Problem Set (Lecture 12-13)
Figure 16.1
1. Refer to Figure 16.1. The efficient amount of fertilizer is
A) zero because any level of production involves an external cost.
B) 50 bags.
C) 60 bags.
D) indeterminate from this information.
Answer: B
2. Refer to Figure 16.1. Absent government intervention, how much fertilizer will
be produced?
A) Zero because any level of production involves an external cost.
B) 50 bags
C) 60 bags
D) indeterminate from this information
Answer: C
3. Refer to Figure 16.1. What is the total damage imposed as a result of producing
the market (unregulated) level of fertilizer?
A) $250
B) $300
C) $500
D) $600
Answer: B
4. Refer to Figure 16.1. What is the total damage imposed as a result of producing
the efficient level of fertilizer?
A) $0
B) $250
C) $300
D) $500
Answer: B
5. Refer to Figure 16.1. To force this firm to produce the ________ level of
output, the government should ________ of $5.00 per bag of fertilizer.
A) efficient; impose a tax
B) market; issue a subsidy
C) efficient; issue a subsidy
D) market; impose a tax
Answer: A
6. In the above figure, if the market is competitive and unregulated, then at the
equilibrium amount of output the marginal social benefit is
A) less than the marginal cost to producers.
B) greater than the marginal social cost.
C) equal to the marginal cost to producers.
D) equal to the marginal private benefit from consumption.
Answer: B
7. In the above figure, in order to promote an efficient allocation of resources, the
government could grant a subsidy equal to
A) zero.
B) $5 per unit.
C) $10 per unit.
D) $15 per unit.
Answer: C
SCENARIO 16.1: The marginal benefit for a particular food is described by MB =
30 - q, where q refers to the quantity of the food. The marginal cost of producing
the food is described by MC = 2q. There is a negative externality associated with
food production and the marginal social cost of food production is MSC = 4q.
8. Refer to Scenario 16.1. The competitive output level is ________ and the
competitive price is ________.
A) 10 units of food; $20
B) 6 units of food; $24
C) 0 units of food; $0
D) 4.29 units of food; $25.71
Answer: A
9. Refer to Scenario 16.1. The efficient output level is ________ and the efficient
price is ________.
A) 10 units of food; $20
B) 6 units of food; $24
C) 0 units of food; $0
D) 4.29 units of food; $25.71
Answer: B
10. Jake spends $200 on fried chickens and Pepsi. The price of a fried chicken is $5
and Pepsi is $2.50 per bottle. With the quantity of Pepsi being measured along
the vertical axis, the slope of Jake's budget line is ________ per fried chicken.
A) 0.5 of a Pepsi
B) -0.5 of a Pepsi
C) 2 Pepsis
D) -2 Pepsis
Answer: D
11. Lizzie's budget line is shown in the figure above. If the price of a cookie rises,
Lizzie's real income in terms of cookies ________ and her real income in terms
of magazines ________.
A) decreases; increases
B) increases; decreases
C) decreases; does not change
D) increases; does not change
Answer: C
12. Lizzie's budget line is shown in the figure above. If the price of a magazine
falls, the budget line
A) shifts rightward and its slope does not change.
B) shifts leftward and its slope does not change.
C) becomes flatter.
D) becomes steeper.
Answer: C
13. Consider the change in the price of a book depicted in the above figure. The
original budget line is BC. The new budget line is BD. As a result of this price
change, the substitution effect can be represented by a movement from
A) point A to point E.
B) point A to point G.
C) point F to point G.
D) point A to point F.
Answer: A
14. In the figure above, the marginal rate of substitution (MRS) at point A is equal
to ________ pounds of pickles per pound of olives.
A) 8
B) 6
C) 1 1/3
D) 2
Answer: C
15. Daisy is consuming X and Y so that she is spending her entire income and
MUx/Px = 12 and MUy/Py = 10. To maximize utility, she should
A) continue to consume the same amount of X and Y since she is already
maximizing utility.
B) consume less of both X and Y.
C) consume more X and less Y.
D) consume less X and more Y.
Answer: C
16. For inferior goods
A) the substitution and income effects of a price increase will both decrease the
quantity of the good demanded.
B) the substitution and income effects of a price increase will both increase the
quantity of the good demanded.
C) the substitution effect of a price increase will increase the quantity of the good
demanded while the income effect of a price increase will decrease the quantity of
the good demanded.
D) the substitution effect of a price increase will decrease the quantity of the good
demanded while the income effect of a price increase will increase the quantity of
the good demanded.
Answer: D
17. If the substitution effect of a wage change outweighs the income effect of a
wage change, the labor-supply curve is
A) upward sloping.
B) horizontal.
C) vertical.
D) backward bending.
Answer: A
As for short-answer questions, please refer to in-class examples.