econ assignments

ECON 201: Microeconomics

Textbook Assignment 4 (Optional, extra credit will be given if you submit the assignment by the due date)

Due Date: February 8, 2016

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. You drive to work each day. The best example of an internal cost is the:

a.	amount of pollution emitted by your car.
b.	congestion created by your car being on the road.
c.	amount the government paid to build the road.
d.	amount you pay to maintain your car.
e.	amount of money you save each day by avoiding the toll roads.

____ 2. For a market to work efficiently:

a.	the external costs must be paid.
b.	all external costs must be eliminated.
c.	all internal costs must be eliminated.
d.	the social costs must be equal to the internal costs.
e.	all pollution must be eliminated.

____ 3. External costs are the result of the actions of:

a.	firms.
b.	consumers.
c.	firms and consumers.
d.	the government.
e.	firms, consumers, and the government.

____ 4. Refer to the accompanying table, where Q represents the quantity produced, internal cost and social cost are given for various quantities, and P represents the price consumers are willing to pay for various quantities.

The external cost is equal to __________ per unit.

a.	$60
b.	$70
c.	$20
d.	$50
e.	$30

Refer to the accompanying figure to answer the questions that follow.

____ 5. To achieve the social optimum, the government could set a tax equal to __________ per unit sold.

a.	$6
b.	$4
c.	$2
d.	$3
e.	$5

____ 6. The figure best illustrates what type of market?

a.	The good produced creates a positive externality.
b.	The good produced creates a negative externality.
c.	The good produced is a club good.
d.	The good produced is a public good.
e.	Firms in this industry have been given a subsidy to encourage more production.

____ 7. The government has identified a situation where the production of a good is creating a negative externality. The government should enact legislation to require firms to internalize the externality:

a.	in all such cases.
b.	if the benefits of doing so outweigh the costs.
c.	as long as it will not increase the price of the good being produced.
d.	as long as it will not create unemployment in this industry.
e.	as long as there are positive health benefits associated with this policy.

____ 8. Refer to the accompanying table, where Q represents the quantity produced, internal cost and external cost are given for various quantities, and P represents the price consumers are willing to pay for various quantities.

The social optimum occurs where price is __________ and quantity is __________.

a.	$4; 2
b.	$8; 4
c.	$10; 3
d.	$10; 5
e.	$12; 6

____ 9. If the government imposes a tax on each aluminum can sold, payable by consumers when they purchase the item, then, in the market for goods sold in aluminum cans, the

a.	supply curve shifts to the left.
b.	supply curve shifts to the right.
c.	demand curve shifts to the left.
d.	demand curve shifts to the right.
e.	supply curve and the demand curve shift to the left.

____ 10. Refer to the accompanying figure. The market for dry-cleaning services is currently in equilibrium at point A, and the government decides to tax the stores that offer dry-cleaning services in order to improve the air quality. The new equilibrium will be at point:

a.	B.
b.	C.
c.	E.
d.	F.
e.	G.

____ 11. The government imposes a tax on the sale of a good whose production is creating a negative externality. The value of the tax is $4 per unit sold. In the new equilibrium, you would expect:

a.	the same amount to be sold and the price to be $4 higher.
b.	the same amount to be sold and the price to increase by less than $4.
c.	less to be sold and the price to increase by $4.
d.	less to be sold and the price to increase by less than $4.
e.	less to be sold and the price to increase by more than $4.

____ 12. Positive externalities exist because:

a.	internal benefits are less than external benefits.
b.	internal benefits are greater than external benefits.
c.	external benefits are greater than social benefits.
d.	internal benefits are greater than social benefits.
e.	internal benefits are less than social benefits.

Consider the accompanying figure to answer the questions that follow.

____ 13. When a positive externality exists, which point best identifies the social optimum?

a.	A
b.	B
c.	C
d.	D
e.	either A or D

____ 14. Refer to the accompanying figure. The market for college degrees is currently in equilibrium at point A, and the government decides to subsidize the cost of a college education by offering grants to students. The new socially optimal equilibrium will be at point:

a.	R.
b.	W.
c.	T.
d.	U.
e.	V.

