Name: Date: D) the level of pollution that minimizes the average total cost of producing the product that generates the pollution.

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1 Name: Date: 1. Given the general agreement that pollution is undesirable and social welfare is increased by reducing pollution, the optimal level of pollution in a society is: A) zero. B) the level that reduces the marginal social costs of pollution to zero. C) the level of pollution at which the marginal social cost of pollution is equal to the marginal social benefit of pollution. D) the level of pollution that minimizes the average total cost of producing the product that generates the pollution. 2. A market economy will produce without any government regulation. A) too little pollution B) too much pollution C) the socially optimal amount of pollution D) the amount of pollution that maximizes total surplus 3. A negative externality: A) is any cost above the economic cost. B) equals the social cost plus the firm's private cost. C) is an uncompensated cost imposed by an individual or firm on others. D) equals the opportunity cost minus the social costs. 4. Oscar owns a meat processing plant whose unpleasant odors waft across the city. Because the production of processed meat provides a negative externality to the community, the government should: A) impose a tax on Oscar's production of processed meat, since the market quantity is less than the socially optimal quantity. B) subsidize Oscar's production of processed meat, since the market quantity is greater than the socially optimal quantity. C) subsidize Oscar's production of processed meat, since the market quantity is less than the socially optimal quantity. D) impose a tax on Oscar's production of processed meat, since the market quantity is greater than the socially optimal quantity. Page 1

2 5. An externality is said to exist when: A) individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account. B) individuals impose costs or benefits on others, and the market provides incentives to take these costs and benefits into account. C) individual actions are affected by external forces like the loss of U.S. jobs because of competition from abroad. D) individual actions are affected by government policies (such as taxes) that are externally imposed on the market. 6. If drivers decide to make phone calls without considering the costs imposed on others, the: A) number of phone calls made while driving will be more than the socially optimal quantity. B) number of phone calls made while driving will be fewer than the socially optimal quantity. C) marginal social cost curve will lie below the marginal cost of production curve. D) marginal social benefit curve will lie below the marginal social cost curve. 7. According to the Coase theorem, a market will when negative externalities are present. A) always reach an efficient solution B) reach an efficient solution if transaction costs are low C) reach an efficient solution only if the government intervenes in the market D) reach an efficient solution only if the negative externalities are offset by positive externalities Page 2

3 Use the following to answer question 8. Figure: Pollution and Efficiency 8. (Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, where sulfur emissions are a result of production, an efficient solution takes place at a price of and a quantity of. A) $5; 40 B) $15; 30 C) $25; 30 D) $15; Suppose an emissions tax is imposed on all dairy farms in Wisconsin. This tax would have the effect of: A) encouraging the dairy farmers to lower prices. B) increasing the level of emissions. C) reducing the supply of milk in Wisconsin. D) increasing the supply of milk in Wisconsin. Page 3

4 Use the following to answer question 10. Figure: The Socially Optimal Quantity of Pollution 10. (Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal Quantity of Pollution, the optimal level of pollution is: A) zero, since no pollution is best for society. B) where the marginal social benefit curve intersects the quantity axis. C) where the marginal social cost curve intersects the quantity axis. D) where the marginal social benefit curve intersects the marginal social cost curve. Page 4

5 Use the following to answer question 11. Figure: Positive Externalities and the Production of Semiconductor Chips 11. (Figure: Positive Externalities and the Production of Semiconductor Chips) Look at the figure Positive Externalities and the Production of Semiconductor Chips. If the marginal external cost of producing a chip is $20, then the socially optimal quantity of chips is and the socially optimal price is. A) 200; $20 B) 300; $35 C) 500; $25 D) 600; $ Which of the following is an example of a nonexcludable good? A) health care B) national defense C) education D) ice cream Page 5

6 13. When Joe watched a television movie, his viewing was in consumption because other people able to view the movie at the same time Joe did. A) nonrival; were B) rival; were C) rival; were not D) nonrival; were not 14. A private good is: A) excludable and rival in consumption. B) nonexcludable and nonrival in consumption. C) excludable and nonrival in consumption. D) nonexcludable and rival in consumption. 15. Which of the following goods is most likely a public good? A) the Internet B) a public park C) a pair of pants D) fire protection provided by the local fire department 16. A common resource is a good or service for which exclusion is: A) possible and which is rival in consumption. B) possible and which is nonrival in consumption. C) not possible and which is rival in consumption. D) not possible and which is nonrival in consumption. 17. The free-rider problem refers to: A) the situation in the Old West when land was largely unfenced and riders had unfettered access to private range land. B) qualifications, or riders, that clients do not request, but which lawyers tend to include in contracts anyway at no extra charge. C) a variation on the phrase There's no such thing as a free lunch, which is replaced by There's no such thing as a free ride. D) a situation in which consumers have no incentive to pay for a nonexcludable good. 18. A Pigouvian tax can lead to the efficient level of production and consumption of: A) a public good. B) a common resource. C) an artificially scarce good. D) no goods, since all taxes create inefficiency. Page 6

