Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is true? Partial equilibrium analysis will A) understate the impact of a tax for substitutes and overstate the impact for complements. B) overstate the impact of a tax for both substitutes and complements. C) understate the impact of a tax for both substitutes and complements. D) understate the impact of a tax for complements and overstate the impact for substitutes. 2) Why does perfect competition guarantee a Pareto optimal distribution of goods between two people? Under perfect competition, A) everyone has the same preferences. B) goods are homogeneous. C) everyone consumes the same quantity of both goods. D) everyone faces the same prices. 3) Suppose there is a water shortage, and the governor proposes that the government distribute equal quantities of water to each person at no cost to the consumers. If consumers were forbidden to trade water, would such a distribution be Pareto optimal? A) Yes, because each person has the same amount of water as everyone else. B) It is impossible to determine without knowing the price of water. C) Yes, because everyone would be receive their water for free. D) Not necessarily, as people may differ in their marginal rates of substitution between water and other goods. E) none of the above 4) Why is the production possibilities frontier concave to (bowed away from) the origin? A) Consumers have declining marginal utility, so their relative satisfaction from consuming a good changes as they move from high levels to low levels of consumption. B) For a production possibilities frontier, we no longer assume firms are price takers, and the input prices and output prices change as the firms alter their mix of outputs. C) The shape of the curve is due to the marginal costs of producing the two goods. At high levels of output for a particular good, the marginal cost is very high, and the firm can use the same inputs to produce a relatively large quantity of the other good. D) none of the above 5) Which of the following is not a cause of market failure? A) Externalities B) Incomplete information C) Public goods D) Individuals acting according to their own self-interest 1)

2)

3)

4)

5)

6) Canada produces MP3 players and lumber, and the marginal costs for the two products are $200 per 1,000 board-feet of lumber and $100 per MP3 player. China also produces these goods, and the marginal costs are $300 per 1,000 board-feet of lumber and $100 per MP3 player. Which country has the comparative advantage in lumber production? A) Canada B) China C) Both countries share the comparative advantage. D) We need more information to answer this question.

6)

Figure 18.1 All producers in the corbomite industry dump wastes in the river in the production of their output.

7) Given the information in Figure 18.1, the competitive output in the corbomite industry is: A) Q0. B) Q1. C) Q2. D) any level as long as price is P0. 8) Given the information in Figure 18.1, the efficient output in the corbomite industry is: A) 0. B) Q0. C) Q1. D) Q2.

7)

8)

Scenario 18.1: It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.

A: B: C: D:

No filter or treatment plant Filter; no treatment plant No filter; treatment plant Filter; treatment plant

Factory $10,000 $6,000 $10,000 $6,000

Fishermen $2,000 $10,000 $4,000 $6,000

9) In the case in Scenario 18.1, the Coase theorem specifies that A) the result will be different if the fishermen are given the right to clean water than it will be if the factory is given the right to use the water as it sees fit, but the result will be inefficient in either case. B) the efficient result will occur whether the fishermen are given the right to clean water or the factory is given the right to use the water as it sees fit. C) economic efficiency requires that no one may contaminate the water. D) economic efficiency requires that the fishermen be given the right to clean water and that the factory be given the right to use the water as it sees fit. E) economic efficiency requires that the fishermen be given the right to clean water. 10) A lighthouse is a public good A) because it doesn't cost any more to light the way for 105 ships than it does to light the way for 104 ships, but for no other reason. B) because there is no way to prevent those who haven't contributed to the lighthouse from seeing better because of it, but for no other reason. C) because the government produces it, and for no other reason. D) for the reasons in A and B together. E) for the reasons in A, B, and C together. 11) To find the social marginal benefit of public goods, one needs to A) sum the consumers' demand curves horizontally. B) sum the consumers' demand curves vertically. C) sum the marginal private cost and the marginal external cost for each unit. D) sum the marginal private benefit and the marginal external benefit for each unit. E) subtract the individual portion of the tax burden necessary for the government to provide the good from the demand curve of each consumer who desires the good. 12) Majority-rule voting A) generates economically efficient outcomes in most cases. B) usually emphasizes the preferences of extremist voters on one side or the other. C) never reflects the preferences of the median voter. D) usually allows extremist voters to band together and swamp the preferences of the median voter. E) reflects the preferences of the median voter.

9)

10)

11)

12)