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MSU / Economics / AEC 2713 / excludability is the property of a good whereby

excludability is the property of a good whereby

excludability is the property of a good whereby

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School: Mississippi State University
Department: Economics
Course: Intro to Food & Resource Econ
Professor: Danny barefield
Term: Fall 2016
Tags: Econ, Economics, micro, and Microeconomics
Cost: 50
Name: Intro to Food and Resource Economics - Study Guide 3
Description: This is everything you need to know for the exam. If you can know all of these terms and questions then you will do great on the exam.
Uploaded: 11/01/2016
25 Pages 190 Views 3 Unlocks
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Intro to Food and Resource Economics -  Study Guide - Test Thursday, November 3 TERMS: CHAPTER 10: _____ The proposition that if private parties can bargain  without cost over the allocation of resources, they can  solve the problem of externalities on their own. A. Externality _____ The costs that parties incur in the process of  agreeing and following through on a bargain. B. Corrective tax _____ A situation when a person's actions have an adverse  impact on a bystander. C. Transaction costs _____ A tax designed to induce private decision makers to  take into account the social costs that arise from a  negative externality. D. Positive  externality _____ The uncompensated impact of one person's actions on  the well-being of a bystander. E. Negative  externality _____ Altering incentives so that people take into  account the external effects of their actions F. Social cost _____ The sum of private costs and external costs G. Internalizing an  externality _____ A situation when a person's actions have a  beneficial impact on a bystander H. Coarse theorem


What are the two types of public polices toward externalities?



CHAPTER 11: _____ Goods that are both excludable and rival in  consumption A. Common resources _____ The property of a good whereby one person's use  diminishes other people's use B. Private goods _____ A person who receives the benefit of a good but  avoids paying for it C. Public goods _____ A study that compares the costs and benefits to  society of providing a public good D. Club good _____ Goods that are rival in consumption but not  excludable E. Excludability _____ The property of a good whereby a person can be  prevented from using it F. Free rider

We also discuss several other topics like contribution margin per unit of limited resource

_____ A parable that illustrates why common resources get  used more than is desirable from the standpoint of  society as a whole G. Rivalry in  consumption _____ Goods that are neither excludable nor rival in  consumption H. Cost-benefit  analysis _____ Goods that are excludable but not rival in  consumption I. Tragedy of the  Commons


Why are tradable pollution permits considered superior to corrective taxes at reducing pollution?



CHAPTER 21: The change in consumption that results when a price  change moves the consumer to a higher or lower  indifference curve A. Budget constraint The rate at which a consumer is willing to trade one good  for another B. Perfect  substitutes The limit on the consumption bundles that a consumer can  afford C. Marginal rate of  substitution A good for which an increase in come raised the quantity  demanded D. Normal good A good for which an increase in the price raises the  quantity demanded E. Indifference  curve Two goods with right-angle indifference curves F. Income effect A curve that shows consumption bundles that give the  consumer the same level of satisfaction G. Giffen good A good for which an increase in income reduces the  quantity demanded H. Perfect  complements Two goods with straight-line indifference curves I. Substitution  effect The change in consumption that results when a price  change moves the consumer along a given indifference  curve to a point with a new marginal rate of substitution J. Inferior good


In question 8 above, how large would the transaction costs need to be in order to ensure that no private solution to the problem can be found?



