Public Finance_Answers to Practice Questions for First Midterm Exam_Spring 2024

The Ohio State University Economics 4300, Government Finance in the American Economy William J. White ANSWERS to Practice Questions for First Mid-Term Exam – Spring 2024 Identification of Terms and Concepts 20 Points Total The following terms and concepts from this course are important to understand and recall. Please fill in the appropriate term that matches each description. (2 points per question) 1. Situation in which quantity supplied equals quantity demanded at the market price ___ equilibrium _______________________________________________________ 2. Market structure with identical products, involving many buyers and many sellers, none of which is large enough to impact equilibrium price ___ perfect competition ________________________________________________ 3. In consumer theory, the curve showing all the possible combinations of two goods that a consumer can purchase with his/her income __ budget line ________________________________________________________ 4. This curve traces out all of the combinations of labor and capital that will produce a given level of output __ isoquant ____________________________________________________________ 5. Benefit received by sellers in excess of the cost of production for a good or service __ producer surplus ___________________________________________________ 6. Monopolists may be able to engage in this behavior if they can determine the maximum willingness to pay of all their potential customers. __ first degree price discrimination ___________________________________________ 7. Characteristic of demand in which a small decrease in price leads to a large increase in quantity demanded ___ elastic demand ___________________________________________________

8. Market failure in which a transaction between a seller and buyer negatively affects an otherwise uninvolved third party ___ negative externality _______________________________________________ 9. A market failure in which hidden actions of buyers or sellers may destroy markets ___ moral hazard _____________________________________________________ 10. Reduction of total surplus resulting from taxes, or perhaps from monopoly ___ dead-weight loss (also called excess burden) ________________________ Multiple Choice Questions 80 Points Total Directions: Each question in this section is worth 2 (two) points. __ C __ 11) A line that represents all combinations of a firm's factors of production that require the same total expenditure is called the: a. marginal rate of transformation. b. isoquant. c. isocost curve. d. expansion path. __ C __ 12) A negative externality is best described as: a. a market failure in which the marginal social benefit of a good or service exceeds its marginal social cost. b. an information asymmetry that causes one party to a transaction to engage in excessive risk taking. c. a cost suffered by a third party as a result of an economic transaction. d. the reduction in overall welfare from imposition of a sales or excise tax. __ C __ 13) Which of these situations would represent a violation of the axiom that economic actors try to do the best they can with the resources they have: a. consumers adjusting their consumption such that the last dollar spent on each good gives them the same marginal utility. b. an equilibrium in which the marginal rate of transformation equals the marginal rate of substitution. c. firms choosing output levels that maximize their revenues d. all of the above.

__ D __ 20) Command and control regulations were instrumental in significantly reducing US levels of: a. carbon monoxide emissions from automobiles. b. particulate emissions, particularly those from highway trucks. c. airborne lead and mercury. d. all of the above. __ C __ 21) Economists use the word efficiency to describe a situation in which: a. each member of society has access to abundant quantities of goods and services. b. each member of society has the same income. c. society is getting the maximum benefits from its scarce resources. d. society's resources are entirely consumed. __ A __ 22) Which of these governmental activities is Congress empowered to perform by Article 1, Section 8 of the US Constitution? a. to promote the progress of Science and the useful Arts. b. to lay and collect taxes on incomes. c. to outlaw contracts, combinations, or conspiracies in restraint of trade. d. these activities are all authorized in Article 1, Section 8 of the US Constitution. __ C __ 23) Overall social welfare is decreased after imposition of a sales tax because: a. some producer surplus is shifted to government revenue; b. some consumer surplus is shifted to government revenue; c. some consumer surplus becomes dead-weight-loss; d. all of the above. __ B __ 24) How can we justify the federal government's 20th century expansion of activities into areas of governance traditionally reserved to the states? a. The reserved powers clause had been revoked by the 16th amendment. b. States had been doing an inadequate job of protecting the constitutional rights of many of their citizens. c. During the 20th century, the states had agreed to give up many of their traditional responsibilities, recognizing that the federal government was more capable. d. The federal government has not actually expanded its activities into areas of governance traditionally reserved to the states. __ B __ 25) Why do some environmental organizations dislike Cap-and-Trade systems? a. Pollution abatement is more efficiently achieved through command and control methods, such as emissions limits or quotas. b. By creating a market for permits, a Cap-and Trade system implicitly treats pollution as a 'good' rather than a 'bad'. c. Under a Cap-and –Trade system, firms have no incentive to reduce their emissions once they get below the cap. d. Under a Cap-and-Trade system, large reductions in emissions are not likely to occur.

