1. Sample Questions
ECON 2420
Exam 1

2. Opportunity Cost
If you win a free ticket to a movie plus all you can eat at the snack bar, is there a cost to you of going to the movie?
No, because the movie is not sold out.
No, because your ticket is free.
Yes, because attending movies is not on a PPF.
Yes, because the opportunity cost is the alternative that you give up to go to the movie.
No, because your ticket and snacks are free.

3. Production Possibilities and Trade
Identify efficient, unattainable, and inefficient points on a PPF graph
How is economic growth shown on a PPF?
Define absolute advantage and comparative advantage.
Find comparative advantage using PPF’s for two countries.
Find comparative advantage and the gains from trade from a table.

4. Production Possibilities Frontiers and Opportunity Costs
Learning Objective 2.1
Production Possibilities Frontiers and Opportunity Costs
Graphing the Production Possibilities Frontier
FIGURE 2-1
BMW’s Production Possibilities Frontier

5. Production Possibilities Frontiers and Opportunity Costs
Learning Objective 2.1
Production Possibilities Frontiers and Opportunity Costs
Economic Growth
FIGURE 2-3
Economic Growth
Economic growth The ability of the economy to produce increasing quantities of goods and services.

6. Comparative Advantage and Trade
Learning Objective 2.2
Comparative Advantage and Trade
Absolute Advantage versus Comparative Advantage
Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Absolute advantage The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

7. Comparative Advantage and Trade
Learning Objective 2.2
Comparative Advantage and Trade
Trade The act of buying or selling.
Specialization and Gains from Trade
FIGURE 2-4
Production Possibilities for You and Your Neighbor, without Trade

8. Solved Problem 2-2 Learning Objective 2.2
Comparative Advantage and the Gains from Trade
CANADA
UNITED STATES
HONEY (IN TONS)
MAPLE SYRUP (IN TONS)
MAPLE SYRUP (IN TONS) 60 50 10 45 40 20 30 15
BEFORE TRADE
AFTER TRADE
HONEY (IN TONS)
MAPLE SYRUP (IN TONS)
MAPLE SYRUP (IN TONS)
CANADA 30 15 20
UNITED STATES 10 40

9. Free market A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.
Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Centrally planned economy An economy in which the government decides how economic resources will be allocated.
Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but where the government plays a significant role in the allocation of resources.

10. Supply and Demand
What happens in the market for bicycle helmets when the price of bicycles increases? Identify a graph showing this effect.
What happens in the market for women’s clothing when the wages of seamstresses increase? Identify on a graph.
What happens in the market for almonds when almond harvesting productivity increases? Identify on a graph.
What happens in the market for orange juice when the price of grapefruit juice, a substitute, increases?

11. Supply and Demand
Suppliers are willing to sell another unit of a product only if
The price they receive is at least equal to the cost of producing it.
Consumers are willing to purchase a product up to the point where
The marginal benefit of consuming the product is equal to the marginal cost (price) of consuming it.

12. Economic Efficiency In competitive market equilibrium
The marginal benefit of the last unit sold is just equal to the marginal cost of producing it.
Economic Efficiency occurs in a market outcome in which the marginal benefit to consumers of the last unit consumed is just equal to the marginal cost of production, and in which
The sum of consumer and producer surplus is maximized.

13. Price Floors and Ceilings
Identify the following on a graph of a price ceiling and/or price floor:
Producer surplus
Consumer surplus
The deadweight loss
The transfer from consumers to producers under a price floor
The transfer from producers to consumers under a price ceiling

14. Government Intervention in the Market: Price Floors And Price Ceilings
Learning Objective 4.3
Government Intervention in the Market: Price Floors And Price Ceilings
Price Floors: Government Policy in Agricultural Markets
FIGURE 4-8
The Economic Effect of a Price Floor in the Wheat Market

15. Government Intervention in the Market: Price Floors And Price Ceilings
Learning Objective 4.3
Government Intervention in the Market: Price Floors And Price Ceilings
Price Ceilings: Government Rent Control Policy in Housing Markets
FIGURE 4-9
The Economic Effect of a Rent Ceiling

