Version 1
Econ 54, Spring 2001
Douglas
Second Midterm Exam
PLEDGE: I have neither given nor received unauthorized help on this Exam.
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1.
The “no-trade” domestic price of pineapple in the United States is $500 per ton. The world price of
pineapple is $600 per ton. The U.S. is a price-taker in the pineapple market. If trade is allowed,
a. the U.S. will become an importer of pineapple.
b. the U.S. will become an exporter of pineapple.
c. U.S. producers of pineapple will be made worse off.
d. losses to US pineapple consumers will exceed gains to US pineapple producers.
2.
Market failure is
a. the inability of some unregulated markets to allocate resources efficiently.
b. the inability of a market to establish an equilibrium price.
c. the inability of buyers to place a value on the good or service.
d. the inability of sellers to maximize their profits.
3.
In the figure shown above, at the quantity Q2,
a. the market is in equilibrium.
b. willingness to pay is greater than willingness to sell.
c. consumer surplus plus producer surplus is maximized.
d. willingness to pay is less than willingness to sell.
4.
If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would result in a
a. 4.0 percent decrease in the quantity demanded.
b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 2.5 percent decrease in the quantity demanded.
Econ 54, Douglas
5.
Second Midterm Exam, Vers 1
Spring 2001
In the figure shown above, at the market equilibrium, consumer surplus is represented by the area
a. A.
b. A + B + C.
c. D + E + F.
d. A + B + C + D + E + F.
6.
a.
b.
c.
d.
In the figure shown, total surplus is maximized with the following price-quantity combination:
P1 - Q1.
P2 - Q2.
P3 - Q1.
P1 - Q2.
7.
Ben sells investment advice for $100 per hour. His cost is $10 per hour. Ben’s producer surplus is
a. $10.
b. $90.
c. $100.
d. $110.
8.
The marginal seller is
a. the seller who cannot compete with the other sellers in the market.
b. the seller who would leave the market first if the price were any lower.
c. the seller who can produce at the lowest cost.
d. the seller who has the greatest producer surplus.
9.
The Surgeon General announces that eating chocolate increases tooth decay, which makes consumers
less willing to consume chocolate. As a result, the equilibrium market price of chocolate __________, and
producer surplus ___________.
a. increases, increases
b. increases, decreases
c. decreases, decreases
d. decreases, increases
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Buyer
Cassie
Jamie
John
Jeremy
Sarah
Second Midterm Exam, Vers 1
Spring 2001
Willingness to Pay
$8.50
7.00
5.50
4.00
3.50
10. Refer to the table shown above. If the market price is $4.50, the consumer surplus in the market will be
a. $4.00.
b. $7.50.
c. $21.00.
d. $1.50.
11.
Tradable pollution permits
(i) will be sold by firms that can reduce pollution at low costs.
(ii) will be bought by firms that can reduce pollution only at high costs.
(iii) necessarily increase the level of total pollution.
a. all of the above
b. (iii) only
c. (ii) and (iii) only
d. (i) and (ii) only
12.
When one firm sells its pollution permit to another firm,
a. both firms benefit.
b. the total amount of pollution remains the same.
c. social welfare is enhanced.
d. all of the above
13.
Pigovian taxes are unlike most other taxes because they
a. distort incentives.
b. move the allocation of resources away from the social optimum.
c. raise revenue for the government.
d. move the allocation of resources closer to the social optimum.
14. When a country allows trade and becomes an importer, which of the following would NOT be true?
a. The gains of domestic consumers exceed the losses of domestic producers.
b. The losses of domestic producers exceed the gains of domestic consumers.
c. The price paid by domestic consumers of the good decreases.
d. The price received by domestic producers of the good decreases.
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15.
In the figure above, which curve best represents a Pigovian tax?
a. A
b. B
c. C
d. D
16.
If a good is “normal,” then an increase in income will result in
a. no change in the demand for the good.
b. a decrease in the demand for the good.
c. a higher market price.
d. a lower market price.
17.
Employing a lawyer to draft and enforce a private contract between parties wishing to solve an
externality problem is an example of
a. highway robbery.
b. an implicit cost.
c. a free rider.
d. a transaction cost.
