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EC201 Exam II Review

1. Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, ticket prices are $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. The fact that Ingrid cannot buy a ticket to "Mamma Mia!" is evidence of A. Pareto efficiency in this market. B. A price ceiling above the equilibrium price. C. A situation that is not Pareto efficient. D. The benefits of allocating resources on the first-come, first-served basis.

2. Suppose the market for sugar is in equilibrium at $3 per pound. This means A. all remaining producers will require more than $3 to produce additional sugar. B. all remaining consumers value sugar at more than $3. C. the benefit of the last pound of sugar exceeds $3. D. the cost of the last pound of sugar is less than $3.

Supply and Demand Curve for Jeans in Gallania Mall.

3. At the price of $60 each, sellers offer _____ and buyers wish to purchase _____ pairs of jeans a day. A. 60; 20 B. 8; 24 C. 16; 16 D. 24; 8 4. At the quantity of 24 pairs of jeans a day, what is the cost of producing an extra pair of jeans? A. $20 B. $40 C. $60 D. $80

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5. Suppose that jeans initially sell for $60 each. If the seller lowers price to $40 each it would create an extra ____ of economic surplus. Thus, selling jeans for $60 each is _______. A. $160; inefficient B. $80; efficient C. $80; the equilibrium price D. $160; efficient

6. The equilibrium price will NOT lead to the largest possible total economic surplus when A. the jeans are purchased by consumers with reservation prices greater than $40. B. the jeans market is perfectly competitive. C. production of jeans generates air pollution. D. production of jeans experiences diminishing marginal returns to inputs.

7. A 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

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8. Refer to the figure above. With no subsidy, the equilibrium price of sugar is _____ and the equilibrium quantity is ______ tons per day. A. $1000; 14 B. $1000; 10 C. $1500; 14 D. $1500; 10

9. Refer to the figure above. With no subsidy, what is the consumer surplus? A. $1,000 B. $7,500 C. $10,100 D. $14,000

10. Refer to the figure above. With no subsidy, what is the producer surplus? A. $0 B. $6,000 C. $7,500 D. $17,000

11. Refer to the figure above. With the subsidy, the equilibrium price of sugar is _____ and the equilibrium quantity is ______ tons per day. A. $1000; 14 B. $1000; 10 C. $1500; 14 D. $1500; 10

12. Refer to the figure above. With the subsidy, what is the consumer surplus? A. $1000 B. $7500 C. $10,100 D. $14,000

13. Refer to the figure above. With the subsidy, what is the producer surplus? A. $0 B. $6,000 C. $7,500 D. $17,000

14. Refer to the figure above. After the subsidy, consumer surplus ______ by ______ per day. A. stays the same; $500 B. decreased; $1000 C. increased; $1000 D. increased; $6500

15. Refer to the figure above. The cost of subsidy, which must be borne by taxpayers, is A. $500 B. $3000 C. $5500 D. $7000

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16. Refer to the figure above. The net effect of the subsidy program ______ total economic surplus by _____. A. increased; $6500 B. decreased; $6500 C. increased; $500 D. decreased; $500

17. Refer to the figure above. Suppose S and D are the initial supply and demand curves and a tax represented by S' is imposed on sellers. The distance that represents the per unit amount of the tax is A. EG. B. 0A. C. HJ. D. IH. 18. Refer to the figure above. If S and D are the initial supply and demand curves, after the tax represented by S' is imposed, the equilibrium price is the distance A. 0M. B. 0E. C. 0A. D. 0G. 19. Refer to the figure above. If S and D are the initial supply and demand curves, the amount of tax revenue raised by this tax, represented by S', is equal to the area represented by the area A. EGJI. B. AGJH. C. EAHI. D. IJC.

