Principles of Microeconomics Spring2018

Homework 5

Name Pratik Kacha                                  

MULTIPLE CHOICE.   Choose the one alternative that best completes the statement or answers the    question.

1. Conceptually, the efficient level of carbon emissions is the level for which                           
   1. the marginal cost of reducing carbon emissions is minimized.
   2. the marginal benefit of reducing carbon emissions is minimized and the marginal cost of reducing carbon emissions is maximized.
   3. the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions.
   4. 
      the marginal benefit of reducing carbon emissions is maximized.
2. Which of the following is a source of market failure?                                                            
   1. incomplete property rights or inability to enforce property rights
   2. unforeseen circumstances which leads to the bankruptcy of many firms
   3. a lack of government intervention in a market
   4. 
      an  inequitable income distribution
3. Which of the following activities create a negative externality?                                            
   1. cleaning up the sidewalk on your block
   2. graduating from college
   3. keeping a junked car parked on your front lawn
   4. 
      repainting the house you live in to improve its appearance
4. What is a "social cost" of production?                                                                                        
   1. the cost of the environmental damage created by production
   2. the cost of the natural resources used up in production
   3. the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product
   4. 
      the total costs of producing a product, both implicit and explicit costs
5. A positive externality causes                                                                                                     
   1. the marginal social benefit to exceed the marginal private cost of the last unit produced.
   2. the marginal private benefit to exceed the marginal social cost of the last unit produced.
   3. the marginal social benefit to be equal to the marginal private cost of the last unit produced.
   4. 
      the marginal social benefit to be less than the marginal private cost of the last unit produced.

Figure 5-1 shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is  Q2.

6. Refer to Figure 5-1. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, the diagram shows
   1. the effect of an external benefit such as a subsidy granted to consumers of a good.
   2. the effect of a positive externality in the production of a good.
   3. the effect of an external cost imposed on a producer.
   4. the effect of a negative externality in the production of a good.

7. Refer to Figure 5-1. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does S1 represent?
   1. the market supply curve reflecting external cost
   2. the market supply curve reflecting marginal social cost
   3. the market supply curve  reflecting implicit cost
   4. the market supply curve reflecting marginal private cost

8. Refer to Figure 5-1. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does S2 represent?
   1. the market supply curve  reflecting implicit cost
   2. the market supply curve reflecting marginal private cost
   3. the market supply curve reflecting external cost
   4. the market supply curve reflecting marginal social cost

Figure 5-2 shows a market with a negative externality.

9. Refer to Figure 5-2. The efficient output  level is                                                                     9)    B                                                                                                                                                
   1. 
      Qb - Qd.                    B) Qa.                           C) Qd.                           D) Qb.
10. Refer to Figure 5-2. The deadweight loss due to the externality is represented by the area  10)   C                                                                                                                                                
    1. 
       abc.                           B) ade.                          C) abf.                          D) abd.
11. Refer to Figure 5-2. The marginal benefit of the last unit produced is represented by the price                                                                                                                                           11)   B                                                                                                                                                
    1. 
       Pa.                             B) Pb.                            C) Pc.                            D) Pf.
12. Refer to Figure 5-2. The true marginal cost of the last unit produced is represented by the price                                                                                                                                           12)   D                                                                                                                                                
    1. 
       Pa.                             B) Pb.                            C) Pc.                            D) Pf.
13. A market supply curve reflects the                                                                                             13)   D                                                                                                                                                
    1. social costs of producing a good or service.
    2. external benefits of producing a good or service.
    3. external costs of producing a good or service.
    4. 
       private costs of producing a good or service.
14. A positive externality results when                                                                                             14)   C                                                                                                                                                
    1. someone pays for a good or service even though she is not directly affected by the production or consumption of it.
    2. people who are not directly involved in producing or paying for a good or service benefit from it.
    3. people who live in one country benefit from the production of a good or service that occurs  in another country.
    4. 
       economists are sure that a good or service provides benefits to consumers.

15. Medical research that results in a cure for a serious disease produces positive externalities. What is the impact of this positive externality on economic efficiency?
    1. A deadweight loss occurs because at equilibrium the marginal social cost of medical research   is greater than the marginal social benefit.
    2. A deadweight loss occurs because at equilibrium the marginal social cost equals the marginal social benefit.
    3. At equilibrium, less than the economically efficient quantity of medical research is produced.
    4. At equilibrium, more than the economically efficient quantity of medical research is produced.

16. Refer to Figure 5-5. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, diagram shows
    1. the effect of a subsidy granted to producers of a  good.
    2. the effect of a negative externality in the consumption of a  good.
    3. the effect of an excess demand in a market.
    4. the effect of a positive externality in the consumption of a good.

17. In economics, the optimal level of pollution is                                                                           
    1. the level for which the net benefit from reducing the pollution is the  greatest.
    2. the level for which the marginal benefit from reducing the pollution is the  greatest.
    3. zero.
    4. 
       the level for which the total benefit from reducing the pollution is the greatest.

18. Refer to Figure 5-7. The marginal benefit of reducing pollution curve is the same curve as                                                                                                                                               
    1. the positive externality curve.
    2. the external benefit curve.
    3. the demand for pollution reduction curve.
    4. 
       the supply of pollution reduction curve.
19. The Coase theorem states that                                                                                                  
    1. assigning property rights is the only thing the government should do in a market economy.
    2. a free-market equilibrium is the best solution to address externalities.
    3. if transactions costs are low, private bargaining will result in an efficient solution to the problem  of externalities.
    4. government intervention is always needed if externalities are  present.

20. Consider the following characteristics:

1. low transactions costs
2. small levels of pollution
3. high levels of pollution
4. clear assignment of property  rights

Which of the above are assumptions behind the Coase  Theorem?

1. 1. a, b, and d                 B) a, c, and d                C) a and d                     D) a only

21)   C       

21. Governments can increase the consumption of a product that creates positive externalities by                                                                                                                                              
    1. convincing everyone to consume the product.
    2. assigning property rights to the producers of the product.
    3. taxing the production and consumption of the product.
    4. subsidizing the production of the product so that the supply is increased and market price is reduced.

22. Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on   a pollution generating good. All of the following will result from the tax except
    1. a decrease in the equilibrium quantity produced and consumed.
    2. an increase in the equilibrium market price.
    3. a decrease in market supply of the good.
    4. an increase in demand for the good.

Figure 5-12

23. Refer to Figure 5-12. One way to obtain the economically efficient amount of college education is for governments to subsidize college education. What is the size of the per-student subsidy that the government must provide to internalize the external benefits? (Note that the subsidy can be granted to the education institutions or to the students directly or indirectly; for example, through low-interest student loans.)

A) P0 - P1                      B) P1                             C) P2 - P0                     D) P2 - P1