ECON 1100 Global Economics Exam #2 Fall 2010 (Version B) Multiple Choice Questions ( 2. points each):

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1 ECON 11 Global Economics Exam #2 Fall 21 (Version B) 1 Multiple Choice Questions ( 2 2 points each): 1. In a free market economy, households A. sell finished goods and services to firms. B. receive income from firms in the form of wages and rents. C. produce most finished goods and services. D. More than one of the above answers is correct. 2. Deadweight Loss generally refers to A. the profits that firms make in a free market economy. B. the burden that firms incur from having to pay for inputs, instead of being given them for free. C. the negative impact of industrial production on our scarce environmental resources. D. the difference between the maximum possible Total Social Surplus and the realized Total Social Surplus. 3. Chris owns a copy of the new CD A Year Without Rain by Selena Gomez & the Scene. His reservation price as a seller of this item is $1. Kerry s reservation price as a buyer of this item is $7. If this unit was traded (i.e., transferred from Chris to Kerry) A. Social Surplus would be decreased by $3. B. Social Surplus would be decreased by $1. C. Social Surplus would be decreased by $17. D. Social Surplus would be increased by $7. 4. Antitrust Policy refers to A. taxation structures which result in a more equal distribution of income. B. a government project which creates a relatively small benefit for citizens of a particular legislative district, while spreading much larger costs over the entire population. C. government intervention to correct problems caused by externalities. D. regulatory and legal action designed to promote freedom of entry into a market and to prohibit the merger or collusion of competitive firms. 5. In a free market, the equilibrium quantity of trade and equilibrium price of a good are determined by A. only the buyers in the market. B. only the sellers in the market. C. the interaction of both self interested buyers and self interested sellers in the marketplace. D. neither buyers nor sellers, but rather by a government bureaucrat.

2 6. Last weekend Brenda won $1,8 at a casino in Biloxi, Mississippi. She decided to use the money to purchase a new TV from Walmart. She was able to use the money to acquire the new TV since money serves as a A. government failure. B. medium of exchange. C. store of value. D. unit of account. 7. Which of the following is a good example of a Pure Public Good? A. Public Transportation (e.g., the subway system). B. three fried fish tacos from Pure Taqueria in Woodstock, GA. C. an Atlanta Thrashers game at Philips Arena. D. National Defense. 8. Someone who organizes and manages a business, typically with considerable initiative and exposure to risk is referred to as. A. a government bureaucrat B. a central planner C. an entrepreneur D. a free rider 9. A firm operating in a Perfectly Competitive Market has No Market Power, which implies that the firm A. would lose all of their customers if they attempted to increase price above the prevailing market price. B. must decrease their price in order to increase the quantity of output sold. C. faces a demand curve for its output that is a vertical line. D. More than one of the above answers is correct. 1. Jacob leaves near Centennial Olympic Park in downtown Atlanta. From the balcony of his apartment, he is able to get a good view of the July 4 th AirTran Airways Fireworks Spectacular. When he decides to view the fireworks display from his apartment, his decision to do so in no way affects the benefits that others derive from viewing the fireworks. This observation suggests that the fireworks display A. is at least somewhat non-rival in consumption. B. is a good that is easily excludable. C. is being supplied by a monopolist, and is therefore being supplied at a level which generates an inefficiency from too much trade. D. None of the above answers are correct. 11. The Incidence of a Tax refers to A. which level of government is imposing the tax. B. who bears the burden of the tax in terms of decreased welfare. C. the amount of revenue that is generated from a tax. D. which individual is legally responsible for writing a check to pay the tax.

