Macro FinalPractice.docx
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Macro FinalPractice.docx
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MacroFinalPractice
1.Useagraphtoillustratethequantityofpollutionthatwouldbeemitted(a)afteracorrectivetaxhasbeenimposedand(b)aftertradablepollutionpermitshavebeenimposed.Couldthesetwoquantitieseverbeequivalent?
ANS:
Yes,thesetwoquantitiescouldbeequal.Forexample,PBcouldbeequaltotheamountofthecorrectivetax.
2.Toproducehoney,beekeepersplacehivesofbeesinthefieldsoffarmers.Asbeesgathernectar,theypollinatethecropsinthefields,whichincreasestheyieldsofthesefieldsatnoadditionalcosttothefarmer.Whatmightbeareasonableprivatesolutiontothisexternality,andhowmightthesolutionbereached?
ANS:
Onesolutionwouldbetohaveonepersonownboththefarmfieldsandthebeehives,inwhichcasetheexternalityisinternalized.Anothersolutionwouldbetohavethefarmerandbeekeeperenterintoacontractsothattheycancoordinatethenumberofbeehivesandacresofcropstomaintainanefficientoutcome.
3.Twofirms,AandB,eachcurrentlydump20tonsofchemicalsintothelocalriver.Thegovernmenthasdecidedtoreducethepollutionandfromnowonwillrequireapollutionpermitforeachtonofpollutiondumpedintotheriver.Thegovernmentgiveseachfirm10pollutionpermits,whichitcaneitheruseorselltotheotherfirm.ItcostsFirmA$100foreachtonofpollutionthatiteliminatesbeforeitreachestheriver,anditcostsFirmB$50foreachtonofpollutionthatiteliminatesbeforeitreachestheriver.Afterthetwofirmsbuyorsellpollutionpermitsfromeachother,whatwouldyouexpecttohappen.
ANS:
FirmBwillnolongerpollute,andFirmAwillnotreduceitspollutionatall.
4.Thegovernmentofteninterveneswhenprivatemarketsfailtoprovideanoptimallevelofcertaingoodsandservices.Forexample,thegovernmentimposesanexcisetaxongasolinetoaccountforthenegativeexternalitythatdriversimposeononeanother.Whymighttheprivatemarketnotreachthesociallyoptimalleveloftrafficwithoutthehelpofgovernment?
ANS:
Itispossiblethateveryonecanagreethattheroadsaretoocrowded,butnooneiswillingtomakethesacrificetostayhometohelpsolvethecongestionproblem.Theprivateincentivetofixtheproblemissmall,sogovernmentpoliciessuchastollsandgasolinetaxesmayimprovesocialwelfare.
5.Whydowildsalmonpopulationsfacethethreatofextinctionwhilegoldfishpopulationsareinnosuchdanger?
ANS:
Nooneownsthewildsalmon,whileprivateindividualsowngoldfish.Theprofitmotiveleadstodifferentallocationsoftheresources.Salmonfishermenhaveanindividualincentivetocatchasmanysalmonaspossiblebeforesomeoneelsedoes.Petshopownershaveaprofitincentivetobreedgoldfishtoselltoconsumers.
6.Youarethemayorofatownwith10,000residents.Theheadofyoureconomicdevelopmentagencyrecentlyconductedasurveyinwhichthe10,000residentssaidthatasmallpubliclibraryinthecenteroftownwouldbeworth$25toeachofthem.Becausethecosttobuildthelibraryisonly$150,000,youarrangetohavethelibrarybuilt.Everyoneintownenjoysthelibrary,butwhenyouaskedfordonationstopayforthelibrary,youonlycollected$15,000.Whatdoyouthinkhappened?
ANS:
Seefree-riderproblem.
7.Arecentincreaseinfederalgasolinetaxeswasestimatedtocausea$150millionreductioninthetotalsurplus(consumerplusproducersurplus)inthegasolinemarket.Iftaxrevenuesincreasedby$100million,whatisthedeadweightlossassociatedwiththetax?
Asaresultofthetax,10,000peoplesoldtheircarsandstartedridingtheirbicyclestowork.Howmuchoftheburdenofthedeadweightlossisincurredbythebicycleriders?
ANS:
Thedirectdeadweightlossis$50million.Itisimpossibletodeterminehowmuchofthelossisbornebybicycleriderswithoutmoreinformation.Forexample,someofthedeadweightlossmaybeattributabletowalkersorpeoplewhoswitchedtopublictransportation.
8.UseTableAtocompleteTableB.
TABLEA
OnTaxableIncome
TheTaxRateIs
Upto$27,050
15.0%
From$27,051to$65,550
27.5%
From$65,551to$136,750
30.5%
From$136,751to$297,350
35.5%
Over$297,350
39.1%
TABLEB
Taxpayer
Income
TaxAmount
AverageTaxRate
John
$52,700
Todd
$132,500
Glen
$237,000
Jake
$315,250
ANS:
Taxpayer
Income
TaxAmount
AverageTaxRate
John
$52,700
$11,111.25
21%
Todd
$132,500
$35,064.75
26%
Glen
$237,000
$71,949.75
30%
Jake
$315,250
$100,372.90
32%
9.Whateffect,ifany,doesdiminishingmarginalproducthaveontheshapeofthemarginalcostcurve?
ANS:
Diminishingmarginalproductcausesthemarginalcostcurvetorise.
