Dr. Shishkin
ECON 2106
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Fall 2010
Submit your scantron and questions sheet
Exam 2
Version A
1. Which of the following is necessary for allocative efficiency to be achieved?
A) Marginal benefit must be maximized
B) Marginal cost must be minimized
C) Marginal benefit must equal marginal cost
D) The difference between marginal benefit and marginal cost must be maximized
2. When the marginal cost of producing a bike is greater than the marginal benefit of the bike, to
achieve allocative efficiency
A) more bikes should be produced
B) fewer bikes should be produced
C) no more and no fewer bikes should be produced
D) more information is required to figure out how the level of output should be changed
3. If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75, respectively,
and sells them for $80 each, what is the firm's total producer surplus?
A) $400
B) $225
C) $175
D) $150
4. Graphically, producer surplus is the area under the
A) demand curve and above the supply curve, up to the relevant quantity
B) price and above the demand curve, up to the relevant quantity
C) price and above the supply curve, up to the relevant quantity
D) price and above the quantity axis, up to the relevant quantity
5. Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor
of $5 per gallon of milk, the
A) quantity supplied of milk falls short of the quantity demanded
B) quantity supplied of milk exceeds the quantity demanded
C) supply increases
D) demand decreases
6. If a price ceiling is set above the equilibrium price, then
A) there will be a surplus of the good
B) there will be a shortage of the good
C) there will be neither a shortage nor a surplus of the good
D) the price ceiling will generate revenue for the government
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Dr. Shishkin
ECON 2106
Fall 2010
7. Suppose both demand and supply for Mexican food are unit elastic. If the government imposes a
tax on Mexican food, then
A) The deadweight from this tax will be zero
B) The tax burden will fall mostly on buyers
C) The tax burden will fall mostly on sellers
D) The tax burden will be equally distributed between sellers and buyers
8. For a given supply elasticity, the smaller the elasticity of the demand for a good, the larger the
tax burden falling on
A) buyers
B) sellers
C) participants other than the buyers and sellers
D) government
The figure shows the market
for computer chips. Suppose
that the government imposes a
tax of $10 per chip charged
from the buyers.
9. What is the price paid by buyers after the tax?
A) 10
B) 20
C) 30
D) 40
10. What is the price received by sellers after the tax?
A) 10
B) 20
C) 30
D) 40
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Dr. Shishkin
ECON 2106
Fall 2010
11. How much tax revenue would the government collect from this tax?
A) 200
B) 400
C) 600
D) 1600
12. What is the deadweight loss from this tax?
A) 100
B) 200
C) 300
D) 400
13. The marginal tax rate is the
A) average amount paid as taxes
B) percentage of total income that is paid in tax
C) percentage of an additional dollar of income paid in tax
D) total amount of tax paid as a percentage of total income earned
14. Which of the following is correct?
A) If your income is $20,000 and you are paying $2,000 in taxes, your marginal tax rate is 10
percent.
B) If your income is $20,000 and you are paying $2,000 in income taxes, the income tax you
are paying is progressive.
C) If you paid $0.39 as tax from an additional dollar you earned, your marginal tax rate
is 39 percent.
D) If your marginal tax rate falls as your income increases, the tax is progressive.
15. If the average tax rate falls as income increases, the tax is
A) progressive
B) proportional
C) regressive
D) definitely fair
16. If the average tax rate remains constant as income changes, the tax is
A) progressive
B) proportional
C) regressive
D) definitely fair
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Dr. Shishkin
ECON 2106
Fall 2010
The figure shows the market
for pesticides. When
pesticides are applied to
crops, it runs off into
neighboring streams and
ponds, killing fish and
creating an external cost.
17. What is the equilibrium quantity of pesticides in an unregulated, competitive market?
A) 1 ton per day
B) 2 tons per day
C) 3 tons per day
D) 4 tons per day
18. What is the efficient quantity of pesticides?
A) 1 ton per day
B) 2 tons per day
C) 3 tons per day
D) 4 tons per day
19. What is the deadweight loss borne by society if the externality is left uncorrected?
A) $1,000 per day
B) $1,500 per day
C) $2,000 per day
D) $2,500 per day
20. Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium
price paid by consumers after implementation of the tax?
A) $4,000
B) $5,000
C) $6,000
D) $8,000
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Dr. Shishkin
ECON 2106
Fall 2010
21. At the output level in the previous question, how much is the tax per one ton?
A) $1,000
B) $2,000
C) $3,000
D) $4,000
22. How much total tax revenue does government collect?
A) $2,000
B) $4,000
C) $6,000
D) $8,000
23. Suppose that in a particular town people like trashing their front yards with their old pickup
trucks. The local government decided to limit the number of old vehicles in town to one per a
household, issuing a transferable permit to each homeowner in the town. Because the permits
are transferable, a household can have more than one truck in its yard as long as it has a permit
for each. Chuck has two Chevys in his yard and it costs him $200 per truck to remove one. His
neighbor Fred has two Fords in his yard, and it costs him $300 per truck to remove one. Neither
Chuck nor Fred has special emotional attachments to their rusted trucks, and they are good
neighbors who are always up to a mutually beneficial deal. What is the likely outcome for this
situation?
