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Temple College
ECON 2302
Spring 1998
FINAL EXAM
PART I. MULTIPLE CHOICE 1. [McCONNELL & BRUE Chapter
30.] INSTRUCTIONS: Answer each of the following multiple choice questions by
marking the letter on your answer sheet that corresponds to the BEST response.
1. The demand curve for a public good is determined by
a. summing vertically the individual demand curves for the public good.
b. summing horizontally the individual demand curves for the public good.
c. combining the amounts for the public good that the individual members of society
demand at each price.
d. multiplying the per unit cost of the public good by the quantity made available.
e. none of the above.
2. Refer to the diagrams on the previous page in which figures (a) and (b) show demand
curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather
than do without it. The collective willingness to pay for the first unit of this public good
is
a. $2. b. $6. c. $10. d. $14. e. $18.
3. Refer to the diagrams on the previous page in which figures (a) and (b) show demand
curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather
than do without it. If the marginal cost of the optimal quantity of this public good is
$10, the optimal quantity must be
a. 1 unit. b. 2 units. c. 3 units. d. 4 units. e. 5 units.
The following data are for a series of increasingly extensive flood control projects. Answer
questions #4 and #5 on the basis of these data.
Plan A -- levees
Plan B -- small reservoir
Plan C -- medium reservoir
Plan D -- large reservoir
Total Cost
per year
$10,000
24,000
44,000
72,000
Total Benefit
per year
$16,000
36,000
52,000
64,000
4. For Plan D, marginal costs and marginal benefits are
a. $72,000 and $64,000 respectively.
b. $28,000 and $12,000 respectively.
c. $24,000 and $18,000 respectively.
d. $16,000 and $28,000 respectively.
e. indeterminate.
5. A cost-benefit analysis would indicate that government should
a. undertake Plan D.
b. undertake Plan C.
c. undertake Plan B.
d. undertake Plan A.
e. not become involved in flood control.
6. Refer to the diagram on the previous page in which S is the market supply curve and
St is a supply curve comprising all costs of production, including external costs.
Assume the number of people affected by these external costs is large. Without
government interference, this market will result in
a. an optimal allocation of society's resources.
b. an underallocation of resources to this product.
c. an overallocation of resources to this product.
d. a higher price than is consistent with an optimal allocation of resources.
e. none of these.
7. Refer to the above diagrams for two separate product markets. Assume that
society's optimal level of output in each market is Qo and that government purposely
shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in
diagram (b). The shift of the supply curve from S to S1 in diagram (a) might be
caused by a per unit
a. subsidy paid to the producers of this product.
b. tax on the producers of this product.
c. subsidy paid to the buyers of this product.
d. tax on the buyers of this product.
e. subsidy paid to both the producers and buyers of this product.
8. Refer to the above diagrams for two separate product markets. Assume that
society's optimal level of output in each market is Qo and that government purposely
shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in
diagram (b). The shift of the supply curve from S to S2 in diagram (b) might be
caused by a per unit
a. subsidy paid to the producers of this product.
b. tax on the producers of this product.
c. subsidy paid to the buyers of this product.
d. tax on the buyers of this product.
e. tax on both the producers and buyers of this product.
9. Suppose that a large tree on Shawn's property is blocking Sam's view of the lake
below. Shawn accepts Sam's offer to pay Sam $100 for the right to cut down the
tree. This situation describes
a. the Coase theorem.
b. the diamond-water paradox.
c. logrolling.
d. a market for externality rights.
e. rent-seeking behavior.
10. Clearly defined property rights and liability rules reduce negative spillovers by
a. threatening the perpetrators with lawsuits.
b. shifting the perpetrators' market supply curve rightward.
c. shifting the perpetrators' market demand curve leftward.
d. creating a market for externality rights.
e. encouraging rent-seeking behavior.
