Purpose

The purpose of Unit III was to understand how government intervention affects well-           operating markets and how government intervention can be used to resolve market failures.

Practice Problems

1.  If the government were to use a corrective tax in the presence of a negative externality, what would happen to the deadweight loss?

a.  The deadweight loss would increase.

b.  The deadweight loss would decrease, but remain positive.

c.  The deadweight loss would decrease to zero.

d.  The deadweight loss would become negative.

2.  If the production of a good yields a positive externality, then the social value curve lies _____ the private value curve, and the socially optimal quantity is _____ than the equilibrium quantity.

a.  Above, greater

b.  Above, less

c.  Below, greater

d.  Below, less

3.  A government can internalize a negative externality by _____, which would _____ the quantity supplied and demanded.

a.  Giving a subsidy, increase

b.  Giving a subsidy, decrease

c.  Levying a tax, increase

d.  Levying a tax, decrease

4.  Common resources are

a.  Excludable and rival.

b.  Excludable and non-rival.

c.  Non-excludable and rival.

d.  Non-excludable and non-rival.

5.  In the absence of government, public goods tend to be _____, and common resources tend to be _____.

a.  Underprovided, underprovided

b.  Underprovided, overused

c.  Overused, underprovided

d.  Overused, overused

6.  An industry is considered to be a natural monopoly if

a.  A single firm owns a key resource.

b.  The government has granted one firm the exclusive right to sell a good or service.

c.  A firm is the sole seller of a product without close substitutes.

d.  A single firm has economies of scale over the relevant range of output.

7.  Trade policy decisions between countries can be modeled much like duopolies: with a prisoner’s dilemma.  Mexico and the US believe the gains from two trade policies are as listed below.  What are the trade policy decisions of both countries?

a.  Both countries will choose low tariffs.

b.  The US will choose low tariffs and Mexico will choose high tariffs.

c.  The US will choose high tariffs and Mexico will choose low tariffs.

d.  Both countries will choose high tariffs.

13. If the government believes that market equilibrium price is too high, it can implement a _____.  The trade-off for this is that it will create a _____.

a.  Price ceiling; shortage

b.  Price ceiling; surplus

c.  Price floor; shortage

d.  Price floor; surplus

14. In January 2019, researchers published data that argued that there has been almost no change in employment in the five years after a minimum wage was enacted.  If   we assume that population, the number of job openings, and the types of jobs         remained the same during this period, what can we conclude?

a.  The minimum wage was a binding price floor.

b.  The minimum wage was a non-binding price floor.

c.  The minimum wage was a binding price ceiling.

d.  The minimum wage was a non-binding price ceiling.

15. If a country wishes to reduce imports with as little economic (efficiency) loss as possible, it should

a.  Impose a quota.

b.  Impose regulations.

c.  Impose a tariff.

d.  Impose domestic production subsidies.

16. Refer to the graphs below.  Which country would import bananas and why?

a.  Constantia because it has the lower opportunity cost of producing bananas.

b.  Cambria because it has the lower opportunity cost of producing bananas.

c.  Constantia because it has the higher opportunity cost of producing bananas.

d.  Cambria because it has the higher opportunity cost of producing bananas.

17. Refer to the table below.  What is the world price and quantity of exports?

a.  World price = 20, exports = 45

b.  World price = 30, exports = 30

c.  World price = 40, exports = 60

d.  World price = 50, exports = 90

18. When two individuals produce efficiently and then make a mutually-beneficial trade based on comparative advantage,

a.  Both are only able to consume along their own production possibilities frontiers.

b.  Both consume only those goods in which they have a comparative advantage.

c.  Both are able to consume beyond what they could produce without trade .

d.  Both consumer inside their own production possibilities frontiers.

19. As of December 31, 2019, the law in New York City is that all employees must be     paid at least $15 per hour.  Some have argued that this move will increase              unemployment in New York City.  Why did New York City opt to implement the         minimum wage despite warnings about increased unemployment?  (Use positive, not normative, analysis.)

a.  The warnings are unfounded – minimum wages cannot create unemployment.

b.  We as a society ought to consider cost of living more important than inefficiencies associated with unemployment.

c.  The marginal benefit of increasing the minimum wage is larger than the marginal cost of the additional unemployment.

d.  Higher minimum wages are associated with higher total productivity throughout all of New York City.

20. Which side of the market is more likely to lobby the government for a price floor?

a.  The buyers

b.  The sellers

c.  Both the buyers and the sellers

d.  Neither the buyers nor the sellers

21. Which of the following occurs if a tax is placed on a good?  Assume that the market is operating efficiently.

a.  A decrease in the price buyers pay and a decrease in the price sellers receive

b.  A decrease in the price buyers pay and an increase in the price sellers receive

c.  An increase in the price buyers pay and a decrease in the price sellers receive

d.  An increase in the price buyers pay and an increase in the price sellers

receive

22. The burden of a tax falls more heavily on sellers when

a.  Supply is inelastic and demand is elastic.

b.  Supply is elastic and demand is inelastic.

c.  Both supply and demand are elastic.

d.  Both supply and demand are inelastic.

23. Deadweight loss from a tax is greatest when

a.  Supply is elastic and demand is inelastic.

b.  Supply is inelastic and demand is elastic.

c.  Both supply and demand are elastic.

d.  Both supply and demand are inelastic.

24. Assume that a farmer can use his land either to grow food or drill for oil.  Assume that the markets for both food and oil start at equilibrium with the same price.

a.  In the market for food, what is the immediate impact of a government’s  decision to hold the price for food below the equilibrium price (the farmer cannot reallocate his land)?