ECN 212 Quiz

1) If a good has an external cost, then the marginal private cost curve a. lies below the marginal social cost curve. b. lies above the marginal social cost curve. c. is negative. d. is the same as the marginal external cost curve. 2) When production of a good results in an external cost to society, the unregulated competitive market equilibrium is a. the efficient level of output. b. greater than the efficient level of output. c. less than the efficient level of output. d. unattainable. 3) The efficient quantity of a public good is the quantity at which marginal cost is a. greater than marginal benefit. b. less than marginal benefit. c. equal to marginal benefit. d. zero 4) The “tragedy of the commons” is the absence of incentives to a. correctly measure the marginal cost. b. prevent under use of the common resource. c. prevent overuse and depletion of the common resource. d. discover the resource.

 

 

Page 2 of 9

5) Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the government imposes a 5 percent tax on sugar, the a. price of sugar falls by 5 percent. b. price of sugar increases by less than 5 percent. c. price of sugar does not change. d. quantity of sugar increases. 6) For a given supply elasticity, the more elastic the demand for a good, the larger the share of the tax on a product is paid by the a. buyers. b. sellers. c. participants other than the buyers and sellers. d. government. 7) The quantity of a public good produced by a private firm is always a. less than the efficient quantity. b. more than the efficient quantity. c. zero. d. depends on the demand for public goods. 8) If the government assigns private property rights to a common resource, then the a. resource is under-utilized. b. marginal private benefit becomes equal to the marginal social benefit. c. government needs to set a quota to achieve efficiency. d. None of the above answers is correct. 9) If the exchange rate is constant and U.S. imports increase, then in the foreign exchange market the a. supply of U.S. dollars increases. b. demand for U.S. dollars increases. c. quantity of U.S. dollars supplied increases. d. quantity of U.S. dollars supplied decreases. e. supply of U.S. dollars decreases. 10) An example of a regressive tax is a. a tax on food. b. a higher tax rate on earned income than on capital gains and interest income. c. a consumption tax. d. a tax, such as Social Security, which is applied to only the first X dollars of income. e. All of the above are regressive taxes.

 

 

Page 3 of 9

11) Suppose the elasticity of demand for a product is 0 and the elasticity of supply is 1. If the government imposes a tax on the product, then

a. buyers and sellers pay exactly the same share of the tax. b. buyers pay all of the tax. c. sellers pay all of the tax. d. buyers pay a smaller share of the tax than do sellers but both buyers and sellers pay

some of the tax. 12) Of the following, who gains from tariffs and why? a. domestic buyers because they can be sure of buying high-quality products b. foreign government because they gain more revenue c. domestic producers of protected goods because they can sell at a higher price d. domestic buyers because they pay a lower price e. foreign producers because they earn more total revenue

13) During the 1980s, Harley-Davidson, the American motorcycle maker asked Congress for tariff protection from large motorcycles imported from Japan. Harley-Davidson argued that their company needed protection so the company could reorganize and, after some time had passed, could become more competitive. Harley-Davidson’s argument is similar to the ________ argument for protection. a. bring diversity and stability b. infant-industry c. national security d. save domestic jobs e. anti-dumping 14) Suppose scientific research generates external benefits. Without government intervention, the market for scientific research would a. produce the efficient amount. b. produce too much. c. produce too little. d. produce zero research.

15) Workers in the United States pay 6.2 percent of the first $118,500 of their earnings, and employers also pay 6.2 percent of the worker’s first $118,500 in earnings as a Social Security tax, or 12.4% total tax. Which of the following is definitely true?

a. The incidence of the Social Security tax is that the workers and employers each pay an equal amount of the tax.

b. Employers pay the full amount of the tax. c. Workers pay the full amount of the tax. d. More information is needed to determine the incidence of the tax.

 

 

Page 4 of 9

16) The Coase theorem states that a. the level of pollution should be equal to zero to maximize social net benefit. b. profit making producers pollute because they are forced to. c. the efficient level of output is where marginal social cost equals marginal benefit. d. if property rights exist and are freely enforced, private transactions are efficient. 17) In 2013, President Obama imposed tariffs of up to 118% on South Korean steel. He did so in response to rent seeking by a. foreign steel producers. b. domestic steel consumers. c. foreign politicians. d. domestic steel producers. e. foreign steel consumers. 18) Suppose BMW invests in an assembly plant in South Carolina. This investment is entered into which of the balance of payments accounts? a. capital account b. trade account c. business purchases account d. current account e. official settlements account 19) Which of the following generally becomes negative when the value of U.S. imports exceeds the value of U.S. exports? a. the exchange rate b. the balance of payments account c. current account d. the official settlements account e. capital account 20) If the exchange rate is constant and U.S. exports decrease, then in the foreign exchange market the a. demand for U.S. dollars decreases. b. supply of U.S. dollars increases. c. quantity of U.S. dollars demanded increases. d. demand for U.S. dollars increases. e. quantity of U.S. dollars demanded decreases.

