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Econ 101, Sections 4 and 5, S09

Exam #3, Blue

Choose the single best answer for each question. Do all of your scratch work in the
margins or in the blank space on page 7.

1. In our analyses of trade policy, when we assume that a country is "small," we are
assuming that
a. the country can only import goods; it cannot export.
b. there is no demand for the country's domestically-produced goods by other countries.
c. the country does not have a comparative advantage over any other country.
*. a change in the country's trade policies will not affect world market prices.

2. A tax on an imported good is called a
a. quota.
*. tariff.
c. supply tax.
d. retention bonus.

3. When the country of Sowhatistan allows free trade, it produces some steel
domestically and imports some foreign-made steel. Elections in Sowhatistan bring to
power a new administration that decides to ban trade altogether. As a result of the new
trade ban, in Sowhatistan's domestic market for steel,
a. producer surplus will decrease and total surplus will decrease.
*. producer surplus will increase and consumer surplus will decrease.
c. consumer surplus will decrease and total surplus will increase.
d. none of the above.

4. The country of Kansasland prohibits international trade in wheat, and the price of
wheat in the country's domestic market is lower than the world market price. If the
government of Kansasland were to lift the trade ban, the country would become an
a. importer of wheat and domestic wheat-producer surplus would increase.
b. importer of wheat and domestic wheat-producer surplus would decrease.
*. exporter of wheat and domestic wheat-producer surplus would increase.
d. exporter of wheat and domestic wheat-producer surplus would decrease.

5. The North American Free Trade Agreement
a. is opposed by the majority of economists.
b. eliminated tariffs on imports to North America from the rest of the world.
c. was repealed by President George W. Bush in 2003.
*. reduced trade restrictions among Canada, Mexico, and the United States.
Questions 6, 7, and 8 refer to the following figure. It depicts the domestic demand (Dd)
and domestic supply (Sd) of rice, a homogeneous product, in Bangora, a small country.

6. If the world market price of rice is $300/ton, in a free trade situation, domestic
production of rice in Bangora would be
a. 15,000 tons/month.
b. 10,000 tons/month.
c. 7,500 tons/month.
*. 5,000 tons/month.

7. Starting from a free trade situation with a world market price of $300/ton, the
government of Bangora imposes a $100/ton tariff on rice imports. The change in
domestic consumer surplus that results from the imposition of the tariff is
a. a decrease of $1,500,000/month.
*. a decrease of $1,750,000/month.
c. an increase of $1,500,000/month.
d. an increase of $1,750,000/month.

8. Starting from a free trade situation with a world market price of $300/ton, the
government of Bangora imposes a $100/ton tariff on rice imports. The tariff revenue that
would be collected as a result is
a. $1,500,000/month.
b. $1,000,000/month.
*. $750,000/month.
d. $500,000/month.




5,000 7,500 10,000 15,000 20,000 (tons/month)
9. The term market failure refers to
a. a firm that is forced into bankruptcy because of losses.
*. a market that fails to allocate resources efficiently.
c. an unsuccessful advertising campaign that reduces demand.
d. ruthless competition among firms in an industry.

10. Which of the following is the best example of a positive externality?
a. Your lifetime earning potential is higher because you're going to college.
b. My beauty sleep is interrupted because my neighbor's dog barks at night.
*. Your chances of getting the flu are lower because many of your friends got flu shots.
d. My health is adversely affected by pollution caused by automobile emissions.

11. Altering incentives so that decision-makers take account of the external effects of
their actions is called
a. subsidizing the externality.
b. amplifying the externality.
c. marginalizing the externality.
*. internalizing the externality.

12. The market for gizmos is competitive. The production of gizmos results in air
pollution that has an adverse effect on people living in the areas surrounding the gizmo
factories. If the affected parties are not able to use Coasian bargaining to reach an
efficient solution to this externality problem, the market equilibrium quantity of gizmos
will be
*. greater than the socially optimal quantity.
b. less than the socially optimal quantity.
c. equal to the socially optimal quantity.
d. None of the above. (The market will not be able to reach an equilibrium.)

13. Recall lecture's "factory/town/river" example that we used to illustrate Coasian
bargaining. Supposed the factory values the river's waste disposal capacity at $500,000,
and the town values the river's potential as a clean drinking water source at $400,000.
Suppose the law gives the property right to the town; that is, the town has the legal right
to prevent the factory from polluting the river. Finally, suppose that the factory and the
town can bargain without cost over the use of the river. In this case, the factory
a. will not pollute and the town will pay the factory $500,000.
b. will not pollute and neither party will make any payment to the other.
*. will pollute and the factory will pay the town between $400,000 and $500,000.
d. will pollute and the factory will pay the town $100,000.
14. A voluntary, legally binding contract that prevents certain types of development from
taking place on a piece of property is called a conservation
a. allotment.
*. easement.
c. disclaimer.
d. annuity.

