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Economics 2010-640 Name________________________________________________________ Exam II Multiple-choice questions (choose the best answer): 1. The major drawback of a price ceiling is a. it causes a shortage b. there is no drawback c. it causes a surplus d. government regulations are easy to enforce 2. A problem that results from rent controls is a. shortages of apartments b. arson c. poorly maintained apartments d. all of the above 3. If we take into account the social costs of pollution then the market level of output is too_________ and the market price is too __________. a. low; low b. high; high c. high; low d. low; high 4. When evaluating the size of the deadweight loss due to a tax we know that the a. greater the elasticities of supply and demand, the greater the deadweight loss. b. smaller the elasticities of supply and demand, the greater the deadweight loss. c. smaller the decrease in both quantity demanded and quantity supplied, the greater the deadweight loss. d. primary factor that determines the size of the deadweight loss is the percentage the tax is of price. 5. One result of a tax, whether the tax is placed on the buyer or the seller, is that the a. demand curve will shift upward. b. size of the market is reduced. c. price the seller receives is higher. d. supply curve will shift upward. 6. Which of the following has the fewest characteristics of a public good? a. government provided public school lunches b. national defense c. the fire department d. the light from a lighthouse 7. Which of the following is an example (does not have to be realistic) of a negative production externality? a. pollution b. a well-kept front yard c. the external effects of an education d. decreased national IQ from playing video games 8. Which of the following is an example (does not have to be realistic) of a positive consumption externality? a. decreased national IQ from playing video games b. increased individual studying motivation from drinking Mt. Dew c. increased national IQ from watching Michigan football d. pollution 9. When the government places a production subsidy on a product in an efficient market a. without additional information, such as the elasticity of demand for this product, it is impossible to compare the welfare gains of the subsidy with the amount spent on the subsidy. b. the welfare (surplus) gains to buyers and sellers will be less than the amount of government spending on the subsidy. c. the welfare of the sellers will rise by more than the welfare of the buyers. d. the welfare of consumers will rise by more than the welfare of producers. Table 2 Quantity of public good Person A's PMB Person B's PMB Person C's PMB 1 $30 $40 $50 2 $28 $37 $46 3 $26 $34 $42 4 $24 $31 $38 5 $22 $28 $34 6 $20 $25 $30 7 $18 $22 $26 8 $16 $19 $22 10. Refer to Table 2. What is the marginal benefit for society of 6 units of the public good? a. $75 b. $55 c. $45 d. $20 e. $5 11. Refer to Table 2. Suppose the marginal cost of the public good is constant and equals $66. What is the efficient amount of the public good? a. 7 b. 6 c. 5 d. 4 e. 3 12. If the marginal social costs (MSC) exceed the marginal private costs (MPC) for the production of bacon, then a. bacon is a public good. b. a negative externality exists in the production of bacon. c. a positive externality exists in the production of bacon. d. bacon should be made from chicken instead of pork.

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