Exam 4: Market Efficiency and Market Failure

Figure 4-6 Figure 4-6 shows the market for granola. The market is initially in equilibrium at a price of P₁ and a quantity of Q₁. Now suppose producers decide to cut output to Q₂ in order to raise the price to P₂. -Refer to Figure 4-6.What area represents producer surplus at P₂?

Suppliers will be willing to supply a product only if

What is the difference between scarcity and a shortage?

Which of the following activities create a negative externality?

Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?

Figure 4-7 -Refer to Figure 4-7.The figure above represents the market for iced tea.Assume that this is a competitive market.If 10,000 units of iced tea are sold

What is a market failure?

Figure 4-6 Figure 4-6 shows the market for granola. The market is initially in equilibrium at a price of P₁ and a quantity of Q₁. Now suppose producers decide to cut output to Q₂ in order to raise the price to P₂. -Refer to Figure 4-6.At the equilibrium price of P₁,consumers are willing to buy Q₁ pounds of granola.Is this an economically efficient quantity?

Figure 4-12 -Refer to Figure 4-12 which shows the market for vitamins.Suppose the government imposes a price ceiling of Pᵥ.How will the price ceiling affect the quantity supplied,quantity demanded,and quantity exchanged?

Figure 4-3 Figure 4-3 shows Kendra's demand curve for ice cream cones. -Refer to Figure 4-3.What is the total amount that Kendra is willing to pay for 1 ice cream cone?

Figure 4-19 Figure 4-19 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂. -Refer to Figure 4-19.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does D₁ represent?

Government intervention in agriculture began in the United States in the 1890s.

Rent control is an example of a price floor.

Producer surplus is the difference between the highest price someone is willing to pay and the price he actually pays.

The additional benefit to a consumer from consuming one more unit of a good or service is the marginal benefit.

________ is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production,and in which the sum of consumer surplus and producer surplus is at a maximum.

Figure 4-1 Figure 4-1 shows Arnold's demand curve for burritos. -Refer to Figure 4-1.If the market price is $1.50,what is the consumer surplus on the second burrito?

Policies that mandate the installation of specific pollution control devices are called

Figure 4-25 Figure 4-25 illustrates the market for gasoline before the government imposes a tax to bring about the efficient level of gasoline production. -Refer to Figure 4-25.The market equilibrium price of gasoline is ________ per gallon.

Figure 4-26 Figure 4-26 shows the market for aviation security. Aviation security generates a positive externality because people who are not airline passengers benefit from aviation security. -Refer to Figure 4-26 to answer the following questions. a.In the absence of any government intervention what is the equilibrium level of security that airlines will supply? Using the diagram,denote this level,Q*.Briefly explain why this quantity is not the economically efficient level of aviation security. b.In the diagram,illustrate the presence of positive externalities in the aviation security market.Label any new curve that you draw. c.On your diagram identify the economically efficient level of aviation security.Denote this level Qe. d.Explain how a government subsidy for the airlines can bring about the economically efficient aviation security level.Be sure to identify the size of the subsidy.