Chapters 9,10 & 11 Practice

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.

____ 1. If a country allows trade and, for a certain good, the domestic price without trade is higher than the world

price, a. the country will be an exporter of the good. b. the country will be an importer of the good. c. the country will be neither an exporter nor an importer of the good. d. Additional information is needed about demand to determine whether the country will be

an exporter of the good, an importer of the good, or neither.

____ 2. When a country allows trade and becomes an exporter of a good, a. domestic producers gain and domestic consumers lose. b. domestic producers lose and domestic consumers gain. c. domestic producers and domestic consumers both gain. d. domestic producers and domestic consumers both lose.

____ 3. When a nation first begins to trade with other countries and the nation becomes an importer of soybeans, a. this is an indication that the world price of soybeans exceeds the nation’s domestic price of

soybeans in the absence of trade. b. this is an indication that the nation has a comparative advantage in producing soybeans. c. the nation’s producers of soybeans become worse off and the nation’s consumers of

soybeans become better off. d. All of the above are correct.

____ 4. When a country allows trade and becomes an exporter of a good, a. consumer surplus and producer surplus both increase. b. consumer surplus and producer surplus both decrease. c. consumer surplus increases and producer surplus decreases. d. consumer surplus decreases and producer surplus increases.

____ 5. Suppose a country begins to allow international trade in steel. Which of the following outcomes will be observed regardless of whether the country finds itself importing steel or exporting steel? a. The sum of consumer surplus and producer surplus for domestic traders of steel increases. b. The quantity of steel demanded by domestic consumers increases. c. Domestic producers of steel receive a higher price for steel. d. The losses of the losers exceed the gains of the winners.

____ 6. Suppose a country abandons a no-trade policy in favor of a free-trade policy. If, as a result, the domestic price of beans increases to equal the world price of beans, then a. that country becomes an exporter of beans. b. that country has a comparative advantage in producing beans. c. at the world price, the quantity of beans supplied in that country exceeds the quantity of

beans demanded in that country. d. All of the above are correct.

Figure 9-2. The domestic country is China.

____ 7. Refer to Figure 9-2. The increase in total surplus in China when trade becomes allowed is

a. $400. b. $500. c. $600. d. $750.

Scenario 9-1 The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $600 per ton. The U.S. is a price-taker in the tomatoes market.

____ 8. Refer to Scenario 9-1. If trade in tomatoes is allowed, the

a. price paid by American consumers of tomatoes is unchanged relative to the no-trade situation.

b. total well-being of American producers of tomatoes is diminished relative to the no-trade situation.

c. total well-being of American consumers of tomatoes is enhanced relative to the no-trade situation.

d. total well-being of the United States is enhanced relative to the no-trade situation.

Figure 9-4

____ 9. Refer to Figure 9-4. With trade, this country

a. exports 20 wagons. b. exports 50 wagons. c. imports 30 wagons. d. imports 50 wagons.

____ 10. Refer to Figure 9-4. Without trade, total surplus amounts to a. $122.50. b. $245. c. $367.50. d. $612.50.

____ 11. Refer to Figure 9-4. With trade, total surplus is a. $245. b. $367.50. c. $607.50. d. $687.50.

____ 12. Refer to Figure 9-4. The increase in total surplus resulting from trade is a. $60, since producer surplus increases by $180 and consumer surplus falls by $240. b. $60, since consumer surplus increases by $180 and producer surplus falls by $240. c. $75, since consumer surplus increases by $240 and producer surplus falls by $165. d. $75, since consumer surplus increases by $300 and producer surplus falls by $225.

____ 13. Refer to Figure 9-4. Bearing in mind that this country is “small,” which of the following events conceivably could cause the country to switch from being an importer of wagons to an exporter of wagons? a. Incomes of domestic citizens increase, and wagons are a normal good. b. Within this country, the price of a substitute for wagons decreases. c. Within this country, the price of a complement to wagons decreases. d. Wages increase for domestic workers who produce wagons.

____ 14. Refer to Figure 9-4. Bearing in mind that this country is “small,” what would happen if there were a decrease in the price of wagon wheels within this country, given that wagons and wagon wheels are complements? a. The quantity of wagons that this country imports would increase. b. The quantity of wagons that this country imports would decrease, but the country would

still be an importer of wagons. c. This country would switch from being an importer of wagons to an exporter of wagons.

d. The domestic price without trade would move closer to the world price.

Figure 9-6. The figure applies to the nation of Wales and the good is cheese.

____ 15. Refer to Figure 9-6. The equilibrium price and the equilibrium quantity of cheese in Wales before trade are

a. P1 and Q2. b. P1 and Q1. c. P0 and Q0. d. P0 and Q1.

Figure 9-8

____ 16. Refer to Figure 9-8. Total surplus in this market before trade is

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

____ 17. Refer to Figure 9-8. The change in total surplus in this market because of trade is a. D, and this area represents a loss of total surplus because of trade. b. D, and this area represents a gain in total surplus because of trade. c. B + D, and this area represents a loss of total surplus because of trade. d. B + D, and this area represents a gain in total surplus because of trade.

Figure 9-10

____ 18. Refer to Figure 9-10. Consumer surplus in this market before trade is

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

Figure 9-11

Domestic Supply

Domestic Demand

World Price

200 400 600 800 1000 1200 1400 Quantity

2468

10121416182022242628

Price

____ 19. Refer to Figure 9-11. Producer surplus after trade is a. $4,800. b. $5,600. c. $6,400. d. $7,000.

Figure 9-13. On the diagram below, Q represents the quantity of computers and P represents the price of computers.

