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Assignment from Lecture 4 Multiple Choice Questions Chapter 7 1. Consumer surplus is the: a. difference between what the consumer is willing to pay and what the consumer has to pay. b. surplus of goods the consumer has after consuming all he/she needs from them. c. excess number of goods consumers purchase over and above what they really need. d. excess number of units firms produce over and above what consumers want to purchase. 2. The consumer surplus can be expressed graphically as the area: a. above the supply curve and below the price. b. above the supply curve and below the demand curve. c. below the supply curve and above the horizontal axis. d. below the demand curve and above the price of the good. 3. The producer surplus can be expressed graphically as the area: a. above the supply curve and below the price. b. above the supply curve and below the demand curve. c. below the supply curve and above the horizontal axis. d. below the demand curve and above the price of the good. 4. The producer surplus represents the: a. production in a market over and above what consumers wish to purchase. b. difference between the price of the good and the cost to the seller. c. left over of raw materials and other inputs that firms have after producing the good. d. left over of the good that remains unsold after the Holiday season. 5. A price increase will cause consumer surplus to ________. a. increase b. decrease c. stay the same d. increase or decrease 6. A price increase will cause producer surplus to ________. 1

a. increase b. decrease c. stay the same d. increase or decrease 7. Total Surplus can be calculated as follows: a. Value to buyers minus amount paid by buyers. b. Amount received by sellers minus cost to sellers. c. Cost to sellers minus value to buyers. d. Value to buyers minus cost to sellers. 8. Total surplus in a market is usually maximized when: a. firms obtain the biggest possible profit. b. consumers pay the lowest possible price. c. the maximum amount possible is produced d. the market is in equilibrium. 9. If the quantity traded in a market is less than the equilibrium quantity: a. the value to consumers for additional units is less than the cost to sellers of producing those units. b. the value to consumers for additional units is greater than the cost to sellers of producing those units. c. the market will decrease its total surplus if more units are produced. d. total surplus is larger than in equilibrium. 10. If a market is not very competitive and/or if there are externalities, we can expect the market outcome: a. to be efficient, and total surplus to be maximized. b. to be efficient, but total surplus will not be maximized. c. not to be efficient, but the total surplus will still be maximized. d. not to be efficient, and total surplus will not be maximized. Chapter 10 1. Which of the following statements is true regarding externalities? a) Both negative and positive externalities lead to inefficient outcomes in markets. b) Negative externalities lead to inefficiencies in markets, but positive externalities do not. c) Negative externalities occur when the good harms those who consume it. d) Positive externalities occur when the good benefits those who consume it. 2. Positive externalities cause the market to trade a quantity: a) greater than the optimal quantity. b) smaller than the optimal quantity. 2

c) that is exactly the optimal. d) that can be greater, or smaller than the optimal quantity. 3. Negative externalities cause the market to trade a quantity: a) greater than the optimal quantity b) smaller than the optimal quantity c) that is exactly the optimal d) that can be greater, or smaller than the optimal quantity 4. Markets with positive externalities do not trade the optimal quantity because a) the government fails to provide markets with all the information needed for an efficient outcome. b) producers fail to consider the external cost in their decision making process. c) consumers fail to consider the external benefit in their decision making process. d) bystanders are not important members of society. 5. Markets with negative externalities do not trade the optimal quantity because: a) the government fails to provide markets with all the information needed for an efficient outcome. b) producers fail to consider the external cost in their decision making process. c) consumers fail to consider the external benefit in their decision making process. d) bystanders are not important members of society. 6. Private solutions to externalities are not always possible because: a) the government has a vested interest in the outcome and will always intervene. b) private parties are simply not good at negotiating problems related to externalities. c) sometimes there are simply too many people involved for them to be able to reach a negotiated solution. d) externalities affect other people who are not participating in the market. 7. Which of the following statements is true about regulating externalities? a) Regulation only works if the government does not get involved. b) Regulation only works in dealing with positive externalities. c) Regulation is a method used by the government to let the market reach on its own an efficient outcome. d) Regulation is a command and control policy that can be used to deal with externalities. 8. Which of the following is false regarding a Pigovian tax? a) Applying a Pigovian tax can lead a market with negative externalities to trade an optimal quantity. b) An ideal Pigovian tax is equal to the negative externality. c) A Pigovian tax can be given to either the sellers or the buyers of the good with the externality. d) A Pigovian tax can only be applied effectively in situations with positive externalities. 3

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Chapter 11 1. Public goods are: a) both excludable and rival. b) neither excludable nor rival. c) excludable, but not rival. rival, but not excludable. 2. Common resources are: a) both excludable and rival. b) neither excludable nor rival. c) excludable, but not rival. d) rival, but not excludable. 3. The free-rider problem refers to the: a) over exploitation that tends to occur to common resources b) abuse of power by some firms when they increase their prices to unreasonable levels. c) excessive consumption that occurs when goods are given for free during promotion campaigns. d) fact that when public goods are provided by someone, there is no way of preventing others from using them, even if they do not pay for them. 4. All of the following are examples of public goods, EXCEPT: a) national defense. b) basic research. c) clean air and water. d) programs to fight poverty. 5. The tragedy of the commons refers to: a) the grounds surrounding medieval towns, which became barren through overuse. b) ill conceived government policies that led to excessive bureaucracy. c) the free rider problem, that led communities not to provide desirable public goods. d) farmers being taxed too heavily. 6. Which of the following is a good example of a common resource? a) Batteries for toys. b) Congested freeways. c) A gallon of chocolate ice cream. d) The electricity utility service. 7. Which of the following is the most effective solution to congested freeways? a) Build more freeways. 4

b) Add more lanes to existing freeways. c) Urge people to drive less. d) Make freeways into toll ways, with the toll being steep enough to discourage some drivers from using them. 8. Which of the following will help solve the free-rider problem of public goods? a) Taxing the good b) Regulating the good, to limit its over use. c) Have the government itself provide the good. d) Educating consumers, so they buy the optimal quantity of the good. Problems and Application 1. Policy goal: Reducing Automobile Exhaust - Two approaches: - Enact regulations requiring automakers to produce more fuel-efficient vehicles - Significantly raise the gas tax Discuss the merits of each approach. Which do you think would achieve the goal at lower cost? Who do you think would support or oppose each approach? Regulations requiring automakers to produce more fuel-efficient vehicles would have the merits of producing better vehicles for the economy and for the future. Raising the gas tax would have the merit of convincing the drivers to drive their vehicles less. I think raising the gas tax would achieve the goal at a lower cost. I think the government and the producers would support the tax, but the producers would oppose the fuel-efficient vehicles. The consumers would oppose the gas tax, since it significantly impacts their usage of gas. 2. Both public goods and common resources involve externalities. A Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free market quantity of public goods generally greater or less than the efficient quantity? Public goods are generally positive externalities. For example, the firework display on July fourth would be shown to all people in an area regardless of if they made a payment or not. This is a positive externality. The free market quantity of public goods is generally greater than the efficient quantity. 5

B Are the externalities associated with common resources generally positive or negative? Use examples in your answer. Is the free market use of common resources generally greater or less than the efficient use? Common resources are generally negative externalities. For example, the limited grass for the sheep in a village is depleting as more sheep arrived. This is a negative externality. The free market use of common resources is generally less than the efficient use. 6

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