ECON 1100 Global Economics (Section 08) Exam #2 Spring 2010 (Version A) Multiple Choice Questions ( 2. points each):

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1 ECON 1100 Global Economics (Section 08) Exam #2 Spring 2010 (Version A) 1 Multiple Choice Questions ( 2 2 points each): 1. One of the principle functions of money is that it serves as a unit of account. This role could be described by recognizing that money is a. an asset that can be used as a means to hold wealth. b. an asset used as payment when purchasing goods and services. c. used as a basic unit of measuring economic activity. d. something which people count on to help them in acquiring goods and services. 2. The Average Costs of producing a level of output are simply Total Costs divide by level of output. In the market for widgets it costs: $40,000 to produce 1,000 units of output, $70,000 to produce 2,000 units of output, and $96,000 to produce 3,000 units of output. Based upon these figures a. consumption of widgets generates a substantial negative externality. b. this production process would appear to exhibit Economies of Scale. c. production of widgets results in a government failure. d. None of the above answers are correct. 3. In a free market economy, households a. receive income from firms in the form of wages and rents. b. produce goods and services which they sell to firms. c. provide labor and other factors of production to firms. 4. A seller s reservation price a. refers to the maximum dollar amount a buyer is willing to pay for an item. b. refers to the minimum dollar amount a seller is willing to accept in exchange for an item. c. is visually illustrated by the height of the supply curve. 5. In 2009, government spending in the U.S. (combined, at all levels of government) as a percentage of GDP was approximately a %, well below the average over the entire history of our country. b %, which is not the lowest value in the entire history of our country but is the lowest in the past 41 years. c %, 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). d %, higher than in any previous year in the entire history of our country.

2 6. The refers to who bears the burden of a tax in terms of decreased welfare. a. Incidence of a Tax b. Progressivity of a Tax c. Free Rider Problem. d. Tax Evasion Metric For Questions 7 through 9, consider a good for which the Marginal Private Benefits, Private Costs, Social Benefits, and Social Costs from production/consumption are as illustrated below $ Marginal Social Costs Marginal Private Costs (a) (b) (d) (f) (c) (e) (Marginal Private Benefits) = (Marginal Social Benefits) 0 quantity 0 7,400 14,500 22, From this graph, it is clear that a. the good is being provided by a government agency (in order to correct for a market failure which would otherwise result from the seller having too much market power ). b. production/consumption of this good generates a positive externality. c. production/consumption of this good generates a negative externality. 8. In order to maximize Total Social Welfare, units should be traded. a. 22,800 b. 14,500 c. 7,400 d At the free market outcome (that is, without any government intervention) a. there would be a Deadweight-Loss equal to area (f). b. Total Consumers Surplus would be equal to zero. c. 14,500 units would be traded.

3 10. Government Failure may arise because: Once created, government agencies often take on a life of their own. Employees of such agencies often have incentives to expand the scope of their agency in order to increase their own job security. This phenomenon is known as a. Agency Inertia. b. Capture of Regulators. c. Rent Seeking Behavior. d. Collective Action. 11. In general, Deadweight Loss a. will be positive in a market in which more than the efficient quantity is traded, but negative in a market in which less than the efficient quantity is traded. b. provides a measure of inefficiency, defined as the difference between maximum possible Total Social Surplus and realized Total Social Surplus. c. provides a measure of the costs borne by third parties as a result of industrial pollution generated by the production of goods/services. 12. Lead is an important input in the production of Crystal. If the price of Lead were to decrease, then a. the equilibrium price of Crystal would increase. b. Demand for Crystal would increase. c. Supply for Crystal would increase. 13. Suppose a new per unit tax is placed on sellers of fast food French Fries. This tax will Total Consumers Surplus and Total Producer s Surplus. a. not change; decrease. b. decrease; decrease. c. decrease; not change. d. decrease; increase. 14. Incomes may differ across different individuals in a free market society due to a. only factors which are under the direct control of the individual (such as how much education to acquire ). b. some factors which are under the control of the individual (such as how much education to acquire ) and some factors which are beyond the control of the individual (such as their endowment at birth of natural talent and ability ). c. only factors which are beyond the control of the individual (such as their endowment at birth of natural talent and ability ). d. None of the above answers are correct (since in general, income prospects in a free market society are essentially entirely random ).