We also discuss several other topics like econ 471
We also discuss several other topics like fast falloff lighting
We also discuss several other topics like uci forensic psychology
If you want to learn more check out it 3570
Don't forget about the age old question of math 2433

TRUE/FALSE: CHAPTER 10: 1. A positive externality is an external benefit that accrues to the buyers  in a market while a negative externality is an external cost that accrues to the sellers in a market. True  False  2. If a market generates a negative externality, the social cost curve is  above the supply curve (private cost curve) True  False  3. If a market generates a positive externality, the social value curve is  above the demand curve (private value curve) True  False  4. A market that generates a negative externality that has not been  internalized generates an equilibrium quantity that is less than the  optimal quantity True  False  5. If a market generates a negative externality, a corrective tax will move  the market toward a more efficient outcome True  False  6. According to the Coast theorem, an externality always requires government  intervention in order to internalize the externality True  False  7. To reduce pollution by some targeted amount, it is most efficient if each  firm that pollutes reduces it pollution by an equal amount True  False  8. When Smokey the Bear says, "Only you can prevent forest fires," society is  attempting to use moral codes and social sanctions to internalize the  externality associated with using fire while camping True  False  9. A tax always makes a market less efficient True  False 10. If Bob values smoking in a restaurant at $10 and Sue values clean air  while she eats at $15, according to the Coast theorem, Bob will not  smoke in the restaurant only if Sue owns the right to clean air True  False  11. If transaction costs exceed the potential gains from an agreement between  affected parties to an externality, there will be no private solution  to the externality True  False  12. A corrective tax sets the price of pollution while tradable pollution  permits set the quantity of pollution True  False  13. An advance of using tradable pollution permits to reduce pollution is  that the regulator need not know anything about he demand for pollution  rights True  False  14. The majority of economists do not like the idea of putting a price on  pollution the environment True  False  15. For any given demand curve for pollution, a regulator can achieve the  same level of pollution with either a corrective tax or by allocating  tradable pollution permits True  False CHAPTER 11: 1. A public good is both rival in consumption and excludable True  False  2. A common resource is neither rival in consumption nor excludable True  False  3. An apple sold in a grocery store is a private goodTrue  False  4. Club goods are free to the consumer of the good True  False  5. Private markets have difficulty providing public goods due to the free rider problem True  False  6. If the city government sells apples at a roadside stand, the apples are  public goods because they are provided by the governments True  False  7. Public good are related to positive externalities because the potential  buyers of public goods ignore the external benefits those goods provide  to other consumers when they make their decision about whether to  purchase public goods True  False  8. Common resources are overused because common resources are free to the  consumer True  False  9. The socially optimal price for a fishing license is zero True  False  10. The government should continue to spend to improve the safety of our  highways until there are no deaths from auto accidents True  False  11. Common resources are related to negatives externalities because consumers  of common resources ignore the negative impact of their consumption on  the other consumer of the common resource True  False  12. If someone owned the property rights to clean air, that person could  charge for the use of the clean air in a market for clean air, and thus, air pollution could be reduced to the optimal level True  False  13. A fireworks display at a private amusement park is a good provided by a  natural monopoly True  False  14. When the government uses cost-benefit analysis to decide whether to  provide a public good, the potential benefit of the public good can  easily be established by surveying consumers of the public good True  False  15. National defense is a classic example of a common resource True  False  CHAPTER 21: 1. If we measure the quantity of French fries on the horizontal axis and the  quantity of hamburgers on the vertical axis, and if the price of French  fries is $0.60 and the price of a hamburger is $2.40, then the slope of  the budget constraint is 1/4 (and it is negative) True  False  2. A budget constraint is a set of commodity bundles that provide the  consumer with the same level of satisfaction True  False  3. Indifference curves measure the consumer's willingness to trade one good  for another good while maintaining a constant level of satisfaction True  False  4. When drawn on a graph that measures the quantity of a good on each axis,  indifference curves are usually straight lines that slope downward  (negatively). True  False  5. If two goods are perfect complements, indifference curves associated with  these two goods would cross each other at the optimum.  True False  6. Indifference curves tend to be bowed inward because a consumer is willing  to trade a greater amount of a good for another if they have an  abundance of the good they are trading away True  False  7. At the consumer's optimum point, the marginal rate of substitution of  apples for oranges is equal to the ratio of the prices of oranges to  the price of apples.  