Exam 2 Answers PDF

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Exam 2 study guide questions with answers...

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Which of the following is false? a. If the social supply curve lies to the left of the private supply curve, then a negative externality is present. If a product creates an external cost (negative externality), society should devote fewer resources to its production., Suppose government intervenes in a market where a negative externality exists on the demand-side of the market. If such intervention decreases the private demand for that good/service, then we can say that “government failure” has occurred., If society fails to consider externalities, it will fail to use its economic resources properly., Consumers tend to purchase too much of products that create negative externalities. Recently, a railroad asked the state commerce commission for permission to increase its commuter rates by 10%. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad’s revenues would fall because of the rate hike. It can be concluded that: a. The railroad felt that the demand for passenger service was elastic and the opponents of the rate increase felt it was inelastic., The railroad felt that the demand for passenger service was inelastic and the opponents of the rate increase felt it was elastic., Both groups felt that the demand was inelastic but for different reasons., Both groups felt that the demand was elastic but for different reasons., Nothing can be concluded about the price elasticity of demand from the above information. Which of the following would support the theory of public choice? a. Governor DeWine vetoes a bill that makes it easier for adults to obtain firearms even though he is under intense pressure by the National Rifle Association (NRA) to sign off on the bill., President Rogers eliminates wasteful departments and programs even though this will shorten his tenure at BGSU and threaten his political aspirations., The president of Columbia goes after drug traffickers in spite of death threats and the offer of bribes that could make him a rich man., The City of Toledo proposes a law banning smoking from public buildings, which is a proposal designed to eliminate the harmful effects of second-hand smoke., A Senator from Missouri might agree to vote in favor of a bill that would expand the federal highway system in Florida in return for a Florida senator’s favorable vote on a bill appropriating more money for Missouri’s military bases even though the costs of these projects exceed the benefits. As discussed in our leather tannery example, the purpose of a pollution tax or government regulation is to a. Force the firm to cease production., Make the leather’s price more accurately reflect the true private cost of its production., Force the firm to internalize its external costs., Encourage the polluting firm to expand output to the socially optimal level., Encourage the firm to pollute. A primary factor determining the degree of the price elasticity of supply is a. The number of good substitutes that are available to consumers., The number of producers of the product., The amount of time producers are given to adjust to the price change., The income of consumers., The amount of competition in the industry. Refer to the diagram above. Which area represents consumer surplus once an effective/binding price ceiling of P1 has been established? a. P2AC., P1DCA., P1DBA., P1D0., P2ED0. Refer to the diagram above. The implementation of a binding price ceiling of P1 will transfer surplus (benefits) from the producer to the consumer. Which area represents producer surplus prior to the implementation of the price ceiling P1 that will be transferred to the consumer once the price ceiling has been established? a. P2C0., P1DBA., P2CDP1., CBD., P2EDP1.

If Bowling Green State University increases tuition by 10% and the number of enrollment spots demanded declines, then a. It can be determined that the demand for enrollment spots at BGSU is elastic and that the demand curve for enrollment spots is a horizontal line., It can be determined that the demand for enrollment spots at BGSU is elastic and that the demand curve for enrollment spots is downward-sloping., It can be determined that the demand for enrollment spots at BGSU is inelastic and that the demand curve for enrollment spots is a vertical line., It can be determined that the demand for enrollment spots at BGSU is inelastic and that the demand curve for enrollment spots is downward-sloping.,

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From the information given, nothing can be concluded about the price elasticity of demand for enrollment spots at BGSU; however, the demand curve must be downward-sloping. The government imposes a $1.00 tax/gallon on the producers of gasoline. If the price elasticity of demand for gasoline is 0.63 and the price elasticity of supply for gasoline is 1.41, then a. The consumers will bear the majority of the tax incidence., The consumers will bear the entire tax incidence., The producers will bear the majority of the tax incidence., The producers will bear the entire tax incidence., The tax incidence will be evenly split between the consumers and the producers. Refer to the table above. Assume that streetlights are a public good, and without government intervention, the nation is currently operating at Combination C. Which of the following is true? a. The government must generally provide streetlights because the free-rider dilemma makes it difficult for private firms to earn a profit from producing streetlights., Streetlights convey their benefits only to the buyers and sellers of them., It is likely that government intervention in the street light market will move this nation towards Combination D., All of the above., Answers a). and c). above. Assume that equilibrium price is currently $3.00 and equilibrium quantity is currently 8 million packs in the market for cigarettes. Now, suppose that government imposes a $1/pack tax on the consumers of cigarettes and this results in a new equilibrium price of $2.75 and a new equilibrium quantity of 7 million packs in the market for cigarettes, the consumers’ tax incidence will be a. $3.00., $2.75., $1.00., $0.75., $0.25 According to the “invisible hand theorem”, a. As individual consumers and firms pursue their own interests, they tend to promote the good of society as a whole., When individual consumers and firms attempt to promote the best interests of the entire society, they also further their own personal interests., Government can be relied upon to ensure that firms serve society’s best interests., The actions of individual consumers and firms often have unanticipated and undesirable effects on society., Government intervention is important to force individual consumers and firms to behave in an ethical manner. Power plants in the Midwest burn coal with a high sulfur content. When the smoke from these plants mixes with moisture from the atmosphere, the result is a dilute acid that is windblown north to Canada and east to New York and New England, where it falls to the earth in rain. Estimates of damage from fish kills, building deterioration & deforestation are approximately $500,000/month. It would cost the power plants $750,000/month to burn coal with a lower sulfur content, and that would help eliminate a significant portion of the phenomenon known as acid rain. a. If government assigns the right to “air” to the power plants, then the air will continue to be polluted because the power plants will continue to use high sulfur coal., If government assigns the right to “air” to the power plants, then the air will most likely not be polluted because the citizens will negotiate with the power plants to get the power plants to use low sulfur coal., If the government assigns the right to “air” to the citizens of Canada, New York & New England, then the air will most likely be polluted because the power plants will negotiate with the citizens for the right to use high sulfur coal., Regardless of who is assigned the right to the air, the air will not be polluted., Answers a). and c). above.

