Microeconomics Canadian 14th Edition Mcconnell - Test Bank

Microeconomics Canadian 14th Edition Mcconnell – Test Bank

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ExamName___________________________________MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.1)Which of the following is a key difference between the economic activities ofgovernment and those of private firms?1)A)Private economic activities create externalities; government activities do not.B)Government has the legal right to force people to do things; private firms do not.C)Private firms face the constraint of scarcity; government does not.D)Government focuses primarily on equity; private firms focus only on efficiency.Answer:B2)Which of the following is an activity of government that is not an activity of privatefirms?2)A)Paying equitable wages.B)Creating positive externalities.C)Enforcing involuntary transactions.D)Pursuing economic efficiency.Answer:C3)The government’s ability to coerce can enhance economic efficiency by:3)A)eliminating income inequality.B)correcting market failures.C)restraining self-interest.D)preventing resources from going to their most valued uses.Answer:B4)In a market economy, the government’s power to coerce can:4)A)reduce private-sector risk and increase economic efficiency.B)cause significant negative externalities.C)undermine economic efficiency by increasing private-sector risk.D)improve economic efficiency by directing all resources to their most valued uses.Answer:A5)How does government’s power to coerce behavior tend to reduce private-sector risk?5)A)By guaranteeing that the government will financially cover any losses byprivate-sector firms.B)By enforcing contracts and discouraging illegal behavior that threatens privateproperty.C)By strictly regulating the allocation of most property resources in the economy.D)The coercive power of government only increases private-sector risk.Answer:B1
6)Weak government enforcement of contracts and laws tends to:6)A)discourage economic activity by encouraging private-sector coercion such asblackmail and extortion.B)stimulate innovation and investment.C)increase economic efficiency by minimizing government interference.D)not affect economic activity, as incentives for theft and deception are low.Answer:A7)The government of Southland wants to improve resource allocation in the country.Which of the following actions by the Southland government is most likely toaccomplish this?7)A)Coercing all firms to innovate and invest.B)Promising to cover every risk of loss for private firms.C)Weakening enforcement of laws and contracts.D)Taxing polluters and subsidizing firms that are creating significant positiveexternalities.Answer:D8)Which of the following is a source of government failure?8)A)Excessive flexibility.B)The enormous size and scope of government.C)The lack of bureaucracy in government.D)The invisible hand.Answer:B9)Information problems create inefficient outcomes in:9)A)neither the private nor the public sector.B)the private sector but not the public sector.C)the public sector but not the private sector.D)both the private and the public sectors.Answer:D10)The many layers of the federal government in Canada:10)A)better allow the invisible hand to direct government resources to their best uses.B)improve accountability of government officials, thus leading to more efficientpolicies.C)lead to economic inefficiencies because of difficulty aggregating and conveyinginformation.D)enhance government’s ability make effective decisions quickly.Answer:C2
11)In what way, if any, does the invisible hand affect government resource allocation?11)A)It reduces government efficiency by sending market signals that interfere withgovernment decision making.B)It does not help resource allocation, as there are no competitive forces withingovernment that automatically direct resources to their best uses.C)It rewards government bureaucrats who are most efficient at implementing publicpolicies.D)It enhances government efficiency by promoting competition for resources withingovernment.Answer:B12)Individual accountability within the government bureaucracy:12)A)is not a problem because government bureaucrats are not affected by theself-interest that affects private sector individuals.B)is easy to monitor because of the small size and scope of government.C)tends to be greater than in private firms, making government more efficient thanprivate firms.D)tends to be lacking because of civil service protections and the complexity ofgovernment.Answer:D13)Government officials tend to make:13)A)inefficient choices because they lack the information necessary to accurately weighmarginal benefits and marginal costs.B)better economic decisions than private individuals because of the wealth ofinformation at their disposal.C)inefficient choices because the invisible hand directs them away from the resourceallocation where marginal benefits equal marginal costs.D)better economic decisions than private individuals because of the efficient processesand flexibility built into the government bureaucracy.Answer:A14)As it relates to corporations, the principal-agent problem is that:14)A)the goals of the corporate managers (the agents) may not match the goals of thecorporate owners (the principals).B)it is costly for the corporate owners (the principals) to obtain a corporate charterfrom government (the agent).C)the federal government (the agent) taxes both corporate profits and the dividendspaid to stockholders (the principals).D)the goals of the corporate managers (the principals) may not match the goals of thecorporate owners (the agents).Answer:A15)In corporations, owners are ________ and managers are ________.15)A)stockholders; bondholdersB)agents; employeesC)agents; principalsD)principals; agentsAnswer:D3
16)In representative democracy, voters are ________ and politicians are ________.16)A)principals; agentsB)agents; principalsC)logrollers; principalsD)agents; employeesAnswer:A17)As it relates to owners and managers, the principal-agent problem results from the:17)A)limited liability of corporate owners.B)differing interests of corporate stockholders and bondholders.C)double taxation of corporate profit.D)separation of corporate ownership and control.Answer:D18)As it relates to the political process, the principal-agent problem results from the:18)A)paradox of voting.B)political rules that encourage elected officials to engage in unethical and illegalbehavior.C)inconsistency between voters’ interest in programs and politicians’ interest inreelection.D)negative externalities that are created by some policy actions.Answer:C19)Vote for my special local project and I will vote for yours. This political technique:19)A)illustrates the paradox of voting.B)is called “logrolling.”C)undermines the benefits-received principle.D)illustrates the median voter model.Answer:B20)Factors that impede the attainment of economic efficiency in the public sector arecalled:20)A)voting irregularities.B)externalities.C)market failures.D)government failures.Answer:D21)The idea of government failure includes all of the followingexcept:21)A)extensive positive externalities from public and quasi-public goods.B)special-interest effect.C)pressure by special-interest groups.D)bureaucratic inefficiency.Answer:A22)Suppose Canadian winemakers convince the federal government to issue a directive toserve only domestically produced wine at government functions. This would be anexample of:22)A)the principal-agent problem.B)moral hazard.C)logrolling.D)rent-seeking behavior.Answer:D4
