ECON 102 - Principles of Microeconomics Summer 2012

Mehmet S. Tosun

ECON 102 Homework 2 (Due Friday, June 1, 2012) (Answer All Questions on Scantron Form No. 882-E) 1. Which of the following is an example of an excise tax? A) a tax of $0.41 per gallon of gas B) a tax on the value of your property C) a one-time local government tax of $50 D) a tax of 12.4% of your wages

2. State governments place excise taxes on cigarettes because: A) they want to reduce deadweight loss. B) they want to discourage cigarette smuggling. C) they want to subsidize tobacco farming. D) it is an easy way to raise tax revenue while discouraging smoking.

3. The incidence of a tax: A) is a measure of the revenue the government receives from the tax. B) refers to who writes the check to the government. C) refers to who in reality pays the tax to the government. D) is a measure of the deadweight loss from the tax.

4. Suppose the price elasticity of demand for yachts equals 4.04, while the price elasticity of supply for yachts equals 0.22. If Congress reinstates a luxury tax on yachts, who will pay more of the tax? A) Yacht builders will pay more. B) Yacht buyers will pay more. C) Yacht builders and buyers will pay equally. D) It's impossible to tell without additional information.

Page 1

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 5: Figure: Market for Lattes

5. (Figure: Market for Lattes) If, in the market for lattes shown in the figure, the government assesses a tax of $0.75 on each latte, the price the consumer pays for a latte after the tax will: A) increase from $2 to $2.50. B) change, but we cannot determine by how much. C) increase from $2 to $2.25. D) increase from $2 to $2.75.

6. If demand is perfectly inelastic and the supply curve is upward-sloping, then the burden of an excise tax is: A) shared by consumers and producers, with the burden falling mainly on producers. B) shared by consumers and producers, with the burden falling mainly on consumers. C) borne entirely by producers. D) borne entirely by consumers.

7. The governor wants to impose a $1 excise tax on some goodhe doesn't care which but he does want to minimize the deadweight loss. The deadweight loss will be least when: A) both demand and supply curves are elastic. B) both demand and supply are inelastic. C) the demand is elastic and supply is inelastic. D) the demand is inelastic and supply is elastic.

Page 2

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 8: Figure: Tax Incidence

8. (Figure: Tax Incidence) Based on the figure, the deadweight loss of an excise tax is likely to be: A) greater in Panel B than in Panel A. B) greater in Panel C than in Panel D. C) greater in Panel D than in Panel A. D) greater in Panel C than in Panel A.

Page 3

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 9: Figure: The Gas Market

9. (Figure: The Gas Market) The figure represents the market for gasoline. An excise tax has been levied on each gallon of gasoline supplied by producers. Based on the graph, the incidence of the tax on suppliers is: A) $15,000. B) $1.50. C) $0.50. D) $1.

10. Criteria that economists use in selecting a tax system include: A) only benefits received. B) low revenue yield. C) only ability to pay. D) ability to pay and benefits received.

11. A tax that takes a larger share of the income of high-income taxpayers than of lowincome taxpayers is called a: A) progressive tax. B) regressive tax. C) flat tax. D) sales tax.

Page 4

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

12. Paying a fee every time you use the municipal golf course is an example of the: A) progressive tax principle. B) benefits principle. C) ability-to-pay principle. D) regressive tax principle.

13. Paying a tax of $10 on an income of $100, a tax of $20 on an income of $200, and a tax of $30 on an income of $300 is an example of a: A) proportional tax. B) progressive tax. C) regressive tax. D) benefits tax.

14. Suppose Governor Meridias initiates a payroll tax of 10% on all income up to $50,000. Any income above $50,000 is not taxed. This payroll tax will be: A) regressive. B) structural. C) progressive. D) proportional.

15. Accounting profit differs from economic profit because: A) economic costs include depreciation, while accounting costs do not. B) accounting costs are generally higher than economic costs because accounting costs include explicit and implicit costs, while economic costs include only explicit costs. C) of differences in the manner in which revenue is calculated. D) economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

16. For most firms, economic profit is: A) negative. B) greater than accounting profit. C) equal to accounting profit. D) less than accounting profit.