4 15. Which of the following is a good example of a Pure Public Good? a. Public Transportation (e.g., the subway system). b. National Defense. c. a Whopper from Burger King. d. an Atlanta Thrashers game at Philips Arena. 16. broadly refers to government policies designed to reshape the allocation of wealth, income, and consumption across individuals in society. a. Anti-Trust Policy b. Government Failure c. The Incidence of a Tax d. Redistribution 17. Congress has decided to impose a new per unit tax on gasoline. Consider the following two proposals: Tax A a $1 per unit tax imposed on buyers (i.e., buyers would be legally responsible for writing a check to pay the tax); Tax B a $1 per unit tax on sellers (i.e., sellers would be legally responsible for writing a check to pay the tax). We should expect that a. the magnitude of Deadweight Loss would be exactly the same under Tax A as under Tax B. b. Tax A would generate more tax revenue than would Tax B. c. Total Consumers Surplus will be larger if Tax B is enacted than if Tax A is enacted. For questions 18 and 19, refer to the table below which provides information on buyer s reservation prices for two consumers (Joe and Emery) for different levels of consumption of 40 ounce bottles of Schaefer Beer (America s Oldest Lager Beer). 1 st Bottle 2 nd Bottle 3 rd Bottle 4 th Bottle 5 th Bottle Joe Emery If each bottle of beer cost $6, then a. Emery would not purchase any beer. b. Emery would choose to purchase five bottles of beer. c. Joe would choose to purchase two bottles of beer. d. None of the above answers are correct. 19. If the price of a bottle of beer were to decrease from $4.75 to $3.75, then a. the total value of Emery s Consumer s Surplus would increase by $2.75. b. Joe would choose to purchase more beer. c. the total value of Joe s Consumer s Surplus would not change at all.

5 20. Which of the following could never lead to an increase in the demand for pizzas? a. a decrease in the price of pizzas. b. an increase in consumer income. c. an increase in the price of cheeseburgers. d. a decrease in the price of Coca-Cola. 21. The reintroduction of the gray wolf into the wilderness of the Western United States during the last several decades a. proves that the proposed Coasian Solution to the problem of externalities does not work. b. led to ranchers in the region realizing an external cost as a result of an increase in the number of their livestock being killed by wild animals. c. was done by a government agency and was therefore inefficient. 22. In the Circular Flow Diagram, which of the following items flows from Households to Firms through the Markets for Goods and Services? a. Finished Goods and Services. b. Dollars spent on Finished Goods and Services. c. Inputs used in the production process (e.g., Labor, Land, and Capital). 23. When quantity demanded decreases at every possible price, we know that the demand curve has a. shifted to the left. b. shifted to the right. c. not shifted, but rather has become steeper. d. not shifted, but rather we have moved up along a fixed, unchanged demand curve. 24. A 4 th of July Fireworks display in downtown Atlanta is a. perfectly Rival in Consumption. b. very Non-Rival in Consumption. c. easily Excludable. 25. suggests that: under certain conditions, the behavior of selfinterested decision makers in free markets will lead to outcomes which are good for all individuals in society. a. James Buchanan s description of Pork Barreling. b. Adam Smith s notion of the Invisible Hand. c. Ronald Coase s solution to the problem of externalities. d. Jermey Bentham s notion of Utilitarianism.

6 26. The market failure associated with the Free Rider Problem is a result of a. a problem associated with pollution. b. firms in a market having too much market power. c. benefits from consumption which can be realized even by people who do not pay for an item. d. consumers not having accurate information about their true reservation price for an item (because such information is very costly to acquire). For Questions 27 through 29, consider a monopolist facing Demand and with Marginal Costs and Marginal Revenue as illustrated below. $ Marginal Costs of Production 7.00 a d b e c f Demand 5.00 g 0 0 Marginal 1,700 Revenue 2,900 3, The efficient level of output for this good is units. a. 1,700 b. more than 1,700 but less than 2,900 c. 2,900 d. 3,700 5,700 quantity 28. To maximize profit, this monopolist would a. charge a price of $14.25 and sell 5,700 units of output. b. charge a price of $10.00 and sell 1,700 units of output. c. charge a price of $7.00 and sell 2,900 units of output. d. charge a price of $5.00 and sell 1,700 units of output. 29. When this monopolist chooses the price and quantity which maximizes profit, a. Producer s Surplus (i.e., Monopoly Surplus ) is equal to areas (a)+(b)+(d)+(e)+(g). b. Deadweight-Loss is equal to areas (c)+(f). c. Total Consumers Surplus is equal to zero.