23)Public choice theorists contend that:23)A)government can efficiently correct instances of market system failure.B)public bureaucracies are inherently more efficient than private enterprises.C)public bureaucracies are inherently less efficient than private enterprises.D)the existence of cost-benefit analysis has brought about the efficient use ofresources in the public sector.Answer:C24)The pursuit through government of a “transfer of wealth” at someone else’s expenserefers to:24)A)rent-seeking behavior.B)the paradox of voting.C)the median-voter model.D)logrolling.Answer:A25)Economists call the pursuit of a transfer of wealth through government at someoneelse’s expense:25)A)rent-seeking behavior.B)the benefits-received principle.C)adverse selection.D)the paradox of voting.Answer:A26)Public choice economists hold that politicians will:26)A)favor programs entailing immediate and clear-cut costs and vaguely defined ordeferred benefits.B)objectively weigh the costs and benefits of various government programs and voteaccordingly.C)follow policies leading to an optimal allocation of resources between public andprivate sectors.D)favor programs entailing immediate and clear-cut benefits and vaguely defined ordeferred costs.Answer:D27)Public choice economists contend public bureaucracies are inefficient primarilybecause:27)A)of the absence of competitive market pressures.B)the value of public goods is more easily measured than is the value of private goods.C)relatively low pay in government attracts workers of lesser quality.D)public sector workers are more security-conscious than are private sector workers.Answer:A28)A special-interest issue is one whose passage yields:28)A)large economic gains to a small number of people and small economic losses to alarge number of people.B)large external benefits compared to private benefits.C)private benefits equal to external benefits.D)small economic losses to a small number of people and large economic losses to alarge number of people.Answer:A5
29)The political tendency to favor spending priorities with immediate benefits but deferredcosts results in:29)A)unfunded liabilities.B)misdirection of stabilization policy.C)chronic budget deficits.D)all of these.Answer:D30)Government’s unfunded liabilities:30)A)are caused primarily by market failures.B)result in more efficient policies in an attempt to satisfy these liabilities.C)only occur in democratically elected governments.D)result from the political bias toward immediate benefits and deferred costs.Answer:D31)Chronic budget deficits can be attributed to:31)A)unfunded liabilities.B)voters wanting government programs but not wanting to pay taxes.C)state budget laws.D)inappropriate monetary policy.Answer:B32)Which of the following impacts would economists expect to result from chronic budgetdeficits?32)A)Greater economic efficiency resulting from the abundance of public goodsproduced.B)Government control of an inefficiently large share of the economy’s resources.C)Permanently high levels of output and continued economic growth.D)Greater political control over monetary policy.Answer:B33)Government changes in interest rates to regulate the economy are part of:33)A)monetary policy.B)liability policy.C)fiscal policy.D)debt policy.Answer:A34)Government fiscal policy involves changing which of the following?34)A)Interest rates.B)The amount of money in circulation.C)Regulations on business.D)Taxes and government spending.Answer:D35)A government using fiscal policy in an attempt to stimulate the economy would dowhich of the following?35)A)Lower interest rates.B)Raise taxes.C)Raise interest rates.D)Raise government spending.Answer:D6
36)To reduce politicization of policy making, many countries have given control of________ to politically independent central banks.36)A)unfunded liabilitiesB)budget deficitsC)fiscal policyD)monetary policyAnswer:D37)The Bank of Canada, U.S. Federal Reserve, the Bank of Japan, the Bank of England,and the European Central Bank are all in charge of what for the countries theyrepresent?37)A)Unfunded liabilities.B)Monetary policy.C)Debt management.D)Fiscal policy.Answer:B38)Monetary stimulus is only helpful to an economy:38)A)with few public goods.B)experiencing significant negative externalities.C)that is experiencing high inflation.D)that is in recession.Answer:D39)When a nation is in a debt crisis, the government’s level of debt is so high that:39)A)other countries will be unwilling to buy goods and services from the nation.B)it can only be solved with a fiscal stimulus of lower taxes and more governmentspending.C)monetary policy is ineffective.D)the government is unable to find willing lenders so it can continue borrowing.Answer:D40)Public choice theorists point out that the political process:40)A)is less prone to failure than is the marketplace.B)is a much fairer way to allocate society’s scarce resources than is the impersonalmarketplace, which is dominated by high-income consumers.C)differs from the marketplace in that voters and congressional representatives oftenface limited and bundled choices.D)involves logrolling, which is always inefficient.Answer:C41)When congressional representatives vote on an appropriations bill, they must vote yeaor nay, taking the bad with the good. This statement best reflects the:41)A)benefits-received principle.B)paradox of voting.C)concept of limited and bundled choices.D)regulatory capture effect.Answer:C7
42)Suppose lawyers seek legislation to limit the use of computer software that enablespeople to use their personal computers to self-prepare their own wills, trusts, and otherlegal documents. This is an example of:42)A)the principal-agent problem.B)rent-seeking behavior.C)logrolling.D)limited and bundled choices.Answer:B43)In a sporting goods store, you can buy the equipment you want and forgo the rest. Butin an election you “buy” the entire range of the candidate’s positions, including someyou may not agree with. This difference:43)A)describes the principal-agent problem in the public sector.B)creates bureaucratic inefficiency in the public sector.C)describes the paradox of voting.D)reflects limited and bundled choices in the public sector.Answer:D44)According to some economists, the private sector is more efficient than the public sectormainly because:44)A)worker turnover is higher in the public sector.B)of extensive negative externalities in the public sector.C)the private sector has a clear test of performance: profit and loss.D)wages, salaries, and fringe benefits are higher in the private sector.Answer:C45)Regulatory capture is said to have occurred when which of the following is true?45)A)One firm controls an entire market, having captured customers away from otherfirms.B)Government imposes excessive regulations in an industry, resulting ininefficiencies.C)Consumers make all the rules for an industry, forcing firms into inefficientproduction methods.D)Rules and enforcement in an industry are heavily influenced by the industry beingregulated.Answer:D46)Which of the following would be the best example of regulatory capture?46)A)Starbucks buys up all the available supplies of coffee beans.B)Executives from the Ford, General Motors, and Chrysler companies write the rulesregulating automobile safety and fuel requirements.C)Federal law makers write and pass legislation that protects domestic companiesfrom foreign competition.D)Nike executives influence the rules for track and field events.Answer:B8
