Name ________________________________________please circle your section è11AM or 6:30PM

 

 ECON 2106 Principles of Microeconomics

Problem Set 4 mankiw chapter 10

dUE fRIDAY 18:00 September 11, 2009

 

Directions: Print this answer sheet out at your computer. Work individually or in a group with a maximum of three people. A group will submit one answer sheet with each group member’s name at the top. Read each question carefully. Each question has only one correct answer. Place the letter that corresponds to the correct answer alongside the number that corresponds to the question on the problem set on this answer sheet. Turn in only the answer sheet no later than 18:00 of the date indicated above.

 

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ECON 2106 Principles of Microeconomics

Problem Set 4 mankiw chapter 10

dUE fRIDAY 18:00 September 5, 2008

 

____               1.     Market failure can be caused by

a.

too much competition.

b.

externalities.

c.

low consumer demand.

d.

scarcity.

 

____               2.     Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

a.

A well-maintained yard conveys a positive externality because it increases the home's market value.

b.

A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner.

c.

A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.

d.

A well-maintained yard cannot provide any type of externality.

 

____               3.     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.

 

Figure 10-1

 

____               4.     Refer to Figure 10-1. This graph represents the tobacco industry. If the government uses a pollution tax, how much tax revenue will the government receive?

a.

$7.00

b.

$10.50

c.

$63.00

d.

$67.20

 

 

 

 

Figure 10-2

 

____               5.     Refer to Figure 10-2. Suppose that the production of soccer balls creates a social cost which is depicted in the graph above. If the government wanted to force the firm to internalize the cost of the externality, what action should it take?

a.

Impose a tax of $7.50 per soccer ball.

b.

Impose a tax of $7 per soccer ball.

c.

Offer a subsidy of $3 per soccer ball.

d.

Offer a subsidy of $2.50 per soccer ball.

 

Figure 10-4

 

____               6.     Refer to Figure 10-4. If this market is currently producing at Q1, then total economic well-being would increase if output

a.

increased to Q2.

b.

increased to Q3.

c.

increased to Q4.

d.

stayed at Q1.

 

____               7.     Refer to Figure 10-4. If this market is currently producing at Q4, then total economic well-being would increase if output

a.

increased beyond Q4.

b.

decreased to Q2.

c.

decreased to zero.

d.

stayed at Q4.

 

____               8.     Markets are often inefficient when negative externalities are present because

a.

private costs exceed social costs at the private market solution.

b.

externalities cannot be corrected without government regulation.

c.

social costs exceed private costs at the private market solution.

d.

production externalities lead to consumption externalities.

 

 


____               9.     A positive externality occurs when

a.

Jack receives a benefit from John's consumption of a certain good.

b.

Jack receives personal benefits from his own consumption of a certain good.

c.

Jack's benefit exceeds John's benefit when they each consume the same good.

d.

Jack's receives a loss from John’s consumption of a certain good.

 

____               10.  Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

a.

They are equal.

b.

The equilibrium quantity is greater than the socially optimal quantity.

c.

The equilibrium quantity is less than the socially optimal quantity.

d.

There is not enough information to answer the question.

 

____               11.  If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover, it should

a.

impose a corrective tax on any firm producing a technology spillover.

b.

offer tax credits to consumers who are adversely affected by the new technology.

c.

subsidize producers by an amount equal to the value of the technology spillover.

d.

provide research grants to those firms not currently engaging in research to increase competition in the industry.

 

____               12.  Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

a.

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.

b.

The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.

c.

The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs.

d.

There is not enough information to answer the question.

 

____               13.  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.

 

____               14.  In class action lawsuits interested parties to the lawsuit are not required to pay attorney fees directly. This is an example of an attempt to

a.

maximize attorney fees.

b.

reduce the incentive of attorneys to file class action lawsuits.

c.

reduce the transaction costs of finding a private solution to an externality.

d.

regulate attorney fees.

 

____               15.  In which of the following cases is the Coase theorem most likely to solve the externality?

a.

Richard is annoyed because his roommate smokes.

b.

Chemicals from farms in the Mississippi Valley are polluting the Gulf of Mexico.

c.

Car exhaust in a small town is making one of its residents ill.

d.

Industrialization around the world is causing acid rain.

 


____               16.  A local laundry advertises that the clothes it washes smell "sunshine fresh" because it line dries everything outside. Then a steel factory moves in next door and emits black smoke which stains the clothes drying at the laundry. According to the Coase theorem, granting the

a.

steel factory the right to pollute would be efficient, but granting the laundry the right to clean air would be equitable.

b.

laundry the right to clean air would be efficient, but granting the steel factory the right to pollute would be equitable.

c.

steel factory the right to pollute has the same effect on equity as granting the laundry the right to clean air.

d.

steel factory the right to pollute has the same effect on efficiency as granting the laundry the right to clean air.

 

____               17.  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.

 

____               18.  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.

 

____               19.  Chad's maple tree hangs over Amy's fence and drops leaves into her yard each autumn. The benefit to Chad of lower utility bills due to the tree’s shade in the summer is $300. The cost to Amy of having her lawn cleaned and reseeded is $350. Based on the Coase theorem,

a.

Chad should pay Amy $400 so that he may keep the tree.

b.

Chad should pay Amy $350 to have her lawn repaired and cleaned.

c.

Amy should pay Chad $325 to cut down the tree.

d.

Amy should build a fence.

 

____               20.  Suppose that Maria wants to dine at a fancy restaurant, but the only available table is in the smoking section. Maria dislikes the smell of cigarette smoke. She notices that only one person, John, is smoking in the smoking section. Maria values the absence of smoke at $25. John values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs?

a.

John continues to smoke because he has a right to smoke in the smoking section.

b.

Maria offers John between $15 and $25 not to smoke. John accepts, and both parties are better off.

c.

Maria offers John between $15 and $25 not to smoke. John declines because he has a right to smoke in the smoking section.

d.

Only a government policy banning smoking in restaurants will solve this problem.

 

____               21.  Which of the following statements is not correct?

a.

Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level.

b.

Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution.

c.

Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution.

d.

Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.

____               22.  Which of the following statements is not correct?

a.

Patents help internalize the externalities associated with technological advances.

b.

Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution.

c.

Allowing firms to trade pollution permits will lower the total cost of reducing pollution.

d.

A big impediment to implementing the Coase theorem in many cases is high transactions costs.

 

The following questions are True-False and deal with chapters 26, 27, 28, and 29 in Miller et al. Mark a “T” or an “F” alongside the appropriate question number on the answer sheet.

 

23. The market value of used materials for recycling has increased five fold over the past twenty years because of the large demand for raw materials by the insatiable Chinese industrial machine. 

 

24. Native Americans hunted bison in an ecologically sound way taking only what they needed unlike white hunters and settlers that exploited the bison herds to extinction.

 

25. One of the important problems associated with using a tradable pollution permit system to improve environmental quality is the significant transactions costs involved.