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Econ - 102
Third Midterm
Summer 2011
1. When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively
inelastic,
a. buyers of the good will bear most of the burden of the tax.
b. sellers of the good will bear most of the burden of the tax.
c. the effective price paid by buyers of the good will decrease.
d. the size of the market for the good will expand.
2. Efficiency is attained when
a.
total surplus is maximized.
b.
producer surplus is maximized.
c.
all resources are being used.
d.
consumer surplus is maximized and producer surplus is minimized.
3. The supply curve and the demand curve for a good are straight lines, and the good is taxed. When the tax
is doubled,
a.
the base of the triangle that represents the deadweight loss quadruples.
b.
the height of the triangle that represents the deadweight loss doubles.
c.
the deadweight loss of the tax doubles.
d.
All of the above are correct.
4. Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the
tax burden, when
a.
the tax is placed on the sellers of the product.
b.
the tax is placed on the buyers of the product.
c.
the supply of the product is more elastic than the demand for the product.
d.
the demand for the product is more elastic than the supply of the product.
5. When externalities exist, buyers and sellers
a.
neglect the external effects of their actions, but the market equilibrium is still efficient.
b.
do not neglect the external effects of their actions, and the market equilibrium is efficient.
c.
neglect the external effects of their actions, and the market equilibrium is not efficient.
d.
do not neglect the external effects of their actions, and the market equilibrium is not
efficient.
6. Both public goods and common resources are
a.
rival in consumption.
b.
nonrival in consumption.
c.
excludable.
d.
nonexcludable.
7. Mark, Kerry, Greg, and Carlos each like Chicago Cubs baseball games. The single-game ticket price for
an infield box seat is $50. Mark values a ticket at $70, Kerry at $65, Greg at $60, and Carlos at $55.
Suppose that if the government taxes tickets at $5 each, the selling price will rise to $55. A
consequence of the tax is that
a. consumer surplus shrinks by $50 and tax revenues increase by $20, so there is a deadweight loss
of $30.
b. consumer surplus shrinks by $30 and tax revenues increase by $20, so there is a deadweight loss
of $10.
c. consumer surplus shrinks by $20 and tax revenues increase by $20, so there is no deadweight
loss.
d. consumer surplus shrinks by $50 and tax revenues increase by $20, so there is no deadweight
loss.
8. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all
income above $40,000. What are the tax liability and the marginal tax rate for a person whose
income is $30,000?
a. both are 10 percent
b. 10 percent and $2,000, respectively
c. $3,000 and 10 percent, respectively
d. $3,000 and 20 percent, respectively
9. Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40
percent of the next $50,000, and 60 percent of all income over $100,000. John earns $200,000, and
Theresa earns $600,000. Which of the following statements is correct?
a. John's marginal tax rate is higher than Theresa's marginal tax rate.
b. John's average tax rate is higher than his marginal tax rate.
c. Theresa's average tax rate is higher than her marginal tax rate.
d. Theresa's average tax rate is higher than John's average tax rate.
10. An income tax in which the average tax rate is the same for all taxpayers would be considered a
a. progressive tax.
b. regressive tax.
c. distortion-free tax.
d. proportional tax.
11. A person's average tax rate equals her
a. tax obligation divided by her marginal tax rate.
b. increase in taxes if her income were to rise by $1.
c. tax obligation divided by her income.
d. increase in taxes if her marginal tax rate were to rise 1%.
12. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on
all income above $40,000. What is the average tax rate when income is $50,000?
a. 20 percent
b. 15 percent
c. 12 percent
d. 10 percent
13. Refer to Table 1. What is the marginal cost of creating the tenth instructional module in a given
month?
a. $900
b. $1,250
c. $2,500
d. $3,060
14. Refer to Table 1. What is the average variable cost for the month if six instructional modules are
produced?
a. $180.00
b. $533.33
c. $700.00
d. $713.33
15. Refer to Table 1. What is the average fixed cost for the month if nine instructional modules are
produced?
a. $108.00
b. $120.00
c. $150.00
d. $811.11
16. Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax
will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity
very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it
will have a large effect on the equilibrium quantity. Other factors are held constant. In which market
will the tax have a larger deadweight loss?
a. Market A
b. Market B
c. The deadweight loss will be the same in both markets.
d. There is not enough information to answer the question.
17. An externality exists whenever
a. the economy can benefit from government intervention.
b. markets are not able to reach equilibrium.
c. a firm sells its product in a foreign market.
d. a person engages in an activity that influences the well-being of a bystander and yet neither pays
nor receives payment for that effect.
18. Which of the following statements is not correct?
a. Government policies may improve the market's allocation of resources when negative
externalities are present.
b. Government policies may improve the market's allocation of resources when positive
externalities are present.
c. A positive externality is an example of a market failure.
d. Without government intervention, the market will tend to undersupply products that produce
negative externalities.
19. When negative externalities are present in a market
a. private costs will be greater than social costs.
b. social costs will be greater than private costs.
c. only government regulation will solve the problem.
d. the market will not be able to reach any equilibrium.
20. Which of the following policies is the government most inclined to use when faced with a positive
externality?
a. taxation
b. permits
c. subsidies
d. usage fees
21. The Coase theorem suggests that private markets may not be able to solve the problem of externalities
a. if the government does not become involved in the process.
b. when the number of interested parties is large and bargaining costs are high.
c. if the firm in the market is a monopoly.
d. if some people benefit from the externality.
22. Mike and Bob are both in the same enclosed hotel room. Mike assigns a $20 value to smoking his cigar.
Bob values smoke-free air at $10. Which of the following scenarios is a successful example of the
Coase theorem?
a. Bob offers Mike $15 not to smoke his cigar. Mike accepts and does not smoke.
b. Mike pays Bob $11 so that Mike can smoke his cigar.
c. Mike pays Bob $9 so that Mike can smoke his cigar.
d. Bob offers Mike $10 not to smoke his cigar. Mike accepts and does not smoke.
