Question 1

The best example of a positive externality is:

Accepted Answer

A) roller coaster rides. 
B) pollution. 
C) alcoholic beverages. 
D) education. 
A) roller coaster rides. 
B) pollution. 
C) alcoholic beverages. 
D) education.

Question 2

An economist argues that the states that have spent the most on higher education in the last 25 years have experienced the least economic growth. One might conclude that higher education:

Accepted Answer

A) does not have important positive externalities. 
B) does not have important negative externalities. 
C) is a nonexcludable service. 
D) has problems of adverse selection. 
A) does not have important positive externalities. 
B) does not have important negative externalities. 
C) is a nonexcludable service. 
D) has problems of adverse selection.

Question 3

When negative externalities are present, market failure often occurs because:

Accepted Answer

A) the cost borne by a third party not involved in the trade is not reflected in the market price. 
B) the cost borne by a third party not involved in the trade is reflected in the market price. 
C) the existence of imports from foreign countries takes jobs (and income)away from U.S. citizens. 
D) consumers will consume the good at a level at which their individual marginal benefits exceed the marginal costs borne by the firm producing the good. 
A) the cost borne by a third party not involved in the trade is not reflected in the market price. 
B) the cost borne by a third party not involved in the trade is reflected in the market price. 
C) the existence of imports from foreign countries takes jobs (and income)away from U.S. citizens. 
D) consumers will consume the good at a level at which their individual marginal benefits exceed the marginal costs borne by the firm producing the good.

Question 4

Economists generally prefer direct regulation to incentive-based programs because explicit regulation tends to be more efficient.

Accepted Answer

A) True 
 B)False

Question 5

At one time many economists were suspicious of brand names. They saw them as a barrier to entry with no benefits to consumers. In the 1970s economists began to see a possible benefit of brand names to consumers. They discovered that brand names were a way to:

Accepted Answer

A) signal quality. 
B) market public goods. 
C) overcome negative externalities. 
D) overcome the free rider effect. 
A) signal quality. 
B) market public goods. 
C) overcome negative externalities. 
D) overcome the free rider effect.

Question 6

What is the adverse selection problem? Give an example in the market for used cars or health insurance.

Accepted Answer

The adverse selection problem is a probl

Question 7

The following table shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution. $$\begin{array} { | c | c | c | c | } 
\hline \text { Firm } & \begin{array} { c } 
\text { Total Discharge (in } \
\text { tons) }
\end{array} & \begin{array} { c } 
\text { Marginal Cost of } \
\text { Cleanup } \
\text { (per tan) }
\end{array} & \begin{array} { c } 
\text { Total Cost of } \
\text { Cleanup }
\end{array} \
\hline \text { A } & 60 & \$ 5.00 & \$ 300 \
\hline \text { B } & 70 & \$ 8.00 & \$ 560 \
\hline \text { C } & 80 & \$ 7.50 & \$ 600 \
\hline \text { D } & 90 & \$ 4.00 & \$ 360 \
\hline
\end{array}$$ The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes. Suppose that the government gives each company a pollution permit equal to 50 percent of its present discharge. However, companies are allowed to reduce pollution more than 50 percent and sell their permit or reduce less than 50 percent and buy a permit from another company. If firms maximize profits, what would happen?

Accepted Answer

A) Each firm would reduce pollution by 50 percent. 
B) Firms A and D would eliminate pollution and sell their permits with a reasonable price to B and C, which would continue to pollute as before. 
C) Firms B and C would eliminate pollution and sell their permits with a reasonable price to A and D, which would continue to pollute as before. 
D) There is not enough information to answer this question. 
A) Each firm would reduce pollution by 50 percent. 
B) Firms A and D would eliminate pollution and sell their permits with a reasonable price to B and C, which would continue to pollute as before. 
C) Firms B and C would eliminate pollution and sell their permits with a reasonable price to A and D, which would continue to pollute as before. 
D) There is not enough information to answer this question.

