A. Multiple-Choice with explanations( briefly explainyour answers):
| 1. Rising commercial rents in San Francisco have induced many corporations to move their offices out of the city. Should a SanFrancisco firm that owns its office building simply ignore theserising rents?
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a. Yes, because they do not have to pay the higher rents.
b. No, because they could rent those offices to others.
c. Maybe, it depends on the company's profits from production.
d. None of the above.
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2. When deciding whether to purchase a second car, economictheory indicates that the purchaser should compare:
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a. the total benefits expected from the two cars with the total cost of the two cars.
b. the additional benefits expected from the second car with the total cost of the two cars.
c. the dollar cost of two cars with the potential income that the two cars will generate.
d. the additional benefits of the second car with its cost.
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3. As an economist who understands the importance of incentives, which of the following would you reccommend to distribute customers more effectively throughout the lunch period (11am-2:30pm) and there by reduce your restaurant's long lines that typically occurduring the 12 noon-1pm hour?
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a. Increase the price of all meals by 10 percent.
b. Give a 10 percent discount during the 12 noon-1pm period
and place a 10 percent surcharge on all meals at all other times.
c. Place a 10 percent surcharge on all meals during the 12 noon-1pm period and discount them 10 percent at all other times.
d. Build another restaurant.
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4. Suppose the demand for drugs is relatively inelastic. Prohibition will:
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a. Increase the revenues of drug dealers due to increased expenditures on drugs.
b. decrease the revenues of drug dealers due to decreased expenditures on drugs.
c. initially increase the revenues of drug dealers, but in the long run these revenues
will fall as users adjust to the higher prices.
d. cause a relatively large decrease in the output that drug dealers are able to sell.
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5. According to the text, the supply of housing is relativelyresponsive to price. If so, which of the following programs is likely to be most successful? |
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a. A program which provides subsidies to local government to construct
low-income housing for its citizens.
b. A program that provides a voucher to low-income families which could
be "spent" on any housing unit chosenby the family.
c. A program which provides subsidies to private contractors who would
construct low-income housing.
d. A program of rent control to hold down rents.
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6. Your neighborhood association votes to have a private securityfirm patrol the area. You refuse to contribute to the cost, butreceive the benefit of this extra protection because you livein the neighborhood. Your bevavior is an example of: |
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a. a positive externality.
b. a negative externality.
c. the special interest effect.
d. the free rider problem.
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7. What factors might cause the marginal social cost of crimecontrol to increase as additional units are provided?
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a. In order to provide more crime control government must purchase more
sophisticated equipment, thereby increasing costs.
b. In order to provide more crime control government must decrease the
amount spent on other programs, thereby increasing the opportunity cost of crime control.
c. In order to provide more crime control government must hire additional
police officers, thereby increasing costs.
d. Both a and c.
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8. Use the table below to answer the following question. Suppose you have $14,000 to spend on drug control. If the price of marijuana control is $2,000 per unit and the price of cocaine control is $4,000 per unit, how many units of each type of control shouldyou purchase?
| | Marginal Benefit of | Marginal Benefit | Quantity
| | Marijuana Control | of Cocaine Control |
| | 1 | $ 80,000 | $160,000
| | 2 | 70,000 | 120,000
| | 3 | 60,000 | 80,000
| | 4 | 50,000 | 40,000
| | 5 | 40,000 | 20,000
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a. 5 units of marijuana control and 1 unit of cocaine control.
b. 4 units of marijuana control and 1.5 units of cocaine control.
c. 3 units of marijuana control and 2 units of cocaine control.
d. 1 units of marijuana control and 3 units of cocaine control.
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B. ESSAY QUESTIONS
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9. Suppose you want to buy a ticket to a rock show. The ticketcosts $25 and you must stand in line for 5 hours. If, rather thanstanding in line, you would be working and earning $6 per hour,what is the full price of the ticket? Suppose the concert becamemore popular, so that you would need to stand in line for 8 hours.If you would otherwise have worked for these 8 hours, how doesthe increase in popularity affect the price of the ticket?
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10. "A plague of locusts has severely diminished thenations wheat crop. The reduction in the supply of wheat causesthe price of wheat to rise. The rise in price causes people touse other grains as substitutes. As consumers switch to othergrains, the demand for wheat falls, which lowers the price. Onnet, the price does not change." This reasoning is wrong.Explain where it goes astray.
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11. Rent controls are often passed in response to rapid increasesin rent. The passage of these laws is supposed to protect consumersfrom spending too much of their income on housing. Given the effectsof these controls, do you feel they are likely to benefit low-incometenants? Why or why not?
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12. You are a government adviser. Your government needs toraise revenue and to do so will levy a tax on different commodities.Would you recommend that your government tax products with anelastic or inelastic demand? Explain.
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13. Suppose Ms Rich owns several gas stations. In Smallytonshe owns the only gasstation while in Biggington she owns oneof several stations. Compare and contrast the prices she willcharge at her two stations.
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14. "Apples must be a public good. After all, even ifI eat an apple, there are plenty of apples left over for everyoneelse. Therefore, my consumption of an apple does not deprive anyoneelse of eating an apple." The student who uttered this statementwould like to pass this course. Help this student by correctingand explaining the error in the assertion.
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15. All of us who have lived in student dormitories or inthin-walled apartments have experienced the negative externalitycreated by a party at 3:00 in the morning. Construct a diagramto illustrate how such a negative externality affects the "market"for parties. Explain.
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16. Largely to keep its streets free of traffic congestion,Singapore levies taxes on automobiles that raise their price about150 percent.
a)Is it possible that car owners in Singapore arebetter off with the tax than they would be without it? Explain.
b) Assume that all car owners in Singapore believe that the benefitto themselves from reduced congestion due to the tax is worthmore than the tax they must pay. Does it follow that each carowner will voluntarily pay the tax? Explain.
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B. Supply and Demand Problems
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(Provide written explanations of your answers). Fill in the table below. Draw new curves on the graphs as an aid. Show the initial effects on the markets from the indicated events. For changes in demand and supply (shifts in the curves), equilibrium price and quantity, use [+] or [-] to show an increase or decrease, for no change use [0]. If the effect is ambiguous and cannot be deduced from the information given,use [U].
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Market/event
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17. Oranges: A freeze in Florida destroys part of the nation's orange crop.
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18. Milk: Recently it has become possible to give cows a hormone that increases their milk supply. Suppose use of this hormone becomes widespread.
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19. Hot Dogs: Consumers can eat either hamburgers or hot dogs for dinner. The price of hamburger increases.
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20. Hot Dogs: The price of hot dog buns increases.
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21. Wood: Logging companies find that their costs have increased due to expenses incurred meeting stricter environmental standards.
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22 New Automobiles: A recession causes people's incomes to fall. |
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23. Automobiles: In retaliation for alleged dumping the President decreases the quota on the importation of Japanese automobiles, resulting in fewer being imported.
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24. Abortion: Abortion is made illegal.
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25. Engineers: Restrictions on the employment of women by engineering firms are eliminated by federal law. |
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