__ D __ 26) Why have policy makers and many EPA officials embraced Cap-and-Trade systems such as the Clean Air Markets Program (CAMP)? a. These systems have created large reductions in emissions of criteria pollutants. b. Industry's costs have been reduced as those with the lowest cost of compliance have reduced their emissions and sold credits to other firms. c. Political and legal opposition from industrial firms has been much reduced. d. All of the above have increased support for Cap-and-Trade systems. __ B __ 27) Which of these is true of a Lindahl equilibrium? a. Lindahl prices paid by each member of the community are the same. b. All members of the community pay Lindahl prices equal to their marginal benefit for the public good provided. c. Lindahl prices are frequently used to provide public goods at the local level, including community recreation centers and swimming pools. d. Lindahl prices fail to solve the free-rider problem common to public goods, and as a result, are rarely seen in practice. __ C __ 28) US antitrust regulators oppose first degree price discrimination because: a. price discrimination restores economic efficiency to markets. b. regulators typically favor big businesses who are harmed by price discrimination. c. price discrimination converts consumer surplus into producer surplus. d. price discrimination makes monopoly markets less efficient. __ A __ 29) One reason government regulators attempt to prevent monopolies is that: a. monopolies raise price above marginal cost, which is bad for consumers. b. monopoly pricing restores the efficient quantity, and thus increases total surplus. c. since they face no competition, monopolies have little incentive to innovate. d. monopolies transfer producer surplus to consumer surplus. __ D __ 30) Which of the following equations illustrates the equal marginal principle in consumption? a. MU X / P Y = MU Y / P X b. P X / P Y = MRS c. MU X = MU Y d. MU X / P X = MU Y / P Y __ C __ 31) If the conditions for perfect competition are met, a market equilibrium: a. insures that goods are produced by firms with the highest cost. b. insures that goods are purchased by households with the lowest valuation. c. produces a Pareto optimal allocation. d. all of the above are true. __ D __ 32) Which of the following could be considered a spillover? a. Sue catching the flu because she didn't get a flu vaccine. b. Mary catching the flu from Sue because Sue did not get a flu vaccine. c. Sue not catching the flu because she got a flu vaccine. d. Mary not catching the flu from Sue because Sue got a flu vaccine.

__ A __ 37) Which of the following is best characterized as a public good? a. a nearly empty freeway in the wee hours of the morning. b. Walt Disney World in central Florida. c. a patent that can be licensed to any firm willing to pay the royalties. d. a bottle of 1988 vintage Chateauneuf-du-Pape. __ A __ 38) Which of the following best defines the concept of Pareto Efficiency? a. When it is impossible to benefit one individual without simultaneously harming another person. b. When one person is made better off without reducing the utility of another person. c. When one person can benefit from a reallocation of goods. d. When one person cannot benefit from a reallocation of goods. __ D __ 39) Which of the following foundations of the Social Welfare Function is best described as favoring competitive allocations regardless of the distribution of endowments ? a. Utilitarian. b. Commodity Egalitarianism. c. Rawlsian. d. Market Oriented. __ D __ 40) What would be the impact of a regulator attempting to force competition into a natural monopoly electricity market? a. the firms would compete until prices reached marginal cost – ideal for consumers. b. the firms would engage in price fixing, and thus achieve monopoly prices and profits. c. no firms would be willing to operate in such a market, as they could not break even. d. each competing firm would produce a small amount of high-priced electricity. __ C __ 41) Which of the following best describes a Sam's Club membership? a. It is both rival and excludable. b. It is rival and non-excludable. c. It is non-rival and excludable. d. It is non-rival and non-excludable. __ B __ 42) Which of the following best describes normative analysis? a. statements about how the world works which can be tested empirically. b. statements about whether the effects of a policy are desirable. c. a determination of the effects a policy will have on the economy. d. statements about the world that are provably false. __ B __ 43) A good that is non-excludable but rival in consumption is called a a. private good. b. common resource. c. public good. d. mixed good.

Use the following graph to answer questions 44 and 45. __ D __ 44) Which of the following statements is false? a. point D is Pareto-preferred to point B. b. point C is Pareto-preferred to point D. c. point C is Pareto-preferred to point A. d. point E is Pareto-preferred to point C. __ C __ 45) What would be the impact of moving from Point A to Point B? a. Susan's utility would improve while Liz's would remain unchanged. b. Liz's utility would improve while Susan's would remain unchanged. c. The utility of Susan and Liz would stay the same. d. We don't have enough information to gauge the impact of this move. __ B __ 46) What is unusual about moving from an individual demand curve to a market demand curve when considering pure public goods? a. the individual demand curves are summed horizontally to derive market demand. b. individual demand curves are summed vertically to derive market demand. c. individual demand curves cannot be summed to derive market demand. d. individual demand curves are multiplied to derived market demand. __ B __ 47) Which of these is a proper statement of the First Welfare Theorem? a. Any efficient allocation can be achieved as a competitive equilibrium given some initial endowment. b. Any competitive equilibrium leads to a Pareto efficient allocation of resources. c. A Pareto efficient outcome is one in which it is impossible to make any market participant better off without making at least one person worse off. d. Allocative efficiency can only occur under a social welfare function in which the poorest members of society are made better off.