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Principles of Microeconomics
Second Quiz
Johann Jaeckel
New York University
Section I (60 points)
1. A negative externality is incorporated into the supply-and-demand model as (. . . )
(a) a downward shift of the supply curve.
(b) an upward shift of the supply curve.
(c) a downward shift of the demand curve.
(d) an upward shift of the demand curve.
(e) None of the above.
2. From the perspective of economic efficiency, an unregulated market outcome in the presence of a negative externality results in (. . . )
(a) a price that is too high and a quantity that is too low.
(b) a price that is too low and a quantity that is too high.
(c) a price and quantity that are both too low.
(d) a price and quantity that are both too high.
(e) the correct price and quantity.
3. A positive externality is incorporated into the supply-and-demand model as (. . . )
(a) a downward shift of the supply curve.
(b) an upward shift of the supply curve.
(c) a downward shift of the demand curve.
(d) an upward shift of the demand curve.
(e) None of the above.Principles of Microeconomics Second Quiz
4. What is the present value formula?
(a) P V (Xn) = Xn((1 + r)/n)
(b) P V (Xn) = Xn/((1 + r)n)
(c) P V (Xn) = Xn/(1 + r)
n
(d) P V (Xn) = Xn(1 + r)
n
(e) P V (Xn) = Xn/((1–r)n)
5. Suppose a project will result in an economic benefit of $20 million dollars 25 years from now. If the discount rate is 3%, what will be the present value of the benefits of this project?
(a) $40 million
(b) $25 million
(c) $2 million
(d) $10 million
(e) $5 million
For the Questions 6 through 10, refer to the following graph illustrating the effects of a negative externality.
6. In the graph above, what areas comprise producer surplus after a Pigo vian tax has fully internalized the negative externality?
(a) A+B+E
(b) G+F+E
(c) C+D
(d) B+C+D
(e) C+F+I+D+G
7. What areas comprise the tax revenue after a Pigovian tax has fully internalized the negative externality?
(a) B+E
(b) C+F
(c) G+F+E+H+I+K
(d) G+F+E
(e) I+H+K
8. What area(s) comprise consumer surplus when the market is unregu lated (i.e., no Pigovian taxes)?
(a) A
(b) A+B+E
(c) A+B+E+H
(d) A+B+E+H+K
(e) A+B+C
9. What area(s) represent the net increase in social welfare as a result of a Pigovian tax that fully internalizes the externality?
(a) A
(b) K
(c) H+I
(d) H+I+K
(e) J
10. What areas comprise the negative externality damage when the market is unregulated (i.e., no Pigovian taxes)?
(a) G+F+E+H+I+K
(b) G+F+E+H+I
(c) G+F+E
(d) E+H+K
(e) F+E+H+I+K
11. What are the two characteristics of a public good?
(a) Excludable and nonrival
(b) Nonexcludable and nonrival
(c) Excludable and rival
(d) Nonexcludable and rival
(e) None of the above
12. What are the two characteristics of an artificially scarce good?
(a) Excludable and nonrival
(b) Nonexcludable and nonrival
(c) Nonexcludable and rival
(d) Excludable and rival
(e) None of the above
13. What are the two characteristics of a common property resource?
(a) Excludable and nonrival
(b) Nonexcludable and rival
(c) Excludable and rival
(d) Nonexcludable and nonrival
(e) None of the above
14. What statement below provides the best description of the supply curve for an artificially scarce good?
(a) A vertical line
(b) A horizontal line
(c) An upward-sloping line
(d) A downward-sloping line
(e) There are two supply curves.
15. What is the main problem with relying upon voluntary donations to fund the provision of public goods?
(a) That people fail to realize how their donations impact others
(b) That there will be price discrimination
(c) That the social benefits are external
(d) That many people will choose to be free riders
(e) That environmental externalities are not accounted for
16. What is considered to be the most appropriate policy to fund the pro vision of public goods?
(a) Price discrimination
(b) Taxation
(c) Individual transferable quotas
(d) Subsidies
(e) Regulated monopolies
17. What is the primary difference between economic analyses of climate change that advocate for a significant policy response versus those analyses that suggest a modest response?
(a) Whether the analysis considers nonmarket impacts
(b) Whether the analysis considers nonuse benefits
(c) Whether the analysis focuses on the distribution of impacts
(d) The average increase in future temperatures
(e) The choice of the discount rate
18. If a good is nonrival that means (. . . )
(a) its owner can prevent others from consuming the good.
(b) its owner cannot prevent others from consuming the good.
(c) it can be consumed by multiple people at a time.
(d) cannot be consume by multiple people at a time.
(e) None of the above.
19. Artificially scarce goods, such as cable television and toll roads, are (. . . )
(a) excludable and rival.
(b) excludable and nonrival.
(c) nonexcludable and rival.
(d) nonexcludable and nonrival.
(e) None of the above.
20. Unregulated markets always fail to provide the efficient level of (. . . )
(a) artificially scarce goods.
(b) common property resources.
(c) public goods.
(d) private goods.
(e) a), b) and c).