____ 20. Refer to Figure 9-13. The country for which the figure is drawn

a. has a comparative advantage relative to other countries in the production of computers and it will export computers.

b. has a comparative advantage relative to other countries in the production of computers and it will import computers.

c. has a comparative disadvantage relative to other countries in the production of computers and it will export computers.

d. has a comparative disadvantage relative to other countries in the production of computers and it will import computers.

____ 21. If the demand curve and the supply curve for a good are straight lines, then the deadweight loss that results from a tariff is represented on the supply-and-demand graph by a. the area of one triangle. b. the area of one rectangle. c. the combined areas of two different triangles. d. the combined areas of two different rectangles.

____ 22. Suppose Mexico imposes a tariff on lumber. For the tariff to have any effect, it must be the case that a. Mexico is an exporter of lumber. b. the domestic quantity supplied exceeds the domestic quantity demanded at the world price

without the tariff. c. the world price without the tariff is less than the price of lumber without trade. d. the world price without the tariff is greater than the price of lumber without trade.

____ 23. Turkey is an importer of goose-down pillows. The world price of these pillows is $50. Turkey imposes a $7 tariff on pillows. Turkey is a price-taker in the pillow market. As a result of the tariff, the price of goose-down pillows in Turkey

a. remains at $50 and the quantity of goose-down pillows purchased in Turkey decreases. b. increases to $57 and the quantity of goose-down pillows purchased in Turkey decreases. c. increases to a new price between $50 and $57 and the quantity of goose-down pillows

purchased in Turkey decreases. d. increases to a new price above $57 and the quantity of goose-down pillows purchased in

Turkey remains the same.

Figure 9-14

____ 24. Refer to Figure 9-14. The amount of government revenue created by the tariff is

a. B. b. E. c. D + F. d. B + D + E + F.

____ 25. A quota is a. a tax placed on imports. b. a limit on the quantity of imports. c. a tax on exports to other countries. d. an excess of exports over imports.

____ 26. A major difference between tariffs and import quotas is that a. tariffs create deadweight losses, but import quotas do not. b. tariffs help domestic consumers, and import quotas help domestic producers. c. tariffs raise revenue for the government, but import quotas create surplus for those who get

the licenses to import. d. All of the above are correct.

____ 27. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that producer surplus in Aquilonia is now a. higher in the steel market, lower in the incense market, and unchanged in the rug market. b. higher in the incense and steel markets, and unchanged in the rug market. c. lower in the incense and rug markets, and higher in the steel market. d. lower in the incense and steel markets, and the same in the rug market.

____ 28. Workers displaced by trade eventually find jobs in

a. another country. b. the government sector. c. the industries in which the country has a comparative advantage. d. a different company in the same industry.

____ 29. Which of the following is not an advantage of a multilateral approach to free trade over a unilateral approach? a. A multilateral approach can reduce trade restrictions abroad as well as at home. b. A multilateral approach has the potential to result in freer trade. c. A multilateral approach requires the agreement of two or more nations. d. A multilateral approach may have political advantages.

____ 30. Opponents of free trade often want the United States to prohibit the import of goods made in overseas factories that pay wages below the U.S. minimum wage. Prohibiting such goods is likely to a. cause these factories to pay the U.S. minimum wage. b. increase the rate of technological advance in poor countries so that they can afford to pay

higher wages. c. increase poverty in poor countries and benefit U.S. firms which compete with these

imports. d. harm U.S. firms which compete with these imports.

____ 31. One advantage market economies have over other types of economies is that market economies a. provide an equal distribution of goods and services to consumers. b. establish government economic control. c. solve the problem of scarcity. d. are more efficient.

____ 32. An externality exists whenever a. the economy can benefit from government intervention. b. markets are not able to reach equilibrium. c. a firm sells its product in a foreign market. d. a person engages in an activity that influences the well-being of a bystander and yet

neither pays nor receives payment for that effect.

____ 33. When externalities are present in a market, the well-being of market participants a. and market bystanders are both directly affected. b. and market bystanders are both indirectly affected. c. is directly affected, and market bystanders are indirectly affected. d. is indirectly affected, and market bystanders are directly affected.

____ 34. Which of the following statements about a well-maintained yard best conveys the general nature of the externality? a. A well-maintained yard conveys a positive externality because it increases the home's

market value. b. A well-maintained yard conveys a negative externality because it increases the property

tax liability of the owner. c. A well-maintained yard conveys a positive externality because it increases the value of

adjacent properties in the neighborhood. d. A well-maintained yard cannot provide any type of externality.

____ 35. At any given quantity, the willingness to pay in the market for gasoline is reflected in the a. height of the demand curve at that quantity. b. height of the supply curve at that quantity. c. value to the producer of the last unit of gasoline sold. d. total quantity of gasoline exchanged in the market.

____ 36. The supply curve for a product reflects the a. willingness to pay of the marginal buyer.

b. quantity buyers will ultimately purchase of the product. c. cost to sellers of producing the product. d. seller's profit from producing the product.

____ 37. Without government intervention, the market equilibrium for oranges will a. maximize the sum of producer and consumer surplus in the market. b. be both efficient and equitable. c. be equitable but not efficient. d. be neither efficient nor equitable.

Figure 10-1

____ 38. Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

a. $1.90 and 38 units, respectively. b. $1.80 and 35 units, respectively. c. $1.60 and 42 units, respectively. d. $1.35 and 58 units, respectively.

____ 39. Refer to Figure 10-1. This graph represents the tobacco industry. If the government uses a pollution tax, how much tax revenue will the government receive? a. $7.00 b. $10.50 c. $63.00 d. $67.20

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods. Figure 10-3

____ 40. Refer to Figure 10-3. What price and quantity combination best represents the optimum price and number of

concerts that should be organized? a. P1, Q1 b. P2, Q0 c. P2, Q1 d. The optimum quantity is zero concerts as long as residents in surrounding neighborhoods

are adversely affected by noise and congestion.

