Question 1

Which of the following is not a characteristic of a public good?

Accepted Answer

A)  Nonexclusivity 
B)  Available to nonbuyers 
C)  Nonrivalry in consumption. 
D)  Can be consumed only once 
A)  Nonexclusivity 
B)  Available to nonbuyers 
C)  Nonrivalry in consumption. 
D)  Can be consumed only once

Question 2

Television broadcasts are often given as examples of a public good. However, it is possible to code a broadcast so that only people who pay for the decoder box can view it. The use of a coded signal does what to a television broadcast?

Accepted Answer

A)  Makes it rival 
B)  Makes it nonrival 
C)  Makes it excludable 
D)  Makes it nonexcludable 
A)  Makes it rival 
B)  Makes it nonrival 
C)  Makes it excludable 
D)  Makes it nonexcludable

Question 3

Refer to the graph shown. The amount of a tax sufficient to reduce quantity supplied to the level that individuals would have supplied had they included the cost in their decision on third parties is:

Accepted Answer

A)  $2.50. 
B)  $1.70. 
C)  $1.00. 
D)  $0.80. 
A)  $2.50. 
B)  $1.70. 
C)  $1.00. 
D)  $0.80.

Question 4

Moral hazard problems can occur when insured individuals change their behavior to the detriment of the insurer.

Accepted Answer

A) True 
 B)False

Question 5

A policy that requires all the people to certify that they have reduced total consumption, not necessarily their own individual consumption, by a specified amount, is a(n):

Accepted Answer

A)  external incentive plan. 
B)  internal incentive plan. 
C)  tax incentive plan. 
D)  market incentive plan. 
A)  external incentive plan. 
B)  internal incentive plan. 
C)  tax incentive plan. 
D)  market incentive plan.

Question 6

Real-world markets:

Accepted Answer

A)  often involve deception, cheating, and inaccurate information. 
B)  ensure that sellers will always be honest and provide accurate information because those who are dishonest or provide inaccurate information go out of business. 
C)  can operate efficiently only if government takes steps to correct informational problems. 
D)  provide no mechanism for solving informational problems. 
A)  often involve deception, cheating, and inaccurate information. 
B)  ensure that sellers will always be honest and provide accurate information because those who are dishonest or provide inaccurate information go out of business. 
C)  can operate efficiently only if government takes steps to correct informational problems. 
D)  provide no mechanism for solving informational problems.

Question 7

Refer to the following graph.   The point on the graph corresponding to the socially optimal output per year and the price sellers must receive to make that amount available is shown by point:

Accepted Answer

A)  G. 
B)  H. 
C)  I. 
D)  K. 
A)  G. 
B)  H. 
C)  I. 
D)  K.

Question 8

If a consumer is willing to pay $100 for a used vintage record player that is a "cherry" and $30 for a used vintage record player that is a "lemon," the consumer will offer:

Accepted Answer

A)  $30 for any used vintage record player even if the probability that it is a "lemon" is 50 percent. 
B)  $100 for any used vintage record player even if the probability that is a "cherry" is 50 percent. 
C)  $65 for any used vintage record player if the probability that it is a "lemon" is 50 percent. 
D)  $130 for any used vintage record player if the probability that it is a "cherry" is 50 percent. 
A)  $30 for any used vintage record player even if the probability that it is a "lemon" is 50 percent. 
B)  $100 for any used vintage record player even if the probability that is a "cherry" is 50 percent. 
C)  $65 for any used vintage record player if the probability that it is a "lemon" is 50 percent. 
D)  $130 for any used vintage record player if the probability that it is a "cherry" is 50 percent.

Question 9

Economists are likely to oppose direct regulation because they do not believe there is any need for government to take action when negative externalities exist.

Accepted Answer

A) True 
 B)False

Question 10

Externalities can be either positive or negative.