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Refer to the PPF above. Suppose Combination ”B” represents the optimal mix of public and private goods for this nation. The market mechanism is likely to result in a mix of output represented by a. Combinatio n “A” because the market mechanism tends to fail and underproduce public goods., Combination “A” because the market mechanism tends to fail and overproduce public goods., Combination “B” because the market mechanism always gives us both productive and allocatively efficient outcomes., Combination “C” because the market mechanism tends to fail and underproduce public goods., Combination “C” because the market mechanism tends to fail and overproduce public goods.

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PART 1: If Super Cinemas currently sells a movie ticket for $6.00, then what is Super Cinemas total revenue? 5,450 tickets, $32,700, $115,800, $120,925, Cannot be determined from the information given. PART 2: Super Cinemas is considering raising the price of a movie ticket from $6.00 to $7.00. If Consumer Group A’s price elasticity of demand for movie tickets is 1.27 and Consumer Group B’s price elasticity of demand for movie tickets is 0.53, then Super Cinemas should: Raise the price for Group A because they have an inelastic response to the price change and keep the price at $6.00 for Group B because they have an elastic response to the price change., Raise the price for Group A because they have an elastic response to the price change and keep the price at $6.00 for Group B because they have an inelastic response to the price change., Keep the price at $6.00 for Group A because they have an inelastic response to the price change and raise the price for Group B because they have an elastic response to the price change., Keep the price at $6.00 for Group A because they have an elastic response to the price change and raise the price for Group B because they have an inelastic response to the price change., Continue to charge both groups $6.00. PART 3: Based on your price discrimination advice in PART 2 ABOVE, Super Cinemas will increase its total revenues by: 875 tickets., $425., $675., $1,525. Based on your advice, the new total revenue = ($6 * 4500) + ($7 * 875) = $33,125. This is an increase of $425 compared to Super Cinemas original total revenue of $32,700., $33,125., None of the above. Super Cinemas’ revenues will actually decrease. Please note: For the next two questions, you will need to identify the two groups and use this identification in your answers below. For example, Consumer Group A is blondes and Consumer

Group B is non-blondes or Consumer Group A is Republicans and Consumer Group B is Democrats. (PLEASE DO NOT USE MY EXAMPLES! Remember, the market is for movie tickets so the more realistic you make your groups, the easier it will be to answer the questions.) You have identified the groups as follows: Group A: _____________ Group B: _______________ e. PART 4: In general, what two criteria must hold true in order for firms to beneficially price discriminate? Now, please explain whether or not you believe these criteria are met for Super Cinemas. The movie theatre must be able to clearly distinguish between the two groups. Attendants can either visually determine if a customer is over 12 or ask for ID to verify their age. Most generally, it is not hard to tell if a person is over 12 just by looking at them. Then, the movie theatre must be able to determine the two groups are not trading amongst themselves. Movie theatres are designed in a way where you cannot enter into the area with the screens without a ticket. Tickets are collected and checked by employees upon entry. Emplyees can check the age on the customers ticket and verify the customer has not traded tickets with someone else. f. PART 5: Please list two factors influencing price elasticity of demand in general. Now, please use your two factors to explain why your Consumer Groups A and B above have either an elastic or an inelastic demand for movie tickets. Based on your answer to Part 2 above, kids are your Group A (elastic) and adults/teens are your Group B (inelastic group). Group A, likely has more sources of entertainment avalible to them then Group B does. Adults and teens can choose from entertainment options not avalible/appropriate for kids. Such as bars, clubs, parties, concerts, etc. Kids are only able to participate in entertainment options appropriate for them and that they can be taken to by a parent or guardian. Adults may also have greater access to substitutes directly to going to the movies through streaming services they already own at home, kids may not have this available to them. NOT LUXURY 16. Please indicate whether the statement is true or false. If the statement is false, please explain why. Each question is worth 3 points. a. ______ Supply tends to be more inelastic in the long-run than the short-run because firms have more options for expanding or contracting production in the long-run. False. Supply tends to be more elastic in the long-run than in the short-run because firms have more options for expanding or contracting production in the long-run. Please explain why by discussing economic resources. b. True Suppose Kim is willing and able to pay $5 for her first ice cream sundae, $4 for a second ice cream sundae, and $2 for a third ice cream sundae. If Kim is able to buy ice cream sundaes for $2 a piece, she will realize a consumer surplus of $5. c. True Suppose that demand for insulin is perfectly inelastic and supply has its normal upwardsloping shape. If supply were to increase, the equilibrium price would fall, but the equilibrium quantity would stay the same. d. ______ Without government intervention, it is most likely the case that “too little” of a public good/service will be traded in a market economy. In this scenario, “too little” implies that a shortage of the public good/service exists. False. “Too little” implies that the market operates at a suboptimal equilibrium quantity (Qe: Qd = Qs). Please explain why by discussing the free-rider dilemma. e. ______ If Toledo policymakers increase bus fares by 10% and bus service has a price elasticity of demand of 2.0, then bus ridership will increase by 5%. False. If Toledo policymakers increase bus fares by 10% and bus service has a price elasticity of demand of 2.0, then bus ridership will decrease by 20% f. True. If the price of a good/service decreases, then we can expect producer surplus to also decrease.

