Name: ________________________ Class: ___________________ Date: __________ ID: B

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Exam 2

Multiple ChoiceIdentify the choice that best completes the statement or answers the question.

____ 1. Which of the following statements about a well-maintained yard best conveys the general nature of the externality?a. A well-maintained yard conveys a negative externality because it increases the property

tax liability of the owner.b. A well-maintained yard cannot provide any type of externality.c. A well-maintained yard conveys a positive externality because it increases the home's

market value.d. A well-maintained yard conveys a positive externality because it increases the value of

adjacent properties in the neighborhood.

____ 2. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?a. They are equal.b. The equilibrium quantity is less than the socially optimal quantity.c. The equilibrium quantity is greater than the socially optimal quantity.d. There is not enough information to answer the question.

Figure 10-4

____ 3. Refer to Figure 10-4. If this market is currently producing at Q4, then total economic well-being would be maximized if outputa. stayed at Q4.b. decreased to Q1.c. decreased to Q3.d. decreased to Q2.

Name: ________________________ ID: B

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____ 4. Refer to Figure 10-4. If this market is currently producing at Q2, then total economic well-being would increase if outputa. decreased to Q1.b. stayed at Q2.c. increased to Q3.d. increased beyond Q4.

____ 5. Refer to Figure 10-4. The socially optimal quantity would bea. Q1.b. Q3.c. Q4.d. Q2.

Figure 14-2

____ 6. Refer to Figure 14-2. If the market price is $10, what is the firm’s short-run economic profit?a. $15b. $9c. $50d. $30

____ 7. Refer to Figure 14-2. If the market price is $10, what is the firm’s total cost?a. $30b. $35c. $50d. $15

Name: ________________________ ID: B

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Table 10-1

The following table shows the private value, private cost, and external cost for various quantities of output in a market.

Quantity Private Value Private Cost External Cost1 14 10 22 13 11 23 12 12 24 11 13 25 10 14 26 9 15 27 8 16 2

____ 8. Refer to Table 10-1. What is the equilibrium quantity of output in the market?a. 2 unitsb. 5 unitsc. 4 unitsd. 3 units

____ 9. Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?a. 10b. 3c. 9d. 2

____ 10. Refer to Table 10-1. What is the socially-optimal quantity of output in this market?a. 2 unitsb. 4 unitsc. 3 unitsd. 1 unit

Name: ________________________ ID: B

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Figure 15-12

____ 11. Refer to Figure 15-12. If the monopoly firm is not allowed to price discriminate, then consumer surplus amounts toa. $0.b. $1,562.50.c. $6,250.d. $3,125.

____ 12. Refer to Figure 15-12. If the monopoly firm perfectly price discriminates, then consumer surplus amounts toa. $1,562.50.b. $6,250.c. $0.d. $3,125.

____ 13. Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expecta. the market price to fall.b. its profits to fall.c. new firms to enter the market.d. All of the above are correct.

____ 14. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price floor of $250 per physical. As a result of the price floor,a. the demand curve for physicals shifts to the left.b. the number of physicals performed stays the same.c. the supply curve for physicals shifts to the right.d. the quantity demanded of physicals decreases and the quantity of physicals doctors want

to give increases.

Name: ________________________ ID: B

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____ 15. Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emita. 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution

into the air.b. 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution

into the air.c. 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution

into the air.d. 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution

into the air.

____ 16. A firm in a competitive market has the following cost structure:

Output Total Costs0 $101 $122 $153 $194 $245 $306 $377 $468 $559 $65

If the market price is $8, how many units should the firm produce to maximize profit?a. 7 unitsb. 5 unitsc. 6 units d. 8 units

Name: ________________________ ID: B

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Figure 15-7

____ 17. Refer to Figure 15-7. What is the socially efficient price and quantity?a. price = G; quantity = Ab. price = F; quantity = Ac. price = D; quantity = Ad. price = G; quantity = B

____ 18. Refer to Figure 15-7. What area represents the total surplus lost due to monopoly pricing?a. the triangle 1/2[(F-D)x(B-A)]b. the triangle 1/2[(F-G)x(B-A)]c. the rectangle (F-D)xAd. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]

____ 19. Assume a firm is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit isa. $-1,600.b. $8,000.c. $1,600.d. $3,200.

____ 20. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? a. $4,500; $2,500b. $4,500; $4,000c. $4,500; $3,500d. $3,000; $1,500

Name: ________________________ ID: B

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Figure 10-1

____ 21. Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are a. $1.80 and 35 units, respectively.b. $1.90 and 38 units, respectively.c. $1.60 and 42 units, respectively.d. $1.35 and 58 units, respectively.

