CHAPTER # 7
1) Welfare economics is the study of
a. taxes and subsidies.
b. how technology is best put to use in the production of goods and services.
c. government welfare programs for needy people.
d. how the allocation of resources affects economic well-being.
2)
Suppose Raymond and Victoria attend a charity benefit and participate in a silent auction. Each has in mind a
maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called
a. deadweight loss.
b. willingness to pay.
c. consumer surplus.
d. producer surplus.
3.
Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is
$650. Denise
a. buys the dishwasher, and on her purchase she experiences a consumer surplus of $150.
b. buys the dishwasher, and on her purchase she experiences a consumer surplus of $-150.
c. does not buy the dishwasher, and on her purchase she experiences a consumer surplus of $150.
d. does not buy the dishwasher, and on her purchase she experiences a consumer surplus of $0.
4. A seller’s opportunity cost measures the
a. value of everything she must give up to produce a good.
b. amount she is paid for a good minus her cost of providing it.
c. consumer surplus.
d. out of pocket expenses to produce a good but not the value of her time.
5.
At Nick’s Bakery, the cost to make homemade chocolate cake is $4 per cake. As a result of selling five cakes,
Nick experiences a producer surplus in the amount of $17.50. Nick must be selling his cakes for
a. $6.50 each.
b. $7.50 each.
c. $9.50 each.
d. $10.50 each.
CHAPTER # 8
6).
To fully understand how taxes affect economic well-being, we must compare the
a. consumer surplus to the producer surplus.
b. price paid by buyers to the price received by sellers.
c. reduced welfare of buyers and sellers to the revenue raised by the government.
d. consumer surplus to the deadweight loss.
The vertical distance between points A and B represents a tax in the market.
7). Refer to Figure 8-4. The equilibrium price before the tax is imposed is
a. $12, and the equilibrium quantity is 70.
b. $8, and the equilibrium quantity is 100.
c. $5, and the equilibrium quantity is 70.
d. $5, and the equilibrium quantity is 100.
8).
Refer to Figure 8-4. The price that buyers effectively pay after the tax is imposed is
a. $12.
b. between $8 and $12.
c. between $5 and $8.
d. $5.
9). Refer to Figure 8-4. The price that sellers effectively receive after the tax is imposed is
a. $12.
b. between $8 and $12.
c. between $5 and $8.
d. $5.
10).
Refer to Figure 8-4. The amount of tax revenue received by the government is equal to
a. $350.
b. $490.
c. $700.
d. $840.
11).
Refer to Figure 8-4. The amount of deadweight loss as a result of the tax is
a. $105.
b. $210.
c. $490.
d. $600.
12). The size of the deadweight loss generated from a tax is affected by the
a. elasticities of both supply and demand.
b. elasticity of demand only.
c. elasticity of supply only.
d. total revenue collected by the government.
CHAPTER # 3
13). When an economist points out that you and millions of other people are interdependent, he or she is referring
to the fact that we all
a. rely upon the government to provide us with the basic necessities of life.
b. rely upon one another for the goods and services we consume.
c. have similar tastes and abilities.
d. are concerned about one another’s well-being.
Figure 3-2
Peru’s Production Possibilities Frontier
14).
Refer to Figure 3-2. The fact that the line slopes downward reflects the fact that
a. for Peru, it is more costly to produce emeralds than it is to produce rubies.
b. Peru will produce more emeralds and fewer rubies as time goes by.
c.
d.
Peru faces a tradeoff between producing emeralds and producing rubies.
Peru should specialize in producing rubies.
Table 3-1
Assume that Andia and Zardia can switch between producing wheat and producing beef at a constant rate.
Minutes Needed to Make 1
Bushel of Wheat
Pound of Beef
Andia
20
12
Zardia
15
10
15). Refer to Table 3-1. What is Zardia’s opportunity cost of producing one bushel of wheat?
a. 2/3 pound of beef
b. 3/4 pound of beef
c. 5/6 pound of beef
d. 3/2 pounds of beef
16). Tom Brady should probably not mow his own lawn because
a. his opportunity cost of mowing his lawn is higher than the cost of paying someone to mow it for
him.
b. he has a comparative advantage in mowing his lawn relative to a landscaping service.
c. he has an absolute advantage in mowing his lawn relative to a landscaping service.
d. he might sprain his ankle.
CHAPTER # 9
17). If a country allows trade and, for a certain good, the domestic price without trade is lower 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.
Figure 9-7. The figure applies to the nation of Wales and the good is cheese.
18). Refer to Figure 9-7. 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.
19). Refer to Figure 9-7. With trade, Wales
a. imports Q2 - Q1 units of cheese.
b. exports Q2 - Q1 units of cheese.
c. imports Q2 - Q0 units of cheese.
d. exports Q2 - Q0 units of cheese.
CHAPTER # 10
20). Which of the following is not correct?
a. Markets allocate scarce resources with the forces of supply and demand.
b. The equilibrium of supply and demand is typically an efficient allocation of resources.
c. Governments can sometimes improve market outcomes.
d. Externalities cannot be positive.
Figure 10-9
21).
Refer to Figure 10-9. Which graph represents a market with no externality?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. None of the above is correct.
22).
Refer to Figure 10-9. Which graph represents a market with a positive externality?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Both (b) and (c) are correct.
23). Refer to Figure 10-9. Which graph represents a market with a negative externality?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Both (b) and (c) are correct.
24). Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a
$50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to
a. pay your roommate at least $25 but no more than $50 to clean up after herself.
b. pay your roommate at least $51 to clean up after herself.
c. charge your roommate at least $25 to have you clean up after her.
d. charge your roommate at least $50 but no more than $100 to keep you from complaining about the
mess.
CHAPTER 11
25). You are the mayor of a town with 20,000 residents. The head of your economic development agency recently
conducted a survey in which the 20,000 residents said that a small public library in the center of town would
be worth $40 to each of them. Because the cost to build the library is only $500,000, you arrange to have the
library built. Everyone in town enjoys the library, but when you asked for donations to pay for the library, you
only collected $100,000. You are convinced that
a. the survey must have overstated how much the library was worth to each resident; otherwise, you
would have collected $500,000 in donations.
b. the cost of the library exceeded the social benefits.
c. the library was an example of the Tragedy of the Commons.
d. most residents of the town are probably free-riders at the library.
26). You are the mayor of a town with 20,000 residents. The head of your economic development agency recently
conducted a survey in which the 20,000 residents said that a small public library in the center of town would
be worth $40 to each of them. The cost to build the library is $500,000. Which of the following is the most
efficient option?
a. The library should be built and paid for with donations collected from residents, as these donations
should more than cover the cost of the library.
b. The library should be built and paid for by the town government and paid for with a tax on the
residents because all residents would benefit from it but some residents would not donate if they
were asked.
c. The library should be built and paid for by the wealthiest ten percent of the residents.
d. The library should not be built.
27). Highway engineers want to improve a dangerous stretch of highway. They expect that it will reduce the risk
of someone dying in an accident from 4.1 percent to 1.5 percent over the life of the highway. If a human life is
worth $4.2 million, then the project is worth doing as long as it does not cost more than
a. $67,200.
b.
c.
d.
$109,200.
$274,500.
$1.6 million.
28). Many species of animals are common resources, and many must be protected by law to keep them from
extinction. Why is the cow not one of these endangered species even though there is such a high demand for
beef?
a. Cows reproduce at a high rate and have adapted well to their environment.
b. Public policies protect cows from predators and diseases.
c. Cows are privately owned, whereas many endangered species are owned by no one.
d. There is a natural ecological balance between the birth rate of cows and human consumption.