18.
A negative externality will cause a private market to
a. produce less than is socially desirable.
b. produce more than is socially desirable.
c. produce more than is market optimal.
d. produce less than is market optimal.
19. A perfectly elastic demand curve will be
a. vertical.
b. horizontal.
c. downward sloping to the right.
d. upward sloping to the right.
20. Cutting tax rates to increase tax revenues
a. clearly will work for the United States but not for most other countries.
b. clearly will work for all countries that have income taxes.
c. clearly will not work for the United States but will work for most other countries.
d. will work for any country that has high enough tax rates.
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21. If the government doubles the tax on gasoline, the deadweight loss from the gasoline tax would
a. more than double.
b. double.
c. increase, but less than double.
d. not change.
22. According to the graph, the equilibrium market price if NO TAX is imposed is:
a. P1.
b. P2.
c. P3.
d. impossible to determine.
23. According to the graph, if there is a tax imposed, the total price buyers pay including the tax is
a. P1.
b. P2.
c. P3.
d. impossible to determine.
24. According to the graph, the tax caused a REDUCTION in producer surplus represented by area
a. A.
b. B + C.
c. D + E.
d. D + E + F.
25. Which of the following could be a valid argument in favor of tariffs and/or trade quotas?
a. Trade restrictions generally make all Americans better off.
b. Trade restrictions generally increase economic efficiency.
c. Trade restrictions generally are necessary for economic growth.
d. Trade restrictions for some industries may be necessary for national security.
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26.
A dress manufacturer finds a lower-cost source for cloth used in the production of its dresses. We
would expect this would cause
a. the dress manufacturer to supply more dresses.
b. the demand for this manufacturer’s dresses to fall.
c. the dress manufacturer to supply fewer dresses.
d. the demand for this manufacturer’s dresses to rise.
27.
Assume that your roommate is very messy. (According to dorm rules she has a right to be as messy as
she is.) Suppose she gets a $200 benefit from being messy but her messiness imposes a $100 cost on
you. The Coase theorem would suggest that an efficient solution would be for you to
a. play annoying CDs until she is forced to move out.
b. pay her up to $100 to clean up the clutter.
c. put up with the messiness or clean it up yourself.
d. put up with the messiness, but receive payment of $300 from her.
28. In the figure shown, the free-trade (i.e., no tariff) price and quantity demanded would be
a. P1, Q1.
b. P1, Q4.
c. P2, Q2.
d. P2, Q3.
29. In the figure shown, the domestic price and quantity demanded with the tariff imposed would be
a. P1, Q1.
b. P1, Q4.
c. P2, Q2.
d. P2, Q3.
30. In the figure shown, producer surplus with the tariff imposed would be
a. G.
b. C + G.
c. C + D + E + F + G.
d. A + B + C + G.
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31. In the figure shown, as a result of the tariff, deadweight loss would be
a. E.
b. B.
c. D + F.
d. B + D + E + F.
32. In the figure shown, consumer surplus with free trade (i.e., no tariff) would be
a. A.
b. A + B.
c. A + C + G.
d. A + B + C + D + E + F.
33. The cost of sugar used in producing chocolate decreases. As a result, consumer surplus in the chocolate
market
a. decreases.
b. increases.
c. remains constant.
d. decreases, then increases.
34.
In some cases, pollution permits may be better than a Pigovian tax because
a. pollution permits allow for a market solution while a Pigovian tax does not.
b. pollution permits generate more revenue for the government than a Pigovian tax.
c. Pollution permits are never preferred over a Pigovian tax.
d. the government can set a maximum level of pollution using permits.
Labor Hours needed to make one unit of:
Perfume
Cloth
(bottles) (yards)
Nancy
6
8
Roger
5
10
35. Refer to the table shown. Nancy and Roger both could benefit by Nancy exporting __________ and Roger
exporting __________.
a. perfume, cloth
b. cloth, perfume
c. perfume, perfume
d. cloth, cloth
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36.
