with the ability to set price;at any level it wishes.;C.that possesses;some degree of control over its price.;D. that faces perfectly inelastic;demand.;43. Patents and copyrights, which;act as barriers to entry and confer market power upon their owners, exist to;A. protect consumers from;imitations.;B. ensure excessive profits to;the holders.;C.protect;research, development and creative expression.;D. magnify the dominance of large;firms.;44. A firm is most likely to;experience economies of scale if it has _____ start up costs and;marginal;costs.;A. high, increasing;B.high, low;C. high, high;D. low, decreasing;45. When a perfectly competitive;firm sells additional output, __________, and when a monopolist sells;additional output;A.total revenues;always rise, total revenues may rise, fall, or remain unchanged.;B. total revenues remain;unchanged, total revenues always rise.;C. marginal revenues stay the;same, marginal revenues rise.;D. total revenues always rise;total revenues always fall.;46. Refer to the figure above. At;a price of $8/unit, total revenue for a monopolist would be ____, while;marginal revenue earned from the;last whole unit sold would be ____.;A. $8, 8;B. $24, 8;C. $32, 4;D.$40, 0;47. If the demand curve facing a;monopolist is P = 50 - 10*Q, at what quantity are marginal revenues zero?;A. 50;B. 10;C. 5;D.2.5;48. The reason that economists;consider monopoly to be socially undesirable is that monopolists;A. always earn excessive profits.;B. can charge any price they;want.;C. exploit the inelastic nature;of demand.;D.produce less;than the socially efficient amount.;49. The profit maximizing rule MR;= MC applies to;A.all firms.;B. monopolists only.;C. perfect competitors only.;D. all firm types except perfect;competitors.;50. Compared to a monopolist;charging a single price to everyone, perfect price discrimination makes;A. the monopolist better off and;all consumers worse off.;B. society worse off.;C. the monopolist worse off and;consumers better off.;D.the monopolist;and some consumers better off.;SHORT ANSWER QUESTIONS;1. The figure below depicts the;domestic market for sugar?a competitively-produced commodity?with and without;the provision of a subsidy for each unit sold. In the absence of the subsidy;the domestic market price is determined on the global market.;a. Without the subsidy, what is;the amount of consumer and producer surplus?;b. With the subsidy, what is the;amount of consumer and producer surplus, and what is the cost to the government;of providing the subsidy?;c. What effect does the subsidy;have on total economic surplus?;2. The figure below depicts a;market before and after the introduction of a per unit (ad valorem) tax.;a. In the absence of a tax, what;is the amount of total economic surplus in this market?;b. If a $1 per unit (ad;valorem) tax is imposed on sellers, what will be the new equilibrium price;paid by consumers and the new after-tax price received by producers? How is the;burden of the tax shared?;c. How much revenue is collected;by this tax, and what is the deadweight loss in the market?;d. Suppose you learn that production;in this market generates an external cost of $1 per unit produced.;What is the deadweight loss from;the $1 tax in that case?;3. A village has five residents;each of whom has accumulated savings of $50. Each villager can use the money to;buy a government bond that pays 10% interest per year or to buy a year-old;goat, send it onto the common to graz e, and sell it after one year. The price;of the goat that the villager will get at the end of the year depends on the;amount of weight it gains while grazing on the common, which in turn depends on;the number of goats sent onto the common, as shown in table below.;a. If the villagers each behave;on the basis of their own private incentives, how many goats will villagers send;onto the commons?;b. Suppose that instead of each;villager deciding what to do independently, a village elder decides the total number;of goats and bonds to invest in with the goal of maximizing total village;income. How many goats will the village elder choose to send onto the common?.;4. The figure below represents;the demand and marginal revenue curves facing a single firm operating as a natural;monopoly along with the firm?s cost curves.;a. How much output will this;monopolist produce in order to maximize profits, what will be the market price;and what will be the firm?s profits at that point?;b. What would be the monopolist?s;profits if it were instead required to produce at the socially optimal level?;c. What is the deadweight loss in;this market resulting from monopoly pricing?
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