econ 102 2023 with complete solution

Deadweight loss measures the loss in a market to buyers and sellers that is not offset by an increase in government revenue. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J represents consumer surplus after the tax. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The deadweight loss due to the tax is measured by the area I+Y. Refer to Figure 8-3. The amount of tax revenue received by the government is equal to the area P3ACP1. Refer to Figure 8-5. The price that sellers effectively receive after the tax is imposed is P1. To fully understand how taxes affect economic well-being, we must compare the decrease in total surplus to the increase in revenue raised by the government. Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax burden, when the demand for the product is more elastic than the supply of the product. When a good is taxed, the burden of the tax falls more heavily on the side of the market that is more inelastic. Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things equal, All of the above are correct. Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium quantity. Other factors are held constant. In which market will the tax have a larger deadweight loss? Market B Suppose the government places a per-unit tax on a good. The smaller the price elasticities of demand and supply for the good, the smaller the deadweight loss from the tax. If the world price of apples is higher than Argentina's domestic price of apples without trade, then Argentina has a comparative advantage in apples. Assume, for Japan, that the domestic price of automobiles without international trade is lower than the world price of automobiles. This suggests that, in the production of automobiles, Japan has a comparative advantage over other countries and Japan will export automobiles. When a country allows trade and becomes an importer of a good, consumer surplus increases and producer surplus decreases. Refer to Figure 9-1. From the figure it is apparent that Guatemala has a comparative advantage in producing coffee, relative to the rest of the world. Refer to Figure 9-2. The world price for calculators represents the demand for calculators from the rest of the world. Refer to Scenario 9-1. If trade in peaches is allowed, the price of peaches in the United States will increase, and this will cause consumer surplus to decrease. Refer to Figure 9-5. With trade, this country imports 320 tricycles. Refer to Figure 9-9. Producer surplus in this market after trade is B + C + D. Turkey is an importer of wheat. The world price of a bushel of wheat is $7. Turkey imposes a $3-per-bushel tariff on wheat. Turkey is a price-taker in the wheat market. As a result of the tariff, Turkish consumers of wheat become worse off and Turkish producers of wheat become better off. Refer to Figure 9-15. Consumer surplus with trade and without a tariff is A + B + C + D + E + F. Which of the following statements is correct? Government should tax goods with negative externalities and subsidize goods with positive externalities. Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, how much plastic will be produced? 650 Refer to Figure 10-5. Which price and quantity combination represents the social optimum? P2 and Q1. If we know that the supply curve for good x fails to reflect the total cost to society of producing that good, then we know that the market for good x is characterized by an externality, but we cannot determine whether the externality is positive or negative from this fact alone. To enhance the well-being of society, a social planner will encourage firms to increase production when technology spillovers are associated with production. Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct? All of the above are correct. Because there are positive externalities from higher education, private markets will under-supply college classes. Refer to Figure 10-10. A decrease in output from 160 units to 120 units would increase total economic well-being. Before the flu season begins, Jeremy gets a flu shot. As a result, Jeremy and several of his friends and relatives avoid the flu for the entire flu season. It would make sense to argue that All of the above are correct. Assuming education results in a positive externality, which of the following statements is correct? The socially optimal quantity of education will exceed the market equilibrium quantity of education. 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. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced? offer grants to university researchers Which of the following statements is correct? Taxes provide incentives for firms to adopt new methods to reduce negative externalities. The Coase theorem suggests that private markets may not be able to solve the problem of externalities when the number of interested parties is large and bargaining costs are high. A television broadcast is an example of a good that is not rival in consumption. Which of the following goods is nonrival in consumption and excludable? Disney World on a rainy, cool day People cannot be prevented from using a good if the good is a public good or a common resource. Which of the following is not a public good? patented technological knowledge When good X is produced, some people benefit. A free-rider problem arises when the number of beneficiaries is large and it is impossible to prevent anyone from benefiting. National defense is provided by the gover free-riders make it difficult for private markets to supply the socially optimal quantity. Private companies will invest in medical research if they will produce a specific product for which they may receive a patent. Each of the following explains why cost-benefit analysis is difficult except government projects rarely have sufficient funding to complete them on time. To increase safety at a bad intersection, the mayor must decide whether to install a traffic light at a cost of $45,000. If the traffic light reduces the risk of fatality by 0.4 percent, and the value of a human life is estimated to be $10 million, the mayor should not install the light because the expected benefit of $40,000 is less than the cost. The overuse of a common resource relative to its economically efficient use is called the Tragedy of the Commons. The Tragedy of the Commons occurs because common resources are rival in consumption. Imagine a 2,000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking on summer afternoons. Otherwise, it is a great place. An efficient solution to the parking problem would be to charge higher prices for parking at busy times. On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. On these days, electricity is excludable and rival in consumption. Which of