47)Regulatory capture often occurs because of which of the following?47)A)Nearly everyone with expertise works in the regulated industry.B)Patent law allows firms to gain monopoly power easily and therefore control amarket.C)Government officials want stronger control over industry regulation.D)Consumer groups are effective at lobbying the government for industry regulation.Answer:A48)Which of the following is considered a potential solution to some regulatory capture?48)A)Deregulation of the industry.B)Government subsidies for firms in the industry.C)Creating a standard set of regulations for all industries.D)Bringing industry experts into the regulatory process.Answer:A49)Proponents of deregulation point to all of the following industries as examples ofsuccessful deregulationexceptfor:49)A)pharmaceuticals.B)railroads.C)interstate trucking.D)airlines.Answer:A50)Which of the following would best explain why regulatory capture is a problem?50)A)The regulations implemented tend to reduce the profitability of the regulatedindustry and reduce global competitiveness.B)The regulations implemented serve the private interests of the regulated industry,rather than addressing social interests such as consumer safety and environmentalprotection.C)Individuals implementing the regulations lack expertise about the industry andtherefore make poor regulatory choices.D)Regulatory capture unduly increases the size and power of government, increasingcosts for taxpayers.Answer:B51)Deregulation:51)A)tends to improve outcomes in industries generating substantial negativeexternalities.B)eliminates regulatory capture and can improve outcomes by increasing competition.C)always generates greater economic efficiency.D)is most appropriate to undertake by government agencies responsible for humansafety, financial regulation, and environmental protection.Answer:B9
52)Government loan guarantees tend to have the effect of:52)A)privatizing both gains and losses.B)socializing gains and privatizing losses.C)socializing both gains and losses.D)socializing losses and privatizing gains.Answer:D53)Under what circumstances would government loan guarantees be socially beneficial?53)A)When the guarantees promote production of goods otherwise underproduced by theprivate sector.B)When the guarantees stimulate production of goods generating significant spillovercosts.C)When the guarantees socialize losses and privatize gains.D)When the guarantees increase company profits.Answer:A54)Which of the following will tend to socialize losses and privatize gains?54)A)Government guarantees to private investors that they will get their money back evenif the company fails.B)Government creating projects rather than supporting private efforts.C)Lowering interest rates to encourage private borrowing and investment.D)Government regulation to promote human safety and environmental protection.Answer:A55)What is the main problem with government guarantees that socialize losses andprivatize gains?55)A)They discourage private investment in worthwhile projects.B)They encourage overly risky investments by insulating private investors from anylosses.C)They tend to benefit foreign companies at the expense of domestic firms.D)The investments that do occur never generate production of goods underproducedby the private sector.Answer:B56)The unlawful misdirection of governmental resources for personal gain is known as:56)A)logrolling.B)adverse selection.C)political corruption.D)the special-interest effect.Answer:C10
57)The Road Runner Club contributes money to Senator Sly’s reelection campaign fund,and Senator Sly helps pass legislation to add more jogging paths across the state. Fromthis we can definitively conclude:57)A)that political corruption has occurred.B)nothing; the Road Runner Club may have donated to Senator Sly because healready supported the jogging paths.C)that a principal-agent problem has occurred.D)that logrolling has occurred.Answer:B58)Political corruption occurs whenever:58)A)logrolling is used to secure votes for controversial legislation.B)there is pork barrel politics involved.C)special interest groups contribute to elected officials, who in turn support legislationthat benefits the special interest group.D)government officials use unlawful misdirection of governmental resources for theirown personal gain.Answer:D59)The field of economics that analyzes government decision making, politics, andelections is called:59)A)public choice theory.B)political economy.C)public finance.D)collective economics.Answer:A60)Public choice economists:60)A)use the tools of economics to analyze decision making, politics, and elections in thepublic sector.B)are also known as Keynesian economists.C)are, by definition, economists employed by federal, state, and local governments.D)analyze the incidence of taxes.Answer:A61)Which one of the following topics would be of the most interest to a public choiceeconomist?61)A)Inflation and unemployment.B)The law of increasing opportunity cost.C)The theory of comparative advantage.D)Rent-seeking behavior.Answer:D62)An economic analysis of the relationship between proposed legislation affecting majoremployers in each state and the voting patterns of senators and representatives inCongress on that legislation would fit within the subcategory of economics called:62)A)monetarism.B)the economics of fiscal policy.C)behavioral economics.D)public choice theory.Answer:D11
63)Government failure is a prominent topic in:63)A)public choice theory.B)Keynesian economics.C)behavioral economics.D)socialist theory.Answer:A64)Public choice theory focuses on the economics of:64)A)antitrust and regulatory policy.B)the behavior of business firms.C)government decision making, politics, and elections.D)fiscal and monetary policy.Answer:C65)Because majority voting fails to incorporate the strength of the preferences of individualvoters, it:65)A)under some circumstances produces economically inefficient outcomes.B)creates negative externalities.C)leads to market failure.D)leads to politics dominated by special interest groups.Answer:A66)Suppose that Katie and Kelly each expects to receive $500 worth of marginal benefitsfrom a proposed new recreation center, whereas Kerry expects to receive only $100worth. If the proposed tax levied on each for the center would be $400, a majority votewill:66)A)pass this project and resources will be efficiently allocated.B)defeat this project and resources will be underallocated to it.C)pass this project and resources will be overallocated to it.D)pass this project and resources will be underallocated to it.Answer:C67)Suppose that Steve and Susie each perceives $200 of marginal benefit from a proposednew park, whereas Elizabeth perceives $800. If the proposed tax levied on each for thepark would be $300, a majority vote will:67)A)pass this project and resources will be overallocated to it.B)pass this project and resources will be underallocated to it.C)defeat this project and resources will be underallocated to it.D)defeat this project and resources will be efficiently allocated.Answer:C12
68)Answer the question on the basis of this table showing the marginal benefit that aparticular public project will provide to each of the three members of a community. Novote trading is allowed.If the tax cost of this proposed project is $600 per person, a majority vote will:68)A)defeat this project and resources will be allocated efficiently.B)defeat this project and resources will be overallocated to it.C)defeat this project and resources will be underallocated to it.D)pass this project and resources will be overallocated to it.Answer:C69)Answer the question on the basis of this table showing the marginal benefit that aparticular public project will provide to each of the three members of a community. Novote trading is allowed.If the tax cost of this proposed project is $300 per person, a majority vote will:69)A)defeat this project and resources will be underallocated to it.B)pass this project and resources will be underallocated to it.C)pass this project and resources will be allocated efficiently.D)defeat this project and resources will be overallocated to it.Answer:B13
