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# Public Goods

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#### Solution Preview

There are certain definitions that we need to specify before answering the questions.

Public Good: A public good is a good that is non-rivalrous and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others, or does not preclude consumption by some other user; and non-excludability implies that no one can be effectively excluded from using the good, that is if one person consumes the good then others will do so too.

(a) The first question is whether showing a movie in the dorm-room a public good, and based on the above definition it is. Once you play the movie any number of people can watch it on the video, and say Alfred is watching the movie then it will not reduce Woody's utility from it. That is more than one people can consume the good simultaneously without hurting anyone's utility from the good.

Also, in a dorm room one cannot exclude other boarders from watching the movie, unless you decide to lock someone in a bathroom! One can keep other people out of the room, but not the boarders of the room. Thus, the good is non-excludable ...

#### Solution Summary

A progressive taxation system is summarized.

\$2.19

## Microeconomic Multiple Choice

d. Macroeconomic question.

2. Which of the following is a normative statement?

a. Next year's inflation rate will be under 4 percent.
b. Consumers will buy more gasoline over the Christmas holiday even if the price of gas is 10 cents higher than it was during the Thanksgiving holiday
c. The government's cuts in welfare spending impose an unfair hardship on the poor.
d. The current butter surplus is the result of federal policies.

3. A point inside a production possibilities frontier

a. Could indicate that resources are misallocated.
b. Is more efficient than a point on the production possibilities frontier.
c. Reflects the fact that more technology needs to be developed to fully employ all resources.
d. Implies that too much labor and not enough capital is being used.

4. Possessing a comparative advantage in the production of a particular good

a. Tends to discourage specialization.
b. Encourages self-sufficiency.
c. Means that its opportunity cost is higher than that of other goods.

5. If a person can produce more of all goods than anyone else, that
Person

b. Has a comparative advantage in the production of all goods.
c. Will be unable to gain from specification and exchange.
d. Is no longer affected by scarcity.

6. A reduction in the price of a good

a. Shifts the good's demand curve leftward and also decreases the quantity demanded.
b. Shifts the good's demand curve leftward but does not decrease the quantity demanded.
c. Does not shift the good's demand curve leftward but does decrease the quantity demanded
d. Neither shifts the good's demand curve leftward nor decreases the quantity demanded.

7. The existence of a shortage

a. Means resources are being allocated efficiently
b. Is impossible in a market economy
c. Pushes prices up
d. Pushes prices down

8. The demand for movies is unit elastic if

a. A 5 percent decrease in the price leads to an infinite increase in the quantity demanded.
a. A 5 percent increase in the price leads to a 5 percent decrease in the quantity demanded
b. Any increase in the price leads to a 2 percent decrease in the quantity demanded.
e. A 5 percent increase in the price leads to a 5 percent increase in total revenue.

9. Producers' total revenue will increase if

a. Income increases and the good is an inferior good.
b. The price rises and demand is elastic.
c. The price rises and demand is inelastic.
d. Income falls and the good is a normal good.

10. Marginal cost

a. Is the additional cost to the consumer of consuming another unit of a good.
a. Is equal to price times quantity sold.
b. Decreases as more of a good is produced, and, hence, is depicted by a downward sloping curve.
c. Is the opportunity cost of producing one more unit of a good and, hence, is the same as the supply curve.

11. Competitive markets will generally produce

a. Too much of a public good
b. Too little of a public good
c. The efficient amount of a public good
d. The efficient amount of a public good in the short run, but not in the long run

12. Underproduction implies that for the last unit produced

a. Marginal social benefit exceeds marginal social cost
b. Marginal social benefit equals marginal social cost
c. Marginal social cost exceeds marginal social benefit.
d. The deadweight loss is zero.

13. A rent ceiling set above the equilibrium rent

a. Restricts the quantity demanded but not the quantity supplied
b. Restricts the quantity supplied but not the quantity demanded.
c. Restricts both the quantity demanded and the quantity supplied.
d. Has no effect.

14. If the minimum wage is set above the equilibrium wage, a supply
and demand diagram of the low-skilled labor market will show
unemployment as

a. A vertical distance.
b. A horizontal distance.
c. The area of a rectangle.
d. The area of a triangle.

15. A sales tax will be divided so that

a. The buyers pay the full amount if supply is perfectly inelastic.
b. The sellers pay the full amount if supply is perfectly inelastic.
c. The sellers pay the full amount if supply is perfectly elastic.
d. Both buyers and sellers pay some of the tax if supply is perfectly elastic.