Page 5

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

17. You own a small deli that sells sandwiches, salads, and soup to the community. Which of the following is an implicit cost of the business? A) wages paid to part-time employees B) the job offer you did not accept at a local catering service C) bread, meat, and vegetables used to produce the items on your menu D) your monthly utility bill

18. Until recently Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is: A) $30,000. B) $12,000. C) $0. D) $230,000.

19. The implicit cost of capital is: A) the opportunity cost of the capital used by a business. B) the cost of human capital. C) the explicit cost of capital that the firm might have used but didn't need to. D) depreciation. 20. In economics a marginal value refers to: A) the value associated with an unimportant, or marginal, activity. B) a value entered as an explanatory item in the margin of a balance sheet or other accounts. C) the value associated with one more unit of an activity. D) a value that is most appropriately identified in a footnote.

21. The amount by which an additional unit of an activity increases total benefit is: A) marginal cost. B) utility. C) net benefit. D) marginal benefit.

Page 6

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

22. The ________ is the amount by which an additional unit of an activity increases its total benefit. A) average benefit B) top benefit C) net benefit D) marginal benefit

23. Whenever MB > MC, the decision maker should do ________ of the activity. A) none B) less C) more D) the same amount

Use the following to answer questions 24-25: Figure: Marginal Benefits and Marginal Costs In the graph, MB represents the additional points on an economics exam for each hour of studying economics, and MC represents the loss of points on an accounting test for each hour of studying economics.

Page 7

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

24. (Figure: Marginal Benefits and Marginal Costs) As shown, more time spent studying economics adds points to economics scores but subtracts points from accounting scores. When the student studies economics for 4 hours, the marginal benefit is ________ points; when the student studies for 6 hours, the marginal benefit is ________ points. A) 20; 0 B) 20; 10 C) 30; 10 D) 20; 30

25. (Figure: Marginal Benefits and Marginal Costs) As shown, more time spent studying economics adds points to economics scores but subtracts points from accounting scores. At 4 hours of study the student will maximize because: A) the difference between total benefits and total costs is maximized. B) sunk costs are minimized. C) MB > MC. D) MB = 20 and MC = 5.

Use the following to answer questions 26-27:

26. (Table: Tutoring) Sigmund's optimal number of tutoring hours is: A) 5. B) 4. C) 3. D) 2.

Page 8

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

27. (Table: Tutoring) At the optimal hours of tutoring, Sigmund's total net gain is: A) $60. B) $30. C) $15. D) $50.

28. To maximize her grade in economics, Stacey should study until: A) her marginal cost of studying begins to increase. B) her marginal benefit of studying begins to decrease. C) her marginal benefit of studying equals her marginal cost of studying. D) her marginal cost of studying reaches zero.

29. William installs custom sound systems in cars. If he installs seven systems per day, his total costs are $300. If he installs eight systems per day, his total costs are $400. William will install only eight sound systems per day if the eighth customer is willing to pay at least: A) $300. B) $50. C) $400. D) $100.

30. According to the optimal output rule, if marginal benefit: A) exceeds marginal cost, an activity should be reduced. B) is less than marginal cost, an activity should be reduced. C) is equal to marginal cost, an activity should be reduced. D) exceeds marginal cost, net benefit is maximized.

Page 9

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 31: Figure: Marginal Analysis of Good X

31. (Figure: Marginal Analysis of Good X) You are considering consuming units of Good X. The graph represents your marginal benefit and marginal cost curves. How many units of Good X will you consume? A) 1 B) 3 C) 4 D) 2

32. You have won the lottery and have been given the choice of receiving $5 million today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. You should choose: A) $5 million today, since it would be worth more than $10 million after 10 years, if the $5 million earned interest at the rate of 10% per year. B) $10 million after 10 years, since it is the larger amount. C) $10 million after 10 years, since this is more than you would get if you invested $5 million for 10 years at an annual rate of interest of 10%. D) $10 million after 10 years, since that is a larger amount than the present value of $5 million paid after 10 years.