11. Refer to the above diagram of a market for pollution rights. The increase in the
price of pollution rights from P1 to P2 will
a. reduce the quantity of pollution rights.
b. increase the quantity of pollution rights.
c. increase the incentive for environmental groups to buy pollution rights.
d. increase the opportunity cost of polluting.
e. decrease the opportunity cost of polluting.
12. Refer to the above diagram. From society's perspective, if MB1 and MC2 are the
applicable curves,
a. Q4 represents too little pollution abatement.
b. Q1 represents too much pollution abatement.
c. Q2 represents an optimal amount of pollution abatement.
d. Q3 represents an optimal amount of pollution abatement.
e. Q3 represents too little pollution abatement.
13. Suppose a firm offers its workers a "cafeteria plan" in which it allows its workers to
allocate a set amount of fringe benefit money toward specific insurance. Mary, who
has five kids needing braces, selects the family dental coverage. This is an example
of the
a. free-rider problem.
b. principle-agent problem.
c. adverse selection problem.
d. moral hazard problem.
e. Coase theorem.
14. Because the Federal government typically provides disaster relief to farmers, many
farmers do not buy crop insurance even though it is subsidized by the government.
This illustrates
a. the adverse selection problem.
b. the moral hazard problem.
c. a failure of the market for externalities.
d. the existence of spillover benefits.
e. the Coase theorem.
15. Firms are not likely to provide sufficient workplace if
a. workers are unaware of workplace hazards.
b. they have some degree of monopoly power.
c. they are pure competitors and therefore price-takers.
d. they are profit-maximizers.
e. workers are unionized.
PART II. MULTIPLE CHOICE 2. [McCONNELL & BRUE
Chapter 31.] INSTRUCTIONS: Answer each of the following multiple choice
questions by marking the letter on your answer sheet that corresponds to the
BEST response.
16. The field of economics which examines government expenditures and taxation is
called
a. public choice theory.
b. public finance.
c. political economy.
d. collective economics.
e. none of these.
17. Public choice economists
a. analyze the incidence of taxes.
b. are also known as Keynesian econmists.
c. use the tools of economics to analyze decision-making in the public sector.
d. are economists employed by federal, state, and local governments in the United
States.
e. none of these.
Voter
Xavier
Yoho
Zest
Marginal benefit
$ 500
200
2,000
18. Examine the table above showing the marginal benefit which a particular project will
provide each of the three members of a community. No vote trading is allowed
among the three members. If the tax cost of this proposed project is $600 per
person, a majority vote will
a. defeat this project and resources will be underallocated to the public sector.
b. defeat this project and resources will be allocated efficiently.
c. pass this project and resources will be overallocated to the public sector.
d. pass this project and resources will be underallocated to the public sector.
e. defeat this project and resources will be overallocated to the public sector.
Public good
lighthouse
highway
submarine
Larry
3rd choice
2nd choice
1st choice
Curley
1st choice
3rd choice
2nd choice
Moe
2nd choice
1st choice
3rd choice
19. Refer to the above table which shows the ranking of three public goods by three
different voters. The inconsistency illustrated is that, while a majority of voters prefer
the
a. highway to the lighthouse and the submarine to the highway, they also prefer the
lighthouse to the submarine.
b. lighthouse to the highway and the lighthouse to the submarine, they also prefer the
submarine to the highway.
c. highway to the lighthouse and the submarine to the lighthouse, they also prefer the
submarine to the highway.
d. lighthouse to the submarine and the highway to the submarine, they also prefer the
highway to the lighthouse.
e. none of these.
20. Suppose three roommates cannot agree on the size of a pizza to order. Domino
argues for a medium pizza, Caesar contends a large will be needed, and CiCi wants
a super-large pizza. Assuming no paradox of voting and an agreement among the
three to abide the outcome of a majority vote, majority voting will result in a decision
to order
a. a medium pizza.
b. a large pizza.
c. a super large pizza.
d. two medium pizzas.
e. no pizza wil be ordered.