Accepted Answer

A) True 
 B)False

Question 11

A market incentive plan:

Accepted Answer

A)  regulates the amount of a resource a person can consume through direct limits. 
B)  requires that people choose to consume until the marginal costs exceed the marginal benefits. 
C)  makes the price of a resource reflect not only the marginal private costs but also the marginal social costs of consuming that resource. 
D)  makes the price of a resource reflect the marginal private costs of consuming that resource. 
A)  regulates the amount of a resource a person can consume through direct limits. 
B)  requires that people choose to consume until the marginal costs exceed the marginal benefits. 
C)  makes the price of a resource reflect not only the marginal private costs but also the marginal social costs of consuming that resource. 
D)  makes the price of a resource reflect the marginal private costs of consuming that resource.

Question 12

Since trash generation involves an externality, the way economists might address the problem of trash generation that is most likely to be optimal is by:

Accepted Answer

A)  integrating the cost of the externality into the initial price of the good. 
B)  having the government require mandatory sorting and recycling of trash. 
C)  having the cost of the externality be paid by the government. 
D)  not allowing persons to throw away more trash than is acceptable as a maximum. 
A)  integrating the cost of the externality into the initial price of the good. 
B)  having the government require mandatory sorting and recycling of trash. 
C)  having the cost of the externality be paid by the government. 
D)  not allowing persons to throw away more trash than is acceptable as a maximum.

Question 13

The cost of running an electrical utility includes costs for fuel, labor, and capital. In addition, there are sometimes costs associated with pollution from the utility, such an increased health care costs for people living near the utility. To an economist, the costs associated with the pollution resulting from additional electricity are:

Accepted Answer

A)  marginal private costs. 
B)  marginal social costs. 
C)  the difference between marginal social costs and marginal private costs. 
D)  the sum of marginal social costs and marginal private costs. 
A)  marginal private costs. 
B)  marginal social costs. 
C)  the difference between marginal social costs and marginal private costs. 
D)  the sum of marginal social costs and marginal private costs.

Question 14

John and Jack are both trying to sell a used car to Jim. John's car is a lemon, a car that has a serious but nonobvious problem. Jack's car is a cherry, a car that has no problems. Jim cannot tell the difference between the cars. Economists say this information problem might be solved with signaling. Who has an incentive to find a way to signal quality?

Accepted Answer

A)  Both Jack and John 
B)  Jack but not John 
C)  John but not Jack 
D)  Jim 
A)  Both Jack and John 
B)  Jack but not John 
C)  John but not Jack 
D)  Jim

Question 15

If government undertakes to reduce water usage by using a market incentive plan:

Accepted Answer

A)  each consumer will have to reduce his or her water usage by an equal amount. 
B)  consumers who reduce water usage by more than the required amount can sell marketable certificates to consumers who seek to reduce usage by less than the required amount. 
C)  consumers who do not reduce usage by the required amount will have to pay taxes on the extra water usage. 
D)  consumers will be asked to reduce water usage voluntarily. 
A)  each consumer will have to reduce his or her water usage by an equal amount. 
B)  consumers who reduce water usage by more than the required amount can sell marketable certificates to consumers who seek to reduce usage by less than the required amount. 
C)  consumers who do not reduce usage by the required amount will have to pay taxes on the extra water usage. 
D)  consumers will be asked to reduce water usage voluntarily.

Question 16

An economist is most likely to support all of the following methods to address the negative externalities created by the waste from newspapers except:

Accepted Answer

A)  requiring publishers to cut the volume of newspapers generated but allowing them to sell certificates so that others can meet those requirements for them. 
B)  taxing the suppliers of newspaper by the pound. 
C)  having the cost of the externality be paid by the government. 
D)  ensuring that the social cost of buying a newspaper is reflected in its price. 
A)  requiring publishers to cut the volume of newspapers generated but allowing them to sell certificates so that others can meet those requirements for them. 
B)  taxing the suppliers of newspaper by the pound. 
C)  having the cost of the externality be paid by the government. 
D)  ensuring that the social cost of buying a newspaper is reflected in its price.