True  False  8. The more difficult it is to substitute one good for another, the more  bowed inward indifference curves become.  True  False  9. If the price of a good falls, the substitution effect always causes an  increase in the quantity demanded of that good.  True  False  10. If the price of a good falls and the good is a normal good, the income  effect causes a decrease in the quantity demanded of that good.  True  False  11. If the price of a good falls and the good is an inferior good, the income  effect causes a decrease in the quantity demanded of that good.  True  False  12. The income effect is measured as the change in consumption that results  when a price change moves the consumer along a given indifference curve  to a point with new marginal rate of substitution.  True  False  13. An increase in the interest rate will always lead to a greater amount of  saving.  True  False 14. A Giffen good is an extremely inferior good.  True  False  15. The theory of consumer choice can be used to demonstrate that labor supply curves must be upward sloping.  True  False  MULTIPLE CHOICE: CHAPTER 10: 1. An externality is A. the benefit that accrues to the buyer in a market B. the cost that accrues to the seller in a market C. the uncompensated impact of one person's actions on the well-being  of a bystander. D. the compensation paid to a firms external consultants. E. none of the above 2. A negative externality generates A. a social cost curve that is above the supply curve (private cost  curve) for a good. B. a social cost curve that is bellow the supply curve (private cost  curve) for a good. C. a social value curve that is above the demand curve (private value  curve) for a good. D. none of the above. 3. A positive externality generates A. a social cost curve that is above the supply curve (private cost  curve) for a good. B. a social value curve that is above the demand curve (private value  curve) for a good. C. a social value curve that is below the demand curve (private value  curve) for a good. D. none of the above. 4. A negative externality (that has not been internalized) causes the A. optimal quantity to exceed the equilibrium quantity. B. equilibrium quantity to exceed the optimal quantity. C. equilibrium quantity to equal the optimal quantity. D. equilibrium quantity to be either above or below the optimal  quantity. 5. A positive externality (that has not been internalized) causes theA. optimal quantity to exceed the equilibrium quantity B. equilibrium quantity to exceed the optimal quantity C. equilibrium quantity to equal the optimal quantity. D. equilibrium quantity to be either above or below the optimal  quantity. 6. To internalize a negative externality, an appropriate public policy  response would be to A. ban the production of all goods creating negative externalities. B. have the government take over the production of the good causing the  externality. C. subsidize the good. D. tax the good. 7. The government engages in an industrial policy A. to internalize the negative externality associated with industrial  pollution B. to internalize the positive externality associated with technology enhancing industries. C. to help stimulate private solutions to the technology externality. D. by allocating tradable technology permits to high technology  industry. 8. When an individual buys a car in a congested urban area, it generates A. an efficient market outcome B. a technology spillover C. a positive externality D. a negative externality 9. The most efficient pollution control system would ensure that A. each polluter reduce its pollution an equal amount B. the polluters with the lowest cost of reducing pollution reduce  their pollution the greatest amount. C. no pollution of the environment is tolerated D. the regulators decide how much each polluter should reduce its  pollution 10. According to the Coase theorem, private parties can solve the problem of  externalities if A. each affected party has equal power in the negotiations B. the party affected by the externality has the initial property right  to be left alone. C. there are no transaction costs. D. the government requires them to negotiate with each other E. there are a large number of affected people. 11. To internalize a positive externality, an appropriate public policy  response would be toA. ban the good creating the externality B. have the government produce the good until the value of an  additional unit is zero C. subsidize the good. D. tax the good. 12. Which of the following is not considered a transaction cost incurred by  parties in the process of contracting to eliminate a pollution  externality A. costs incurred to reduce the pollution B. costs incurred due to lawyers fees C. costs incurred to enforce the agreement D. costs incurred due to a large number E. All of the above are considered transaction costs. 13. Bob and Tom live in a university dorm. Bob values playing load music at a  value of $100. Tom values people and quiet at a value of $150. Which of  the following statements is true? A. It is efficient for Bob to continue to play loud music B. It is efficient for Bob to stop playing loud music only if Tom as  the property right to peace and quiet. C. It is efficient for Bob to stop playing loud music only if Bob has  the property right to play loud music. D. It is efficient for Bob to stop playing loud musical regardless of  who has the property right to the level of sound. 