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Modern Principles of Economics 2nd Edition Cowen Test Bank
Modern Principles of Economics 2nd Edition Cowen Test Bank
Modern Principles of Economics 2nd Edition Cowen Test Bank
Margaret purchases all her food and clothing in the big city
outside her residence. Incorrect
A small business owner frequently buys raw materials by
using her bank's line of credit. Incorrect
Raymond cannot open his windows at times because he lives
downwind from a mushroom farm. (True Answer )Correct
Felicia, an economics major, asks the most insightful
questions in class. Incorrect
1190 Since the price of antibiotics does not include all the costs of
using antibiotics, the price is too:
high, and so antibiotics are overused. Incorrect
high, and so antibiotics are underused. Incorrect
low, and so antibiotics are overused. (True Answer )Correct
low, and so antibiotics are underused. Incorrect
1191 Suppose that the private cost of using antibiotics is less than its
social cost—we would then expect people to ________
antibiotics, leading to an ________ market outcome.
overuse; inefficient (True Answer )Correct
underuse; inefficient Incorrect
overuse; efficient Incorrect
make efficient use of; equilibrium Incorrect
(Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the
fifth unit is:
$15. Incorrect
$5. Incorrect
$35. (True Answer )Correct
$30. Incorrect
(Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the
market could be eliminated if the government:
outlawed the production of the good. Incorrect
added a $10 tax per unit. (True Answer )Correct
equated marginal benefit with external cost. Incorrect
subsidized consumption by $5 per unit. Incorrect
1201 Markets are often inefficient when external costs are present
because:
externalities cannot be corrected without government
regulation. Incorrect
social costs exceed private costs at the private market
solution. (True Answer )Correct
private costs exceed social costs at the private market
solution. Incorrect
production externalities lead to consumption
externalities. Incorrect
1206 External costs caused by the use of antibiotics are the costs to
people who are:
buying antibiotics. Incorrect
selling antibiotics. Incorrect
either buying or selling antibiotics. Incorrect
neither buying nor selling antibiotics. (True Answer
)Correct
1210 If antibiotic users get all the benefits of antibiotics but do not
bear all of the costs, the social marginal cost of antibiotic use
at the market equilibrium will be:
higher than the marginal cost to antibiotic sellers. (True
Answer )Correct
less than the marginal cost to antibiotic sellers. Incorrect
higher than the marginal benefit to the antibiotic
buyers. Incorrect
less than the marginal benefit to the antibiotic
buyers. Incorrect
1219 The Centers for Disease Control and Prevention (CDC) wants
at least 90 percent of the population vaccinated against
preventable diseases, since the chance of a disease outbreak
decreases as vaccine coverage increases. We can conclude
that:
the external benefits of vaccination likely decrease as more
and more people are vaccinated. (True Answer )Correct
the private benefits of vaccination increase with vaccine
coverage. Incorrect
vaccines create a negative externality once the vaccine
covers 90 percent of the population. Incorrect
vaccines create a positive externality once the vaccine covers
90 percent of the population. Incorrect
1220 The market price for Good X is $10.75, and every time Good
X is consumed it creates an external benefit of $3.00.
Therefore, which of the following is correct?
The social benefit of Good X is $13.75, a justification for the
government to give buyers a $3.00 subsidy. (True Answer
)Correct
The social benefit of Good X is $7.75, a justification for the
government to give buyers a $3.00 subsidy. Incorrect
The social benefit of Good X is $7.75, a justification for the
government to tax sellers $13.75 per unit. Incorrect
The social benefit of Good X is $13.75, a justification for the
government to tax sellers $3.00 per unit. Incorrect
1221 Edgar's expected private benefit from the flu shot is $15, and
it would cost him $20 to get vaccinated. Therefore, which of
the following is correct?
It is socially optimal for Edgar to get the flu shot if the social
benefits of the shot exceed $20. (True Answer )Correct
The external benefits of the flu shot equal $5 ($20 –
$15). Incorrect
Even without a government subsidy, Edgar is certain to be
vaccinated. Incorrect
The deadweight loss is eliminated if Edgar is vaccinated and
the external benefits are $4. Incorrect
1237 (Figure: Social Benefit) Refer to the figure. Which price and
quantity combination represents the efficient equilibrium?