16. Dean spends all his income on movies and soda. Movies cost \$6 each and sodas cost \$0.50 a can. In a diagram with movies on the horizontal axis and sodas on the vertical axis, Dean's budge line

a. Becomes steeper to the right.
b. Becomes shallower to the right.
c. Has a constant positive slope.
d. Has constant negative slope.

17. Sarah consumes only strawberries and cream, and she is spending
all of her income. Her marginal utility of her last dish of strawberries is 200 and her marginal utility of her last pint of cream is 200. The price of strawberries is \$1.00 per dish and the price of cream is \$2.00 per pint. To maximize her utility, Sarah should

a. Buy more strawberries and less cream.
b. Buy more cream and fewer strawberries.
c. Not change her purchases of strawberries and cream.
d. Definitely buy no cream at her consumer equilibrium.

18. Marginal utility theory concludes that a decrease in the price of a good increases the quantity demanded and

a. Increases the demand for substitutes
b. Decreases the demand for complements.
c. Increases income.
d. Increases total utility.

19. Suppose that Dave has \$200 to spend per week and he buys only magazines and pizza. The price of a pizza is \$10 and the price of a magazine is \$5. What is Dave's real income in terms of magazines?

a. 20.
b. 40.
c. 200.
d. 10.

20. Any point below a given indifference curve is

a. Inferior to any point on the indifference curve.
b. Preferred to any point on the indifference curve.
c. Definitely affordable.
d. Definitely unaffordable.

21. Sue owns a baking company. The company's total revenue for a month is \$4000. The explicit monthly costs are \$2000 and implicit monthly costs are \$1000. Sue's economic profit for the month is equal to

a. \$4000.
b. \$3000.
c. \$2000.
d. \$1000.

22. A chief reason firms give employees bonuses based on the firm's
profit is to cope with

a. The tax laws.
b. The law of diminishing returns.
c. The principal-agent problem.
d. Unions.

23. If a firm's marginal product of labor is less than its average product of labor, then an increase in the quantity of labor it employs definitely will

a. Decrease its total product.
b. Decrease its average product of labor.
c. Increase its marginal product of labor.
d. Not change its average product of labor.

24. A firm's average variable cost is \$60, its total fixed cost is \$3000, and its output is 600 units. Its average total cost is

a. Less than \$58.
b. Between \$58 and \$62.
c. Between \$62 and \$64.
d. More than \$64.

25. When economies of scale are present, the LRAC curve touches each short-run ATC curve

a. To the left of the ATC curve's minimum point.
b. To the right of the ATC curve's minimum point.
c. At the ATC curve's minimum point.
d. No points.

26. In perfect competition, the price of the product is determined where
the industry

a. Elasticity of supply equals the industry elasticity of demand.
b. Supply curve and industry demand curve intersect.
c. Average variable cost equals the industry average total cost.
d. Fixed cost is zero.

27. A perfectly competitive firm's marginal cost exceeds its marginal revenue at its current output. To increase its profit, the firm will

a. Lower its price.
b. Raise its price.
c. Decrease its output.
d. Increase its output.

28. If the demand for its product is elastic, a monopoly's

a. Total revenue is unchanged when the firm lowers its price.
b. Total revenue decreases when the firm lowers its price.
c. Marginal revenue is positive.
d. Marginal revenue is zero.

29. Compared to a single-price monopoly, a perfectly competitive industry produces

a. Less output and has a lower price.
b. Less output and has a higher price.
c. More output and has a lower price.
d. More output and has a higher price.
e.
30. A price-discriminating monopolist charges lower prices to customers with

a. Lower supply elasticities.
b. Higher supply elasticities.
c. Lower average willingness-to-pay.
d. Higher average willingness-to-pay.

31. An example of a monopolistically competitive industry is

a. Wheat farming.
b. The automobile industry.
c. Phone service.
d. The restaurant industry.

32. In the dominant firm model of oligopoly, the dominant firm charges

a. A lower price than the smaller firms.
b. The same price as the smaller firms.
c. A higher price than the smaller firms.
d. A price equal to its marginal revenue.

33. According to economic models of public choice, the object of politicians is to

a. Promote the social interest.
b. Get elected and remain in office.
c. Maximize free-ridership.
d. Maximize total public utility.

34. According to capture theory, regulation occurs because a

a. Small group of losers from regulation loses a great deal per person.
b. Small group of winners from regulation gains a great deal per person.
c. Large group of winners from regulation gains only a small amount per person.
d. Deadweight loss escapes market disciplines.