____ 22. Refer to Figure 10-1. This graph represents the tobacco industry. The industry createsa. no externalities.b. no equilibrium in the market.c. negative externalities.d. positive externalities.

____ 23. Under rent control, bribery is a mechanism toa. bring the total price of an apartment (including the bribe) closer to the equilibrium price.b. allocate housing to the most deserving tenants.c. allocate housing to the poorest individuals in the market.d. force the total price of an apartment (including the bribe) to be less than the market price.

____ 24. Once tradable pollution permits have been allocated to firms,a. the value of pollution-saving technology will be lower than the market value of a

pollution permit.b. the Coase theorem is no longer applicable as a solution to reducing pollution.c. the government controls the price of permits.d. firms that can reduce pollution only at high cost will be willing to pay the most for the

pollution permits.

Name: ________________________ ID: B

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____ 25. A command-and-control policy is another term for a a. pollution permit.b. government regulation.c. corrective tax.d. Both a and b are correct.

____ 26. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,a. Firm A will spend $4,500.b. Firm B will spend $3,000.c. Firm B will spend $3,500.d. Firm A will spend $4,000.

____ 27. Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?a. One neighbor plays his music loudly.b. One neighbor doesn't mow her yard.c. One neighbor lets his dog run through another neighbor’s garden, damaging her flowers.d. All of the above are correct.

____ 28. For a firm to price discriminate,a. consumers must tell the firm what they are willing to pay for the product.b. it must be regulated by the government.c. it must be a natural monopoly.d. it must have some market power.

Table 6-1

Price QuantityDemanded

QuantitySupplied

$0 12 0$1 10 2$2 8 4$3 6 6$4 4 8$5 2 10$6 0 12

____ 29. Refer to Table 6-1. Which of the following price ceilings would be binding in this market?a. $5b. $3c. $4d. $2

Name: ________________________ ID: B

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____ 30. Refer to Table 6-1. Which of the following price floors would be binding in this market?a. $3b. $4c. $2d. $1

Scenario 15-3Suppose a monopolist has a demand curve that can be expressed as P=90-Q. The monopolist’s marginal revenue curve can be expressed as MR=90-2Q. The monopolist has constant marginal costs and average total costs of $10.

____ 31. Refer to Scenario 15-3. The profit-maximizing monopolist will earn profits of a. $1,600.b. $6,400.c. $800.d. $3,200.

____ 32. Refer to Scenario 15-3. The profit-maximizing monopolist will produce an output level of a. 10 units.b. 80 units.c. 40 units.d. 20 units.

Scenario 15-4Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.

____ 33. Refer to Scenario 15-4. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate?a. $850,000b. $925,000c. $600,000d. $500,000

____ 34. Refer to Scenario 15-4. If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit?a. price = $150; profit = $450,000b. price = $20; profit = $330,000c. price = $150; profit = $600,000d. price = $20; profit = $400,000

Name: ________________________ ID: B

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____ 35. We can measure the profits earned by a firm in a competitive industry as a. (MC - ATC) × Q.b. (P - ATC) × Q.c. (P - MC) × Q.d. MR × MC.

____ 36. Long lines a. and discrimination according to seller bias are both inefficient rationing mechanisms

because the good does not necessarily go to the buyer who values it most highly.b. are an inefficient rationing mechanism because the good does not necessarily go to the

buyer who values it most highly, and discrimination according to seller bias is an inefficient rationing mechanism because it wastes buyers’ time.

c. are an inefficient rationing mechanism because they waste buyers’ time, and discrimination according to seller bias is an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly.

d. and discrimination according to seller bias are both inefficient rationing mechanisms because they both waste buyers’ time.

____ 37. A firm in a competitive market has the following cost structure:

Output ATC0 --1 $102 $83 $74 $85 $10

If the firm's fixed cost of production is $3, and the market price is $10, how many units should the firm produce to maximize profit?a. 3 unitsb. 1 unitc. 4 unitsd. 2 units

Name: ________________________ ID: B

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Table 15-5Quantity Price

0 $101 $92 $83 $74 $65 $56 $47 $38 $29 $110 $0

____ 38. Refer to Table 15-5. If the monopolist faces a constant marginal cost of $5, how much output should the firm produce?a. 6 unitsb. 3 unitsc. 5 unitsd. 4 units

____ 39. Nancy loves to landscape her yard, but her neighbor Lee places a low value on his landscaping. When Lee's grass is neglected and gets long, Nancy will mow it for Lee. This is an example ofa. an exploitation of a common resource.b. a situation in which the Coase theorem fails to explain the lawn mowing arrangement.c. a private solution to a negative externality problem.d. an improper allocation of resources.

____ 40. The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known asa. arbitrage.b. price discrimination.c. price segregation.d. monopoly pricing.

