AP Unit 5-6 Review

When consumption of a good generates a positive externality, which of the following must be true at the market equilibrium? 

• Marginal social benefit is less than marginal private cost. 
• Marginal social benefit is greater than marginal private benefit. 
• Marginal social cost is greater than marginal social benefit. 
• Marginal social cost is less than marginal private benefit. 

If the production of a good generates a positive externality, the government can increase allocative efficiency by: 

• taxing the producer of the good
  
• setting a price ceiling to encourage production of the good
  
• subsidizing the producer of the good 
• prosecuting firms that produce the good without proper permits
  

Refer to the image. The socially optimal quantity and the per-unit tax that will achieve the socially optimal quantity are which of the following? 

• Quantity = Q1
  Tax = P4-P2
• Quantity = Q2
  Tax = P3-P2
• Quantity = Q2
  Tax = P3-P1
• Quantity = Q3
  Tax = P4-P2

Refer to the image.  Given the position of the marginal social cost curve, one can conclude that the:

• production of good X creates a negative externality
• private cost of producing good X exceeds the social cost of production at all levels of output 
• market quantity, Q3, is the socially optimal quantity
  
• free market will produce too little of good X 

Which of the following best represents a positive externality? 

• Purchasing a pass for an amusement park 
• Being disturbed by neighboring construction noise 
• Dumping waste on someone else’ s property 
• Enjoying watching birds at a neighbor’s bird feeder 

If the production of good X creates a positive externality, then from society’s perspective, the industry that produces good X tends to produce:

• less than the socially optimal amount of good X 
• greater than the socially optimal amount of good X 
• the socially optimal amount of good X 
• a shortage of good X, unless taxed 

Which of the following is true based on the graph shown? 

• Quantity of education in the private market is more than the socially optimal quantity 
• Producers of education could be taxed in order to achieve the socially optimal quantity 
• Consumption of education has a negative externality 
• Consumers of education could be subsidized in order to achieve the socially optimal quantity 

Which of the following policies can help correct a negative externality? 

• Removing all regulations on the producer 

• Implementing a tax on the producer 

• Providing a subsidy to the producer 

• Setting a price floor for the good 

The marginal revenue product of labor is the....

• product price times the wage rate

• additional revenue a firm earns when it employs an additional unit of labor

• increase in the average product of labor when the firm employs an additional unit of labor

• increase in the price of labor when the firm employs an additional unit of labor

• marginal revenue plus product price

A contractor is employing labor and capital to build an office complex. At the current mix of inputs, the marginal product of labor is 30 square feet per day, and the marginal product of capital is 90 square feet per day. The price of labor is 3,000 per day and the price of capital is $9,000 a day. To hire inputs in a cost-minimizing way, the firm should...

• hire more labor and less capital

• hire less labor and more capital

• hire more labor and more capital

• hire less labor and less capital

• make no changes to the mix of inputs