Macro FinalPractice.docx

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.