14. Bob and Tom live in a university dorm. Bob values playing load music at a  value on $100. Tom values peace and quiet at a value of $150. Which of  the following statements is true about an efficient solution to this  externality problem if Bob has the right to play loud music and if  there are no transaction costs? A. Bob will pay Tom $100 and Bob will stop playing load music B. Tom will pay Bob between $100 and $150 and Bob will stop playing  loud music C. Bob will pay Tom $150 and Bob will continue to play loud music. D. Tom will pay Bob between $100 and $150 and Bob will continue to play  loud music. 15. Which of the following is true regarding tradable pollution permits and  corrective taxes? A. Corrective taxes are more likely to reduce pollution to a targeted  amount than tradable pollution permits. B. Tradable pollution permits effectively reduce pollution only if they  are initially distributed to the firms that can reduce pollution at the  lowest cost. C. To set the quantity of pollution with tradable pollution permits,  the regulator must know everything about the demand for pollution  rights. D. Corrective taxes and tradable pollution permits create an efficient  market for pollutionE. All of the above are true 16. The gas-guzzler tax that is placed on new vehicles that get very poor  mileage is an example of A. a tradable pollution permit B. an application of the Coase theorem C. an attempt to internalize a positive externality D. an attempt to internalize a negative externality  17. A corrective tax on pollution A. sets the price of pollution B. sets the quantity of pollution C. determines the demand for pollution rights D. reduces the incentive for technological innovations to further  reduce pollution 18. Tradable pollution permits A. sets the price of pollution B. sets the quantity of pollution C. determine the demand for pollution rights. D. reduce the incentive for technological innovations to further reduce  pollution 19. When wealthy alumni provide charitable contributions to their alma mater  to reduce the tuition payments of current students, it is an example of A. an attempt to internalize a positive externality B. an attempt to internalize a negative externality C. a corrective tax D. a command-and-control policy 20. Suppose an industry emits a negative externality suh as pollution, and  the possible methods to internalize the externality are command-and control policies, corrective taxes, and tradable pollution permits. If  economists were to rank these methods for internalizing a negative  externality based on efficiency, ease of implementation, and the  incentive for the industry to further reduce pollution in the future,  they would likely rank them in the following order (from most favored  to least favored):  A. corrective taxes, command-and-control policies, tradable pollution  permits B. command-and-control policies, tradable pollution permits, corrective  taxes. C. tradable pollution permits, corrective taxes, command-and-control  policies D. tradable pollution permits, command-and-control policies,  corrective taxes E. They would all rank equally high because the same result can be  obtained from any one of the policies.CHAPTER 11: 1. If one person's consumption of a good diminishes other people's use of  good, the good is said to be: A. A common resource B. A club good C. Rival in consumption D. Excludable 2. A public good is: A. Both rival in consumption and excludable B. Neither rival in consumption nor excludable C. Rival in consumption but not excludable D. Not rival in consumption but excludable 3. A private good is: A. Both rival in consumption and excludable B. Neither rival in consumption nor excludable C. Rival in consumption but not excludable D. Not rival in consumption but excludable 4. A club good is: A. Both rival in consumption and excludable B. Neither rival in consumption nor excludable C. Rival in consumption but not excludable D. Not rival in consumption but excludable 5. A common resource is: A. Both rival in consumption and excludable B. Neither rival in consumption nor excludable C. Rival in consumption but not excludable D. Not rival in consumption but excludable 6. Public goods are difficult for a private market to provide due to A. The public goods problem B. The rivalness problem C. The Tragedy of the Commons D. The free-rider problems 7. Suppose each of 20 neighbors on a street values street repairs at $3,000.  The cost of the street repair is $40,000. Which of the following  statements is true? A. It is not efficient to have street repaired B. It is efficient for each neighbor to pay $3,000 to repair the  section of street in front of his home C. It is efficient for the government to tax the residents $2,000 each and repair the road D. None of the above is true 8. A free rider is a person who A. Receives the benefits of a good but avoids paying for it B. Produces a good but fails to received payments for the good C. Pays for a good but fails to receive any benefit from the good D. Fails to produce goods but is allowed to consume good 9. Which of the following is an example of public good? A. Whales in the ocean B. Apples on a tree in a public park C. Hot dogs at a picnic D. National Defense 10. A positive externality affects market efficiency in a manner similar to  a: A. Private good B. Public good C. Common resource D. Rival good 11. Suppose that requiring motorcycle riders to wear helmets reduces the  probability of a motorcycle fatality from 0.3% to 0.2% over the life  time of a motorcycle rider and that the cost of a lifetime supply of  helmets. It is efficient for the government to require riders to wear  helmets if human life is valued at A. $100 or more B. $150 or more C. $500 or more D. $50,000 or more E. $500,000 or more 12. A negative externality affects market efficiency in a manner similar to A. A private good B. A public good C. A common