70)Answer the question on the basis of this table showing the marginal benefit a particularpublic project will provide to each of the three members of a community. No votetrading is allowed.If the tax cost of this proposed project is $600 per person, a majority vote will:70)A)pass this project and resources will be underallocated to it.B)pass this project and resources will be allocated efficiently.C)defeat this project and resources will be underallocated to it.D)pass this project and resources will be overallocated to it.Answer:D71)The political technique called logrolling:71)A)always decreases economic efficiency.B)is an example of the paradox of voting.C)involves trading votes to secure favorable outcomes that otherwise could berejected.D)always increases economic efficiency.Answer:C72)The trading of votes by elected officials to secure favorable outcomes is called:72)A)splitting the difference.B)grandstanding.C)logrolling.D)social engineering.Answer:C73)Senator A agrees to vote for Senator K’s state project in exchange for Senator K votingfor Senator A’s state project. This is an example of:73)A)the median voter model.B)logrolling.C)the paradox of voting.D)the principal-agent problem.Answer:B74)A situation in which society may not be able to rank its preferences consistently throughpaired-choice majority voting refers to:74)A)logrolling.B)the special-interest effect.C)the paradox of voting.D)the median-voter model.Answer:C14
75)The principle that under some circumstances majority voting fails to make consistentchoices reflecting the community’s underlying preference is best demonstrated by the:75)A)median-voter model.B)Coase theorem.C)concept of logrolling.D)paradox of voting.Answer:D76)According to the paradox of voting:76)A)majority voting fails under some circumstances to make consistent choices thatreflect the community’s underlying preferences.B)public goods that cost more than the total benefits they confer may get producedunder majority voting.C)the median voter decides what public goods all voters should have.D)trading of votes may either add to or subtract from economic efficiency.Answer:A77)Suppose that in a series of paired-choice votes a new park is preferred to a newrecreation center and a new recreation center is preferred to street widening. Alsosuppose that street widening is preferred to a new park. This set of votes is an exampleof the:77)A)principal-agent problem.B)median-voter model.C)benefits-received principle.D)paradox of voting.Answer:D78)Refer to the table. In a choice between the highway and the lighthouse:78)A)a majority of voters favor the highway.B)no voter decision is possible.C)the voters are indifferent as between the two.D)a majority of voters favor the lighthouse.Answer:A15
79)Refer to the table. The inconsistency illustrated by the table is that, while a majority ofvoters prefer the:79)A)highway to the lighthouse and the submarine to the lighthouse, they also prefer thesubmarine to the highway.B)lighthouse to the submarine and the highway to the submarine, they also prefer thehighway to the lighthouse.C)highway to the lighthouse and the submarine to the highway, they also prefer thelighthouse to the submarine.D)lighthouse to the highway and the lighthouse to the submarine, they also prefer thesubmarine to the highway.Answer:C80)The information contained in the table illustrates:80)A)the median-voter model.B)political logrolling.C)the principal-agent problem theorem.D)the paradox of voting.Answer:D81)Refer to the table. In a choice between public safety and parks:81)A)a majority of voters would favor public safety.B)the outcome would depend on which item was listed first on the ballot.C)no voter decision is possible.D)a majority of voters would favor parks.Answer:D16
82)Refer to the table. In a choice between parks and education:82)A)a majority of voters would favor parks.B)no voter decision is possible.C)the outcome would depend on which item was listed first on the ballot.D)a majority of voters would favor education.Answer:D83)Refer to the table. In a choice between education and public safety:83)A)a majority of voters would favor public safety.B)no voter decision is possible.C)the outcome would depend on which item was listed first on the ballot.D)a majority of voters would favor education.Answer:A84)Refer to the table. The outcomes of the three possible sets of paired-choice majorityvotes illustrate the:84)A)principal-agent problem.B)the benefits of majority rule.C)inefficiency of logrolling.D)paradox of voting.Answer:D17
85)The median-voter model implies that:85)A)many people will be dissatisfied with the size of government in the economy.B)with majority voting there can never be a consistent ordering of public goodpreferences.C)political voting will be as economically efficient as “dollar voting” in competitivemarkets.D)all voters have about the same preferences for various public goods and services.Answer:A86)The median-voter model implies that a political office seeker will:86)A)favor the private resolution of externality problems rather than governmentalintervention.B)favor extensive government spending because demand curves for public goods areadded vertically rather than horizontally.C)adopt more extreme views when seeking his or her party’s nomination than whenrunning against the other party’s opponent.D)adopt less extreme views when seeking his or her party’s nomination than whenrunning against the other party’s opponent.Answer:C87)Answer the question on the basis of the following table that shows the total costs andtotal benefits facing a city of five different potential baseball stadiums of increasing size.All figures are in millions of dollars.Refer to the table. Suppose a five-person city council must decide via majority votingwhich of these stadiums to build. Also suppose that each of the stadium sizes has thesupport of one council member. According to the median voter model, the council willultimately vote in favor of stadium:87)A)A.B)B.C)C.D)D.Answer:C18
88)Answer the question on the basis of the following table that shows the total costs andtotal benefits facing a city of five different potential baseball stadiums of increasing size.All figures are in millions of dollars.Refer to the table. The marginal cost and marginal benefit of stadium B (relative to A)are:88)A)$20 million and $50 million, respectively.B)$30 million and $50 million, respectively.C)$100 million and $200 million, respectively.D)$20 million and $60 million, respectively.Answer:D89)Answer the question on the basis of the following table that shows the total costs andtotal benefits facing a city of five different potential baseball stadiums of increasing size.All figures are in millions of dollars.Refer to the table. Based on cost-benefit analysis, the city should:89)A)build stadium D.B)not build any of these stadiums.C)build stadium C.D)build stadium E.Answer:A19
90)Suppose three roommates cannot agree on the size of a pizza to order. Domino arguesfor a medium pizza, Godfather contends a large pizza will be needed, and Little Caesarwants a super-large pizza. Assuming no paradox of voting, majority voting will result ina decision to order:90)A)a super-large pizza.B)a medium pizza.C)two medium pizzas.D)a large pizza.Answer:D91)Some people argue that the three main television networks all have similarprogramming. If true, this observation might best be explained by the:91)A)median-voter model.B)ability-to-pay principle.C)law of diminishing marginal utility.D)paradox of voting.Answer:A92)Suppose that friends Jennifer, Stephanie, and Megan cannot agree on how much tospend for a bouquet of flowers to send to a person that allowed them to use their beachhouse for the weekend. Jennifer wants to buy a moderately priced bouquet, Stephaniewants to buy an expensive bouquet, and Megan wants to buy a very expensive bouquet.Assuming no paradox of voting, majority voting will result in the decision to buy:92)A)an inexpensive bouquet.B)a very expensive bouquet.C)an expensive bouquet.D)a moderately priced bouquet.Answer:C93)Suppose a college economics department decides to use a single economics text for allsections of principles of economics. Also assume that the three individual members ofthe textbook selection committee have the following preferences.Assuming all other textbook qualities except analytical level are the same, paired-choicemajority voting will result in the committee:93)A)selecting the C/F book.B)selecting the O/S book.C)being deadlocked and unable to decide on a book.D)selecting the M/B book.Answer:D20