the following statements is correct? The efficient provision of public goods is intrinsically more difficult than the efficient provision of private goods. Which of the following would be most likely to have monopoly power? a local cable TV provider A fundamental source of monopoly market power arises from barriers to entry. A firm that is a natural monopoly All of the above are correct Refer to Figure 15-4. If the monopoly firm is currently producing Q4 units of output, then a decrease in output will necessarily cause profit to increase as long as the new level of output is at least Q2. Refer to Figure 15-5. A profit-maximizing monopoly's total revenue is equal to P2 x Q3. Refer to Figure 15-7. In order to maximize profits, the monopolist should charge a price of $20. The economic inefficiency of a monopolist can be measured by the deadweight loss. To maximize total surplus with a monopoly firm, a benevolent social planner would choose the level of output where MC intersects the demand curve. Refer to Figure 15-14. If the monopoly operates at an output level less than Q0, then an increase in output toward (but not exceeding) Q0 would lower the price and raise total surplus. A market force that can prevent firms from price discriminating is arbitrage. If the government regulates the price that a natural monopolist can charge to be equal to the firm's marginal cost, the firm will earn negative profits, causing the firm to exit the industry. Refer to Figure 15-21. What is the price and quantity for this natural monopolist under fair return pricing? F and K In a monopolistically competitive industry, firms set price above marginal cost since each firm is a price setter. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market faces a downward-sloping demand curve for its product. A firm operating in a monopolistically competitive market can earn economic profits in the short run but not in the long run. Refer to Figure 16-2. In order to maximize profit, the firm will charge a price of $36. Refer to Figure 16-2. If the ATC=40 at the profit-maximizing level of output, which of the following will occur in the long run in this industry? Firms will exit this industry. Refer to Figure 16-3. What is the profit-maximizing price, quantity, and resulting profit? P=$80, Q=20 units, profit=$200 Refer to Figure 16-5. Which of the graphs depicts a short-run equilibrium that will encourage the entry of other firms into a monopolistically competitive industry? panel c Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium? P MC and demand = ATC In a long-run equilibrium, only a perfectly competitive firm operates at its efficient scale. Under which of the following market structures would consumers likely pay the highest price for a product? monopoly A monopolistically competitive market could be considered inefficient because price exceeds marginal cost. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost, firms would require a subsidy to stay in business Professional organizations and producer groups have an incentive to restrict advertising in order to enhance competition on the basis of price. Most businesses advertise their products and services. Some business use SPAM emails to advertise because the cost of a mass e-mail is close to zero. Other business spend millions of dollars to advertise in a 30-second spot during the Super Bowl. Having observed this real world data, economists argue that the amount of money that a business spends on advertising is a proxy for a good or service's quality. Which of the following statements is not correct? Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost. A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called a Nash equilibrium. The theory of oligopoly provides another reason that free trade can benefit all countries because as the number of firms within a given market increases, the price of the good decreases. Other things the same, in which case is the quantity produced the highest? There are a very large number of firms. When strategic interactions are important to pricing and production decisions, a typical firm will consider how competing firms might respond to its actions. In the prisoners' dilemma game with Bonnie and Clyde as the players, the likely outcome is a bad outcome for both players. Refer to Table 17-13. Pursuing its own best interest, Lopes will increase the size of its store and parking lot regardless of the decision made by HomeMax. When the prisoners' dilemma game is generalized to describe situations other than those that literally involve two prisoners, we see that cooperation between the players of the game can be difficult to maintain, even when cooperation would make both players of the game better off. In game theory, a Nash equilibrium is All of the above are correct. Refer to Table 17-14. If player A chooses his/her best strategy, player B should choose left and earn a payoff of 4. In the prisoners' dilemma, when each player chooses his dominant strategy the players reach a Nash equilibrium. A cooperative agreement among oligopolists is less likely to be maintained, the greater the number of oligopolists. A competitive firm has been selling its output for $10 per unit and has been maximizing its profit. Then, the price rises to $14, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its quantity of output is higher than it was previously. Which of the following statements best expresses a firm's profit-maximizing decision rule? All of the above are correct. If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should increase its output. The competitive firm's short-run supply curve is its marginal cost curve, but only the portion above the minimum of average variable cost. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative economic profits in the short run and shutting down? Pd Refer to Figure 14-3. If the market price is $10, what is the firm's total revenue? $50 Refer to Figure 14-4. When price rises from P3 to P4, the firm finds that it can earn a positive profit by increasing production to Q4. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total costs can be represented by the area P3 × Q2. In the long run, each firm in a competitive industry earns zero economic profits. Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to increase. Suppose that a competitive market is initially in equilibrium. Then demand increases. If some resources used in production are not available in sufficient quantities for entering firms, the long-run market supply curve will be upward sloping. Refer to Figure 14-14. Suppose a firm in a competitive market, like the one depicted in panel (a), observes market price rising from P1 to P2. Which of the following could explain this observation? An increase in market demand from D0 to D1. Which of the following statements best reflects a price-taking firm? If the firm were to charge more than the going price, it would sell none of its goods. Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to remain unchanged. The demand for Godiva mint chocolates is likely quite elastic because All of the above are correct. Which of the following is likely to have the most price elastic demand? lattés For which of the following goods is the price elasticity of demand most inelastic? pizza Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result, the equilibrium price increases, and the equilibrium quantity is unchanged. When demand is perfectly inelastic, the demand curve will be vertical, because buyers purchase the same amount as before whenever the price rises or falls. Refer to Figure 5-2. As price falls from Pa to Pb, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity? D3 Which of the following could be the price elasticity of demand for a good for which 4 Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue? 0.3 Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue, it is assuming that the demand for university education is inelastic. Necessities such as food and clothing tend to have low price elasticities of demand and low income elasticities of demand. For which of the following goods is the income elasticity of demand likely lowest? housing You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would be positive, and your roommate's would be negative. Some firms eventually experience problems with their capacity to produce output as their output levels increase. For these firms, supply is more elastic at low levels of output and less elastic at high levels of output. If sellers do not adjust their quantities supplied at all in response to a change in price, supply is perfectly inelastic. If the price elasticity of supply is zero, then the quantity supplied is the same, regardless of price. Farm programs that pay farmers not to plant crops on all their land help farmers by increasing total revenue in the market but hurt consumers by raising food prices. The supply of oil is likely to be inelastic in the short run and elastic in the long run. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the demand for marijuana is inelastic. A drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will raise the price, reduce the quantity, increase total revenues, and increase crime. Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding? The number of firms selling laptop computers decreases. If the government removes a binding price ceiling from a market, then the price received by sellers will increase, and the quantity sold in the market will increase. A binding price floor will reduce a firm's total revenue when demand is elastic. Refer to Figure 6-7. Suppose a price ceiling of $5 is imposed on this market. As a result, the quantity of the good supplied decreases by 20 units. Refer to Figure 6-7. Suppose a price floor of $8 is imposed on this market. As a result, the quantity of the good demanded decreases by 10 units. Refer to Figure 6-12. When the price ceiling applies in this market and the supply curve for gasoline shifts from S1 to S2, a shortage will occur at the new market price of P2. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the supply curve will shift downward by $20, and the price paid by buyers will decrease by less than $20. Suppose buyers of vodka are required to send $5.00 to the government for every bottle of vodka they buy. Further, suppose this tax causes the effective price received by sellers of vodka to fall by $3.00 per bottle. Which of the following statements is correct? All of the above are correct. Refer to Figure 6-20. Suppose a tax of $5 per unit is imposed on this market. Which of the following is correct? Sellers will bear more of the burden of the tax than buyers will. Refer to Figure 6-21. Suppose buyers, rather than sellers, were required to pay this tax (in the same amount per unit as shown in the graph). Relative to the tax on sellers, the tax on buyers would result in the same amount of tax revenue for the government. Refer to Figure 6-23. For every unit of the good that is sold, sellers are required to send three dollars to the government, and buyers are required to send nothing to the government. Refer to Figure 6-24. Suppose sellers, rather than buyers, were required to pay this tax (in the same amount per unit as shown in the graph). Relative to the tax on buyers, the tax on sellers would result in All of the above are correct. Refer to Figure 6-28. Suppose a tax of $4 per unit is imposed on this market. Which of the following is correct? Buyers and sellers will share the burden of the tax equally. The quantity sold in a market will increase if the government More than one of the above is correct. The mayor of Workerville proposes a local payroll tax to fund a new water park for the city. The mayor proposes to collect half the tax from workers and half the tax from firms. The mayor will be able to successfully divide the burden of the tax equally if the demand for labor and supply of labor are equally elastic. All else equal, what happens to consumer surplus if the price of a good decreases? Consumer surplus increases. When there is a technological advance in the pork industry, consumer surplus in that market will increase If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets? Consumer surplus decreases. Refer to Figure 7-2. If the price of the good is $80, then consumer surplus amounts to $185. Refer to Figure 7-12. If the equilibrium price is $350, what is the producer surplus? $30,000 Refer to Figure 7-14. If the government imposes a price ceiling of $50 in this market, then producer surplus will decrease by $300. Refer to Figure 7-15. When the price falls from P2 to P1, which of the following would not be true? The total cost of what is now sold by sellers is actually higher than it was before the decrease in the price. Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts? It increases. Which of the following will cause a decrease in producer surplus? . income increases and buyers consider the good to be inferior Refer to Figure 7-19. At the equilibrium price, total surplus is $250. Refer to Figure 7-29. Which of the following statements is correct? At Q4, the value to buyers is less than the cost to sellers. PlayStations and PlayStation games are complementary goods. A technological advance in the production of PlayStations will increase consumer surplus in the market for PlayStations and increase producer surplus in the market for PlayStation games. Market failure is the inability of some unregulated markets to allocate resources efficiently.