3 12. Kevin lives in a country in which military output is not provided by the government, but rather is supplied by profit maximizing firms and purchased by individual consumers in a free market. Kevin chooses to enjoy the benefits of national security which result from military output purchased by others, while purchasing zero units of military output of his own. This example illustrates A. the Free Rider Problem. B. Agency Inertia C. Rent-Seeking Behavior. D. Adam Smith s Invisible Hand. For questions 13 through 15 refer to the graph below, which illustrates Marginal Private Benefits, Marginal Private Costs, Marginal Social Benefits, and Marginal Social Costs in the market for Phosphate Fertilizers. $ a b c d e Marginal Social Costs = (Marginal Private Costs) + (Marginal External Costs) Supply = (Marginal Private Costs) Demand = (Marginal Private Benefits) = (Marginal Social Benefits) 1,32 2,29 3, Based upon this graph, it appears as if this good A. is a pure public good. B. is produced by a natural monopolist. C. generates a positive externality. D. generates a negative externality. quantity 14. Focusing on the 3,49 th unit of output, producing/consuming this unit A. would generate an external cost of $1.2. B. would generate an external cost of $24.5. C. would lead to an increase in Total Social Welfare. D. More than one of the above answers is correct. 15. At the free market level of trade there would be a Deadweight-Loss A. of zero. B. equal to areas (a)+(b). C. equal to area (c)+(d). D. equal to area (e).

4 16. refers to unselfish concern for the welfare of others. A. Utilitarianism B. Altruism C. Socialism D. Adam Smith s Invisible Hand For questions 17 through 2, refer to the graph below. This graph illustrates the supply and demand for hats in 21. price Supply a b c Demand 21 quantity 2,8 4,12 5, If the consumer of the 2,8 th hat were given a hat for free, her resulting Consumer s Surplus would be A. $. B. $5.1. C. $9.4. D. $ In this market there would be at a price of $ A. excess supply B. excess demand C. neither excess demand nor excess supply. D. both excess demand and excess supply. 19. If 3,7 units were traded then there would be a Deadweight-Loss A. greater than areas (a)+(b). B. exactly equal to areas (a)+(b). C. which is positive, but less than areas (a)+(b). D. exactly equal to area (c). 2. Suppose that hats are a normal good. If consumer income were to decrease, then A. the new quantity traded of hats would be greater than 5,795 units. B. the new price of hats would be less than $11.8. C. Deadweight-Loss would be negative at the new equilibrium outcome. D. More than one of the above answers is correct.

5 21. One of the 6 Determinants of Productivity, Income, and Wealth is natural talent and ability, which refers to the recognition that differences in income or wealth across individuals result in part from differences in A. how hard individuals choose to work. B. the characteristics that people are endowed with at birth. C. the skills and experiences that people acquire through education, training, and work experience. D. the amount of money that individuals receive as inheritances during their lifetime. 22. A seller s reservation price A. is visually illustrated by the vertical distance between the demand curve and the supply curve. B. refers to the maximum dollar amount a seller is willing to accept in exchange for an item. C. refers to the minimum dollar amount a seller is willing to accept in exchange for an item. D. More than one of the above answers is correct. 23. Which of the following is NOT a common source of Market Failure? A. Capture of Regulators. B. Market provision of Public Goods. C. Market provision of a good which generates an externality. D. None of the above answers are correct (since each is a common source of Market Failure). 24. Nancy argues that in a wealthy society such as the U.S., all individuals should have free access to basic necessities such as prescription drugs and education. This argument for redistribution would seem to be based upon which of the following general justifications for redistribution? A. Altruism. B. Shared Growth. C. Social Contract. D. Utilitarianism. 25. In 21, government spending in the U.S. (combined, at all levels of government) as a percentage of GDP is approximately A %, which is not the lowest value in the entire history of our country but is the lowest in the past 41 years. B %, which is higher than the percentage in all but three previous years in the entire history of our country (with the exceptions being 1943, 1944, and 1945). C %, which is roughly equal to the average realized value thus far for the 21 st century (of 61.42%). D. 69.1%, which is the highest value ever realized by any country in any year.

6 26. refers to the expenditure of real resources in an attempt to secure a fixed economic surplus, as opposed to actions which create or increase the value of an economic surplus. A. Adam Smith s Invisible Hand. B. Agency Inertia C. The Free Rider Problem D. Rent-Seeking Behavior For Questions 27 through 29, consider a monopolist facing Demand and with Marginal Costs and Marginal Revenue as illustrated below. 5.1 $ Marginal Costs of Production a c f b d g e h i Demand Marginal Revenue quantity 27. If 23 units were traded in this market, then Deadweight-Loss would be equal to A. zero. B. areas (a)+(b). C. areas (e)+(h). D. area (i). 28. To maximize profit, this monopolist should set a price of per unit. A. $37.85 B. $41.35 C. $43.25 D. $ When this monopolist chooses the price and quantity which maximizes profit, Total Consumers Surplus is equal to A. zero. B. areas (a)+(b). C. areas (a)+(b)+(c)+(d)+(e). D. areas (a)+(b)+(c)+(d)+(f)+(g).