____ 15. You share a house with two other people. You are a concert pianist and often practice at home. One roommate enjoys listening to you practice, but the other does not. For the roommate who enjoys listening to you play, this is an example of __________; for the other roommate, it is an example of __________.

a.	the tragedy of the commons; the third-party problem
b.	a positive externality; a negative externality
c.	a positive externality; the free-rider problem
d.	the free-rider problem; the tragedy of the commons
e.	a negative externality; the tragedy of the commons

____ 16. Consider a market with a negative externality. The market will tend to __________ the good because the market participants tend to ignore the __________ of their decision.

a.	overproduce; external benefit
b.	under-produce; external benefit
c.	overproduce; external cost
d.	under-produce; external cost
e.	overproduce; internal benefit

____ 17. Refer to the accompanying figure. Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

a.	A
b.	B
c.	A + B
d.	C
e.	A + B + C

____ 18. Your neighbor likes to mow his grass each Saturday at 7 A.M. and the noise invariably wakes you up. This is an example of:

a.	the third-party problem.
b.	the tragedy of the commons.
c.	an internal cost.
d.	the free-rider problem.
e.	a positive externality.

____ 19. When pollution (a negative externality) is created by firms, which of the following is NOT a valid way for the government to restore the social optimum?

a.	require firms to install pollution-abatement equipment
b.	require firms to change production techniques to reduce emissions
c.	levy a tax on the production of the good
d.	require firms to pay for the environmental damage they create
e.	offer a subsidy to firms to reduce their production cost

____ 20. Refer to the accompanying table, where Q represents the quantity produced, internal cost and

external cost are given for various quantities, and P represents the price consumers are willing to pay for various quantities.

The market equilibrium occurs where price is __________ and quantity is __________.

a.	$4; 2
b.	$8; 4
c.	$10; 3
d.	$10; 5
e.	$12; 6

____ 21. Refer to the accompanying table, where Q represents the quantity produced, internal cost and social cost are given for various quantities, and P represents the price consumers are willing to pay for various quantities.

The market equilibrium occurs where price is __________ and quantity is __________.

a.	$70; 200
b.	$50; 200
c.	$60; 300
d.	$80; 300
e.	$60; 100

____ 22. Refer to the accompanying table, where Q represents the quantity produced, internal cost and social cost are given for various quantities, and P represents the price consumers are willing to pay for various quantities.

The social optimum occurs where price is __________ and quantity is __________.

a.	$70; 200
b.	$50; 200
c.	$60; 300
d.	$80; 300
e.	$60; 100

____ 23. If government regulation forces firms in an industry to internalize the externality, then the:

a.	supply curve shifts to the left.
b.	supply curve shifts to the right.
c.	demand curve shifts to the left.
d.	demand curve shifts to the right.
e.	supply curve and the demand curve shift to the left.

____ 24. Your roommate is studying to be a chef and likes to try new recipes. He leaves his delicious creations in the refrigerator for anyone who wants to eat them. The food he leaves is always gone within a day. This is an example of:

a.	the third-party problem.
b.	the tragedy of the commons.
c.	an internal cost.
d.	the free-rider problem.
e.	a positive externality.

____ 25. Refer to the accompanying figure. Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

a.	A
b.	B
c.	A + B
d.	C
e.	A + B + C

Short Answer

26. A city is considering expanding a frequently traveled road from two lanes to four lanes. This road passes through the center of the city. What negative externalities and positive externalities might the expansion create, once it is finished?

27. Explain how the following two activities could create both a negative externality and a positive externality:

1. A bee farm

2. A fireworks display

28. Draw a graph to illustrate the market equilibrium and the social optimum in the case where there is a negative externality. Explain why the social optimum is preferred to the market equilibrium.

29. When a negative externality exists, as in the case of pollution, the government may be able to restore the social optimum using three different solutions. Name them.