____ 41. Negative externalities occur when one person's actions a. cause another person to lose money in a stock market transaction. b. cause his or her employer to lose business. c. reveal his or her preference for foreign-produced goods. d. adversely affect the well-being of a bystander who is not party to the action.

____ 42. A negative externality a. is an adverse impact on a bystander. b. causes the product in a market to be under-produced. c. is an adverse impact on market participants. d. is present in markets where the good or service is undesirable for society.

____ 43. Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality? a. The groundwater pollution reduces the cost of large-scale pork production. b. The economic impact of a large-scale pork production facility is localized in a small

geographic area. c. The pollution has the potential for creating a health risk for water users in the region

surrounding the pork production facility. d. Consumers will not reap the benefits of lower production cost from large-scale pork

production.

____ 44. Markets are often inefficient when negative externalities are present because a. private costs exceed social costs at the private market solution. b. externalities cannot be corrected without government regulation. c. social costs exceed private costs at the private market solution. d. production externalities lead to consumption externalities.

____ 45. A fertilizer plant emits a very foul odor during the production process. If the government forces the plant to internalize the negative externality, then the

a. supply curve for fertilizer would shift down. b. supply curve for fertilizer would shift up. c. demand curve for fertilizer would shift down. d. demand curve for fertilizer would shift up.

Figure 10-6

____ 46. Refer to Figure 10-6. Which quantity represents the social optimum for this market?

a. Q1. b. Q2. c. Q3. d. Q4.

____ 47. Suppose that elementary education creates a positive externality. If the government does not subsidize education, then a. the equilibrium quantity of education will be equal the socially optimal quantity of

education. b. the equilibrium quantity of education will be greater than the socially optimal quantity of

education. c. the equilibrium quantity of education will be less than the socially optimal quantity of

education. d. There is not enough information to answer the question.

____ 48. University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

____ 49. Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct? a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of

MBAs. c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of

MBAs. d. There is not enough information to answer the question.

____ 50. Reaching an efficient bargain is difficult when the a. externality is large. b. number of interested parties is large. c. externality is negative. d. government becomes involved.

____ 51. Nancy loves to landscape her yard, but her neighbor Lee places a low value on his landscaping. When Lee's grass is neglected and gets long, Nancy will mow it for Lee. This is an example of a. a situation in which the Coase theorem fails to explain the lawn mowing arrangement. b. an improper allocation of resources. c. a private solution to a negative externality problem. d. an exploitation of a common resource.

____ 52. Why can't private individuals always internalize an externality without the help of government? a. Legal restrictions prevent side payments between individuals. b. Transactions costs may be too high. c. Side payments between individuals are inefficient. d. Side payments between individuals violate equity standards.

____ 53. Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct? a. If Dick's benefit exceeds Jane's cost, government intervention is necessary. b. Dick will pay to keep his dog if his benefit exceeds Jane's cost. c. If Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog. d. If Jane has the legal right to peace and quiet, no further transactions will be mutually

beneficial.

____ 54. Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to a. stop her messy habits or else move out. b. pay you at least $100 but less than $200 to live with the clutter. c. continue to be messy and force you to move out. d. demand payment of at least $100 but no more than $200 to clean up after herself.

____ 55. When the government chooses a policy that aligns private incentives with social efficiency to solve an externality problem, it a. provides incentives to private decisionmakers to induce them to solve the externality

problem on their own. b. typically uses command-and-control techniques. c. uses taxes more often than subsidies. d. uses subsidies more often than taxes.

____ 56. Which of the following statements is correct? a. Because a clean environment is a public good, a feasible goal is to eliminate all pollution,

regardless of the cost. b. Rich countries usually have cleaner environments than poor countries because a clean

environment is like other normal goods in that it has a positive income elasticity. c. Clean water and clean air are priceless goods. d. All of the above are correct.

____ 57. When the government uses a command-and-control policy to solve an externality, it a. is usually the most effective policy option available. b. creates policies that directly regulate behavior. c. usually involves taxing the consumption of a commodity. d. typically refers to the Coase theorem to structure the policy.

____ 58. Which of the following statements is correct? a. Gasoline taxes are an example of an EPA regulation. b. Gasoline taxes are higher in many European countries than in the United States. c. Gasoline taxes contribute to global warming. d. Gasoline taxes are an example of a command-and-control policy.

____ 59. Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes? a. Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and

alcohol. b. Because corrective taxes correct for market externalities, they take into consideration the

well-being of bystanders. c. Corrective taxes provide incentives for the conservation of natural resources. d. Corrective taxes do not affect deadweight loss.

____ 60. In Singapore, littering fines are strictly enforced. This is an example of a policy that a. relies on moral codes to reduce the pollution externality. b. relies on the Coase Theorem. c. discriminates against foreigners. d. relies on incentives to reduce the pollution externality.

____ 61. Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then a. the equilibrium quantity of education will equal the socially optimal quantity of education. b. the equilibrium quantity of education will be greater than the socially optimal quantity of

education. c. the equilibrium quantity of education will be less than the socially optimal quantity of

education. d. There is not enough information to answer the question.

____ 62. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

Figure 10-7

____ 63. Refer to Figure 10-7. Which graph illustrates a regulation?

a. the left graph b. the right graph c. both graphs d. neither graph

____ 64. Refer to Figure 10-7. Which graph illustrates a corrective tax? a. the left graph b. the right graph c. both graphs d. neither graph

____ 65. Refer to Figure 10-7. Which of the following is not necessary in order for the corrective tax and pollution permit to have equivalent effects? a. PB must be equivalent to the corrective tax. b. QA must be equivalent to the amount of pollution allowed to the pollution permit holders. c. The equilibrium price and quantity of pollution must be the same in both graphs. d. The amount of pollution emitted by each firm must be the same.