10.BobEdwardsownsabagelshop.Bobhiresaneconomistwhoassessestheshapeofthebagelshop'saveragetotalcost(ATC)curveasafunctionofthenumberofbagelsproduced.TheresultsindicateaU-shapedaveragetotalcostcurve.Bob'seconomistexplainsthatATCisU-shapedfortworeasons.Thefirstistheexistenceofdiminishingmarginalproduct,whichcausesittorise.Whatwouldbethesecondreason?
Assumethatthemarginalcostcurveislinear.(Hint:
Thesecondreasonrelatestoaveragefixedcost)
ANS:
Averagefixedcostalwaysdeclinesasoutputrisesbecausefixedcostisbeingspreadoveralargernumberofunits,thuscausingtheaveragetotalcostcurvetofall.
11.Iftheaveragetotalcostcurveisfalling,whatisnecessarilytrueofthemarginalcostcurve?
Iftheaveragetotalcostcurveisrising,whatisnecessarilytrueofthemarginalcostcurve?
ANS:
Whenaveragetotalcostcurveisfalling,marginalcostisbelowATC.Iftheaveragetotalcostcurveisrising,marginalcostisaboveATC.
12.Johnhasdecidedtostarthisownlawn-mowingbusiness.Topurchasethemowersandthetrailertotransportthemowers,Johnwithdrew$1,000fromhissavingsaccount,whichwasearning3%interest,andborrowedanadditional$2,000fromthebankataninterestrateof7%.WhatisJohn'sannualopportunitycostofthefinancialcapitalthathasbeeninvestedinthebusiness?
ANS:
170
Table13-2
NumberofWorkers
Output
FixedCost
VariableCost
TotalCost
0
0
$50
$0
$50
1
90
$50
$20
$70
2
170
$50
$40
$90
3
230
$50
$60
$110
4
240
$50
$80
$130
13.RefertoTable13-2.Themarginalproductofthesecondworkeris…?
ANS:
80units
14.RefertoTable13-2.Atwhichnumberofworkersdoesdiminishingmarginalproductbegin?
ANS:
2DIF:
1REF:
13-2NAT:
Analytic
LOC:
CostsofproductionTOP:
Marginalproduct
MSC:
Analytical
15.RefertoTable13-2.Ifthefirmcansellitsoutputfor$1perunit,whatistheprofit-maximizinglevelofoutput?
ANS:
230units
Figure13-3
16.RefertoFigure13-3.Thegraphillustratesatypicaltotalcostcurve.Basedonitsshape,whatdoesthecorrespondingproductionfunctionlooklike?
a.
anupward-slopingcurvethatincreasesatanincreasingrate
b.
anupward-slopingcurvethatincreasesatadecreasingrate
c.
adownward-slopingcurve
d.
ahorizontalstraightline
ANS:
B
17.RefertoFigure13-3.Whichofthefollowingistrueoftheproductionfunction(notpictured)thatunderliesthistotalcostfunction?
(i)
Totaloutputincreasesasthequantityofinputsincreasesbutatadecreasingrate.
(ii)
Marginalproductisdiminishingforalllevelsofinputusage.
(iii)
Theslopeoftheproductionfunctiondecreasesasthequantityofinputsincreases.
ANS:
(i),(ii),and(iii)
18.RefertoFigure13-3.Whichofthefollowingstatementsbestcapturesthenatureoftheunderlyingproductionfunction?
a.
Outputincreasesatadecreasingratewithadditionalunitsofinput.
b.
Outputincreasesatanincreasingratewithadditionalunitsofinput.
c.
Outputdecreasesatadecreasingratewithadditionalunitsofinput.
d.
Outputdecreasesatanincreasingratewithadditionalunitsofinput.
ANS:
A
19.RefertoFigure13-3.Assumingthatthefirmdepictedproducescookies,whichofthestatementsbelowismostconsistentwiththeshapeofthetotalcostcurve?
a.
Producinganadditionalcookieisalwaysmorecostlythanproducingthepreviouscookie.
b.
Totalproductionofcookiesdecreaseswithadditionalunitsofinput.
c.
Producingadditionalcookiesisequallycostly,regardlessofhowmanycookiesarealreadybeingproduced.
d.
Producingadditionalcookiesbecomesincreasinglycostlyonlywhenthenumberofcookiesalreadybeingproducedislarge.
ANS:
A
Table13-5
TheFlyingElvisCopterRides
Quantity
TotalCost
FixedCost
VariableCost
MarginalCost
AverageFixedCost
AverageVariableCost
AverageTotalCost
0
$50
$50
$0
--
--
--
--
1
$150
A
B
C
D
E
F
2
G
H
I
$120
J
K
L
3
M
N
O
P
Q
$120
R
20.RefertoTable13-5.WhatisthevalueofA?
ANS:
50
21.RefertoTable13-5.WhatisthevalueofB?
ANS:
$100
22.RefertoTable13-5.WhatisthevalueofC?
ANS:
$100
23.RefertoTable13-5.WhatisthevalueofG?
ANS:
$270
24.RefertoTable13-5.WhatisthevalueofL?
ANS:
$135
25.RefertoTable13-5.WhatisthevalueofO?
ANS:
$360
Figure13-4
26.RefertoFigure13-4.CurveArepresentswhichtypeofcostcurve?
ANS:
averagefixedcost
27.RefertoFigure13-4.Whichofthecurvesismostlikelytorepresentaveragefixedcost?
ANS:
A
28.RefertoFigure13-4.CurveCrepresentswhichtypeofcostcurve?
ANS:
averagetotalcost
29.RefertoFigure13-4.Whichcurveismostlikelytorepresentaveragetotalcost?
ANS:
C
30.RefertoFigure13-4.CurveDrepresentswhichtypeofcostcurve?
ANS:
marginalcost
144.
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