15. Which of the following is an example of a market-based approach to an externality
a. the federal government's CAFE standards.
b. the EPA's ban on domestic use of DDT.
c. a city's ban on lawn-watering during periods of drought.
*. none of the above.

16. The EPA has set up a "cap-and-trade" system for sulfur emissions by electric power
utilities. At the current market price of tradable sulfur allowances, $380/ton, Eastern
States Power Company is willing to buy allowances and Nebraska Cooperative Power is
willing to sell allowances. It must be the case that the current marginal abatement costs
for these two utilities are:
a. greater than $380/ton for both Eastern States and Nebraska Cooperative.
b. less than $380/ton for both Eastern States and Nebraska Cooperative.
*. greater than $380/ton for Eastern States and less than $380/ton for Nebraska
d. less than $380/ton for Eastern States and greater than $380/ton for Nebraska

17. A cable-television pay-per-view broadcast of a sporting event is
a. excludable and rival in consumption.
*. excludable and non-rival in consumption.
c. non-excludable and rival in consumption.
d. non-excludable and non-rival in consumption.

18. Goods that are rival in consumption include both
a. private goods and public goods.
*. private goods and common resources.
c. common resources and public goods.
d. none of the above.

19. A free-rider problem exists for any good that is not
a. rival in consumption.
*. excludable.
c. a private good.
d. free.
20. The underground freshwater "lake" that lies beneath several Plains states is called the
a. North Platte escarpment.
b. Pleistocene sedimentary pool.
c. Dakotan alluvial fan.
*. Ogallala aquifer.

21. Recall lecture's discussion of the classic example of a common resource: the so-called
"town common," the community-owned cattle pasture land surrounding a medieval
village. In that context, which of the following policies would help to avoid the tragedy
of the commons?
a. Charging town residents a tax that increases with the number of cattle owned.
b. Giving the town common to one person who could then sell grazing rights to others.
c. Establishing property rights by dividing the town common into private parcels.
*. All of the above.

22. The cost of compliance with tax law is called the tax's
a. marginal tax rate.
*. administrative burden.
c. deficit overdraft.
d. loophole accessibility factor.

23. The revenue that the federal government collects from payroll taxes is earmarked to
pay for
a. national defense and welfare programs.
b. interstate highways and public schools.
c. foreign aid and agricultural subsidies.
*. Social Security and Medicare.

24. A tax for which the average tax rate decreases with income is called a
a. redistributive tax.
b. progressive tax.
c. deficit tax.
*. regressive tax.

25. The "FairTax" proposal advocated by many politicians, including former Arkansas
Governor Mike Huckabee, is essentially
*. a federal sales tax.
b. an excise tax on gasoline.
c. a "sin" tax on alcohol and tobacco products.
d. an income tax with a $20,000 exclusion and a single marginal tax rate of 19%.
26. Imagine an income tax that involved a marginal tax rate of 10% on the first $30,000
of annual income, and a marginal tax rate of 0% on annual income over $30,000. Under
this tax structure, the average tax rate for an individual with annual income of $50,000
would be
a. 0%.
b. 3%.
*. 6%.
d. 10%.

27. As a single man with no children, Eldridge is entitled to claim a standard deduction of
$5450 on his 2008 federal individual income tax return. Under what circumstances
would itemizing his deductions, instead of claiming the standard deduction, reduce
Eldridge's tax liability?
*. If the total of his allowable deductions is greater than $5450.
b. If the total of his allowable deductions is less than $5450.
c. Always. (One can always reduce tax liability by itemizing deductions.)
d. Never. (One can never reduce tax liability by itemizing deductions.)

Questions 28, 29, and 30 refer to Schedule Y-1 from the 2008 Instruction booklet for
federal individual income tax form 1040. Craig and Lindsey, a married couple, used the
"married, filing jointly" tax status to file their 2008 federal income tax returns. They
reported taxable income of $125,000 on total income of $150,000.

Schedule Y-1. Use if your filing status is married, filing jointly.
If your taxable
income is over
but not over your tax is of the amount

$0 $16,050 --------- 10% $0
16,050 65,100 $1,605 + 15% 16,050
65,100 131,450 8,962.50 + 25% 65,100
131,450 200,300 25,550 + 28% 131,450
200,300 357,700 44,828 + 33% 200,300
357,700 ---------- 96,770 + 35% 357,700

28. According to schedule Y-1, Craig and Lindsey's federal income tax for 2008 is
a. $30,744.00.
b. $25,445.00.
*. $23,937.50.
d. $17,687.50.

29. According to schedule Y-1, Craig and Lindsey's marginal tax rate is
*. 25%.
b. 15%.
c. 10%.
d. none of the above.
30. According to schedule Y-1, Craig and Lindsey's average tax rate is
a. 20.50%.
b. 19.15%.
*. 15.96%.
d. 11.79%.