1. If the production and sale of a good causes a positive

externality, the total profits of buyers and sellers are maximized

by a competitive equilibrium.

2. If the production and sale of a good causes a negative

externality, a tax on the sale of that good can increase total

profits.

3. Residents of the town of Los Locos (population 100) like to

drive noisy offroad vehicles, but they hate the disturbance and

dust caused by each others’ vehicles. Each vehicle that is

purchased by a resident causes $20 worth of damage to each of the

100 residents. There are 20 residents who are willing to pay up to

$4,000 for an offroad vehicle. There are 30 residents who are

willing to pay up to $3,000 for an offroad vehicle and there are 50

residents who are willing to pay up to $2,500 for an offroad

vehicle. The price of offroad vehicles is $1,200. In the absence of

any governmental interference, how many residents of Los Locos

would buy offroad vehicles?

(a) 0

(b) 20

(c) 50

(d) 80

(e) 100

4. In the town of Los Locos described in question 3, how many

residents would support a ban on offroad vehicles?

(a) 0

(b) 20

(c) 50

(d) 80

(e) 100

5. Suppose that the town of Los Locos imposes a tax of $2,000 on

every resident who buys an offroad vehicle and the town distributes

the revenues collected from the tax equally among all residents of

Los Locos. With the tax in place, how many people in Los Locos will

buy offroad vehicles and how much tax revenue will the government

distribute to each resident?

(a) 50 residents will buy offroad vehicles and each resident

will get a rebate

of 1,000.

(b) 20 residents will buy offroad vehicles and each resident

will get a rebate

of $400.

(c) Nobody will buy an offroad vehicle and there will be no

rebates.

(d) Everybody will buy an offroad vehicle and everyone will get

a rebate of

$2,000.

(e) None of the above.

6. The residents of Los Locos decided to vote on whether to

impose a tax

of $2,000 on each offroad vehicle purchaser. Who would gain and

who

would lose from the tax on offroad vehicles?

(a) The residents with $2,500 buyer values would be better off

and the other

residents would be worse off.

(b) Every resident would be worse off.

(c) The residents with $4,000 buyer values would be better off

and the other

residents would be worse off.

(d) The residents with $4,000 buyer values would be just as well

off and

other residents would be better off.

(e) The residents with $4,000 buyer values would be worse off,

the

residents with $3,000 buyer values would be exactly as well off,

and the

residents with $2,500 buyer values would be better off.

7. Sweet Harmony, Oregon has 100 families. Forty of those

families have a

child, and 60 do not. Twenty of the families with a child are

willing to pay

as much as $6,000 to educate their child, and the other twenty

are willing to

pay as much as $4,000. Each educated child creates a positive

externality

of $25 for each family in Sweet Harmony. The cost of educating a

child is

$5,000. If each family must pay the cost of educating its child,

what is the

total profit all families derive from the education of Sweet

Harmony’s

children?

(a) $30,000

(b) $40,000

(c) $70,000

(d) $100,000

(e) $120,000

8. The town council of Sweet Harmony is considering a proposal

to

provide a free public education to all children in the town. The

total cost of

this proposal would be $200,000 ($5,000×40). To finance this

cost, the

council would tax each family $2,000. If this proposal were

enacted, what

would be the total profit to the residents of Sweet Harmony from

educating

its children?

(a) $30,000

(b) $40,000

(c) $70,000

(d) $100,000

(e) $120,000

9. If the proposal for free public schools in Sweet Harmony were

put to a

vote, how many families would vote in favor of it?

(a) 20

(b) 40

(c) 60

(d) 80

(e) 100

10. Another proposal is to pay each family a subsidy $1,200 if

they pay for

their child’s education. The school would still cost each family

$5,000 for a

net cost after the subsidy of $3,800. The subsidy would be

financed by a

tax on residents. How many families would favor this proposal

over the

status quo described in question 7?

(a) 20

(b) 40

(c) 60

(d) 80

(e) 100

© 2018 |** Intelli Essays Homework Service®**