resource D. An excludable good 13. When governments employ cost-benefit analysis to help them decide whether  to provide a public good, measuring benefits is difficult because A. one can never place a value on human life or the environment  B. respondents to questionnaires have little incentive to tell the  truth C. there are no benefits to the public because a public good is not  excludable D. the benefits are infinite because a public good is not rival in  consumption and an infinIte amount of people can consume it at the same time 14. Which of the following is an example of a common resource? A. a national park B. a fireworks display C. national defense D. iron one 15. The Tragedy of the Commons is a parable that illustrates why A. public goods are underproduced B. private goods are underconsumed C. common resources are overconsumed D. club goods are overconsumed  16. Which of the following are potential solutions to the problem of air  pollution A. auction off pollution permits B. grant rights of the clean air to citizens so that firms must  purchase the right to pollute C. regulate the amount of pollutants that firms can put in the air D. all of the above When markets fail to allocate resources efficiently, the ultimate source of  the problem is usually A. that prices are not high enough so people overconsume B. that prices are not low enough to firms overproduce C. that property rights have not been well established D. government regulation  If a person can be prevented from using a good, the good is said to be A. a common resource B. a public good C. rival in consumption D. excludable A congested toll road is  A. a private good. B. a public good. C. a common resource. D. a club good.  A person who regularly watches public television but fails to contribute to  public television's fundraising drives is known as A. a common rider. B. a costly rider. C. free rider. D. an unwelcome rider. E. excess baggage. CHAPTER 21: 1.The limit on the consumption bundles that a consumer can afford is known as A. An indifference curve B. The marginal rate of substitution C. The budget constraint D. The consumption limit 2. A change in the relative prices of which of the following pairs of goods  would likely cause the smallest substitution effect? A. gasoline from 7-Eleven and gasoline from Quick Stop B. right shoes and left shoes C. Coca-Cola and Pepsi D. Bud Light and Coors Light 3. Indifference curves for perfect substitutes are A. straight lines. B. bowed inward.  C. bowed outward.  D. right angles. E. nonexistent.  4. Suppose a consumer must choose between the consumption of sandwiches and  pizza. If we measure the quantity of pizza on the horizontal axis and  the quantity of sandwiches on the vertical axis, and if the price of  pizza is $10 and the price of a sandwich is $5, then the slope of the  budget constraint is A. 5 B. 10 C. 2 D. 1/2 5. The slope at any point on an indifference curve is known as A. The trade-off rate B. The marginal rate of substitution  C. The marginal rate of trade-off D. The marginal rate of indifference 6. Which of the following statements is not true with regard to the standard  properties of indifference curves? A. Indifference curves are downward sloping B. Indifference curves do not cross each otherC. Higher indifference curves are preferred to lower ones D. Indifference curves are bowed outward 7. The consumer's optimal purchase of any two goods is the point where A. The consumer reaches the highest indifference curve subject to  remaining on the budget constraint B. The consumer has reached the highest indifference curve C. The two highest indifference curves cross D. The budget constraint crosses the indifference curve 8. Which of the following is true about the consumer's optimum consumption  bundle? At the optimum, A. The indifference curve is tangent to the budget constraint B. The slope of the indifference curve equals the slope of the budget  constraint C. The relative prices of the two goods equals the marginal rate of  substitution D. All of the above are true E. None of the above are true 9. Suppose we measure the quantity of good X on the horizontal axis and the  quantity of good Y on the vertical axis. If indifference curves are  bowed inward, as we move from having an abundance of good X to having  an abundance of good Y, the marginal rate of substitution of good Y for  good X (the slope of the indifference curve) A. Rises B. Falls C. Stays the same D. Could rise or fall depending on the relative prices of the two goods 10. If an increase in a consumer's income causes the consumer to increase his  quantity demanded of a good, then the good is A. An inferior good B. A normal good C. A substitute good D. A complementary good 11. If an increase in a consumer's income causes the consumer to decrease her  quantity demanded of a good, then the good is A. An inferior good B. A normal good C. A substitute good D. A complementary good12. The change in consumption that results when a price change moves the  consumer along a given indifference curve is known as the A. complementary effect. B. normal effect C. income effect D. substitution effect E. inferior effect 13. If income and prices were both to double, the budget line would A. shift outward in a parallel fashion B. shift inward in a parallel fashion C. stay the same D. rotate inward E. rotate outward 14. If leisure is a normal good, an increase in the wage A. will always increase the quantity of labor supplied.  B. will always decrease the amount of labor supplied.  C. will increase the amount of labor supplied if the income effect  outweighs the substitute effect. D. will increase the amount of labor supplied if the substitution  effect outweighs the income effect.  