Goods that are nonexcludable and nonrival are
a. public goods.
b. private goods.
c. natural monopolies.
d. common resources.
37.
The government provides public goods because
a. private markets are incapable of producing public goods.
b. free-riders make it difficult for private markets to supply the socially optimal quantity.
c. markets are always better off with some government oversight.
d. external benefits will occur to private producers.
38.
One effective way to eliminate the Tragedy of the Commons permanently is to
a. prevent squatters from creating private property rights in public areas.
b. limit access to the commons.
c. regulate access to the commons.
d. provide more public land for recreation.
39.
In almost all cases, the central problem of common resources results from
a. strict enforcement of private property rights leads to overuse of the common resource.
b. private decisionmakers using the common resource too much.
c. government policy fostering unequal division of the common resource.
d. all of the above
40.
Highly congested roads (e.g., University Avenue in Sunnyside at 5:00 PM) are a good example of a
a. public good.
b. private good.
c. common resource.
d. a good produced by a natural monopoly.
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ANSWERS
1
ANSWER: b. the U.S. will become an exporter of pineapple.
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 2 INSTRUCTION: 4 RANDOM: Y
2
ANSWER: a. the inability of some unregulated markets to allocate resources efficiently.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
3
ANSWER: b. willingness to pay is greater than willingness to sell.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M RANDOM: Y
4
ANSWER: c.
40 percent decrease in the quantity demanded.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 2 RANDOM: Y
5
ANSWER: b. A + B + C.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M
RANDOM: Y
6
ANSWER: b. P2 - Q2.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M
RANDOM: Y
7
ANSWER: b. $90.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
8
ANSWER: b. the seller who would leave the market first if the price were any lower.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
9
ANSWER: c. decreases, decreases
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
10
ANSWER: b. $4.50.
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N
11 ~ANSWER: d.
(i) and (ii) only.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
12
ANSWER: d.
all of the above
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
13
ANSWER: d.
move the allocation of resources closer to the social optimum.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
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14
ANSWER: b. The losses of domestic producers exceed the gains of domestic consumers.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
15
ANSWER: a.
A
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
16 ANSWER: c. an increase in the demand for the good.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
17
ANSWER: d.
a transaction cost.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
18
ANSWER: b.
produce more than is socially desirable.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
19
ANSWER: b.
horizontal.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
20
ANSWER: d. is most likely to have merit for any country that has very high marginal tax rates.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
21
ANSWER: a. more than quadruple.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y
22
ANSWER: a. P1.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M
RANDOM: Y
23
ANSWER: c. P3.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M
RANDOM: Y
24
ANSWER: c. D + E.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M
RANDOM: Y
25
ANSWER: d. Trade restrictions are necessary for national security.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
26 ANSWER: a. the dress manufacturer to supply more dresses.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
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27
ANSWER: c.
Second Midterm Exam, Vers 1
Spring 2001
put up with the messiness or clean it up yourself.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
28
ANSWER: b. P1, Q4.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M QUESTION GRAPH: RANDOM: Y
29
ANSWER: d. P2, Q3.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M QUESTION GRAPH: RANDOM: Y
30
ANSWER: b. C + G.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M QUESTION GRAPH: RANDOM: Y
31
ANSWER: c. D + F.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M QUESTION GRAPH: RANDOM: Y
32
ANSWER: d. A + B + C + D + E + F.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M QUESTION GRAPH: RANDOM: Y
33
ANSWER: b. increases.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
34
ANSWER: d.
the government can set a maximum level of pollution using permits.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y and 219
35
ANSWER: b.
cloth, perfume
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 2 INSTRUCTION: 3 RANDOM: N
36
ANSWER: a.
public goods.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM: Y
37
ANSWER: b.
quantity.
free-riders make it difficult for private markets to supply the socially optimal
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM: Y
38
ANSWER: b.
limit access to the commons.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 5 RANDOM: Y
39
ANSWER: b.
private decisionmakers use the common resource too much.
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TYPE: M KEY1:D SECTION:3 OBJECTIVE: 6 RANDOM: Y
40
ANSWER: c.
common resource.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 6 RANDOM: Y
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