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(Hint: You have been given an incomplete graph as you have only been provided with the social demand and social supply curves. I recommend that, on a scrap sheet of paper, you complete this graph by drawing in the private demand and private supply curves before answering this question.) Flu shots create a positive externality because medical research shows that flu shots protect not only the people inoculated but also those who come into contact with them. In the absence of government intervention, a. Equilibrium quantity will equal 50 million flu shots, and equilibrium price will equal $20. Equilibrium quantity will be greater than 50 million flu shots, and equilibrium price will be greater than $20., Equilibrium quantity will be less than 50 million flu shots, and equilibrium price will be less than $20., Equilibrium quantity will be greater than 50 million flu shots, but equilibrium price will be less than $20., Equilibrium quantity will be less than 50 million flu shots, but equilibrium price will be greater than $20. 18. MARKET FAILURE - Part 2 a. Is the amount of flu shots traded that you identified in Question #17 (MARKET FAILURE - Part 1) allocatively efficient (socially optimal)? Why or why not? The amount of flue shot I identified in Question 17 is not allocatively efficient. This is because it is below the socially optimal graph displays as its Equilibirum Quantity of flu shots. Please explain by discussing consumer buying behavior underlying private vs. social demand. b. Say the government intervenes in this flu market by offering a tax credit to everyone who receives a flu shot. What effect will this policy have in the market for flu shots? As a result of this policy, will this economy move towards a more allocatively efficient (socially optimal) outcome? Why or why not? The governments offering of a tax credit to those who receive a flu shot would push demand curve closer to (or at) where the social demand curve lies. This would move the economy more towards an allocatively efficient outcome as the Quantity Demanded equilibrium would be closer (or at) where it is socially optimal. What determinant is altered, causing private demand to increase? Please explain that Qe (equilibrium quantity, not quantity demanded equilibrium) increases towards the socially optimal Qe* of 50 million flu shots. 19. Problem #2: Public Goods/Services a. Please list and define the two characteristics of a public good/service. Two characteristics of a public good/service are non-rival and non-excludable. Non-rival is when one person using a good/service does not make the good/service unavailable for another person's use. Therefore, the good/service can be used by multiple people, like a road. Non-excludable means that a product, once provided, is expensive or impossible for a firm to exclude any person from enjoying said product. Like that of a street lamp, once in place, it is vertually impossible for a firm to keep a person from using the street lamp. b. Please explain why public goods/services are typically provided by government as opposed to private firms. Everyone expects public goods, like a street lamp, to be there for their use but no one would like to pay for them. This is because of the free-rider dilemma. Governments generally provide public goods becuase they tax citizens and therefore have funds to provide such goods for everyones use. Private firms would need someone to pay for the goods so that they are able to provide them, however, as we already mentioned no one wants to pay for a public good. Private firms, generally, find it unprofitable to provide public goods.

20. Determinants of Demand a. Change in consumers’ incomes i. Normal goods/service ii. Inferior good/service b. Change in consumers’ taste/preferences c. Change in price of a related good/service i. Complementary good/service ii. Substitute good/service d. Change in consumers’ future expectations e. Change in the number of consumers f. Exchange rate fluctuation 21. Determinants of Quantity Demanded a. Change in price 22. Determinants of Supply a. Change in price of resources/changes in production costs i. Taxes and subsidies b. Change in technology/productivity c. Change in producers’ future expectations d. Change in numbers of producers 23. Determinants of Quantity Supplied a. Change in price...