94)Pork-barrel legislation that contains funding for hundreds of earmarks throughoutnumerous states often reflects:94)A)the paradox of voting.B)adverse selection.C)the benefits-received principle.D)logrolling.Answer:D95)(Consider This) Voter failure describes the situation where:95)A)an insufficient number of voters turn out to express their preferences.B)government officials make poor decisions that contradict voter preferences.C)voters support policies that would reduce productive and allocative efficiency.D)voter preferences cannot be adequately captured because of a voting paradox.Answer:C96)(Consider This) Which of the following is an example of voter failure?96)A)Voters wanting greater highway safety are unable to express their preferences onhow to achieve it because the voting system doesn’t allow it.B)Voters support adding stop lights that would increase congestion and travel costswithout increasing safety or convenience.C)Government officials ignore voter calls for regulations that would reduce negativeexternalities and enhance efficiency.D)Voters wanting more government services are divided on what services they mostprefer, leaving government officials to determine what is best.Answer:BTRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.97)The government’s ability to force people to do things can increase economic efficiency.97)Answer:TrueFalse98)Government’s ability to enforce laws and contracts increases private-sector economicrisks.98)Answer:TrueFalse99)The invisible hand guides government’s economic activity just as it does with privateeconomic activity.99)Answer:TrueFalse100)Because of the force of law and bureaucratic structure, government accountability isless of a problem than in the private sector.100)Answer:TrueFalse101)The size and scope of government inhibit the flow of information to decision makers,leading to inefficient outcomes.101)Answer:TrueFalse21
102)The pursuit through government of a transfer of wealth at society’s expense is called”rent seeking.”102)Answer:TrueFalse103)The principal-agent problem is a problem for the private sector but does not apply topolitical decision making.103)Answer:TrueFalse104)A debt crisis refers to how much government spending exceeds tax revenues in a givenyear.104)Answer:TrueFalse105)Fiscal policy is more susceptible to politicization than monetary policy.105)Answer:TrueFalse106)Changes in tax rates are a form of monetary policy.106)Answer:TrueFalse107)Monetary policy attempts to change the level of spending by altering interest rates.107)Answer:TrueFalse108)The problem of limited and bundled choices explains why many voters cannot fullyexpress their political preferences.108)Answer:TrueFalse109)Regulatory capture occurs when government exerts excessive control over an industry.109)Answer:TrueFalse110)The Ontario Securities Commission supervision of Bay Street financial firms is apossible example of regulatory capture.110)Answer:TrueFalse111)Economists widely support deregulation of industries that tend toward monopoly orgenerate substantial negative externalities.111)Answer:TrueFalse112)Deregulation is seen as a solution to regulatory capture because it eliminates theregulatory agency that can or has been captured.112)Answer:TrueFalse113)Government loan guarantees tend to socialize gains and privatize losses.113)Answer:TrueFalse114)Government guarantees that socialize losses and privatize gains tend to encourage riskyand imprudent investment.114)Answer:TrueFalse22
115)Logrolling can either increase or diminish economic efficiency.115)Answer:TrueFalse116)Even if a majority of the population wants a law and the law is passed, the outcome maystill be economically inefficient.116)Answer:TrueFalse117)The paradox of voting is that under majority voting rules the median voter decides theelection outcome.117)Answer:TrueFalse118)Majority voting assures that government will provide a public good if it yields totalbenefits in excess of total costs.118)Answer:TrueFalse23

ExamName___________________________________ESSAY. Write your answer in the space provided or on a separate sheet of paper.1)What is the meaning of Market Failures and how do the Demand and Supply curves cause suchfailures?Answer:Market failures occur when markets fail to function properly, whether by overproducing,underproducing, or failing to produce economically desirable goods. A demand-side marketfailure happens when demand curves do not reflect consumers’ full willingness to pay for agood or service. A supply-side market failure occurs when supply curves do not reflect thefull cost of producing a good or service.2)What is consumer surplus?Answer:Consumer surplus is a measure of an individual’s net benefit from consuming a product andis used in cost-benefit analysis. It is equal to the difference between the maximum amountthat the consumer is willing to pay and the actual amount the consumer must pay.3)How is consumer surplus derived from a demand curve?Answer:Consumer surplus is the area under the demand curve and above the market price.1
4)Draw a market demand curve and indicate the following:(a) The market price;(b) The quantity demanded;(c) The maximum amount that buyers are willing to pay for the quantity demanded;(d) The actual amount that buyers must pay for the quantity demanded;(e) The consumer surplus from obtaining the quantity demanded.Answer:See graph above(a) P, (b) Q, (c) area A + B, (d) area B, (e) area A.5)Demand in a market is represented by the equation, P = 50 – QD. Suppose the market price is $30.(a) How many units do buyers wish to purchase in this market?(b) What is the maximum amount that the buyers are willing to pay for this quantity of output?(c) What is the actual amount that buyers have to pay for this quantity of output?(d) What is the consumer surplus that buyers obtain from purchasing this quantity of output?Answer:(a) 20 units; (b) $800 [.5($50 – $30) × 20 + $30 × 20]; (c) $600 ($30 × 20); (d) $200.2
6)Demand in a market is represented by the equation, P = 30 – .5QD. Suppose the market price is $18.(a) How many units do buyers wish to purchase in this market?(b) What is the maximum amount that the buyers are willing to pay for this quantity of output?(c) What is the actual amount that buyers have to pay for this quantity of output?(d) What is the consumer surplus that buyers obtain from purchasing this quantity of output?Answer:(a) 24 units; (b) $576 [.5($30 – $18) × 24 + $18 × 24]; (c) $432 ($18 × 24); (d) $144.7)What is producer surplus?Answer:Producer surplus is the difference between what sellers receive for their product and themarginal cost of producing the product.8)How is producer surplus derived from a supply curve?Answer:Producer surplus is the area above the supply curve and below the market price.9)Draw a market supply curve and indicate the following:(a) The market price;(b) The quantity supplied;(c) The minimum amount that sellers are willing to accept for the quantity supplied;(d) The actual amount that sellers receive for providing the quantity supplied;(e) The producer surplus from providing the quantity supplied.Answer:See graph above(a) P, (b) Q, (c) area B, (d) area A + B, (e) area A3