____ 66. What is the difference between command-and-control policies and market-based policies toward externalities? a. Command-and-control policies provide incentives for private decisionmakers to solve the

problems on their own, whereas market-based policies regulate behavior directly. b. Command-and-control policies rely on taxes, whereas market-based policies rely on

quotas. c. Command-and-control policies regulate behavior directly, whereas market-based policies

provide incentives for private decisionmakers to change their behavior. d. Command-and-control policies are efficient, whereas market-based policies are inefficient.

____ 67. Some goods can be either common resources or public goods depending on a. whether the good is rival in consumption. b. whether the good is excludable. c. the marginal cost of the good. d. None of the above is correct.

____ 68. Which of the following statements is not correct? a. Some goods that are often thought of as public goods may be private goods in certain

circumstances. For example, a lighthouse that protects a privately owned port may be a private good.

b. Some goods that are often though of a private goods may be public goods in certain circumstances. For example, a candy bar could be a public good.

c. Antipoverty programs can be an example of a public good because everyone benefits from living in a society with less poverty.

d. The government must provide national defense because it is impossible to exclude people from its benefit, and the consumption of national defense is nonrival in consumption.

____ 69. Uncongested, nontoll roads are a good example of a a. public good. b. private good. c. common resource. d. Pigovian good.

____ 70. When one person uses a common resource, which of the following does not occur? a. An externality will occur. b. Other people are worse off.

c. It is difficult to charge the person for the use of the resource. d. No one else will be able to use the resource.

____ 71. Natural monopolies are both a. excludable and nonrival in consumption. b. nonexcludable and rival in consumption. c. excludable and rival in consumption. d. nonexcludable and nonrival in consumption.

____ 72. Knowledge is an example of a a. public good. b. private good. c. common resource. d. natural monopoly good.

____ 73. Advocates of antipoverty programs claim that fighting poverty a. is best accomplished by charities. b. is a public good. c. is more efficiently accomplished by the market. d. should not be attempted with tax dollars.

____ 74. Which of the following is an example of a public good? a. a candy bar b. a painting by Monet c. a beautiful sunset d. a crowded beach

____ 75. To achieve the optimal provision of public goods, the a. market should be allowed to arrive at an equilibrium without government intervention. b. government must limit the provision of the goods. c. government must tax producers of the goods. d. government must either provide the goods or subsidize their production.

____ 76. Private companies will invest in medical research if a. they will produce general knowledge. b. they will produce a specific product for which they may receive a patent. c. there is no government intervention in the market for medical products. d. others will benefit from their discoveries.

____ 77. If everyone benefits from helping the poor, a. government intervention cannot improve social well-being. b. eliminating taxes aimed at redistributing income will make rich people better off. c. taxing the wealthy to raise living standards of the poor can potentially make everyone

better off. d. private markets can adequately provide charity programs to help the poor, despite

free-rider problems.

____ 78. Highway engineers have proposed improving a dangerous stretch of highway at a cost of $2 million. They expect that it will reduce the risk of someone dying in an accident over the life of the highway from 22.1 percent to 5.7 percent. The project would be worth doing as long as a human life is worth at least a. $114,000. b. $328,000. c. $442,000. d. $10 million.

____ 79. A lighthouse might be considered a private good if a. there is a second lighthouse nearby, thus preventing a monopoly. b. the owner of the lighthouse is able to exclude beneficiaries from receiving the benefits of

the lighthouse. c. ships are able to enjoy the benefits of the lighthouse without paying for the benefit. d. a nearby port authority is able to avoid paying any fees to the lighthouse owner.

Table 11-2 There are no lobstering restrictions on Point Judith Sound, RI. A lobsterman on Point Judith Sound can catch 100 lobsters per day, provided he has the sound to himself. Two lobstermen can catch 95 lobsters apiece per day, and three can catch 90 apiece per day. Other numbers are given by the table: Number of Lobstermen

Lobsters per Day per Lobstermen

Total Number of Lobsters Caught per Day

Marginal Number of Lobsters Caught per Day: This is a Marginal Benefit Calculation.

0 0 1 100 2 95 3 90 4 85 5 75 6 65 7 55 8 40 9 25 10 5 The opportunity cost of a day on Point Judith Sound is 25 lobsters per lobsterman. That is, the alternative activity is as valuable as 25 lobsters.

____ 80. Refer to Table 11-2. How many lobsters will be caught per day on Point Judith sound?

a. 50 lobsters b. 100 lobsters c. 225 lobsters d. 375 lobsters

____ 81. Refer to Table 11-2. In terms of lobsters, what is the total cost of lobstering per day? a. 25 lobsters b. 125 lobsters c. 225 lobsters d. 250 lobsters

____ 82. Simply asking people how much they value a highway is not a reliable way of measuring the benefits and costs because a. those who stand to gain have an incentive to tell the truth. b. those who stand to lose have an incentive to exaggerate their true costs. c. answers to the survey questions will always be downwardly biased. d. not everyone asked will be using the highway.

____ 83. Cost-benefit analysis is important to determine the role of government in our economy because a. the government should provide all goods for which the benefits exceed the costs. b. cost-benefit analysis identifies the possible gains to society from government provision of

a particular good. c. markets for private goods cannot effectively assign costs and benefits.

d. cost-benefit analysis is the best tool to identify market failures.