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20. Refer to the figure above. If S and D are the initial supply and demand curves and S' represents a tax, consumer surplus after the tax is imposed is represented by the area A. MAC. B. MEI. C. MAHI. D. EAHI. 21. Refer to the figure above. If S and D are the initial supply and demand curves and S' represents a tax, producer surplus after the tax is imposed is represented by the area A. HJC. B. AKC. C. GJK. D. EGJCI. 21. Refer to the figure above. If S and D are the initial supply and demand curves and S' represents a tax, the burden of the tax to consumers is measured by the distance A. EA. B. AG. C. HJ. D. 0E. 22. Refer to the figure above. If S and D are the initial supply and demand curves and S' represents a tax, the burden of the tax to producers is measured by the distance A. GL. B. GK. C. EG. D. AG. 23. Refer to the figure above. If S and D are the initial supply and demand curves and S' represents a tax, the deadweight loss due to the tax is measured by the area A. LKCI. B. HJC. C. IHC. D. IJC. 24. Refer to the figure above. The loss in efficiency due to the tax, represented by S', is measured by the area ______ and stems from ______. A. IJC; the trades that do not occur because of the tax B. IHC; consumer unrest about higher prices C. HJC; producer dissatisfaction with lower revenues D. EGJI; wasteful use of the tax revenue by government 25. The percentage change in quantity demanded that results from the percentage change in price is known as the A. price elasticity of supply. B. price elasticity of demand. C. income elasticity of demand. D. cross-price elasticity of demand.

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26. If the price of cheese falls by one percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese has a value of A. 30. B. 0.30. C. 0.333. D. 3.

27. If the price elasticity of demand for football game ticket is 2, if the price increases by 1% quantity demanded decreases by A. ½%. B. 1%. C. 2%. D. 4%.

28. If the price elasticity of demand for pineapple is 0.75, a 4% increase in the price of pineapple will lead to a A. 3% decrease in the quantity demanded of pineapple. B. 3% increase in the quantity demanded of pineapple. C. 4% decrease in the quantity demanded of pineapple. D. 3/16% increase in the quantity demanded of pineapple.

29. The demand for a good is inelastic with respect to price, if the price elasticity of demand A. equals one. B. is greater than one. C. is less than one. D. equals negative one.

30. When the price of NBA ticket is $25 each, 30,000 tickets are sold every game. After increasing the price to $30 each, 20,000 tickets are sold every game. At the original price, the demand for NBA ticket is A. elastic. B. inelastic. C. unitary elastic. D. perfectly elastic.

31. Suppose a 10% increase in the price of pain relievers leads to a 5% decrease in quantity demanded of pain relievers. The demand for pain relievers, with respect to price, is A. elastic. B. inelastic. C. unitary elastic. D. perfectly inelastic.

32. Demand tends to be _______ in the short run than in the long run. A. more elastic B. more inelastic C. more volatile D. less important

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33. Refer to the figure above. The slope of the demand curve D1 is _____ and of demand curve D2 is ______. A. 1/2; 2 B. 2; 1/2 C. 5/4; 4/5 D. 4/5; 5/4 34. Refer to the figure above. For demand curve D1, what is the price elasticity of demand when P = 12? A. 12 B. 6 C. 4 D. 3 35. Refer to the figure above. When P = 8, the price elasticity of demand for the demand curve D1 is ______ and D2 is _____. A. 4; 1 B. 1; 4 C. 4; 4 D. 2; 4 36. Refer to the figure above. At P = 8 and Q = 4, D1 is ______ elastic than D2, which is shown graphically as D1 being _____ D2. A. more; flatter than B. more; steeper than C. less; flatter than D. less; steeper than

