Question

Question 2 [1 marks each/20 marks] True or false 5) In an unregulated competitive market, the presence of marginal external cost of a good or service results in overproduction. 6) A marginal external cost is the cost of producing an additional unit of a good that falls on the producer. 7) Young drivers often buy used cars. An increase in the legal driving age to twenty-one shifts the demand curve for used cars leftward, whereas lowering the age to fifteen shifts the demand curve rightward. 8) An inferior good is a good whose income elasticity of demand is less than 0. Page 12 of 15 9) Market failure is the situation in which a market delivers an inefficient outcome. 10) A minimum wage set above the equilibrium wage rate has no effect. 11) In the long run, a perfectly competitive firm leaves the market if the market price is less than the firm's average total cost. 12) When the market demand increases in a perfect competition, the long-run result is a larger number of firms, a higher price, and a permanent economic profit for the firms. 13) A free rider problem is created by private goods. 14) If the consumption of a good decreases the quantity available for another person, the good is rival. 15) One way of overcoming the problem of the commons is to make it private property. 16) When external costs are present and government imposes a tax equal to the external marginal cost, then efficiency can be achieved. 17) An increase in price results in increase in supply but not an increase in the quantity supplied. 18) Fantastic growing conditions that produce a bumper crop of oranges on each tree this year will definitely make the short run supply of oranges more price elastic. 19) If the hot dog vendors at Yankee Stadium are earning a producer surplus on each hot dog they sell, then baseball fans cannot be gaining any consumer surplus on the hot dogs they buy. 20) If the demand is perfectly elastic, buyers pay the entire tax.

Answer 1

5. In an unregulated competitive market, the presence of marginal external cost of good or service results in overproduction- The statement is true. This is due to the occurrence of negative externality which results deadweight welfare loss.

6. A marginal external cost is the cost of producing an additional unit of a good that falls on the producer.-   The statement is False. The marginal external cost is for producing one additional unit of a good falls other than the producer.

7) Young drivers often buy used cars. An increase in the legal driving age to twenty-one shifts the demand curve for used cars leftward, whereas lowering the age to fifteen shifts the demand curve rightward.- The statement is False. An increase in the legal driving age to twenty one will increase the demand for used car and which leads to shift the demand curve for used car towards right.

8) An inferior good is a good whose income elasticity of demand is less than 0. – The statement is False. For Inferior good the income elasticity of demand is negative.

9) Market failure is the situation in which a market delivers an inefficient outcome.- The statement is True.

10) If the minimum wage is set above the equilibrium wage rate, the quantity of labor supplied by workers exceeds the quantity demanded by employers. There is a surplus of labor.- Therefore the statement is False.

11) In the long run, a perfectly competitive firm leaves the market if the market price is less than the firm's average total cost.- True. In that case firm will make loss.

12) When the market demand increases in a perfect competition, the long-run result is a larger number of firms, a higher price, and a permanent economic profit for the firms. –False. In the long run as demand increases, more firm enters into the industry which results reducing the price level and a normal profit for the firm.

13) A free rider problem is created by private goods. --- This statement is false. In free rider problem people are benefited from the goods and services that they do not paid for it. The problem is commonly seen in public goods.

14) If the consumption of a good decreases the quantity available for another person, the good is rival. – The statement is true.

15) One way of overcoming the problem of the commons is to make it private property.-The statement is true.

16) When external costs are present and government imposes a tax equal to the external marginal cost, then efficiency can be achieved.- This statement is true. The negative externality caused by the marginal external cost will be reduced by taxation.

17) An increase in price results in increase in supply but not an increase in the quantity supplied.- This statement is false. An increase in price results in an increase in quantity supplied that moves towards the same supply curve.

18) Fantastic growing conditions that produce a bumper crop of oranges on each tree this year will definitely make the short run supply of oranges more price elastic.- True

19) If the hot dog vendors at Yankee Stadium are earning a producer surplus on each hot dog they sell, then baseball fans cannot be gaining any consumer surplus on the hot dogs they buy. --- The statement is true. In a market equilibrium there is no way to make some people better off without making something worse off.

20) If the demand is perfectly elastic, buyers pay the entire tax.---This statement is false. In this situation consumers have no willingness to pay higher prices and producers absorb the entire burden of tax.