____ 84. A town engineer comes to the city council with a proposal to install a traffic light at a certain intersection that currently has a stop sign. The benefit of the traffic light is increased safety because the light will reduce the incidence of fatal traffic accidents by 50 percent per year. Which of the following statements is correct? a. The city council should vote to install the traffic light because the benefits will outweigh

the costs. b. The city council should carefully evaluate the benefits of reduced fatalities against only

the explicit costs of the light. c. The city council should carefully evaluate the benefits of reduced fatalities against the

costs of the light and of the extra time that drivers will spend waiting for a green light. d. The costs will invariably outweigh the benefits.

____ 85. An overcrowded beach is an example of a. a positive externality. b. a Tragedy of the Commons. c. an environmentally inefficient allocation of resources. d. an economically unfair allocation of resources.

____ 86. A Maine legislator wanted to create a deposit on cigarettes butts. If implemented, people would have the incentive to (1) not toss cigarette butts onto public streets and sidewalks, and (2) pick butts up to redeem them for the cash. The degradation of the environment from littered cigarette butts is a a. private goods problem. b. Nash equilibrium. c. Tragedy of the Commons. d. cost-benefit equilibrium.

____ 87. The overuse of a common resource relative to its economically efficient use is called a. monopolistic competition. b. the Tragedy of the Commons. c. common resource abuse. d. communism.

____ 88. The U.S. government protects fish, a common resource, by a. subsidizing the fishing industry. b. heavily taxing competing industries. c. selling fishing licenses and regulating fish lengths. d. None of the above is correct.

____ 89. Using a toll to reduce traffic when congestion is greatest is an example of a a. regulation solution. b. command-and-control policy. c. corrective tax. d. Coase theorem solution.

____ 90. Which of the following is not an advantage of road tolls as a way to reduce traffic? a. They charge people based on consumption. b. They can help bring usage closer to its optimal level. c. Rates can differ according to the time of day. d. The administrative costs of collecting the tolls are almost zero, especially for local roads.

____ 91. Elephant populations in some African countries have started to rise because a. poachers and environmentalists are working together to save the elephants. b. new laws make killing elephants and selling their ivory illegal. c. some elephants have been made a private good, and people are allowed to kill elephants

on their own property. d. high ivory taxes make it hard to earn a decent return on elephant tusks.

____ 92. Very few entrepreneurs operate their own nature parks in the U.S. because a. urban sprawl is encroaching on rural areas. b. government-sponsored national parks set entrance fees below costs. c. restrictive laws prohibit private citizens from owning parks. d. private citizens demand fewer parks each year.

____ 93. Which of the following statements best describes the cause of "overrun and overtrampled" national parks? a. Park administrators do not use the best science available to manage park resources. b. National parks are treated as free goods by their visitors. c. National parks do not charge entrance fees. d. The price of entrance to national parks is higher than other forms of recreation.

____ 94. The commercial value of ivory is a threat to the elephant, but the commercial value of beef is a guardian of the cow. This is because a. the cow is raised in developed countries, while the elephant lives primarily in

less-developed countries. b. cows are private goods, while elephants tend to roam freely without owners. c. cows and elephants are public goods, but ivory is nonrival. d. ivory is nonrival and nonexclusive, but beef is rival and exclusive.

____ 95. Governments can grant private property rights over resources that were previously viewed as public, such as fish or elephants. Why would governments want to do so? a. to prevent overuse b. to decrease taxes c. to fight poverty d. to increase consumption

Short Answer

96. Use the graph to answer the following questions about CDs.

a. What is the equilibrium price of CDs before trade? b. What is the equilibrium quantity of CDs before trade? c. What is the price of CDs after trade is allowed? d. What is the quantity of CDs exported after trade is allowed?

e. What is the amount of consumer surplus before trade? f. What is the amount of consumer surplus after trade? g. What is the amount of producer surplus before trade? h. What is the amount of producer surplus after trade? i. What is the amount of total surplus before trade? j. What is the amount of total surplus after trade? k. What is the change in total surplus because of trade?

97. Using the graph below, answer the following questions about hammers.

a. What is the equilibrium price of hammers before trade? b. What is the equilibrium quantity of hammers before trade? c. What is the price of hammers after trade is allowed? d. What is the quantity of hammers imported after trade is allowed? e. What is the amount of consumer surplus before trade? f. What is the amount of consumer surplus after trade? g. What is the amount of producer surplus before trade? h. What is the amount of producer surplus after trade? i. What is the amount of total surplus before trade? j. What is the amount of total surplus after trade? k. What is the change in total surplus because of trade?

98. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this information.

a. What is the domestic price and quantity demanded of hammers after the tariff is

imposed? b. What is the quantity of hammers imported before the tariff? c. What is the quantity of hammers imported after the tariff? d. What would be the amount of consumer surplus before the tariff? e. What would be the amount of consumer surplus after the tariff? f. What would be the amount of producer surplus before the tariff? g. What would be the amount of producer surplus after the tariff? h. What would be the amount of government revenue because of the tariff? i. What would be the total amount of deadweight loss due to the tariff?

99. How does an import quota differ from an equivalent tariff?

100. Characterize the two different approaches a nation can take to achieve free trade. Does one approach have an advantage over the other?

101. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most economists, do any of these arguments really justify trade restrictions? Explain.

102. Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

103. Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

104. To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increases the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality, and how might the solution be reached?

105. The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

106. Why are efficiency taxes preferred to regulatory policies as methods remedy externalities?

107. Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent?

108. Place each of the following in the correct location in the table.

Rival? Yes No

Excludable? Yes Private Goods Natural Monopolies No Common Resources Public Goods

a. Congested toll roads b. Knowledge c. Fish in the ocean d. National defense e. Congested nontoll roads f. Cable TV g. The environment h. Fire protection i. Ice-cream cones j. Uncongested toll roads k. Clothing l. Uncongested nontoll roads

109. The creation of knowledge is a public good. Because knowledge is a public good, profit-seeking firms tend to free-ride on the knowledge created by others and, as a result, devote too few resources to the creation of knowledge. How does the U.S. government correct for this apparent market failure?