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37. Refer to the figure above. When P = 4, the price elasticity of demand for the demand curve D1 is ______ and D2 is _____. A. 3; 3 B. 2/3; 1/3 C. 1/3; 3 D. 1/3; 2/3 38. Suppose the price P gives us a price elasticity of demand equal to 1. Any price higher than P will move us to the _______ part of the demand curve. A. elastic B. unitary elastic C. inelastic D. perfectly elastic 39. When Taylor raised the price of earrings at Taylor's Boutique, total revenue from earrings increased. This suggests that A. the demand for Taylor's earrings at the original price must be elastic. B. there are too many other boutiques competing with Taylor. C. there was excess demand for earrings at the original price. D. the demand for Taylor's earrings at the original price was inelastic. 40. Suppose the demand curve for open-heart surgery is vertical among people with serious heart conditions. Therefore, demand for open-heart surgery is _____ with respect to price. A. unitary elastic B. inelastic. C. perfectly elastic. D. perfectly inelastic. 41. A pizza shop observes that when it raises the price of the large pizza, total revenue from pizza decreases and when they lower the price of the large pizza, total revenue increases. This suggests that A. pizza lovers act irrationally. B. the demand for large pizza must be elastic. C. there are few good substitutes for large pizza. D. the demand for large pizza must be inelastic. 42. If the demand for salad dressing increased when the price of lettuce decreased, cross price elasticity would be ________, and we would say these two goods are _______. A. unitary; inelastic B. zero; inferior C. negative; substitutes D. negative; complements 43. A cross price elasticity of -1.2 indicates the two goods are A. inferior. B. elastically demanded. C. complements. D. substitutes.

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44. Suppose you believe that plaid flannel shirts are an inferior good, and want to test this with economic data. You expect to find that the income elasticity for plaid flannel shirts is A. close to zero. B. greater than zero, but less than one. C. greater than one. D. less than zero.

45. If a one percent increase in the price of oranges leads to a five percent increase in the quantity supplied, the price elasticity of supply for oranges is ______. A. 1/5 B. 1/2 C. 5 D. 2

46. Suppose that each serving of Mac & Cheese costs exactly $0.50 to make no matter how many servings are produced. This means that the price elasticity of supply for Mac & Cheese is ______ and the supply is _______. A. one; perfectly inelastic B. zero; perfectly elastic C. infinity; perfectly inelastic D. infinity; perfectly elastic

47. When some fraction of the benefit of an activity is received by people not participating in the activity, it is called a(n) A. winner's curse. B. positive externality. C. external cost. D. efficient allocation.

48. For most people, baking cinnamon rolls generates _____ externality, and burning tires generates _______ externality. A. a positive; a negative B. a negative; a positive. C. a positive, no D. no; a negative

49. Which of the following is not an example of an activity with external benefits? A. Eating a sandwich in the dining hall B. Planting flowers in the front yard C. Staying home from class when you have the flu D. Having your smoking car repaired

50. If the market equilibrium quantity is less than the socially optimal quantity, one can infer that A. the private supply curve for the activity is below the socially optimal supply curve. B. the private demand curve for the activity is above the socially optimal demand. C. the production of this good has a positive externality. D. the production of this good has a negative externality.

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51. If the equilibrium quantity is equal to the socially optimal quantity, one can infer that A. the supply curve for the activity is below the socially optimal supply curve. B. the production of this good has no externality. C. the production of this good has a positive externality. D. the production of this good has a negative externality.

52. Refer to the figure above. When the market has no external costs or benefits, the resulting equilibrium quantity is ____ and price is _____. A. 0; $4 B. 1000; $3 C. 2000; $2 D. 3000; $1 53. Refer to the figure above. Suppose that production of this good is accompanied by an external cost, the private market equilibrium quantity is ____ and the private market equilibrium price is ______. A. 0; $4 B. 1000; $3 C. 2000; $2 D. 3000; $1 54. Refer to the figure above. Suppose that production of this good is accompanied by an external cost illustrated on this graph. The private market equilibrium quantity is ______ the socially optimal quantity. A. equal to B. 1000 units less than C. 1000 units more than D. 2000 units more than

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55. Refer to the figure above. Suppose, production of this good is accompanied by an external cost = $2/unit, social MC equals ________. A. private MC - $2 B. private MC + $2 C. private MC - $0 D. private demand - $2

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking.