A) Chuck will remove one of his Chevys, and Fred will remove one of his Fords to comply
with the ordinance.
B) Fred will remove both his Fords and will sell his permit to Chuck for $250
C) Chuck will remove both his Chevys and will sell his permit to Fred for $350
D) Fred will keep both his Fords and will buy a permit from Chuck for $250.
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Dr. Shishkin
ECON 2106
Fall 2010
The figure shows the market
for education in a small
town. Education has an
external benefit. Refer to
this diagram to answer
questions 24-
24. If the market is competitive and left unregulated, how many students will be enrolled per year?
A) 1,000
B) 2,000
C) 3,000
D) 4,000
25. What is the efficient number of students?
A) 1,000
B) 2,000
C) 3,000
D) 4,000
26. What is the deadweight loss resulting from an inefficient amount of education provided by the
market that does not take into account external benefits of education?
A) 1 million
B) 2 million
C) 3 million
D) 4 million
Suppose that the government introduces a subsidy paid to colleges that moves the market to the
efficient number of students
27. Which curve is going to be affected on the diagram above?
A) S
B) D
C) MSB
D) neither one
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Dr. Shishkin
ECON 2106
Fall 2010
28. What is the amount of the subsidy per student should be paid in this case?
A) $1,000
B) $2,000
C) $3,000
D) $4,000
29. How much would be paid by a student?
A) $5,000
B) $6,000
C) $8,000
D) $10,000
30. What amount per student would be received by colleges (both tuition plus subsidy)?
A) $5,000
B) $6,000
C) $8,000
D) $10,000
31. How much would it cost to the government per year to support this program?
A) $4 million
B) $6 million
C) $8 million
D) $9 million
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Dr. Shishkin
ECON 2106
Fall 2010
Number of
Total catch
boats
(tons per month)
0
0
10
1,400
20
2,400
30
3,000
40
3,200
50
3,000
60
2,000
70
1,400
The table above shows how the sustainable catch of lobster in the Red Sea depends on the
number of boats that go fishing. The marginal cost of operating a fishing boat is the same for all
producers, the equivalent of 30 tons of lobster a month. Assume that boats can only go fishing in
groups of 10.
32. What would be the equilibrium number of boats in the Red Sea in this case?
A) 20
B) 40
C) 60
D) 70
33. If 10 extra boats getting into fishing while there are 20 boats currently fishing, what would be
the marginal social benefit (i.e. an increase in the total catch for the whole fishing area) from
this increase in the number of boats fishing (tons of lobster per boat)?
A) 20
B) 40
C) 60
D) 140
34. What is the efficient number of fishing boats in the Red Sea, if boats can only be added in
groups of 10?
A) 10
B) 30
C) 40
D) 50
35. If individual transferable quotas (ITQs) are issued to fishing boats to limit the catch in the Red
Sea to the efficient quantity, what would be the price of an ITQ if measured in tons of lobster
per month?
A) 10
B) 30
C) 50
D) 70
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Dr. Shishkin
ECON 2106
Fall 2010
36. If the quota is introduced, what is the major concern regarding the fishermen’s behavior
according to our discussion in class?
A) They would be tempted to cheat on their quotas and fish too much
B) They would sell their quotas to outsiders
C) They would get too rich and lazy
D) They would be discouraged from meeting their quota and will fish too little
37. A good is nonrival if
A) only the government can produce it
B) it is very difficult or impossible to prevent someone from consuming this good
C) when you pay for the good, you are guaranteed to be the sole consumer
D) when you consume a unit, that means there is no less for someone else
38. A public good is defined as a good or service that is
A) something tangible
B) rival and excludable
C) rival and nonexcludable
D) nonrival and nonexcludable
39. A good is nonexcludable if
A) only the government can produce it
B) it is very difficult or impossible to prevent someone from consuming this good
C) when you pay for the good, you are guaranteed to be the sole consumer
D) when you consume a unit, that means there is no less for someone else
Quantity
of cats
1
2
3
4
John’s marginal benefit,
dollars per month
60
40
20
10
Mary’s marginal benefit,
dollars per month
100
80
60
30
40. John and Mary are considering getting cats in their house. The table above gives their marginal
benefits from cats, a public good in their household. Suppose that the marginal cost of keeping a
cat is $100 per month. What is the efficient quantity of cats in their household? Apply the
marginal analysis approach to answer this question.
A) 0
B) 1
C) 2
D) 3
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