16. Excise Taxes Identify the following on a graph The tax revenue
The “excess burden” or deadweight loss of the tax
Consumer surplus after the tax
Producer surplus after the tax
Who bears the burden of the tax or tax incidence

17. The Economic Impact of Taxes
Learning Objective 4.4
The Economic Impact of Taxes
The Effect of Taxes on Economic Efficiency
FIGURE 4-10
The Effect of a Tax on the Market for Cigarettes

18. Externalities An externality is Identify the following on a graph
A cost or benefit experienced by someone who is not a producer or consumer of a good or service.
Identify the following on a graph
The private marginal cost (or supply) curve
The social marginal cost (or supply) curve
The private marginal benefit (or demand) curve
The social marginal benefit (or demand) curve

19. Externalities Which of the following is a source of market failure?
Incomplete property rights or an inability to enforce property rights
Unforeseen circumstances that lead to bankruptcy
A lack of government intervention in a market
An inequitable income distribution
What is a market failure?
The inability of a market to allocate resources efficiently where marginal social benefit is equal to marginal social cost.

20. Externalities Identify on a graph The Coase theorem states that
The efficient level of output for a good with a positive or negative externality
The quantity by which a good with an external benefit is under-produced
The quantity by which a good with an external cost is over-produced
The deadweight loss due to an externality
The amount of a Pigovian tax to internalize the externality
The Coase theorem states that
If transactions costs are low, private bargaining will result in efficient solutions to externality problems.

21. Externalities and Economic Efficiency
Learning Objective 5.1
Externalities and Economic Efficiency
The Effect of Externalities
How a Negative Externality in Production Reduces Economic Efficiency
FIGURE 5-1
The Effect of Pollution on Economic Efficiency

22. Externalities and Economic Efficiency
Learning Objective 5.1
Externalities and Economic Efficiency
How a Positive Externality in Consumption Reduces Economic Efficiency
FIGURE 5-2
The Effect of a Positive Externality on Efficiency

23. Solved Problem 5-3 Learning Objective 5.3
Some toilet paper plants discharge bleach into rivers and lakes, causing substantial environmental damage. How could the federal government can use a tax on toilet paper to bring about the efficient level of production?.
Using a Tax to Deal with a Negative Externality

24. Externalities The efficient level of pollution is that level at which
The marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction.
One solution to the problem of external benefits or positive externalities is
To subsidize the production of the good to increase its supply and reduce the price.
One solution to the problem of external costs, or negative externalities, is
To tax the good, reducing its supply and raising its price.
What does “internalizing an external cost” mean?
Making producers factor the external costs of producing their product into their (private) costs of production
Taxing a good with a negative externality
Forces the producer to internalize the external cost

25. The Economically Efficient Level of Pollution Reduction
Learning Objective 5.2
The Economically Efficient Level of Pollution Reduction
FIGURE 5.3
The Marginal Benefit from Pollution Reduction Should Equal the Marginal Cost

26. Tradable Emissions Allowances
Firms will sell allowances if
The cost of pollution reduction is less than the price of allowances
Firms will buy allowances if
The cost of pollution reduction is more than the price of allowances
The net effect of tradable allowances is to
Achieve a certain level of pollution reduction at lower cost

27. Public Goods Public goods are
Non-rival and non-excludable.
Common resources differ form public good in that
Unlike public goods, common resources are rivalrous in consumption.
A “free-rider” is
Someone who benefits from a good or service without paying for it.
The market demand for public goods is determined by
Adding up the amount each consumer is willing to pay for each unit of the good.
Private producers have no incentive to produce public goods because
It is impossible to exclude those who do not pay for the good.

28. Four Categories of Goods
Learning Objective 5.4
Four Categories of Goods
FIGURE 5.8
Four Categories of Goods

29. Four Categories of Goods
Learning Objective 5.4
Four Categories of Goods
The Demand for a Public Good
FIGURE 5.10
Constructing the Market Demand Curve for a Public Good