10)Supply in a market is represented by the equation, P = 20 + .1QS. Suppose the market price is $30.(a) How many units do sellers wish to provide in this market?(b) What is the minimum amount that sellers are willing to accept for this quantity of output?(c) What is the actual amount that sellers receive for providing for this quantity of output?(d) What is the producer surplus that sellers obtain for providing this quantity of output?Answer:(a) 100 units; (b) $2500 [.5($30 – $20) × 100 + $20 × 100]; (c) $3000 ($30 × 100); (d) $500.11)Supply in a market is represented by the equation, P = 5 + .1QS. Suppose the market price is $30.(a) How many units do sellers wish to provide in this market?(b) What is the minimum amount that sellers are willing to accept for this quantity of output?(c) What is the actual amount that sellers receive for providing for this quantity of output?(d) What is the producer surplus that sellers obtain for providing this quantity of output?Answer:(a) 250 units; (b) $4375 [.5($30 – $5) × 250 + $5 × 250]; (c) $7500 ($30 × 250); (d) $3125.12)How are producer surplus and economic profit related?Answer:Profit is equal to total revenue less total costs. Total cost can be further broken down intototal variable cost and total fixed cost. In equation form: ʌ = TR – (TVC + TFC) = TR – TVC- TFC. At a production level of Q, a firm’s producer surplus is the difference between its totalrevenues and the sum of its marginal costs (or its total variable costs). This means we canreplace TR – TVC in our above equation with PSʌ = PS – TFC or PS = ʌ + TFC(producer surplus is equal to the sum of economic profit and total fixed cost).4
13)Demand is represented by the equation, P = 20 – 0.2QDand supply by the equation P = 5 + 0.1QS.(a) Suppose this market produces 40 units of output. What price would this output be sold at? Whatis the marginal benefit to society of the 40thunit? What is the marginal cost of the 40thunit?(b) What is consumer surplus if the market produces 40 units of output? What is producer surplus?What is the sum of consumer and producer surplus?(c) What are the equilibrium price and quantity?(d) What is consumer surplus at equilibrium? What is producer surplus? What is the sum ofconsumer and producer surplus?(e) Is allocative efficiency achieved when the market produces 40 units of output? Explain in threedifferent ways.Answer:(a) The price is $12 [20 – 0.2(40)]. The marginal benefit is $12. The marginal cost is $9 [5 +0.1(40)].(b) Consumer surplus is $160 [0.5($20 – $12) × 40]. Producer surplus is $200 [0.5($9 – $5) ×40 + ($12 – $9) × 40]. The sum of consumer and producer surplus is $360.(c) The equilibrium price and quantity are $10 and 50 units.(d) Consumer surplus is $250 [0.5($20 – $10) × 50]. Producer surplus is $125 [0.5($10 – $5)× 50]. The sum of consumer and producer surplus is $375.(e) Allocative efficiency is achieved when P = MC, when MB = MC, and when the sum ofconsumer and producer surplus is maximized. When 40 units of output are produced, P, whichis $12, exceeds MC, which is $9. Also, MB, which is $12, exceeds MC, which is $9. Finally,the sum of consumer and producer surplus is $360. However, this sum is not maximized. Thesum can be as large as $375. Therefore, on all three bases, allocative efficiency is notachieved at 40 units of output. There is an underallocation of resources to this industry. Byshifting resources to this industry and increasing output to 50 units, allocative efficiency isachieved.5
14)Demand is represented by the equation, P = 200 – 2QDand supply by the equation P = 25 + 3QS.(a) Suppose this market produces 30 units of output. What price would this output be sold at ifconsumers we going to buy all goods? What is the marginal benefit to society of the 30thunit?What is the marginal cost of the 30thunit?(b) What is consumer surplus if the market produces 30 units of output? What is producer surplus?What is the sum of consumer and producer surplus?(c) What are the equilibrium price and quantity?(d) What is consumer surplus at equilibrium? What is producer surplus? What is the sum ofconsumer and producer surplus?(e) Is allocative efficiency achieved when the market produces 30 units of output? Explain in threedifferent ways.Answer:(a) The price is $140 [200 – 2(30)]. The marginal benefit is $140. The marginal cost is $115[25 + 3(30)].(b) Consumer surplus is $900 [0.5($200 – $140) × 30]. Producer surplus is $2100 [0.5($115 -$25) × 30 + ($140 – $115) × 30]. The sum of consumer and producer surplus is $3000.(c) The equilibrium price and quantity are $130 and 35 units.(d) Consumer surplus is $1225 [0.5($200 – $130) × 35]. Producer surplus is $1837.50[0.5($130 – $25) × 35]. The sum of consumer and producer surplus is $3062.50.(e) Allocative efficiency is achieved when P = MC, when MB = MC, and when the sum ofconsumer and producer surplus is maximized. When 30 units of output are produced, P, whichis $140, exceeds MC, which is $115. Also, MB, which is $140, exceeds MC, which is $115.Finally, the sum of consumer and producer surplus is $3000. However, this sum is notmaximized. The sum can be as large as $3062.50. Therefore, on all three bases, allocativeefficiency is not achieved at 30 units of output. There is an underallocation of resources tothis industry. By shifting resources to this industry and increasing output to 35 units,allocative efficiency is achieved.15)What are the basic differences between a public good and a private good?Answer:A public good and a private good have two distinguishing features. First, a private good ischaracterized by rivalry. The purchase of use of the private good by one person preventsothers from purchasing and consuming the good. Second, a private good is subject to theexclusion principle whereas a public good is not. In the case of the private good, thoseconsumers who pay for it receive the benefits. If they do not pay, they will be excluded fromobtaining the private good. With a public good, once it is provided to one person it will beprovided for all people, whether or not they pay for the good.16)In your own words, describe what free-riding means.Answer:Free-riding is the act of using a publicly provided good without paying for it.6
17)How does the market demand curve for a public good differ from the market demand curve for aprivate good?Answer:The demand curve for the private good is an accurate reflection of what people are willing topay for a quantity of the good. In contrast, the demand curve for a public good understatesthe true preferences of citizens. The free rider problem with a public good means that peoplewho received the benefits of a public good do not always have to pay for the good. Once thepublic good is provided for one person, it is available to all. Thus, some citizens may not bewilling to voluntarily pay for the public good, and as a result, people’s true preferences for apublic good will be understated or even nonexistent even when the collective benefitsoutweigh the relevant costs.Furthermore, the market demand curve for a private good is the horizontal sum of theindividual demand curves for the good. On the other hand, since a public good ischaracterized by non-rivalry, its collective demand is the vertical sum of individual demandcurves.18)Explain the difference between a public and private good. Describe the rationale behind supply anddemand analysis for public goods.Answer:A public good is one, which is not subject to rivalry and one for which the exclusionprinciple does not apply. With a private good, the market demand is determined by addingthe quantities demanded people are willing to buy at each possible price whereas with apublic good, the collective demand is found by adding together the prices people are willingto pay for the last unit of the public good at each possible quantity demanded. The demandcurve for a public good slopes downward because of the law of diminishing marginal utility.The supply curve for a public good is upward sloping because of the law of diminishingreturns. The demand curve for a public good is, in essence, a marginal benefit curve; thesupply curve for a public good reflects rising marginal costs. The optimal quantity of apublic good is found at the intersection of the collective demand and supply curves where themarginal benefit of the last unit equals that unit’s marginal cost.19)Data on two individuals’ preferences for a public good are reflected in the table below.PAandPBrepresent the prices individuals A and B, the only two people in the society, are willing to pay for anextra unit of a public good, rather than do without.(a) Complete the table below showing the collective willingness to pay for the public good in thissociety.7