7 19. G. Reecy's Hamburger Joint is a fast-food restaurant that specializes in hamburgers. It uses inputs and factors of production in the production process. Which of the following is a factor of production? A) the raw meat used for the hamburgers B) the hamburger buns C) the cook D) the concentrate that is diluted to make the soft drinks 20. Human capital is the improvement in created by. A) physical capital; technology B) labor; education and knowledge C) labor; physical capital D) labor; management 21. The largest component of the factor distribution of income in the United States is: A) interest and rents. B) taxes. C) corporate profits. D) compensation of employees. 22. The demand for factors of production is called a derived demand because it is: A) derived from the demand for the outputs that are produced by the factors of production. B) derived from the available supply of factors, such as land, that can be overexploited. C) not easy to determine and must be derived by a technical (and often complicated) process. D) derived on the basis of questions posed to residents during the census. 23. The amount that an additional unit of a factor adds to a firm's total revenue is called the: A) marginal revenue. B) marginal cost. C) additional revenue product. D) value of the marginal product. 24. Which of the following calculations is correct? A) VMPL = MC P. B) VMPL = MP P. C) MP = VMPL P. D) VMPL / MC = TR. Page 7

8 25. Barry's Brewpub is considering hiring more brew masters (it already employs several). A pint of brew sells for $3. The market wage of a brew master is $150 per day. Barry's Brewpub will hire another brew master only if Barry believes the new brew master will: A) produce the same number of pints per day as the last brew master hired. B) produce 50 or more pints per day. C) raise total production to 50 or more pints per day. D) increase the marginal product by $150 per day. 26. A firm's demand curve for labor is: A) its marginal cost curve. B) its marginal product curve. C) its VMPL curve. D) horizontal if it is in perfect competition. 27. If a firm hires labor such that W < VMPL, then profit: A) is maximized. B) can be increased by hiring less labor. C) can be increased by hiring more labor. D) can be increased by increasing the wage. 28. Labor with a particular skill level and training is used in only two industries: grape cultivation and cranberry cultivation. Which of the following is likely to cause an increase in the demand for this type of labor? A) improved technology that leads to more efficient machines for grape picking B) publication of a report asserting that drinking two glasses of grape or cranberry juice every day improves digestion and heart health C) a report by the USDA that an increasing proportion of imported grapes are contaminated with unacceptable pesticides D) a decrease in the amount of land used for growing cranberries Page 8

9 Use the following to answer question 29. Figure: Equilibrium in the Labor Market 29. (Figure: Equilibrium in the Labor Market) In the figure Equilibrium in the Labor Market, an increase in the productivity of labor, when everything else stays the same, will lead to a(n) in the equilibrium quantity of labor and a(n) in the equilibrium price of labor. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase 30. Which of the following examples of a wage disparity is an example of compensating differentials? A) Tiger Woods gets paid more than a college professor. B) A window washer working in a suburban residential subdivision gets paid less than one who is washing windows on the outside of a skyscraper. C) A nuclear scientist gets paid more than a janitor working in the same building. D) On average, white men get paid more than women of all ethnicities. 31. According to the efficiency wage model, all of the following are correct except that: A) efficiency wages reduce unemployment. B) efficiency wages are a type of market failure. C) efficiency wages are above the equilibrium wage. D) efficiency wages may reduce worker turnover. Page 9

10 32. Gabriella often faces a trade-off between time at the beach and time working as a model. She earns $40 per hour as a model and values going to the beach at the same price. When explaining this to her parents, she says, The marginal utility per hour working is the same as the marginal utility of going to the beach. This is an illustration of which concept? A) indifference curves B) the substitution effect C) the income effect D) optimal time allocation 33. Assume that Stan just received a promotion and raise. In terms of labor supply, the substitution effect of a higher wage will: A) lead him to supply fewer hours of labor. B) lead him to supply more hours of labor. C) lead him to substitute leisure for work. D) lead to a reduction of work time to zero. Page 10

11 Answer Key - practiceproblems C 2. B 3. C 4. D 5. A 6. A 7. B 8. B 9. C 10. D 11. D 12. B 13. A 14. A 15. D 16. C 17. D 18. B 19. C 20. B 21. D 22. A 23. D 24. B 25. B 26. C 27. C 28. B 29. D 30. B 31. A 32. D 33. B Page 11