23. Corrective taxes are unlike most other taxes because they
a. distort incentives.
b. move the allocation of resources away from the social optimum.
c. raise revenue for the government.
d. move the allocation of resources closer to the social optimum.
24. Two firms, A and B, each currently dump 20 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. The government gives each firm 10 pollution permits, which it can
either use or sell to the other firm. 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. After the two firms buy or sell pollution permits from each other, we would
expect that
a. Firm A will no longer pollute, and Firm B will not reduce its pollution at all.
b. Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
c. Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution
into the river.
d. Firm A will increase its pollution and Firm B will reduce its pollution.
25. Goods that are rival in consumption include both
a. natural monopolies and public goods.
b. public goods and common resources.
c. common resources and private goods.
d. private goods and natural monopolies.
26. When a free-rider problem exists,
a. the market will devote too few resources to the production of the good.
b. the cost of the good will always be more than the benefit of the good.
c. the good will not be produced.
d. entrepreneurs will eventually find a way to make free-riders pay their share.
27. You are the mayor of a small town with 2,000 residents. The head of your economic development
agency recently conducted a survey in which the 2,000 residents said that a public concert in the
center of town would be worth $20 to each of them. Since the concert cost only $5,000 to hold, you
organized and held the concert, which everyone in town enjoyed. But when you asked for donations
to pay for the concert, you only collected $300. You are convinced that
a. the survey must have overstated how much the concert was worth to each resident; otherwise,
you would have collected $40,000 in donations.
b. the cost of the concert exceeded the social benefits.
c. the concert was an example of the Tragedy of the Commons.
d. residents of the town were probably free-riders at the concert.
28. It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the
U.S. military are produced by private firms. We can conclude that
a. resources would be used more efficiently if the government produced the weapons.
b. resources would be used more efficiently if private firms provided national defense.
c. weapons are rival in consumption and excludable, but national defense is not rival in
consumption and not excludable.
d. national defense is rival in consumption and excludable, but weapons are not rival in
consumption and not excludable.
29. An overcrowded beach is an example of
a. a positive externality.
b. a Tragedy of the Commons.
c. an environmentally inefficient allocation of resources.
d. an economically unfair allocation of resources.
30. Ten friends who love to ski decide to pool their financial resources and equally share the cost of a oneweek time-share condominium in Alta, Utah. Suppose that the lift lines at the ski resort become more
congested when the ten additional people start to ski. Which of the following statements is not correct
a.
Use of the ski resort by the ten new skiers will yield a negative externality.
b.
The ski resort can reduce the congestion externality by raising lift ticket prices.
c.
An increase in lift ticket prices could be viewed as a corrective tax on the externality of
congestion.
d.
Each of the ten friends would have been better off staying at home.
31. Jane decides to open her own business and earns $50,000 in accounting profit the first year. When
deciding to open her own business she turned down three separate job offers with annual salaries of
$30,000, $40,000, and $45,000. What is Jane's economic profit from running her own business?
a. $-65,000
b. $5,000
c. $10,000
d. $20,000
32. When calculating a firm's profit, an economist
a) will subtract only explicit costs from total revenue since these are the only costs that can
be measured explicitly.
b) will subtract only implicit costs from total revenue since these include both the costs that
can be directly measured as well as the costs that can be indirectly measured.
c) will subtract only the opportunity costs from total revenue since these include both the
implicit and explicit costs of the firm.
d) will subtract only the marginal cost since the cost of the next unit is the only relevant
cost.
33. Which of the following costs do not vary with the amount of output a firm produces?
a. average fixed costs
b. fixed costs and average fixed costs
c. marginal costs and average fixed costs
d. fixed costs
34. Who among the following is a free rider?
a. Barry steals candy from the store where he works.
b. Betty rides to work with Sally, but she pays Sally for gasoline and other travel-related expenses.
c. Joe drives 20,000 miles a year on public streets, but he pays no more in property taxes than Sam,
who only drives 1,000 miles.
d. Fred watches many public television programs, but he has never sent in a contribution to the
station.
Using the graph shown, determine the value of each of the following:
35. total surplus before the tax was
a. 3600
b. 2400
c. 6000
d. 8000
36. consumer surplus after the tax is
a. 900
b. 1800
c. 2400
d. 3600
37. producer surplus after the tax is
a. 900
b. 600
c. 300
d. 2400
38. total tax revenue to the government
a. 2000
b. 3000
c. 5000
d. 6000
39. total surplus after the tax
a.
b.
c.
d.
4000
3500
4500
6000
40.deadweight loss
a. 600
b. 900
c. 1500
d. 2000
Table 1: Teacher's Helper is a small company that has a subcontract to produce instructional materials
for disabled children in public school districts. The owner rents several small rooms in an office building
in the suburbs for $600 a month and has leased computer equipment that costs $480 a month.
Output (Instructional
Modules per Month)
0
1
2
3
4
5
6
7
8
9
10
Fixed
Costs
1,080
1,080
Variable
Costs
400
1,350
1,900
2,500
Total
Cost
Average
Fixed
Cost
Average
Variable
Cost
Average
Total
Cost
Marginal
Cost
965
400
450
1,480
2,430
475
216
4,280
4,100
5,400
7,300
700
135
10,880
Some Formulae that you might find helpful
Total cost (TC) = Fixed cost (FC) + Variable Cost (VC)
AFC=FC/Q
AVC=VC/Q
MC=change in TC/ change in Q
980