Question 8

Refer to the graph shown. The price and quantity that would prevail if all social costs and benefits were taken into account is:

Accepted Answer

A) $5 and 2,600 units. 
B) $3.45 and 2,000 units. 
C) $2.45 and 2,600 units. 
D) $1.80 and 2,000 units. 
A) $5 and 2,600 units. 
B) $3.45 and 2,000 units. 
C) $2.45 and 2,600 units. 
D) $1.80 and 2,000 units.

Question 9

If a market has no externalities, marginal private costs:

Accepted Answer

A) exceed marginal social costs. 
B) equal marginal social costs. 
C) are below marginal social costs. 
D) intersect marginal social costs. 
A) exceed marginal social costs. 
B) equal marginal social costs. 
C) are below marginal social costs. 
D) intersect marginal social costs.

Question 10

Refer to the graph shown, which shows the demand and supply for a new vaccine against the common cold. Suppose once vaccinated, a person cannot catch a cold or give a cold to someone else. As a result, the marginal social benefit curve will:

Accepted Answer

A) coincide with the market demand curve. 
B) lie strictly below the market supply curve. 
C) lie below the market demand curve. 
D) lie above the market demand curve. 
A) coincide with the market demand curve. 
B) lie strictly below the market supply curve. 
C) lie below the market demand curve. 
D) lie above the market demand curve.

Question 11

Refer to the following graph.   Assuming a marginal cost external to the trade equals the tax shown in the graph, the market price necessary to induce consumers to purchase the efficient quantity each year is:

Accepted Answer

A) P1. 
B) P2. 
C) P3. 
D) P4. 
A) P1. 
B) P2. 
C) P3. 
D) P4.

Question 12

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 13

If the marginal benefit of one more unit of a public good is $500 for Sam and $800 for Alex, the social benefit of one more unit of a public good is:

Accepted Answer

A) $500 since the benefit will go to the person who values it least. 
B) $800 since the benefit will go to the person who values it most. 
C) $1,300 since the benefit of one more unit goes to both individuals. 
D) more than $1,300 since the benefits to society exceed the sum of individual benefits. 
A) $500 since the benefit will go to the person who values it least. 
B) $800 since the benefit will go to the person who values it most. 
C) $1,300 since the benefit of one more unit goes to both individuals. 
D) more than $1,300 since the benefits to society exceed the sum of individual benefits.

Question 14

The following table shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution. $$\begin{array} { | c | c | c | c | } 
\hline \text { Firm } & \begin{array} { c } 
\text { Total Discharge (in } \
\text { tons) }
\end{array} & \begin{array} { c } 
\text { Marginal Cost of } \
\text { Cleanup } \
\text { (per tan) }
\end{array} & \begin{array} { c } 
\text { Total Cost of } \
\text { Cleanup }
\end{array} \
\hline \text { A } & 60 & \$ 5.00 & \$ 300 \
\hline \text { B } & 70 & \$ 8.00 & \$ 560 \
\hline \text { C } & 80 & \$ 7.50 & \$ 600 \
\hline \text { D } & 90 & \$ 4.00 & \$ 360 \
\hline
\end{array}$$ The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes. If the government establishes an effluent fee of $7.00 per ton, how much tax would firms pay to the government?

Accepted Answer

A) $660 
B) $1,050 
C) $1,820 
D) $2,100 
A) $660 
B) $1,050 
C) $1,820 
D) $2,100

Question 15

If a corrective tax on gasoline results in the efficient output of gasoline by internalizing negative externalities associated with pollution:

Accepted Answer

A) pollution from gasoline will increase because people are also harmed by the tax. 
B) there will be no effect on pollution from gasoline because the tax is paid by the supplier. 
C) pollution from gasoline will be zero because environmental cleanliness is priceless. 
D) the tax will generate enough revenue to compensate society for the damages resulting from the pollution that still occurs. 
A) pollution from gasoline will increase because people are also harmed by the tax. 
B) there will be no effect on pollution from gasoline because the tax is paid by the supplier. 
C) pollution from gasoline will be zero because environmental cleanliness is priceless. 
D) the tax will generate enough revenue to compensate society for the damages resulting from the pollution that still occurs.