7 30. Graphically, the area below a demand curve but above price illustrates a. Equilibrium Price. b. Deadweight Loss. c. Total Consumers Surplus. d. Total Producers Surplus. 31. If a productive activity generates some pollution, then in order to maximize Total Social Welfare a society would have to a. simply let free markets work, because market forces always direct society to the optimal outcome in all instances. b. completely ban the activity. c. completely ban all pollution in general. d. carefully compare all of the benefits and all of the costs (including, but not limited to, the costs of the pollution) when deciding how much of the activity is best. 32. An entrepreneur a. is someone who purchases a good which generates a substantial negative externality. b. is someone who organizes and manages a business, typically with considerable initiative and exposure to risk. c. is a single seller of a unique good for which there are no close substitutes. d. is the individual who makes the decisions in a centrally planned economy. 33. Rent Seeking Behavior can be described as a. a situation in which a firm has virtually no control over the price of their output (i.e., they simply take the market price as given ). b. the tendency for individuals to try to enjoy the benefits of units of a nonexcludable good purchased by others, while making no contribution to the provision of the good. c. the expenditure of real resources in an attempt to secure a fixed economic surplus, as opposed to actions which generate an economic surplus. d. entry into markets where firms are currently earning large profits, provided that barriers to entry are sufficiently low. 34. A widget is a good that is both non-excludable and non-rival in consumption. Based upon this information, we would expect that if widgets were simply traded in a free market, then at the market equilibrium a. fewer than the efficient number of widgets would be traded. b. more than the efficient number of widgets would be traded. c. a substantial negative externality would be generated. d. there would be a negative Deadweight Loss.

8 35. In order for a free market to provide the efficient quantity of a good, it is necessary that a. production and consumption of the good does not generate any external benefits or external costs. b. it is costly for consumers to find out who is selling the good in question and at what price. c. there are many sellers and many buyers of the good in question. For questions 36 through 38 refer to the graph below, which illustrates Supply and Demand for Apples in price Supply Demand 2009 quantity 0 11,500 20,250 29, In this market there would be at a price of $5.80. a. excess demand b. excess supply c. neither excess demand nor excess supply. d. a violation of the Law of Supply 37. In equilibrium, units would be traded each at a price of. a. 11,500; $2.90. b. 20,250; $4.50. c. 29,375; $3.45. d. 29,375; $ In equilibrium a. both Total Producers Surplus and Total Consumers Surplus are positive. b. Total Producers Surplus is positive, but Total Consumers Surplus is zero. c. Total Consumers Surplus is positive, but Total Producers Surplus is zero. d. None of the above answers are correct.

9 39. When a per unit tax is placed on buyers of a product, the price ultimately paid by buyers, while the price ultimately received by sellers. a. increases; increases. b. increases; decreases. c. increases; remains unchanged. d. remains unchanged; decreases. 40. One of the desirable features of a free market system is that disequilibria are self correcting. This characteristic can be best described as follows: a. the large short term profits for successfully developing a new product which consumers value or successfully developing a less expensive way to produce an existing product serve to direct research efforts toward those activities that are most valued by society. b. for central planning to realize an efficient outcome it would first be necessary to gather and analyze a tremendous amount of information across many markets such gathering of information is not necessary for a free market system to achieve efficiency. c. if market conditions change, market forces will lead to a new equilibrium, without the need for a central authority to redirect resources. d. the best policy for a government to enact in the presence of a positive externality is to completely ban the activity in question, in order to prevent the market from reaching its equilibrium.

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