15. If consumption when young and when old are both normal goods, an increase  in the interest rate.  A. will always increase the quantity of saving B. will always decrease the quantity of saving C. will increase the quantity of saving if the substitution effect  outweighs the income effect. D. will increase the quantity of saving if the income effect outweighs  the substitute effect. 16. Which of the following is not true regarding the outcome of a consumer's  optimization process? A. The consumer has reached his highest indifference curve subject to  his budget constraint. B. The marginal utility per dollar spend on each good is the same. C. The consumer is indifferent between any two points on his budget  constraint. D. The marginal rate of substitution between goods is equal to the  ratio of the prices between goods.  E. The consumer's indifference curve is tangent to his budget  constraint.SHORT ANSWER: CHAPTER 10: To answer questions 1, 2 and 3, you need the following verbiage: Suppose that a commercial apple orchard uses pesticides in the  production of apples. In the process, dangerous fumes drift across a  nearby neighborhood. 1. Is this an example of a positive or a negative externality? Explain.  __________________________________________ __________________________________________ __________________________________________ __________________________________________ 2. If this externality is not internalized, does the market overproduce or  underproduce apples? What does it mean to overproduce or  underproduce a product?  __________________________________________ __________________________________________ __________________________________________ __________________________________________ 3. To internalize this externality, should the government tax or subsidize  apples? Why or why not? __________________________________________ __________________________________________ __________________________________________ 4. What are the two types of public polices toward externalities? Describe  them. Which one do economists prefer? Why? __________________________________________ __________________________________________ __________________________________________ 5. Does a corrective tax reduce or increase efficiency? Why? __________________________________________ __________________________________________ __________________________________________ 6. Why are tradable pollution permits considered superior to corrective taxes  at reducing pollution? __________________________________________ __________________________________________ __________________________________________ 7. Suppose an individual enjoys lawn care and gardening a great deal. He uses  pesticides to control insects and the harmful residue drifts across  the neighborhood. He values the use of the pesticides at $10,000  and the neighborhood values clean air at $15,000. What does the Coase theorem suggest will take place? __________________________________________ __________________________________________ __________________________________________ __________________________________________ 8. In question 8 above, how large would the transaction costs need to be in  order to ensure that no private solution to the problem can be  found? __________________________________________ __________________________________________ __________________________________________ 9. What are the sources to transaction costs when affected parties try to  eliminate an externality? __________________________________________ __________________________________________ __________________________________________ 10. What are some types of private solutions to externalities? __________________________________________ __________________________________________ __________________________________________ CHAPTER 11: 1. What does it mean to say that a good is excludable? __________________________________________ __________________________________________ 2. Why is it difficult for private industry to provide public goods? __________________________________________ __________________________________________ __________________________________________ 3. How is a streetlight (a public good) related to a positive externality? __________________________________________ __________________________________________ __________________________________________ 4. Suppose the value of human life is $10 million. Suppose the use of airbags  in cars reduces the probability of dying in a car accident over  one's lifetime from 0.2 percent to 0.1 percent. Further, suppose  that a lifetime supply of airbags will cost the average consumer  $12,000. If these numbers were accurate, would it be efficient for  the government to require airbags in cars? Why or why not? ____________________________________________________________________________________ __________________________________________ 5. What type of problem are hunting and fishing licenses intended to relieve?  Explain.  __________________________________________ __________________________________________ __________________________________________ 6. How are fish in the ocean (a common resource) related to a negative  externality? __________________________________________ __________________________________________ __________________________________________ 7. How can the establishment of individual property rights eliminate the  problems associated with a common resource? __________________________________________ __________________________________________ __________________________________________ 8. Food is more important than roads to the public, yet the government  provides roads for the public and rarely provides food. Why? __________________________________________ __________________________________________ __________________________________________ 9. Why did buffalo almost become extinct while cows (a similar animal) are  unlikely to ever become extinct? __________________________________________ __________________________________________ __________________________________________ 10. Were the buffalo hunters who almost made the buffalo extinct behaving  irrationally? Explain.  __________________________________________ __________________________________________ __________________________________________ CHAPTER 21: 1. Suppose that there are two goods available to the customer-- pens and  pencils. Suppose that the price of a pen is $2.00 while the price of  a pencil is $0.50. If we measure the quantity of pens on the  horizontal axis and the quantity of pencils on the vertical axis,  what is the slop of the budget constraint? Do you need to know the  income of the consumer to answer this question? Why or why not? ____________________________________________________________________________________ __________________________________________ 2. If we measure "goods" on each axis, is an indifference curve positively  (upward)sloped or negatively (downward) sloped? Why? If we measure a  "good" on one axis but a "bad" (such as pollution) on the axis, what  type of slope do you think an indifference curve would have? Why? __________________________________________ __________________________________________ __________________________________________ 3. Why are most indifference curves bowed inward? __________________________________________ __________________________________________ __________________________________________ 4. Consider the following two pairs of goods: -Graduation caps and graduation gowns -Gasoline at an Exxon station and gasoline at a Shell station Which of the pairs of goods above is likely to be nearly perfect  substitutes, and which is likely to be nearly perfect complements?  Explain.  __________________________________________ __________________________________________ __________________________________________ 5. Referring to question 5 above, what is the shape of the indifference  curves that you would expect each pair of goods to generate,  straight-line or right-angle? For which pair of goods would you  observe the greatest substitution effect if the relative prices of  the two goods were to change? Why? __________________________________________ __________________________________________ __________________________________________ 6. Suppose there are two goods available to the consumer-- coffee and tea.  Suppose that the price of coffee decreases. What impact will the  substitution effect and income effect have on the quantity demanded  of coffee if coffee is a normal good? Explain. What impact will the  substitution effect and income effect have on the quantity demanded  of coffee if coffee is an inferior good? Explain.  __________________________________________ __________________________________________ __________________________________________ 7. Suppose there are only two goods available to you, apples and oranges.  Suppose that the prices of apples and oranges double and that your  income also doubles. What will happen to the amount of apples and  oranges that you choose to consume? Explain. (Hint: What has  happened to the slope of the budget constraint? What has happened to the maximum amount of apples or oranges that you could consume if  you allocated all of your income to one good or the other?)  __________________________________________ __________________________________________ __________________________________________ 8. Some people argue that the tax rate should be reduced on interest earned  from saving because it will increase the after-tax return to saving,  increase the quantity of saving supplied, and increase economic  growth. Are we certain that a decrease in the tax rate on interest  earned from saving will increase the quantity of saving? Explain.  __________________________________________ __________________________________________ __________________________________________ANSWERS: TERMS: CHAPTER 10: H C E B A G F D CHAPTER 11: B G F H A E I C D CHAPTER 21: F C A D G H E J B I TRUE/FALSE: CHAPTER 10: 1. F 2. T 3. T 4. F 5. T 6. F 7. F 8. T 9. F 10. F 11. T 12. T SHORT ANSWER: CHAPTER 11: 13. T 14. F 15. T CHAPTER 11: 1. F 2. F 3. T 4. F 5. T 6. F 7. T 8. T 9. F 10. F 11. T 12. T 13. T 14. F 15. F CHAPTER 21: 1. T 2. F 3. T 4. F 5. F 6. T 7. T 8. T 9. T 10.F 11.T 12.F 13.F 14.T 15.F  MULTIPLE CHOICE: CHAPTER 10: 1. C 2. A 3. B 4. B 5. A 6. D 7. B 8. D 9. B 10.C 11.C 12.A 13.D 14.B 15.D 16.D 17.A 18.B 19.A 20.C CHAPTER 11: 1. C 2. B 3. A 4. D 5. C 6. D 7. C 8. A 9. D 10.B 11.E 12.C 13.B 14.A 15.C 16.D 17.C 18.D 19.A 20.C CHAPTER 21: 1. C 2. B 3. A 4. C 5. B 6. D 7. A 8. D 9. A 10. B 11. A 12. D 13. C 14. D 15. C 16. C 1. Negative externality, because the social cost of producing apples exceeds  the private cost of producing apples.2. Overproduce. To overproduce is to produce units where the true cost  exceeds the true value. To underproduce is to fail to produce units  where the true value exceeds the true cost. 3. Tax apples because to internalize this externality, it requires that the  supply curve for apples be shifted upward until it equals the true  social cost curve.  4. Command-and-control policies are regulations that prohibit certain  behaviors. Market-based policies align private incentives with social  efficiency. Economists prefer market-based policies because they are  more efficient and they provide incentives for even further reduction  in, say, pollution through advances in technology.  