Figure: Social Benefit
P1 and Q1
Incorrect
P2 and Q1
Incorrect
P3 and Q1
Incorrect
P2 and Q2
(True Answer )Correct
1239 If only people who get a flu shot receive all the benefits of the
vaccination, then the:
demand curve would shift downward. Incorrect
supply curve would shift upward. Incorrect
market outcome will be efficient. (True Answer )Correct
deadweight loss will be higher than if the vaccinations
benefited others as well. Incorrect
1257 The Coase theorem says that private bargains can ensure an
efficient market equilibrium even when externalities exist if:
the government does not involve itself in the
process. Incorrect
the market is sufficiently competitive. Incorrect
the number of market participants is large. Incorrect
transaction costs are low and property rights are clearly
defined. (True Answer )Correct
127 (Table: Costs of Reducing Sulfur Dioxide) Refer to the table. Which of the
3 following statements is FALSE?
Table: Costs of Reducing Sulfur Dioxide
Industry Sulfur Dioxide Emissions (tons) Cost of Reducing 1 Ton of Sulfur Dioxide
Industry X 20 $300
Industry Y 20 $400
Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry
X emits zero tons. Incorrect
Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it
$301. (True Answer )Correct
If Industry X decreases emissions by 1 ton and Industry Y increases emissions
by 1 ton, the cost of reducing pollution rises by $100. Incorrect
Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid
it at least $1,500. Incorrect
1274 The paper industry and brewery industry each emit 60 tons of
particulates into the air. It costs the paper industry $1,000 to
remove 1 ton of particulates and it costs the brewery industry
$1,400 to remove 1 ton of particulates. In an effort to reduce
particulate pollution, the government gives each industry
tradeable allowances worth 50 tons of particulates. We would
expect that:
the paper industry will buy tradeable allowances from the
brewery industry at a cost between $1,000 and $1,400 per
allowance. Incorrect
the paper industry will buy tradeable allowances from the
brewery industry at a cost greater than $1,400 per
allowance. Incorrect
the brewery industry will buy tradeable allowances from the
paper industry at a cost between $1,000 and $1,400 per
allowance. (True Answer )Correct
the brewery industry will buy tradeable allowances from the
paper industry at a cost greater than $1,400 per
allowance. Incorrect
1277 Which of the following answers best explains how the market
for tradeable allowances in pollution works?
Firms are given a particular dollar subsidy value to clean up
pollution, and they can trade these subsidies between
themselves if they fall below or surpass the limits. Incorrect
Firms are taxed a particular percentage rate according to
how much they pollute, and they can trade the pollutants to
reduce the effective tax rates they pay. Incorrect
Firms are required to stick to particular production levels,
and if they go beyond these production levels, they are
charged a percentage of their profits. Incorrect
Firms are given a particular allowance amount of pollutants
and if they fall below or surpass these targets they can trade
their available allowances with other firms. (True Answer
)Correct
1279 Suppose that the EPA limits the pollution level of two firms,
firm High with high cost of reducing pollution and firm Low
with low cost of reducing pollution. Which of the following
statements is correct?
The EPA should limit both firms' pollution to the same
level. Incorrect
The EPA should limit High's pollution level to a lower level
than Low's in an attempt to entice High to find more efficient
ways to lower its costs. Incorrect
The EPA should allow Low to increase its pollution level
and trade with High who would cut its pollution to lower than
the required level. Incorrect
The EPA should allow High to increase its pollution level
and trade with Low who would cut its pollution to lower than
the required level. (True Answer )Correct
1287 Under the Clean Air Act of 1990, the EPA distributes
pollution allowances to generators of electricity, and firms
trade allowances as they see fit. The EPA's tradeable
allowances program has resulted in:
air quality that is neither improved nor
worsened. Incorrect
an improved air quality. (True Answer )Correct
a worsening in air quality. Incorrect
a less efficient market outcome. Incorrect
1291 The main difference between tradable allowances and taxes is:
1296 An external cost is built into the market price of a good and
thus paid by the consumers.
True
False (True Answer )
1300 The social cost of pollution includes the private producer costs
plus the costs to bystanders adversely affected by the
pollution.
True (True Answer )
False
1307 If the private benefit of getting a flu shot for a person is less
than the social benefit, the market quantity will be greater
than the efficient quantity.
True
False (True Answer )
1309 According to the Coase theorem, the private market will need
government intervention in order to reach an efficient
outcome when externalities are present.
True
False (True Answer )
1310 While the Coase theorem is appealing, private actors often fail
to resolve the problems caused by external costs and benefits.