56. Which outcome is consistent with the Coase Theorem? A. The cigar smoker will not be able to smoke because there are more non-smokers in the room. B. The cigar smoker will pay each other occupant fifty-five cents, and they will agree to allow smoking. C. The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration. D. The cigar smoker will pay each other occupant a dollar, and they will agree to allow smoking. 57. What is the total economic surplus if the cigar smoker refrains from smoking? A. -$4.50 B. -$.50 C. $4.50 D. $9.50 58. If the cigar smoker paid each other occupant fifty cents for the right to smoke, the cigar smoker would be ______ and the other occupants would be _______. A. better off; worse off. B. better off; just as well off as before the payment. C. better off; better off. D. worse off; just as well off as before the payment. 59. Now suppose that the rules governing the room are that smoking is allowed unless everyone in the room agrees to prohibit it. In that case, A. the non-smoking occupants will pay the cigar smoker to not smoke. B. the cigar smoker will smoke and not have to pay the other occupants for the external cost. C. the cigar smoker will smoke, and will pay each other occupant 50 cents. D. the parties may or may not be able to reach a negotiated agreement depending on the bargaining strength of each. 60. Declaring the card room a non-smoking area with no opportunity to negotiate would A. decrease total economic surplus. B. increase total economic surplus. C. leave total economic surplus unchanged, but redistribute benefits. D. efficiently solve the externality problem.

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Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains (in thousands of dollars) and losses for the three parties are listed below.

61. When Erie Textiles operates without a filter, the total daily gain (in thousands of dollars) by all three parties is _______. A. $985 B. $325 C. $510 D. $475

62. When Erie Textiles operates with a filter, the total daily gain (in thousand of dollars) by all three parties is _______. A. $985 B. $600 C. $510 D. $475

63. The daily cost (in thousands of dollars) of the filter to Erie Textiles is _______, and the daily net benefit (in thousands of dollars) of the filter to the fishermen and bird watchers is _______. A. $400; $310 B. $310; $200 C. $200; $75 D. $200; $235

64. If Erie Textiles does not install the filter there will be a net social _____ of _____ (in thousands of dollars). A. loss; $35 B. gain; $75 C. loss; $110 D. gain; $200

65. Local fishermen and bird watchers would be willing to compensate Erie Textiles ______ for operating with a filter. A. up to $310 thousand dollars B. no more than $235 thousand dollars C. no more than $75 thousand dollars D. nothing

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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 commons to graze, 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 commons, which in turn depends on the number of goats sent onto the commons, as shown in table below.

66. The villager will buy a year-old goat if it will command a price of at least _____ as a 2-year-old. A. $55 B. $75 C. $70 D. $65

67. How many goats will villagers send onto the commons? A. 2 B. 3 C. 4 D. 5 68. What will be the total village income, if everyone makes the decision that gives him or her the maximum benefit? A. $5 B. $125 C. $75 D. $25 69. Suppose a village elder decides the total number of goats and bonds with the goal of maximizing total village income. The elder will buy _____ government bond(s) and send ____ goat(s) onto the commons. A. 0; 5 B. 1; 4 C. 2; 3 D. 3; 2 70. Suppose a village elder decides the total number of goats and bonds with the goal of maximizing total village income. The village income will be _______. A. $250 B. $125 C. $70 D. $15

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71. In order to achieve a socially optimal level of output, activities that generate negative externalities should be A. banned. B. subsidized. C. taxed. D. bought out by the government. 72. If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter? A. No, because it makes $200 less in profit with the filter. B. Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter. C. No, because use of a filter would result in smaller total economic surplus. D. Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

73. Suppose that Erie Textiles can only negotiate with one of the affected groups. Will Erie operate with a filter? A. Yes, if they negotiate with the Bird Watchers, but not if they negotiate with the Fishermen. B. No, regardless of which group they negotiate with. C. Yes, if they negotiate with the Fishermen, but not if they negotiate with the Bird Watchers. D. Yes, regardless of which group they negotiate with.