21. Public choice theorists hold that politicians will
a. favor programs entailing immediate and clear-cut costs and vaguely-defined or
deferred benefits.
b. follow policies leading to an optimal allocation of resources between public and
private sectors.
c. favor programs entailing immediate and clear-cut benefits and vaguely-defined or
deferred costs.
d. objectively weigh the costs and benefits of various government programs and vote
accordingly.
e. none of these.
22. Which of the following best reflects the ability-to-pay philosophy of taxation?
a. a tax on residential property
b. a progressive income tax
c. an excise tax on gasoline
d. an excise tax on coffee
e. a general sales tax on retail sales
23. Examine the following tax schedules, all of which represent aggregate income tax
schedules. [Figures are all in billions of dollars.] Which schedule(s) represent(s) a
progressive tax?
a. V only
b. III and V
c. II and III
d. III only
e. I only
I
Tax
$30
50
60
70
II
Base
(income)
$100
200
300
400
Tax
$10
20
30
40
Base
(income)
$100
200
300
400
III
Tax
$ 5
15
30
50
Base
(income)
$100
200
300
400
IV
Tax
$30
60
90
120
Base
(income)
$100
200
300
400
V
Base
Tax (income)
$10 $100
30
200
60
300
100
400
24. A sales tax is regressive because the
a. percentage of income paid in taxes falls as income rises.
b. administrative costs associated with the collection of the tax are relatively high.
c. percentage of income paid in taxes is constant as income rises.
d. Tax tends to reduce the total volume of consumption expenditures.
e. sales tax is an indirect, rather than a direct, tax.
25. Assume you pay a tax of $4,000 on a taxable income of $24,000. If your taxable
income were $30,000, your tax payment would be $5,000. This suggests that the
tax is
a. progressive.
b. proportional.
c. regressive.
d. discriminatory.
e. based on the benefits-received principle.
26. Refer to the above figure in which S is the before-tax supply curve and Stax is the
supply curve after the imposition of an excise tax. The total tax revenue collected
from this tax will be the area
a. PcPsEC.
b. PcPsEC + ECF.
c. ECF.
d. 0PcCQtax.
e. 0PeFQe.
27. Refer to the above figure in which S is the before-tax supply curve and Stax is the
supply curve after the imposition of an excise tax. The efficiency loss or excess
burden of this tax will be
a. PcPsEC.
b. PcPsEC + ECF.
c. ECF.
d. 0PsEQtax.
e. 0PeFQe.
28. Which of the following generalizations is CORRECT?
a. the more elastic the supply of a product, the larger the portion of an excise tax
which is borne by buyers.
b. the more elastic the demand for a product, the larger the portion of an excise
tax which is borne by buyers.
c. the more inelastic the supply of a product, the larger the portion of an excise
tax which is borne by buyers.
d. the more inelastic the demand for a product, the larger the portion of an excise
tax which is borne by sellers.
e. the more elastic the supply of a product, the larger the portion of an excise tax
which is borne by sellers.
29. Refer to the above figure in which S is the before-tax supply curve for bottled water.
The market price for bottled water is $1.00 and the equilibrium quantity is 125,000
bottles per week. Stax is the supply curve after the imposition of an excise tax. The
tax rate is ______ per bottle sold and the tax revenues paid to government are
______ per week.
a. $0.50; $62,500
b. $1.00; $100,000
c. $0.75; $75,000
d. $0.50; $50,000
e. $1.25; $156,250
30. Refer to the above figure in which S is the before-tax supply curve for bottled water.
The market price for bottled water is $1.00 and the equilibrium quantity is 125,000
bottles per week. Stax is the supply curve after the imposition of an excise tax. The
total amount of the tax paid by consumers is _____; the total amount of the tax paid
by sellers (producers) is ______; the excess burden (efficiency loss) of the tax is
______.
a. $50,000; $0; $6,250
b. $0; $50,000, $3,125
c. $25,000; $25,000; $3,125
d. $25,000; $25,000; $6,250
e. $50,000; $50,000; $12,500