 

 

Page 5 of 9

21) In the United States, the agricultural economy is characterized by a. supply increasing much faster than demand. b. demand which is inelastic with respect to both price and income. c. decreasing real prices for farm output and declining real farm income. d. significant government involvement in output markets. e. all of the above characterize the U.S. agricultural economy. 22) In the used car market with no warranties, the equilibrium is a ________ and there is ________. a. pooling equilibrium; inefficiency, partly because of over-supply of good cars b. pooling equilibrium; inefficiency, partly because of over-supply of lemons c. separating equilibrium; no inefficiency d. separating equilibrium; inefficiency, partly because of over-supply of lemons e. pooling equilibrium; no inefficiency 23) In the used car market with warranties, the equilibrium is a ________ and the lemons problem is ________. a. pooling equilibrium; solved b. pooling equilibrium; unresolved c. separating equilibrium; unresolved d. separating equilibrium; solved e. pooling equilibrium; possibly solved and possibly unresolved, depending on whether

good used cars sell for a higher price than do lemons 24) As the area between the Lorenz curve and diagonal gets larger, the Gini ratio:

 

a. Rises to reflect greater equality b. Rises to reflect greater inequality c. Falls to reflect greater inequality d. Falls to reflect greater equality

 

 

Page 6 of 9

25)

Which statement best describes the data in the above table? a. Between 1970 and 2008, the highest 20 percent of households gained a larger share of total

income at the expense of the lowest 80 percent b. Between 1970 and 2008, the lowest and the highest quintiles gained larger shares of total

income at the expense of the three middle quintiles c. Between 1970 and 2008, the lowest 40 percent of households gained a larger share of total

income at the expense of the highest 40 percent d. Between 1970 and 2008, each quintile gained a larger share of total income because the

level of total income increased greatly

 

 

 

Page 7 of 9

Short Answer

10 points each

1)

1) The following is a supply and demand schedule for ethylene glycol:

Price ($/gallon) Quantity supplied (1000’s

gls./day)

Quantity demanded

(1000’s gls./day)

Price – tax ($/gallon)

Quantity supplied after

tax (1000’s gls./day)

3.50 16 4 3.00 14 5 2.50 12 6 2.00 10 7 1.50 8 8 1.00 6 9 0.50 4 10

 

a. What is the equilibrium price and quantity for ethylene glycol? b. Suppose that the government places a tax of $1.50 on each gallon of ethylene glycol.

What is the new equilibrium price and quantity for ethylene glycol?

c. How is the burden of the new tax divided among buyers and sellers? d. How much revenue does the government collect each day from the tax?

2) Consider Akerlof’s 1970 paper “The Market for Lemons.” Suppose there are only two kinds of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can’t tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What kinds of cars (lemons, good cars, or both) are traded? Explain and substantiate your answer.

 

 

Page 8 of 9

3) N.B., Graph is not to scale. The diagram to the left shows the market for fertilizer. When fertilizer is applied to crops, it runs off into neighboring streams and ponds, killing fish and nematodes and it creates an external cost. a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market? b. What is the efficient quantity of fertilizer?

c. Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by farmers and the equilibrium quantity after implementation of the tax? d. At the output level in part (c), how much is the tax? e. How much tax revenue does government collect? f. What is the deadweight loss borne by society if the externality is left uncorrected? g. What is a nematode and how much does it cost to buy 100,000,000 of them at

nematodes.com? 4) The short-term interest rate on Sylvania’s silvo currency is 2.6% while the short-term interest rate on Freedonia’s freedo currency is 8.0%. In the spot market, one silvo buys two freedos. If interest rate parity holds, how many freedos can we expect to buy with one silvo 12 months from today? The 12-month futures contract for silvos is trading at US$0.8600; the same contract on freedos is trading at US$0.4085. If you cover a currency carry trade position with futures, is there an opportunity to profit? If so, exclusive of leverage and transactions costs, what is your annual rate of return?

 

 

Page 9 of 9

5) The following table shows the percentage of income received by quintile. In the graph below,

draw a Lorenz curve using the before taxes and transfer data and a Lorenz curve for the after taxes and transfer data. Label the Lorenz curves and each axis of the graph.

 

Percentage of income received, 1999

Quintile Before taxes and transfers

After taxes and transfers

Lowest 20% 1.1 4.9

Second 20% 7.0 10.5

Third 20% 14.0 15.9

Fourth 20% 23.0 22.8

Highest 20% 54.8 46.0

 

Extra Credit) What are your estimates of the Gini coefficients for the Lorenz curves above and how did you arrive at them?