ID: B

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Exam 2Answer Section

MULTIPLE CHOICE

1. ANS: D PTS: 1 DIF: 2 REF: 10-0NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative

2. ANS: B PTS: 1 DIF: 3 REF: 10-2NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes | Positive externalities MSC: Analytical

3. ANS: D PTS: 1 DIF: 1 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Interpretive

4. ANS: B PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Interpretive

5. ANS: D PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Interpretive

6. ANS: A PTS: 1 DIF: 3 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: ProfitMSC: Analytical

7. ANS: B PTS: 1 DIF: 3 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: Total costMSC: Analytical

8. ANS: D PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Applicative

9. ANS: D PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Applicative

10. ANS: A PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative

11. ANS: B PTS: 1 DIF: 2 REF: 15-4NAT: Analytic LOC: Monopoly TOP: Consumer surplus MSC: Applicative

12. ANS: C PTS: 1 DIF: 2 REF: 15-4NAT: Analytic LOC: Monopoly TOP: Perfect price discriminationMSC: Analytical

13. ANS: D PTS: 1 DIF: 1 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: Profit maximizationMSC: Applicative

14. ANS: D PTS: 1 DIF: 2 REF: 6-1NAT: Analytic LOC: Supply and demand TOP: Price floors | SurplusesMSC: Interpretive

ID: B

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15. ANS: D PTS: 1 DIF: 3 REF: 10-2NAT: Analytic LOC: Markets, market failure, and externalities TOP: Tradable pollution permits MSC: Analytical

16. ANS: C PTS: 1 DIF: 2 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: Profit maximizationMSC: Analytical

17. ANS: D PTS: 1 DIF: 2 REF: 15-3NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative

18. ANS: A PTS: 1 DIF: 3 REF: 15-3NAT: Analytic LOC: Monopoly TOP: Deadweight loss MSC: Applicative

19. ANS: C PTS: 1 DIF: 2 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: ProfitMSC: Applicative

20. ANS: C PTS: 1 DIF: 3 REF: 10-2NAT: Analytic LOC: Markets, market failure, and externalities TOP: Tradable pollution permits MSC: Analytical

21. ANS: A PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative

22. ANS: C PTS: 1 DIF: 2 REF: 10-1NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative

23. ANS: A PTS: 1 DIF: 1 REF: 6-1NAT: Analytic LOC: Supply and demand TOP: Rent controlMSC: Interpretive

24. ANS: D PTS: 1 DIF: 2 REF: 10-2NAT: Analytic LOC: Markets, market failure, and externalities TOP: Tradable pollution permits MSC: Interpretive

25. ANS: B PTS: 1 DIF: 1 REF: 10-2NAT: Analytic LOC: Markets, market failure, and externalities TOP: Command-and-control policies MSC: Definitional

26. ANS: D PTS: 1 DIF: 3 REF: 10-2NAT: Analytic LOC: Markets, market failure, and externalities TOP: Tradable pollution permits MSC: Analytical

27. ANS: D PTS: 1 DIF: 2 REF: 10-3NAT: Analytic LOC: Markets, market failure, and externalities TOP: Coase theorem MSC: Applicative

28. ANS: D PTS: 1 DIF: 2 REF: 15-4NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Interpretive

29. ANS: D PTS: 1 DIF: 2 REF: 6-1NAT: Analytic LOC: Supply and demand TOP: Price ceilingsMSC: Applicative

30. ANS: B PTS: 1 DIF: 2 REF: 6-1NAT: Analytic LOC: Supply and demand TOP: Price floorsMSC: Applicative

ID: B

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31. ANS: A PTS: 1 DIF: 3 REF: 15-3NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Applicative

32. ANS: C PTS: 1 DIF: 3 REF: 15-3NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Applicative

33. ANS: A PTS: 1 DIF: 2 REF: 15-4NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Applicative

34. ANS: A PTS: 1 DIF: 2 REF: 15-4NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Applicative

35. ANS: B PTS: 1 DIF: 2 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: ProfitMSC: Analytical

36. ANS: C PTS: 1 DIF: 2 REF: 6-1NAT: Analytic LOC: Supply and demand TOP: Price ceilings | EfficiencyMSC: Interpretive

37. ANS: A PTS: 1 DIF: 3 REF: 14-2NAT: Analytic LOC: Perfect competition TOP: Profit maximizationMSC: Analytical

38. ANS: B PTS: 1 DIF: 3 REF: 15-3NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Analytical

39. ANS: C PTS: 1 DIF: 2 REF: 10-3NAT: Analytic LOC: Markets, market failure, and externalities TOP: Coase theorem MSC: Applicative

40. ANS: B PTS: 1 DIF: 2 REF: 15-4NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Definitional