35. Although the effects of antitrust law have varied over the years, the overall thrust appears to have been to

a. Reduce deadweight loss, as suggested by the capture theory.
b. Reduce deadweight loss, as suggested by the social interest theory.
c. Increase producer surplus, as suggested by the capture theory.
d. Increase producer surplus, as suggested by the social interest theory.

36. The difference between marginal social cost and marginal private cost equals

a. The cost of producing an additional unit of a good.
b. Marginal external benefit.
c. Marginal external cost.
d. Marginal private benefit.

37. Public universities, by charging tuition

a. Below the marginal cost of education, decrease the number of students.
b. Below the marginal cost of education, increase the number of students.
c. Above the marginal cost of education, decrease the number of students.
d. Above the marginal cost of education, increase the number of students.

38. Suppose that recycling rubber for sneakers creates an external benefit of \$2.0 per ton of rubber. There are no external costs. The efficient amount of rubber will be recycled when the government creates a

a. Subsidy of more than \$2.00 per ton of rubber.
b. Subsidy of \$2.00 per ton of rubber.
c. Tax of more than \$2.00 per ton of rubber.
d. Tax of \$2.00 per ton of rubber.

39. Of those listed below, the best example of a pure public good is

a. A state lottery.
b. A book.
c. A rock concert held in a small auditorium.

40. A free-rider problem with a public good leads to

a. Inefficiency if the good is provided by only private markets with no government action.
b. Overproduction if the good is provided by private markets.
c. Underproduction if the good is provided by the government.
d. None of the above answers is correct.

41. The problem of the commons arises because ________ exceeds ________ when the resource is used.

a. Marginal social benefit; marginal private benefit
b. Marginal private benefit; marginal social benefit
c. Marginal private benefit; marginal cost
d. Marginal cost; marginal private benefit

42. A decrease in the supply of a factor normally

a. Decreases both its equilibrium price and its equilibrium quantity.
b. Increase both its equilibrium price and its equilibrium quantity.
c. Lowers its equilibrium price and increases its equilibrium quantity.
d. Raises its equilibrium price and decreases its equilibrium quantity.

43. If the marginal revenue product of a factor of production exceeds the price of the factor the
a. Firm should hire more of that factor.
b. Firm should hire less of that factor.
c. Firm is maximizing profits.
d. Firm should shut down.

44. If the elasticity of demand for labor is 1.5, a 10 percent increase in the wage rate will result in

a. A 15 percent decrease in the quantity of labor demanded.
b. A 15 percent increase in the quantity of labor demanded.
c. A 6.7 percent increase in the quantity of labor demanded.
d. A 6.7 percent decrease in the quantity of labor demanded.

a. Less equally than annual income and less equally than measured wealth.
b. Less equally than annual income and more equally than measured wealth.
c. More equally than annual income and less equally than measured wealth.
d. More equally than annual income and more equally than measured wealth.

46. High-skilled workers earn more than low-skilled workers in part because

a. High-skilled workers have higher marginal revenue products.
b. Of government legislation.
c. The supply of high-skilled workers is more elastic.
d. The demand for high-skilled workers is more elastic.

a. Less in benefits than they pay in taxes, and so do the rich.
b. More in benefits than they pay in taxes, and so do the rich.
c. Less in benefits than they pay in taxes, and the rich receive more in benefits than they pay in taxes.
d. More in benefits than they pay in taxes, and the rich receive less in benefits than they pay in taxes.

48. Jessica must choose option A or option B. Option A gives her \$10,000 for sure. Option B gives her \$5000 if a fair coin toss shows heads and \$15,000 if it shows tails. If Jessica is risk averse her utility of wealth curve becomes
a. Flatter as her wealth increases and she will choose option A.
b. Flatter as her wealth increases and she will choose option B.
c. Steeper as her wealth increases and she will choose option A.
d. Steeper as her wealth increases and she will choose option B.

49. Once Akira has found a VCR priced at his reservation price, his marginal benefit of further search

a. Is zero.
b. Equals his reservation price.
c. Equals his marginal cost of further search.
d. Equals his elasticity of demand.

50. You have invested \$100,000 in each of two independent projects. Your total investment is \$200,000. Each project has a 50 percent chance of losing \$25,000 and a 50 percent chance of making \$50,000. Your chance of having a negative return on the \$200,000 you have invested is

a. 1/8.
b. 1/4.
c. 1/2.
d. 1

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