21. Which one of the following is an economic, but not an accounting, cost?
(a) The cost of paper
(b) The wages a business owner could have received from a full-time job elsewhere
(c) The wages paid to a part-time employee
(d) Taxes
(e) Interest paid on a loan
22. The difference between economic and accounting costs is the inclusion of (. . . )
(a) private costs.
(b) external costs.
(c) labor costs.
(d) opportunity costs.
(e) depreciation costs.
23. Which of the following is most likely to be a fixed cost of a manufac turing company?
(a) Expenditures on raw materials.
(b) Property insurance premiums.
(c) Wages for unskilled labor.
(d) Shipping charges.
(e) Utility bills.
24. Economics defines the “long run” as a time period where (. . . )
(a) fixed costs must be paid.
(b) all but one input are variable.
(c) all inputs are fixed.
(d) output is variable.
(e) all inputs are variable.
25. The relationship between a firm’s level of output and level of inputs is given by (. . . )
(a) a marginal cost curve.
(b) a production function.
(c) a production possibilities frontier.
(d) an average cost curve.
(e) an economic cost curve.
26. At a total cost of $3,100, a company can produce 4 scooters. It has fixed costs of $1,000. If it produces 5 scooters, the costs of production total $3,800. Which of the following statements is true?
(a) Variable costs of producing 4 scooters total $3096.
(b) The marginal cost of producing the fifth scooter is $700.
(c) The average (or per unit) cost of producing 5 scooters is $300 per
scooter.
(d) Fixed costs will be higher when it produces 5 scooters.
(e) The total cost curve for this firm is downward sloping.
27. At a total cost of $3,100, a company can produce 4 scooters. It has fixed costs of $1,000. If it produces 5 scooters, the costs of production total $3,800. Which of the following statements is true?
(a) Variable costs of producing 4 scooters total $2,100.
(b) The marginal cost of producing the fifth scooter is $1000.
(c) The average (or per unit) cost of producing 5 scooters is $300 per scooter.
(d) Fixed costs will be higher when it produces 5 scooters.
(e) The total cost curve for this firm is downward sloping.
28. At a total cost of $3,100, a company can produce 4 scooters. It has fixed costs of $1,000. If it produces 5 scooters, the costs of production total $3,800. Which of the following statements is true?
(a) Variable costs of producing 4 scooters total $3,000.
(b) The marginal cost of producing the fifth scooter is $1000.
(c) The average (or per unit) cost of producing 5 scooters is $760 per scooter.
(d) Fixed costs will be higher when it produces 5 scooters.
(e) The total cost curve for this firm is downward sloping.
29. What term is used by economists when an increase in output results in an increase in a firm’s long-run average cost curve?
(a) Economies of scale
(b) Economic costs
(c) Diseconomies of scale
(d) Capacity constraint
(e) Scarcity
30. The short run marginal cost curve in the traditional microeconomic model eventually rises because of (. . . )
(a) diminishing marginal returns.
(b) rising fixed costs.
(c) diseconomies of scale.
(d) diminishing marginal revenues.
(e) increasing marginal productivity of variable inputs.
Section II (40 points)
Answer the questions in this section in a single Word/PDF documents. Use a word/text editor for short answers and tables. Take pictures of your graphs or use a simple graphing software.
1. Ramona designs webpages and needs the jolt she gets from caffeine in cola drinks to keep herself productive. The relation between her cola consumption and the number of pages she can design is given by the following table.
Variable Input Total Output
0 0
1 3
2 5
3 6
4 6
Ramona’s employer pays her $50 per day regardless of her productivitylevel and provides her with all the cola she can drink. Cola costs theemployer $2 per can.
(a) Copy the table above and add information on the fixed, variable,total, and the marginal cost at each level of output.
(b) Graph and carefully label the production function. (What is measured on the horizontal and on the vertical axis?)
(c) Graph and carefully label the total cost curve. (What is measuredon the horizontal and on the vertical axis?)
(d) What pattern can we observe in the marginal cost of production?(2.5 points each)
2. Suppose that Lynn’s output of hand-made mittens per hour is determined by the following table. Suppose she is paid $15 per hour andhas purchased a sewing machine for $150.
Hours Worked Marginal Product
0 -
1 4
2 3
3 1
(a) Copy the table above and add information on the total output.
(b) Add the average, marginal and the total cost of production to thetable.
(c) Graph and label the total product curve.
(d) Graph and label the total cost curve.
(e) What pattern can we observe in the marginal returns of this production process?
(3 points each)
3. Consider the following supply and demand function, QD = 65 − 2Pand QS = 1.5P − 5, and assume a $17.50 excise tax is collected fromconsumers.
(a) Calculate price and quantity in this market before (P1 and Q1)and after the tax (P2 and Q2).
(b) What is the amount of tax revenue that is collected from consumers, producers and in total?
(c) What is the relative tax burden of consumers and producers?
(d) Show how the elasticity of supply and demand determine the sharing of the tax burden.
(e) What is the relative tax burden of producers and consumers if thetax is collected from producers, instead?
(3 points each)