(b) Given the supply schedule for this public good as shown by theQscolumn, what is the optimalquantity of this public good and what is the optimal price?(c) What is the perceived marginal benefit and perceived marginal cost when 4 units of the publicgood are supplied? What does this indicate about the allocation of resources to this public good?Answer:(a)See table above(b) The optimal quantity is 5 units and the optimal price is $11.(c) The marginal benefit of the public good is $15, but the marginal cost is only $7. There isan under-allocation of resources to the public good.8
20)Data on two individuals’ preferences for a public good are reflected in the table below.PAandPBrepresent the prices individuals A and B, the only two people in the society, are willing to pay forthe last unit of a public good, rather than do without.(a) Complete the table below showing the collective willingness to pay for the public good in thissociety.(b) Given the supply schedule for this public good as shown by theQscolumn, what is the optimalquantity of this public good and what is the optimal price?(c) What is the perceived marginal benefit and perceived marginal cost when 3 units of the publicgood are supplied? What does this indicate about the allocation of resources to this public good?Answer:9
Answer:(a)See table above(b) The optimal quantity is 4 units and the optimal price is $38.(c) The marginal benefit of the public good is $49, but the marginal cost is only $27. There isan under-allocation of resources to the public good.21)The next three questions refer to the below supply and demand graph for a public good.(a) What does pointcrepresent?(b) What does the line segmentefat outputQ3represent?(c) At what output level is there an underallocation of resources to the production of this publicgood?Answer:(a) Where the marginal benefit of an additional unit of a public good is just equal to themarginal cost of an additional unit of the public good.(b) The difference between the marginal cost of an additional unit of the public good and themarginal benefit of the additional unit of the public good. In this case, MB < MC, so there isan overallocation of resources to the production of a public good atQ3.(c) At less thanQ2units of the public good.10
22)Imagine that a provincial government is considering the construction of a new office building toconsolidate its operations. Its estimate of the total costs and the total benefits of building a 4- 6-, 8-,or 10-story building is shown in the table below. (All figures are in millions of dollars.)(a) Compute the marginal cost and the marginal benefit of the 4-, 6-, 8-, and 10-story buildings.(b) Should the state build a new office building? If so, what size building and what will be the totalbenefit, total cost, andnetbenefit to society?Answer:(a)See table above(b) Yes, the government should build a 6-story building. The total cost of building a 6-storybuilding is $16 million. The total benefit is $23 million. The net benefit is $7 million.23)Evaluate. Economy in government requires that government minimize its spending.Answer:Economy in government refers to government using scarce resources efficiently. Efficiencyrequires that the marginal benefit to society of a government project be equal to its marginalcost and that net benefits are maximized. Minimizing government spending does notnecessarily achieve economy in government. For example, when the marginal benefit tosociety exceeds the marginal cost, the government must increase spending on the projectachieve economy.24)What are quasi-public goods and why does the government provide them?Answer:Quasi-public goods are goods provided by the government that fit the economist’s definitionof a public good but can be produced in such a way that exclusion would be possible. Suchquasi-public goods include education, streets and highways, police and fire protection,libraries and museums, preventive medicine, and sewage disposal. They could all be pricedand provided by private firms through the market system. But because they all havesubstantial positive externalities, they would be underproduced by the market system.Therefore, government often provides them to avoid the underallocation of resources thatwould otherwise occur.11
25)What are negative and positive externalities? How do they affect supply and demand curves?Answer:Negative externalities or spillover costs result in an over-allocation of resources to theproduction of a product. All the costs associated with the product are not reflected in thesupply curve. The producer’s supply curve lies to the right of the full-cost supply curve.Positive externalities or spillover benefits result in an under-allocation of resources to theproduction of a product. All of the benefits associated with the product are not reflected inthe demand curve. The demand curve lies to the left of the full-benefits demand curve.26)How could you use the Coase theorem to predict what would happen when smoke from a factorycreated dirty air and slightly acid rain for all the residents in the area in a one-kilometre radius ofthe plant?Answer:Under the assumptions of the Coase theorem, either the property owners would have therights to clean air or the factory would have the property rights to pollute the air in thatneighbourhood. If the property owners had rights to clean air, the factory would want to seeif it could buy the rights at a cost less than the cost of purifying its emissions. The residents inturn would have an incentive to determine how much the factory would be willing to paythem for their clean air rights. Negotiations between the two parties would lead to an”efficient” outcome: an optimal amount of pollution based upon the marginal costs andbenefits of clean air.If the factory initially owned pollution rights for the area, then the property owners wouldhave to decide how much they would be willing to pay to get the factory to reduce oreliminate the pollution. The factory has an incentive to negotiate with the residents to findout whether those affected negatively by the pollution would be willing to pay the factory anamount greater than what it would cost the factory to clean up some or all the pollution.Once again the Coase theorem would predict that the two parties will negotiate aneconomically efficient outcome.27)What is the economic rationale for liability rules and lawsuits? What are the limitations with thisapproach?Answer:Liability rules help to specify property rights. If one party feels that it is adversely affected bythe actions of another party that violated those liability rules, then the first party can sue incourt for redress of the negative externalities created by the second party.The lawsuits to correct negative externalities can be costly for the party that brings the suitand also take many years to resolve. The outcome of the case is also uncertain, so there issome risk in bringing a suit to court.28)How do direct controls and specific taxes affect negative externalities? Briefly explain in terms ofsupply and demand.Answer:If a good generates a negative externality then the market tends to over-allocate resources tothe production of that good and consequently produces too much of it. Direct controlsthrough laws or regulations that limit private activity are commonly used to curb thisover-production, either through restricting production or raising the private costs of doingbusiness and decreasing the supply curve, thus raising product price and decreasing output.Similarly, the imposition of a tax on a polluting firm will raise the cost of doing business.This action will decrease supply, raising price and reducing output.12