True (True Answer )
False
1311 If transaction costs are low and property rights are clearly
identifiable, an efficient market equilibrium can be achieved
even when externalities exist.
True (True Answer )
False
1313 The Coase theorem says that if transaction costs are high and
property rights are clearly defined, the private bargains will
ensure that the market equilibrium is efficient even when
there are externalities.
True
False (True Answer )
1317 The prime motivation for low-pollutant firms to enter into the
market for tradeable allowances is profit.
True (True Answer )
False
1322 The market for bathroom cleaners can be defined by this set
of equations:
Qd = 24 – 2P
Qs = –4 + 2P
where P is the price of bathroom cleaners in dollars, and Q is
quantity in thousands. When bathroom cleaners are washed
down the drain, they cause environmental poisoning. The
government estimates that the external cost related to the use
of each container of bathroom cleaner is $3 and is considering
imposing a tax of $3 on the producers of the bathroom cleaner.
Using this information answer the following questions.
a. What are the market price and market quantity in the
bathroom cleaner market?
b. What is the social cost of this quantity of bathroom cleaner?
c. If producers are charged a tax of $3, that would cause the
supply curve to the shift to the left, and the new equation for
the supply curve would be Qs = –4 + 2(P – 3). What is the
efficient quantity traded in this market as a result of the tax?
d. Draw a graph to illustrate the old and new equilibriums in
this market (before and after the tax).
e. What is the dollar amount of the deadweight loss that would
be removed from this market as a result of the tax?
a. 24 – 2P = –4 + 2P
28 = 4P
P = 7 or the Market price = $7 and market quantity = 10 units.
b. $7 + $3 = $10
c. 24 – 2P = –4 + 2(P – 3)
34 = 4P
P = 8.5 or the Efficient market price = $8.50 and Efficient
quantity = 7
d. See the following figure.
e. (3 × 3)/2 = $4.50
1323 (Figure: Positive Externality) The figure shows the market for
a good that, when consumed, causes an external benefit.
Suppose the government decides to begin issuing a subsidy to
the consumers of the good. Using the information provided in
the figure, answer the following questions.
Figure: Positive Externality
Fewer people get flu shots than is efficient since the private cost
of getting a flu shot is less than the private benefit. When one
person gets a flu shot the expected number of people who get the
flu falls by more than one, so getting a flu shot generates a
social benefit that is greater than the private benefit.
If people who got a flu shot did receive all the benefits of
vaccination then their demand curve would shift upwards by the
amount of external benefit, and therefore the market
equilibrium will be consistent with the efficient equilibrium.
Thus subsidizing flu shots should result in more vaccinations
and greater social benefit. Subsidies should occur until the
marginal social benefit equals the private marginal cost of
production.
1328 Briefly list some private and public solutions to the existence
of externalities (negative or positive) in markets.
Private solutions include trade in externalities, or a market for
tradeable allowances (where it exists without government
mandate). Government solutions include the command-and-
control-technique (used when external costs are severe and very
significant; this technique is not always efficient), and taxes and
subsidies. Markets for tradeable allowances can also be
government mandated as is, for example, the market for carbon
emissions.
132 (Table: Sulfur Dioxide) The table sets forth the sulfur dioxide emissions along
9 with the costs of reducing sulfur dioxide emissions for two industries. Suppose the
government gives each industry 100 tradeable allowances; each allowance allows
for 1 ton of sulfur dioxide emissions. Explain how the industries will trade the
allowances and the range of prices that the allowances will trade for. What is the
final allocation of allowances between the industries? How many tons of sulfur
dioxide are removed from the air and at what cost?
Table: Sulfur Dioxide
Industry Sulfur Dioxide Emissions (tons) Cost of Reducing 1 Ton of Sulfur Dioxide
Industry X 100 $100
Industry Y 120 $300
Industry Y will pay between $100 and $300 for 20 allowances from Industry X.
Industry Y will now have 120 allowances and emit 120 tons of sulfur dioxide.
Industry X traded away 20 allowances, leaving it with 80 allowances and emitting 80
tons of sulfur dioxide. Twenty tons of sulfur dioxide are removed (220 – total
allowances). Since Industry X removed all the pollution, the total cost is 20 × 100 =
$200. (Note: in calculating the cost, we ignore what Industry Y paid Industry X for
the allowances, since this merely represents a transfer from one industry to another.)