110. Some advocates of antipoverty programs claim that fighting poverty is a public good. Describe why government intervention may be necessary to reduce poverty.

111. The government often intervenes when private markets fail to provide an optimal level of certain goods and services. For example, the government imposes an excise tax on gasoline to account for the negative externality that drivers impose on one another. Why might the private market not reach the socially optimal level of traffic without the help of government?

112. Why do wild salmon populations face the threat of extinction while goldfish populations are in no such danger?

Chapters 9,10 & 11 Practice Answer Section

MULTIPLE CHOICE

1. ANS: B DIF: 2 REF: 9-1 TOP: Prices, Imports

MSC: Interpretive

2. ANS: A DIF: 2 REF: 9-2 TOP: Exports, Gains from trade MSC: Interpretive

3. ANS: C DIF: 3 REF: 9-2 TOP: Imports, Comparative advantage, Economic welfare MSC: Applicative

4. ANS: D DIF: 2 REF: 9-2 TOP: Exports, Consumer surplus, Producer surplus MSC: Interpretive

5. ANS: A DIF: 2 REF: 9-2 TOP: Trade, Economic Welfare MSC: Applicative

6. ANS: D DIF: 2 REF: 9-2 TOP: Exports, Comparative advantage MSC: Applicative

7. ANS: B DIF: 2 REF: 9-2 TOP: Trade, Total surplus MSC: Applicative

8. ANS: D DIF: 2 REF: 9-2 TOP: Trade, Total surplus MSC: Applicative

9. ANS: D DIF: 2 REF: 9-2 TOP: Imports MSC: Applicative

10. ANS: D DIF: 2 REF: 9-2 TOP: Total surplus MSC: Applicative

11. ANS: D DIF: 2 REF: 9-2 TOP: Trade, Total surplus MSC: Applicative

12. ANS: C DIF: 3 REF: 9-2 TOP: Trade, Total surplus MSC: Applicative

13. ANS: B DIF: 3 REF: 9-2 TOP: Imports, Exports MSC: Analytical

14. ANS: A DIF: 3 REF: 9-2 TOP: Imports, Exports MSC: Analytical

15. ANS: C DIF: 1 REF: 9-2 TOP: Equilibrium price, Equilibrium quantity MSC: Interpretive

16. ANS: B DIF: 2 REF: 9-2 TOP: Total surplus MSC: Applicative

17. ANS: B DIF: 2 REF: 9-2 TOP: Trade, Total surplus MSC: Applicative

18. ANS: A DIF: 2 REF: 9-2 TOP: Consumer surplus MSC: Applicative

19. ANS: C DIF: 2 REF: 9-2 TOP: Trade, Producer surplus MSC: Applicative

20. ANS: A DIF: 2 REF: 9-2 TOP: Comparative advantage, Exports MSC: Applicative

21. ANS: C DIF: 2 REF: 9-2 TOP: Tariffs, Deadweight losses MSC: Interpretive

22. ANS: C DIF: 2 REF: 9-2 TOP: Tariffs

MSC: Interpretive

23. ANS: B DIF: 3 REF: 9-2 TOP: Tariffs, Equilibrium MSC: Applicative

24. ANS: B DIF: 2 REF: 9-2 TOP: Tariffs, Government MSC: Applicative

25. ANS: B DIF: 1 REF: 9-2 TOP: Import quotas MSC: Definitional

26. ANS: C DIF: 2 REF: 9-2 TOP: Tariffs, Import quotas MSC: Interpretive

27. ANS: A DIF: 3 REF: 9-2 TOP: Trade, Economic welfare MSC: Applicative

28. ANS: C DIF: 1 REF: 9-3 TOP: Trade, Employment MSC: Interpretive

29. ANS: C DIF: 2 REF: 9-3 TOP: Trade policy MSC: Interpretive

30. ANS: C DIF: 2 REF: 9-3 TOP: Trade policy MSC: Interpretive

31. ANS: D DIF: 1 REF: 10-0 TOP: Externalities MSC: Applicative

32. ANS: D DIF: 2 REF: 10-0 TOP: Externalities MSC: Definitional

33. ANS: C DIF: 2 REF: 10-0 TOP: Externalities MSC: Analytical

34. ANS: C DIF: 2 REF: 10-0 TOP: Externalities MSC: Applicative

35. ANS: A DIF: 2 REF: 10-1 TOP: Externalities MSC: Applicative

36. ANS: C DIF: 2 REF: 10-1 TOP: Externalities MSC: Applicative

37. ANS: A DIF: 2 REF: 10-1 TOP: Externalities MSC: Applicative

38. ANS: B DIF: 2 REF: 10-1 TOP: Externalities MSC: Applicative

39. ANS: B DIF: 3 REF: 10-3 TOP: Corrective taxes MSC: Analytical

40. ANS: B DIF: 2 REF: 10-1 TOP: Negative externalities MSC: Analytical

41. ANS: D DIF: 1 REF: 10-1 TOP: Negative externalities MSC: Definitional

42. ANS: A DIF: 1 REF: 10-1 TOP: Negative externalities MSC: Definitional

43. ANS: C DIF: 2 REF: 10-1 TOP: Negative externalities MSC: Analytical

44. ANS: C DIF: 2 REF: 10-1 TOP: Negative externalities MSC: Analytical

45. ANS: B DIF: 3 REF: 10-1 TOP: Negative externalities MSC: Analytical

46. ANS: C DIF: 2 REF: 10-1 TOP: Positive externalities

MSC: Analytical

47. ANS: C DIF: 2 REF: 10-1 TOP: Positive externalities MSC: Analytical

48. ANS: C DIF: 2 REF: 10-1 TOP: Positive externalities MSC: Analytical