29)What resource problem is created by negative externalities and what methods are suggested fordealing with this problem?Answer:When spillover costs arise in production, firms are not paying the full costs of productionand an overallocation of resources to the industry occurs. The five ways for correcting forthis overallocation of resources are: (1) individual bargaining; (2) the use of liability rulesand lawsuits; (3) imposing a tax on producers; (4) direct controls such as legal mandates orrestrictions; and (5) creating a market for externality rights.30)The demand and supply in a market are represented by the equations P = 50 – .2QDand P = 20 +.3QS. A spillover cost in production equal to $2 per unit exists in this market.(a) What are the equilibrium price and quantity?(b) What are the optimal price and quantity?(c) How large must a specific tax in this market be to eliminate the market failure? Is the tax equalto the difference between the equilibrium price and the optimal price?Answer:(a) The equilibrium price and quantity are $38 and 60 units of output.(b) The optimal price and quantity are $38.80 and 56 units of output.(c) A $2 per unit tax is required. The tax needs to be the same as the spillover cost. Eventhough the optimal price is only $.80 more than the equilibrium price, it must be recognizedthat the burden of the specific tax is shared by both buyers and sellers. Buyers pay $.80 of the$2 tax while sellers bear $1.20 of the tax.31)What resource problem is created by positive externalities and what methods are suggested fordealing with this problem?Answer:When there are spillover benefits in the production process, this causes an under-allocationof resources to the production of a product. The reason for the under-allocation is that thefirm is not receiving all the benefit from producing the product. Some of the benefits spillover to a third party. The four suggested ways for correcting for this under-allocation ofresources are: (1) individual bargaining; (2) a subsidy to consumers; (3) a subsidy toproducers; and (4) government provision of the product.32)Describe how a market for externality rights would work in terms of supply and demand.Answer:A regional government, for example, might proscribe a set amount of air pollution that itwould be willing to accept from businesses. If this were the case, the supply curve for the airpollution rights would be perfectly inelastic. The demand curve for air pollution rights wouldbe downward sloping and would intersect the supply curve to determine the price for theright to pollute the air in that region. Polluting firms would have the right to trade theirpollution permits; firms finding it inexpensive to reduce pollution would sell their permits tofirms that found it too expensive to reduce emissions.If the demand for air pollution rights increased over time, then the price would rise but thequantity would stay the same. Similarly, an environmentally conscious government couldreduce the cap on air pollution over time (i.e., decrease supply) and this too would have theeffect of raising prices.13
33)Assume the atmosphere of an urban area is able to reabsorb 4,000 tonnes of pollutants per year. Theschedule below shows the price polluters would be willing to pay for the right to dispose of 1 tonneof pollutants per year and the total quantity of pollutants they would wish to dispose of at eachprice.(a) If there were no emission fee, how many tonnes of pollutants would there be and how muchgreater would this amount be than the capacity for re-absorption?(b) What pollution fee should the urban authorities charge to solve the problem?(c) What would happen in this market for pollution rights if quantity demanded increased by 1,000tonnes at each price?Answer:(a) If there were no emission fee, polluters would put 8,000 tonnes of pollutants in the aireach year. This quantity of pollutants would exceed the ability of nature to reabsorb them by4,000 tonnes.(b) To reduce pollution to the capacity of the atmosphere to recycle pollutants, an emissionfee of $4,000 per tonne should be set and total emission fees would be $16 million [4,000 ×$4,000](c) If the quantity of pollution rights demanded at each price were to increase by 1,000tonnes, the emission fee could be increased by $1,000 to $5,000 and total emission feescollected would be $20 million [4,000 × $5,000]14
34)Assume the atmosphere of an urban area is able to reabsorb 8,000 tonnes of pollutants per year. Theschedule below shows the price polluters would be willing to pay for the right to dispose of 1 tonneof pollutants per year and the total quantity of pollutants they would wish to dispose of at eachprice.(a) If there were no emission fee, how many tonnes of pollutants would there be and how muchgreater would this amount be than the capacity for re-absorption?(b) What pollution fee should the urban authorities charge to solve the problem?(c) What would happen in this market for pollution rights if quantity demanded increased by 1,000tonnes at each price?Answer:(a) If there were no emission fee, polluters would put 13,000 tonnes of pollutants in the aireach year. This quantity of pollutants would exceed the ability of nature to reabsorb them by5,000 tonnes.(b) To reduce pollution to the capacity of the atmosphere to recycle pollutants, an emissionfee of $5,000 per tonne should be set and total emission fees would be $40 million [8,000 ×$5,000].(c) If the quantity of pollution rights demanded at each price were to increase by 1,000tonnes, the emission fee could be increased by $1,000 to $6,000 and total emission feescollected would be $48 million [8,000 × $6,000].15
35)Draw a supply and demand graph on the below diagram that illustrates the market for pollutionrights. Label the axes and curves. Then show what happens to price and quantity when the demandfor pollution rights increases in the market.Answer:Demand increases fromD1toD2, which raises price fromP1toP2. The equilibrium movesfrom A to B. The quantity remains the same atQ1because the supply of pollution rights isfixed by government in the market and perfectly inelastic atQ1.16
36)Evaluate: “Pollution is undesirable. Therefore, all pollution should be banned.”Answer:The economist would argue that it is necessary to weigh the marginal cost of pollutionabatement against the marginal benefit to society of pollution abatement to determine theoptimal level of pollution for society. In most cases, the marginal cost of pollution abatementactivity that is necessary to eliminate all pollution will be much greater than the marginalbenefit to society. People will not be well-served by a no pollution policy because it will bevery costly in terms of resources devoted to pollution control and other productive activitythat must be curtailed to eliminate the pollution.37)The following table shows marginal costs and benefits of the optimal quantity of pollutionabatement that will occur at a local factory.(a) What is the optimal level of pollution abatement? Why?(b) If the marginal benefit of pollution abatement were to increase by $30,000 at each level becauseof the factory’s desire to improve its image and environment, what would the optimal level be?Why?(c) What might cause the optimal level of pollution abatement to be 400 tonnes?Answer:(a) 500 tonnes because the marginal cost of pollution abatement just equals the marginalbenefit of $40,000.(b) 600 tonnes. MC of $60,000 equals MB of $60,000.(c) If marginal costs increased by $40,000 or the marginal benefit declined by $40,000.17
38)The following table shows marginal costs and benefits of the optimal quantity of pollutionabatement that will occur at a local factory.(a) What is the optimal level of pollution abatement? Why?(b) If the marginal benefit of pollution abatement were to increase by $150,000 at each levelbecause of the factory’s desire to improve its image and environment, what would the optimal levelbe? Why?(c) What might cause the optimal level of pollution abatement to be 120 tonnes?Answer:(a) 140 tonnes because the marginal cost of pollution abatement just equals the marginalbenefit of $60,000.(b) 180 tonnes; MC of $180,000 equals MB of $180,000.(c) If marginal costs increased by $50,000 or the marginal benefit declined by $50,000.18