Question 16

In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide emissions, giving electric utilities an allowance of a set amount of emissions and allowing the utilities to trade their allowances. This type of plan is:

Accepted Answer

A) more efficient than direct regulation because utilities that receive a high marginal benefit from emissions can gain additional allowances through trade. 
B) more efficient than direct regulation because it forces each utility company to reduce sulfur dioxide emissions by the same amount. 
C) less efficient than direct regulation because utilities that receive a high marginal benefit from emissions can gain additional allowances through trade. 
D) less efficient than direct regulation because it forces each utility company to reduce sulfur dioxide emissions by the same amount. 
A) more efficient than direct regulation because utilities that receive a high marginal benefit from emissions can gain additional allowances through trade. 
B) more efficient than direct regulation because it forces each utility company to reduce sulfur dioxide emissions by the same amount. 
C) less efficient than direct regulation because utilities that receive a high marginal benefit from emissions can gain additional allowances through trade. 
D) less efficient than direct regulation because it forces each utility company to reduce sulfur dioxide emissions by the same amount.

Question 17

What is a public good? Give two examples of a public good.

Accepted Answer

A public good is a good that is nonexclu

Question 18

In a tax incentive program, the person who conserves the most pays:

Accepted Answer

A) relatively less tax. 
B) relatively more tax. 
C) no tax. 
D) no penalties. 
A) relatively less tax. 
B) relatively more tax. 
C) no tax. 
D) no penalties.

Question 19

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 20

Some economists believe that the market will not solve all problems. They are referring to:

Accepted Answer

A) market failure. 
B) market incentive plans. 
C) optional policy. 
D) the need to balance the good of the individual with the good of society as a whole. 
A) market failure. 
B) market incentive plans. 
C) optional policy. 
D) the need to balance the good of the individual with the good of society as a whole.

Exam 8: Market Failure Versus Government Failure

The best example of a positive externality is:

An economist argues that the states that have spent the most on higher education in the last 25 years have experienced the least economic growth. One might conclude that higher education:

When negative externalities are present, market failure often occurs because:

Economists generally prefer direct regulation to incentive-based programs because explicit regulation tends to be more efficient.

At one time many economists were suspicious of brand names. They saw them as a barrier to entry with no benefits to consumers. In the 1970s economists began to see a possible benefit of brand names to consumers. They discovered that brand names were a way to:

What is the adverse selection problem? Give an example in the market for used cars or health insurance.

Refer to the graph shown. The price and quantity that would prevail if all social costs and benefits were taken into account is:

If a market has no externalities, marginal private costs:

Refer to the graph shown, which shows the demand and supply for a new vaccine against the common cold. Suppose once vaccinated, a person cannot catch a cold or give a cold to someone else. As a result, the marginal social benefit curve will:

Refer to the following graph. Assuming a marginal cost external to the trade equals the tax shown in the graph, the market price necessary to induce consumers to purchase the efficient quantity each year is:

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

If the marginal benefit of one more unit of a public good is $500 for Sam and $800 for Alex, the social benefit of one more unit of a public good is:

If a corrective tax on gasoline results in the efficient output of gasoline by internalizing negative externalities associated with pollution:

In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide emissions, giving electric utilities an allowance of a set amount of emissions and allowing the utilities to trade their allowances. This type of plan is:

What is a public good? Give two examples of a public good.

In a tax incentive program, the person who conserves the most pays:

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:

Some economists believe that the market will not solve all problems. They are referring to:

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

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

The Financial Sector and the Economy

Monetary Policy

Financial Crises, Panics, and Unconventional Monetary Policy

Deficits and Debt: the Austerity Debate

The Fiscal Policy Dilemma

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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