49. ANS: A DIF: 3 REF: 10-1, 10-3 TOP: Externalities MSC: Analytical

50. ANS: B DIF: 2 REF: 10-2 TOP: Coase theorem MSC: Applicative

51. ANS: C DIF: 2 REF: 10-2 TOP: Coase theorem MSC: Applicative

52. ANS: B DIF: 2 REF: 10-2 TOP: Coase theorem MSC: Applicative

53. ANS: B DIF: 3 REF: 10-2 TOP: Coase theorem MSC: Analytical

54. ANS: B DIF: 3 REF: 10-2 TOP: Coase theorem MSC: Analytical

55. ANS: A DIF: 2 REF: 10-3 TOP: Externalities MSC: Interpretive

56. ANS: B DIF: 2 REF: 10-3 TOP: Externalities MSC: Interpretive

57. ANS: B DIF: 2 REF: 10-3 TOP: Command-and-control policies MSC: Interpretive

58. ANS: B DIF: 1 REF: 10-3 TOP: Corrective taxes MSC: Applicative

59. ANS: B DIF: 2 REF: 10-3 TOP: Corrective taxes MSC: Interpretive

60. ANS: D DIF: 2 REF: 10-3 TOP: Corrective taxes MSC: Applicative

61. ANS: A DIF: 2 REF: 10-3 TOP: Corrective taxes, Positive externalities MSC: Analytical

62. ANS: B DIF: 3 REF: 10-3 TOP: Corrective taxes, Positive externalities MSC: Analytical

63. ANS: B DIF: 2 REF: 10-3 TOP: Command-and-control policies MSC: Analytical

64. ANS: A DIF: 2 REF: 10-3 TOP: Corrective taxes MSC: Analytical

65. ANS: D DIF: 3 REF: 10-3 TOP: Corrective taxes, Tradable pollution permits MSC: Analytical

66. ANS: C DIF: 1 REF: 10-3 TOP: Command-and-control policies MSC: Definitional

67. ANS: A DIF: 2 REF: 11-1 TOP: Rivalry in consumption MSC: Interpretive

68. ANS: B DIF: 2 REF: 11-1 TOP: Private goods, Public goods MSC: Analytical

69. ANS: A DIF: 1 REF: 11-1 TOP: Public goods MSC: Applicative

70. ANS: D DIF: 2 REF: 11-1 TOP: Common resources

MSC: Analytical

71. ANS: A DIF: 2 REF: 11-1 TOP: Natural monopolies MSC: Applicative

72. ANS: A DIF: 1 REF: 11-2 TOP: Public goods MSC: Applicative

73. ANS: B DIF: 1 REF: 11-2 TOP: Public goods MSC: Applicative

74. ANS: C DIF: 2 REF: 11-2 TOP: Public goods MSC: Applicative

75. ANS: D DIF: 2 REF: 11-2 TOP: Public goods MSC: Applicative

76. ANS: B DIF: 2 REF: 11-2 TOP: Public goods, Property rights MSC: Interpretive

77. ANS: C DIF: 2 REF: 11-2 TOP: Public goods MSC: Interpretive

78. ANS: B DIF: 3 REF: 11-2 TOP: Public goods MSC: Analytical

79. ANS: B DIF: 2 REF: 11-2 TOP: Excludability MSC: Interpretive

80. ANS: C DIF: 3 REF: 11-2 TOP: Public goods MSC: Analytical

81. ANS: C DIF: 3 REF: 11-2 TOP: Public goods MSC: Analytical

82. ANS: B DIF: 2 REF: 11-2 TOP: Cost-benefit analysis MSC: Interpretive

83. ANS: B DIF: 2 REF: 11-2 TOP: Cost-benefit analysis MSC: Interpretive

84. ANS: C DIF: 3 REF: 11-2 TOP: Cost-benefit analysis MSC: Analytical

85. ANS: B DIF: 1 REF: 11-3 TOP: Tragedy of the Commons MSC: Applicative

86. ANS: C DIF: 2 REF: 11-3 TOP: Tragedy of the Commons MSC: Interpretive

87. ANS: B DIF: 2 REF: 11-3 TOP: Tragedy of the Commons MSC: Definitional

88. ANS: C DIF: 1 REF: 11-3 TOP: Common resources MSC: Applicative

89. ANS: C DIF: 2 REF: 11-3 TOP: Common resources MSC: Applicative

90. ANS: D DIF: 2 REF: 11-3 TOP: Common resources MSC: Analytical

91. ANS: C DIF: 2 REF: 11-3 TOP: Common resources MSC: Interpretive

92. ANS: B DIF: 2 REF: 11-3 TOP: Common resources MSC: Interpretive

93. ANS: B DIF: 2 REF: 11-3 TOP: Common resources MSC: Interpretive

94. ANS: B DIF: 2 REF: 11-3 TOP: Common resources

MSC: Interpretive

95. ANS: A DIF: 2 REF: 11-4 TOP: Property rights MSC: Analytical

SHORT ANSWER

96. ANS:

a. $12 b. 50 c. $15 d. 30 e. $250 f. $122.50 g. $250 h. $422.50 i. $500 j. $545 k. $45

DIF: 2 REF: 9-2 TOP: Exports, Economic welfare MSC: Applicative

97. ANS: a. $14 b. 90 c. $10 d. 85 e. $360 f. $810 g. $405 h. $125 i. $765 j. $935 k. $170

DIF: 2 REF: 9-2 TOP: Imports, Economic welfare MSC: Applicative

98. ANS: a. $6, 84 b. 66 c. 44 d. $384 e. $294 f. $45 g. $80 h. $44 i. $11

DIF: 2 REF: 9-2 TOP: Tariffs, Economic welfare MSC: Applicative

99. ANS: Both the import quota and the tariff raise the domestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses. The only difference for the economy is that the tariff raises revenue for the government, while the import quota creates surplus for license holders.