5. It increases efficiency by shifting the supply or demand curve toward the  true social cost or value curve, thereby making the market solution  equal to the optimal or efficient solution.  6. The regulator doesn't need to know anything about the demand to pollute in  order to arrive at the targeted amount of pollution.  7. No pesticides will be used, and the air will be clean, regardless of  whether the individual owns the right to use pesticides or the  neighborhood residents own the right to clean air. Either the  individual will fail to buy the right to pollute or the neighborhood  residents will pay the individual not to pollute. 8. There are $15,000 - $10,000 = $5,000 of potential benefits. If transaction  costs exceed this amount, there will be no private solution.  9. Lawyers' fees, costs of enforcement, a breakdown in bargaining when there  is a range of prices that would create efficiency, and a large number  of interested parties.  10. Moral codes and social sanctions, charities, mergers between affected  firms, contracts between affected firms. CHAPTER 11: 1. It means that those who do not pay for the good can be excluded from  consuming it.  2. Because public goods are not excludable, the free rider problem makes it  unprofitable for private industry to produce public goods. 3. When people consider buying a streetlight, they fail to consider the  external benefit it would provide to others and only consider their  personal benefit. Thus, there is an underproduction and consumption of  both public goods that generate positive externalities.  4. No, because the expected benefit from airbags is (0.2-0.1) x $10,000,000 =  $10,000 while the cost is $12,000.  5. The overconsumption of common resources. Because common resources are  free, people use them excessively. Selling a limited number of hunting  or fishing licenses restricts the number of users.  6. A common resource is free so it is overconsumed. Each consumer of fish  fails to take into account the negative impact on others of their  consumption causing overuse of the resource from a social perspective.  7. People overuse common resources because their benefit is positive and  their cost is zero. If ownership over the resource is realized and a  socially optimal price is generated. 8. Food is both rival in consumption and excludable, so it can be efficiently  provided by the private market. Roads are often neither rival in  consumption nor excludable, so they will not be provided by private  markets and may be most efficiently provided by government. 9. Buffalo were a common resource and overconsumed. Cows are private goods  and are produced and sold at the socially efficient price and quantity. 10. No. Because the buffalo were a common property resource, the buffalo were  free. Each hunter pursued his own best interest but failed to take into  account the impact of his actions on other people. CHAPTER 21: 1. Slope = rise/run = 4/1 or $. It is also the ratio of the price of pens to  the price of pencils or $2.00/$0.50 = 4. (All slopes are negative.) No.  Income simply must be any positive amount. A change in income shifts  the budget constraint in or out but does not change its slope.  2. Negatively sloped because, for a consumer to be equally happy, if  consumption of one good is reduced, the consumption of the other good  must be increased. Positively sloped because, for a consumer to be  equally happy, if consumption of the bad item is increased, the  consumption of the good item must also be increased. 3. Because the marginal rate of substitution (MRS) is not constant along most  indifference curves. A consumer is willing to trade a greater amount of  a good for another if they have an abundance of the food they are  trading away. They are willing to trade a lesser amount away if they  have very little of the good they are trading way.  4. Exxon gas and Shell gas are nearly perfect substitutes because the  marginal rate of substitution is fixed at about one-- one gallon of  Exxon gas for one gallon of Shell gas. Graduation caps and gowns are  nearly perfect complements because additional units of caps without  gowns or additional units of gowns without caps provide little or not  additional satisfaction.  5. Exxon gas and Shell gas would have nearly straight-line indifference  curves while graduation caps and gowns would have nearly right-angle  indifference curves. A change in the relative prices of gas would cause  a great substitution between gas at each station while a change in the  relative prices of caps and gowns would cause little or no substitution  of caps for gowns or gowns for caps. 6. The substitution effect will cause an increase in the quantity demanded of  coffee regardless of whether coffee is normal or inferior. If coffee is  normal, the income effect will cause an increase in the quantity  demanded of coffee. If coffee is inferior, the income effect will cause  a decrease in the quantity demanded of coffee.  7. There will be no impact because the slope of the budget constraint is  unaltered (relative prices are the same so the market trade-off is the  same) and the position of the budget constraint is unaltered (the  maximum amount of each good that can be purchased is unaltered so the  end points of the budget constraint are the same).  8. No. An increase in the return to saving should increase consumption when  old (substitution effect increases saving), but an increase in the  return to saving increases income and should increase consumption when  young and old (income effect decreases saving). If the income effect  outweighs the substitution effect, a greater after-tax return on saving  would decrease saving.
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