Question 17

If the benefit of a public good is small to each individual in a society of millions of individuals:

Accepted Answer

A)  it will never be efficient for government to provide the public good. 
B)  the total benefit will be large since social benefit is the sum of all individual benefits. 
C)  the total benefit will be small since individuals cannot share the benefits of public goods. 
D)  it cannot really be a public good since the benefit of public goods is always large. 
A)  it will never be efficient for government to provide the public good. 
B)  the total benefit will be large since social benefit is the sum of all individual benefits. 
C)  the total benefit will be small since individuals cannot share the benefits of public goods. 
D)  it cannot really be a public good since the benefit of public goods is always large.

Question 18

Both opponents of and proponents of government intervention most likely would agree with which of the following?

Accepted Answer

A)  Government can and does create proper incentives to correct for externalities. 
B)  Property rights eliminate the need for government. 
C)  The market is inherently fair. 
D)  Property rights must exist for a market to operate. 
A)  Government can and does create proper incentives to correct for externalities. 
B)  Property rights eliminate the need for government. 
C)  The market is inherently fair. 
D)  Property rights must exist for a market to operate.

Question 19

When negative externalities exist in the production of a good, the marginal social cost of producing the good:

Accepted Answer

A)  is equal to the marginal benefit received by consumers if competitive markets exist and there is no government intervention. 
B)  equals the marginal cost borne by the firm minus marginal cost borne by a third party that results from the production and consumption of the good. 
C)  is less than the marginal cost borne by the firm. 
D)  equals the marginal cost borne by the firm plus the marginal cost borne by third parties from the production and consumption of the good. 
A)  is equal to the marginal benefit received by consumers if competitive markets exist and there is no government intervention. 
B)  equals the marginal cost borne by the firm minus marginal cost borne by a third party that results from the production and consumption of the good. 
C)  is less than the marginal cost borne by the firm. 
D)  equals the marginal cost borne by the firm plus the marginal cost borne by third parties from the production and consumption of the good.

Question 20

What do economists mean when they say there is "market failure"?

Accepted Answer

A)  Business has introduced a product that consumers do not want. 
B)  Free markets have led to excessive profits. 
C)  Markets have surpluses or shortages so that government rationing is necessary. 
D)  Free markets yield results that economists do not consider socially optimal. 
A)  Business has introduced a product that consumers do not want. 
B)  Free markets have led to excessive profits. 
C)  Markets have surpluses or shortages so that government rationing is necessary. 
D)  Free markets yield results that economists do not consider socially optimal.

Exam 8: Market Failure Versus Government Failure

Which of the following is not a characteristic of a public good?

Television broadcasts are often given as examples of a public good. However, it is possible to code a broadcast so that only people who pay for the decoder box can view it. The use of a coded signal does what to a television broadcast?

Refer to the graph shown. The amount of a tax sufficient to reduce quantity supplied to the level that individuals would have supplied had they included the cost in their decision on third parties is:

Moral hazard problems can occur when insured individuals change their behavior to the detriment of the insurer.

A policy that requires all the people to certify that they have reduced total consumption, not necessarily their own individual consumption, by a specified amount, is a(n):

Real-world markets:

Refer to the following graph. The point on the graph corresponding to the socially optimal output per year and the price sellers must receive to make that amount available is shown by point:

If a consumer is willing to pay $100 for a used vintage record player that is a "cherry" and $30 for a used vintage record player that is a "lemon," the consumer will offer:

Economists are likely to oppose direct regulation because they do not believe there is any need for government to take action when negative externalities exist.

Externalities can be either positive or negative.

A market incentive plan:

Since trash generation involves an externality, the way economists might address the problem of trash generation that is most likely to be optimal is by:

If government undertakes to reduce water usage by using a market incentive plan:

An economist is most likely to support all of the following methods to address the negative externalities created by the waste from newspapers except:

If the benefit of a public good is small to each individual in a society of millions of individuals:

Both opponents of and proponents of government intervention most likely would agree with which of the following?

When negative externalities exist in the production of a good, the marginal social cost of producing the good:

What do economists mean when they say there is "market failure"?

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

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