DIF: 2 REF: 9-2 TOP: Tariffs, Import quotas MSC: Interpretive

100. ANS: A unilateral approach is when a country removes its trade restrictions on its own. A multilateral approach is when a country removes its trade restrictions while other countries do the same. A multilateral approach has two advantages. The first is that it has the potential to result in freer trade because it can reduce trade restrictions abroad as well as at home. If international negotiations fail, however, the result could be more restricted trade than under a unilateral approach. Also, the multilateral approach may have a political advantage and can sometimes win political support when a unilateral reduction cannot.

DIF: 2 REF: 9-3 TOP: Trade policy MSC: Interpretive

101. ANS: Arguments mentioned in the text include the jobs argument, the national security argument, the infant industry argument, the unfair competition argument, and the protection-as-a-bargaining-chip argument. These arguments and counter-arguments are outlined in section 9-3 of the text. Most economists would dismiss the jobs argument, the infant industry argument, and the unfair competition argument on strictly economic grounds. The bargaining-chip argument carries high risks of economic harm if the threat doesn't work. The national-security argument balances economic loss from trade restriction against the benefit of long-term national survival, and is probably the argument that economists would most likely buy if it were clear that the industry being protected was clearly crucial to national security.

DIF: 2 REF: 9-3 TOP: Trade policy MSC: Interpretive

102. ANS:

When a negative externality exists, the private cost (or supply curve) is less than the social cost. The market equilibrium quantity of Q0 will be greater than the socially optimal quantity of Q1. The government could help eliminate this inefficiency by taxing the product. In this example, the size of the per-unit tax would be P3 - P1 (or P2 - P0).

DIF: 2 REF: 10-2 TOP: Negative externalities MSC: Analytical

103. ANS:

When a positive externality exists, the private value (or demand curve) is less than the social value. The market equilibrium quantity will be less than the socially optimal quantity. The government could help eliminate this inefficiency by subsidizing the product. In this example, the size of the per-unit subsidy would be P3 - P1.

DIF: 2 REF: 10-1 TOP: Positive externalities MSC: Analytical

104. ANS: One solution would be to have one person own both the farm fields and the beehives, in which case the externality is internalized. Another solution would be to have the farmer and beekeeper enter into a contract so that they can coordinate the number of bee hives and acres of crops to maintain an efficient outcome.

DIF: 1 REF: 10-2 TOP: Externalities MSC: Applicative

105. ANS: Private parties may fail to bargain to an efficient solution under a variety of circumstances. First, the transaction costs of bargaining may be so high that one or both of the parties decides not to bargain. Second, the bargaining may not take place if one or both of the parties believes that the agreement cannot be enforced. Third, one or both of the parties may try to hold out for a better deal, in which case the bargaining process breaks down. Fourth, if there are a large number of parties taking part in the negotiations, the costs of coordination may be so great that the bargaining is not successful.

DIF: 1 REF: 10-2 TOP: Coase theorem MSC: Interpretive

106. ANS: Efficiency taxes allow markets to coordinate optimal resource allocation. In order for regulations to be efficient, the government needs detailed information about specific industries, including information about the alternative technologies that those industries could adopt. Thus, taxes are likely to reduce pollution at a lower cost to society.

DIF: 2 REF: 10-3 TOP: Command-and-control policies, Corrective taxes MSC: Applicative

107. ANS:

Yes, these two quantities could be equal. For example, PB could be equal to the amount of the corrective tax.

DIF: 2 REF: 10-3 TOP: Corrective taxes, Tradable pollution permits MSC: Analytical

108. ANS: Rival? Yes No

Excludable?

Yes

Private Goods • Ice-cream cones • Clothing • Congested toll roads

Natural Monopolies • Fire protection • Cable TV • Uncongested toll roads

No

Common Resources • Fish in the ocean • The environment • Congested nontoll roads

Public Goods • National defense • Knowledge • Uncongested nontoll roads

DIF: 1 REF: 11-1 TOP: Excludability, Rivalry in consumption MSC: Applicative

109. ANS: The government assigns and protects the property rights of the producers of specific, technological knowledge through patents. The inventor will obtain much of the benefit of his invention. The U.S. government also subsidizes basic research in many different fields.

DIF: 1 REF: 11-2 TOP: Public goods MSC: Applicative

110. ANS: Eliminating poverty is not a good that the private market can provide. No single individual can solve the problem of poverty, and those who do not donate to charity can free-ride on the generosity of others. If we all prefer to live in a society without poverty, taxing the wealthy to raise the living standards of the poor may be able to make everyone better off.

DIF: 1 REF: 11-2 TOP: Public goods

MSC: Applicative

111. ANS: It is possible that everyone can agree that the roads are too crowded, but no one is willing to make the sacrifice to stay home to help solve the congestion problem. The private incentive to fix the problem is small, so government policies such as tolls and gasoline taxes may improve social welfare.

DIF: 1 REF: 11-3 TOP: Common resources MSC: Interpretive

112. ANS: No one owns the wild salmon, while private individuals own goldfish. The profit motive leads to different allocations of the resources. Salmon fishermen have an individual incentive to catch as many salmon as possible before someone else does. Pet shop owners have a profit incentive to breed goldfish to sell to consumers.

DIF: 2 REF: 11-3 TOP: Common resources MSC: Interpretive