ECONOMICS EXAM WITH CORRECT SOLUTIONS |UPDATED VERSION|

Consider the market for plane tickets to Hawaii. A bad winter in the mainland United States increases demand for tropical vacations, shifting the demand curve to the right. The supply curve stays constant. Total surplus will: ANSWER IS: - increase because both consumer and producer surplus increase. Rent control creates deadweight loss for both consumers and suppliers of housing. Consumers are often in favor of this policy because: ANSWER IS: - they think they will be able to find an apartment at a lower price. Julie says, "I am willing to pay $10.00 for a pizza." Which of the following is true? ANSWER IS: - The benefit that Julie will receive from the pizza is $10. To describe the overall benefits that sellers received in a market, we can add up: ANSWER IS: - each seller's producer surplus. Assume a market has an equilibrium price of $5. If the market price is set at $9, producer surplus: ANSWER IS: - rises for some producers because of the increased price. decreases for some producers because of fewer transactions taking place The market to buy and sell organs: ANSWER IS: - would increase the well-being of those who interacted in it. Suppose there has been a long-standing price ceiling on housing in your city. Recently, population has declined and demand for housing has decreased. The decrease in demand could cause the efficiency of the price ceiling to: ANSWER IS: - become non-binding so there would be no shortage or deadweight loss. A subsidy will increase consumer and producer surplus in a market and will increase the quantity of trades. A subsidy (such as a subsidy for producing corn in the United States) can be considered inefficient because a subsidy results in a quantity: ANSWER IS: - higher than the market equilibrium quantity where the cost of supplying that unit exceeds the willingness to pay. The city of Seattle limits each household to one can of free garbage collection per week. There are fees for any extra garbage collected from the curb. Suppose that a neighborhood group in Seattle organizes a group of families so that those who plan to go over their one-can garbage quota can find households that are under their quota and pay them to put out the extra trash. ANSWER IS: - this policy will increase efficiency If the revenues from a Pigovian tax are not directed to those who are affected by the externality, the outcome: ANSWER IS: - is efficient and maximizes surplus. External costs are those costs: ANSWER IS: - that are imposed without compensation on someone other than the person who caused them. A network externality is: ANSWER IS: - the effect that an additional user of a good or participant in an activity has on the value of that good or activity for others. Which do you expect to be more sustainable? This outcome is best explained by the following economic concept ANSWER IS: - Grazing on privately owned pastures. The tragedy of the commons There is a road between the suburbs and downtown. The road becomes congested at rush hour. As long as fewer than 100 people use the road at rush hour, the trip takes 30 minutes. When the 101st person enters the road, everyone has to slow down and the trip now takes 31 minutes. People value their time at $6 per hour (i.e., $0.10 per minute) and so a 30 minute trip costs $3. ANSWER IS: - a. The private cost of one of the 100 individuals using the road is $3.00. The private cost. The total private cost of 100 people using the road is $ 300.00. The total social cost of 100 people using the road is $ 300.00 b. The total social cost of 101 people using the road is $ 313.10. The private cost of using the road for the 101st individual is $ 3.10. The external social cost of the 101st person using the road is $ 10.00 A problem that occurs when the non-excludability of a public good leads to under-supply is a: ANSWER IS: - free-rider problem As tax rates get higher, at some point, taxes can get so high that the _____ effect dominates the _____ effect, and raising taxes further will _____ total revenue. ANSWER IS: - quantity price decrease The side of the market that is more inelastic: ANSWER IS: - will bear more of the tax burden In general, the more equitable the incidence of a tax system is the: ANSWER IS: - more complicated and less efficient is its design. Which of the following correctly states whether it is possible for two countries to have the same Gini coefficient but different distributions of income? ANSWER IS: - It is possible, as the Gini coefficient measures income inequality but not how the income is actually distributed