7 3. Related to the issue of Pork Barreling, argued that politicians in a democracy often act with an aim of maximizing their probability of re-election. A. Ronald Coase B. Arthur Pigou C. James Buchanan D. Jeremy Bentham For questions 31 through 33, consider a market with Supply and Demand as illustrated below. $ Supply a b 31. Demand 1, 1,5 2,25 quantity 31. Imposing a per unit tax of $2. on sellers in this market would generate tax revenue of A. exactly $2,. B. more than $2, but less than $3,. C. exactly $3,. D. more than $3, but less than $4, In comparison to the free market outcome, imposing a per unit tax of $3.5 on buyers in this market would A. not have any impact on the value of Consumers Surplus. B. decrease Consumers Surplus by more than areas (a)+(b). C. decrease Consumers Surplus by exactly areas (a)+(b). D. decrease Consumers Surplus but by less than areas (a)+(b). 33. Consider the following two proposed taxes: Tax A is a $3 per unit tax imposed on buyers; Tax B is a $2 per unit tax imposed on sellers. Sellers would A. prefer Tax B over Tax A. B. prefer Tax A over Tax B. C. not care whether Tax A or Tax B was enacted (since Producers Surplus would be exactly the same under each of the two proposals). D. None of the above answers are correct (since the above graph does not convey enough information to be able to determine which of these two tax proposals would be preferred by sellers).

8 34. Which of the following demonstrates the Law of Supply? A. A 1% decrease in the price of flour (an input used in the production of donuts) ultimately makes Melissa sell more donuts but at a lower price (compared to the quantity sold and price charged before this change). B. Joan chooses to sell more donuts at a price of $11.4 per dozen than she chooses to sell at a price of $8.8 per dozen (all other factors fixed). C. After Clarissa won the lottery, she decided to stop selling donuts. D. Sabrina chose to sell more donuts today, after she learned some information which caused her to expect the price of donuts to be drastically lower starting tomorrow. 35. Ronald Coase argued that in order to realize an efficient outcome in the presence of an externality, society should A. completely ban the activity which is generating the externality. B. internalize the externality by clearly and completely defining property rights and allowing affected parties to negotiate with each other. C. sit back and let market forces work (since market outcomes are in general efficient). D. redistribute income from wealthy people to poor people, since greater income equality will lead to greater social cohesion. 36. In a free market system, serve as a vital signaling device, directing resources to their most valued use. A. government bureaucrats B. externalities C. taxes D. profits 37. The Average Costs of producing a level of output are simply Total Costs divide by level of output. Consider a firm for which: it costs $5, to produce 2, units of output, and it costs $12, to produce 6, units of output. Based upon these figures A. this production process would appear to exhibit Economies of Scale. B. consumption of this good creates a substantial positive externality. C. consumers are unable to accurately determine to what degree they would benefit from purchasing the output of this firm. D. None of the above answers are correct. 38. broadly refers to government policies designed to reshape the partition of wealth, income, and consumption across the different individual members of society. A. The Incidence of a Tax B. Redistribution C. Anti-Trust Policy D. Free-Riding

9 39. The Circular Flow Diagram A. explains why market provision of a pure public good will be inefficient. B. summarizes the different combinations of output that a society could produce, given their currently available productive resources. C. illustrates how Supply and Demand interact to determine the unique equilibrium price and equilibrium quantity in a market. D. illustrates the interaction between households and firms in a simplified free market economy. 4. During the last several decades, health officials in the United States have argued that eating too much beef might be harmful to humans. As a result, there has been a significant decrease in the amount of beef consumed in the United States. Which of the following best explains this decrease in consumption? A. Congress likely decided to subsidize the production of beef, so that U.S. ranchers could produce beef at essentially lower costs. B. Ranchers (whose primary concern is the health of their customers) decided to produce relatively less beef. C. Individual consumers (concerned about their own health) decreased their demand for beef (resulting in a decrease in both the equilibrium price and equilibrium quantity of beef). D. Government officials mandated that ranchers produce relatively less beef (out of concern for consumer health).

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