Page 10

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 33:

33. (Table: Present Value of Projects A, B, C, and D) Given the information in the accompanying table, if the interest rate were 2%, which project would you choose? A) A B) B C) C D) D

34. A line representing all the possible combinations of two commodities that a consumer can purchase at a particular time, given the market prices of the commodities and the consumer's income, is a(n): A) income consumption curve. B) indifference curve. C) budget line. D) consumption line.

35. The marginal utility of coffee consumption for Steve is the change in ________ generated by consuming an additional unit of coffee. A) total utility B) total consumption C) total demand D) price

36. On a small island with only few people, high-speed Internet service would have a ________ marginal utility than in New York City, while in New York City, quiet evenings would carry a ________ marginal utility than on a deserted island. A) higher; lower B) lower; higher C) higher; higher D) lower; lower

Page 11

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

37. The principle of diminishing marginal utility states that as an individual consumes more of a good: A) the addition to total utility obtained from the nth unit of the good will be less than that obtained from the (n 1) unit of the good. B) the total utility obtained will eventually become negative. C) the marginal utility will eventually become negative. D) the total utility obtained will eventually fall.

Use the following to answer questions 38-39:

38. (Table: Utility) The marginal utility for the second unit is: A) 5. B) 35. C) 10. D) 15.

39. (Table: Utility) Total utility is maximized at the ________ unit. A) second B) sixth C) fourth D) first

40. When total utility is at a maximum, marginal utility is: A) zero. B) at its average value. C) rising. D) at a maximum.

41. Utility is the: A) lowest price that buyers are willing to pay for a given quantity of a good. B) difference between a firm's total revenue and its total economic cost. C) satisfaction consumers derive from their consumption of goods and services. D) good not adequately provided by a free market and usually provided by the government.

Page 12

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

42. Chuck spends all his income on two goods: tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. Put tacos on the horizontal axis and milkshakes on the vertical axis. The slope of Chuck's budget line is equal to: A) 5. B) 5. C) 1/5. D) 1/5.

43. Chuck spends all his income on two goods: tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. If Chuck purchases 10 milkshakes, he can purchase ________ tacos. A) 8 B) 50 C) 18 D) 10

44. For Darryl, the optimum consumption bundle is the one that ________ his ________, given his budget constraint. A) maximizes; utility B) maximizes; opportunity cost C) minimizes; utility D) minimizes; opportunity cost

Page 13

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

Use the following to answer question 45: Figure and Table: The Budget Line

45. (Figure and Table: The Budget Line) In the figure, a(n) ________ in the price of clams would rotate the budget line along the ________ axis ________ the origin. A) increase; horizontal; toward B) decrease; horizontal; toward C) increase; vertical; toward D) decrease; vertical; away from

46. Whatever the time period involved, a consumer's spending will be ________ by his or her ________. A) limited; marginal utility B) limited; budget C) unlimited; marginal utility D) unlimited; budget

Page 14

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

47. Suzy knows she has maximized her utility, because she is on her budget constraint and: A) MUx/Px = MUy/Py. B) what is spent on Good X equals what is spent on Good Y. C) MUx = MUy. D) consumption of Good X equals consumption of Good Y.

Use the following to answer question 48:

48. (Table: Marginal Utility per Dollar) According to data in the table, if the price of clams is $3 per pound, while the price of potatoes is $1 per pound, and this consumer has $9 to spend on potatoes and clams, then the utility-maximizing combination is ________ pound(s) of clams and ________ pounds of potatoes. A) 2; 3 B) 2; 2 C) 0; 9 D) 1; 6

Page 15

ECON 102.003 - Principles of Microeconomics

Mehmet S. Tosun

49. Assume that as the price of cauliflower falls, the income effect causes consumers to buy less cauliflower. We can conclude that cauliflower is: A) expensive. B) an inferior good. C) a normal good. D) nasty tasting.

50. A Giffin good is not correctly described by which of the following? A) A Giffin good must be an inferior good. B) A Giffin good must have an upward-sloping demand curve. C) A Giffin good must be such that the income effect and the substitution effect move in opposite directions, and the income effect outweighs the substitution effect. D) A Giffin good must be such that the substitution effect outweighs the income effect for an inferior good.

Page 16