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AEB 2014 – Economic Issues, Food, and You Review Session for Exam # 2; Thursday, October 19th, 2006 1. Refer to Figure. Graph A shows which of the following? a. an increase in demand and an increase in quantity supplied b. an increase in demand and an increase in supply c. an increase in quantity demanded and an increase in quantity supplied d. an increase in supply and an increase in quantity demanded 2. Refer to Figure. Graph C shows which of the following? a. an increase in demand and an increase in quantity supplied b. an increase in demand and an increase in supply c. an increase in quantity demanded and an increase in quantity supplied d. an increase in supply and an increase in quantity demanded 3. Refer a. b. c. d. to Figure. Which of the four graphs illustrates an increase in quantity supplied? A. B. C. D. 4. Refer a. b. c. d. to Figure. Which of the four graphs illustrates a decrease in quantity demanded? A. B. C. D. 5. Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. 6. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Page 1 of 3 AEB 2014 – Economic Issues, Food, and You Review Session for Exam # 2; Thursday, October 19th, 2006 7. Refer to Figure. If the government imposes a price floor of $14 in this market, the result would be a a. surplus of 20. b. surplus of 40. c. shortage of 20. d. shortage of 40. 8. Refer to Figure. At the equilibrium price, consumer surplus is a. $480. b. $640. c. $1,120. d. $1,280. 9. Refer to Figure. If the price decreases from $22 to $16, producer surplus decreases by a. $90. b. $210. c. $570. d. $600. 10. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. Jane pays Dick $450 to give the dog to his parents who live on an isolated farm. b. Dick pays Jane $650 for her inconvenience. c. Jane pays Dick $650 to give the dog to his parents who live on an isolated farm. d. There is no private transaction that would improve this situation. Page 2 of 3 AEB 2014 – Economic Issues, Food, and You Review Session for Exam # 2; Thursday, October 19th, 2006 11. Refer to Figure. This graph represents the tobacco industry. The industry creates a. positive externalities. b. negative externalities. c. no externalities. d. no equilibrium in the market. 12. Refer to Figure. This graph represents the tobacco industry. The socially optimal price and quantity are a. $1.90 and 38 units, respectively. b. $1.80 and 35 units, respectively. c. $1.60 and 42 units, respectively. d. $1.35 and 58 units, respectively. Calculate also: a) The optimal tax amount b) Government revenue due tax 13. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? Assume that the price of the permit in the market is the average cost for both firms. a. b. c. d. $3,000; $4,500; $4,500; $4,500; $1,500 $3,500 $4,000 $2,500 Calculate: a) total cost FOR EACH FIRM before market is introduced, b) total cost FOR EACH FIRM after market is introduced, c) what firms sells and what firm buys permits, AND d) how many permits will the firms trade Page 3 of 3