Question

Suppose there are 100 homeowners in a neighborhood that needs street repairs. Each homeowners valuesstreet repairs at $3,000. The total cost of street repairs is $200,000. Which of the following is true?

	A.	It is efficient for the government to repair the street and tax each homeowner $2,000.
	B.	It is inefficient to repair the street.
	C.	Voluntary contributions will raise enough funds to repair the street.
	D.	It is efficient for the government to repair the street and subsidize each homeowner $2,000.

2)

The current market price is above the equilibrium price. Which of the following is true?

	A.	There is pressure for the market price to increase due to competition among sellers.
	B.	There is pressure for the market price to decrease due to competition among buyers.
	C.	There is pressure for the market price to decrease due to competition among sellers.
	D.	There is pressure for the market price to increase due to competition among buyers.

3)

Oak boards and maple boards are substitutes. The price of maple boards decreases. Other things equal. What happens to the producer surplus of maple board producers................and the producer surplus of oak board producers.....................?

	A.	decreases, increases
	B.	decreases, decreases
	C.	increases, decreases
	D.	increases, increases

Answer 1

Ans 1. A) It is efficient for the government to repair the street and tax each homeowner $2000.

Since this would lead to collection of $200,000 which is what is needed to repair the streets, the government can then build the streets. It is also lesser than whatthe homeowners value the street and hence they are also willing to pay this much amount.

Ans 2. C) There is pressure for the market price to decrease due to competition amoung sellers.

Since there is excess supply and less demand, the price level will decrease.

Ans 3. C) increases, decreases

Since a decrease in the price of maple boards means that it is relatively cheaper for consumers, the consumers will purchase maple boards and not oak boards. hence, producer surplus of maple boards will increase and that of oak boards will decrease.