Question 1

A market transaction causes an externality if someone

Accepted Answer

A) directly involved in the transaction receives uncompensated benefits or costs from it. 
B) not directly involved in the transaction receives uncompensated benefits or costs from it. 
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D) not directly involved in the transaction interferes in it by imposing regulations or product standards. 
A) directly involved in the transaction receives uncompensated benefits or costs from it. 
B) not directly involved in the transaction receives uncompensated benefits or costs from it. 
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D) not directly involved in the transaction interferes in it by imposing regulations or product standards.

Question 2

Figure 5-4  
-Refer to Figure 5-4. If the government uses a pollution tax, how much of a tax must be imposed on each unit of production?

Accepted Answer

A) $1.90 
B) $1.80 
C) $1.60 
D) $0.30 
A) $1.90 
B) $1.80 
C) $1.60 
D) $0.30

Question 3

After spending $400,000 to build your dream home, you recently discovered that after less than one year the foundation is cracking. Further investigation reveals that the contractor used substandard concrete. Is there a role for the public sector in this situation?

Accepted Answer

There would certainly appear to be since

Question 4

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

Accepted Answer

A) result in a price that is lower than the efficient price for both goods. 
B) result in a price that is higher than the efficient price for both goods. 
C) result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost. 
D) result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost. 
A) result in a price that is lower than the efficient price for both goods. 
B) result in a price that is higher than the efficient price for both goods. 
C) result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost. 
D) result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost.

Question 5

Which of the following about public goods is true?

Accepted Answer

A) Consumption of a public good by one individual reduces the availability of the good for others. 
B) It is extremely difficult to limit the benefits of a public good to only the people who pay for it. 
C) Public goods are free to a society when they are produced by the government. 
D) From an efficiency standpoint, a market will generally supply too much of a public good. 
A) Consumption of a public good by one individual reduces the availability of the good for others. 
B) It is extremely difficult to limit the benefits of a public good to only the people who pay for it. 
C) Public goods are free to a society when they are produced by the government. 
D) From an efficiency standpoint, a market will generally supply too much of a public good.

Question 6

Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

A) The efficient outcome would be greater than 325 units. 
B) The efficient outcome would be less than 325 units. 
C) The efficient outcome would also be 325 units. 
D) The efficient price would be less than $24. 
A) The efficient outcome would be greater than 325 units. 
B) The efficient outcome would be less than 325 units. 
C) The efficient outcome would also be 325 units. 
D) The efficient price would be less than $24.

Question 7

Use the figure below to answer the following question(s).
Figure 5-2  
-Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

Accepted Answer

A) Relative to economic efficiency, output of the good will be too large and the price too low. 
B) Relative to economic efficiency, output of the good will be too large and the price too high. 
C) Relative to economic efficiency, output of the good will be too small and the price too low. 
D) Relative to economic efficiency, output of the good will be too small and the price too high. 
A) Relative to economic efficiency, output of the good will be too large and the price too low. 
B) Relative to economic efficiency, output of the good will be too large and the price too high. 
C) Relative to economic efficiency, output of the good will be too small and the price too low. 
D) Relative to economic efficiency, output of the good will be too small and the price too high.

Question 8

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

Accepted Answer

A) durable. 
B) nonrival-in-consumption. 
C) a common good. 
D) a natural resource. 
A) durable. 
B) nonrival-in-consumption. 
C) a common good. 
D) a natural resource.

Question 9

The standard economists use to assess whether an activity should be undertaken is

Accepted Answer

A) majority vote 
B) the marginal benefit assessment. 
C) the gold standard 
D) economic efficiency. 
A) majority vote 
B) the marginal benefit assessment. 
C) the gold standard 
D) economic efficiency.

Question 10

Which of the following most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers?

Accepted Answer

A) The franchiser has a monopoly on the sale of products in his industry. 
B) If quality is not maintained, the franchiser will be limited in his ability to sell other franchises and collect franchise fees. 
C) If quality is not maintained, the government will prohibit future sales of the franchises. 
D) Franchisers do not gain financially by maintaining quality, but they generally maintain quality anyway because they are consumers as well as producers. 
A) The franchiser has a monopoly on the sale of products in his industry. 
B) If quality is not maintained, the franchiser will be limited in his ability to sell other franchises and collect franchise fees. 
C) If quality is not maintained, the government will prohibit future sales of the franchises. 
D) Franchisers do not gain financially by maintaining quality, but they generally maintain quality anyway because they are consumers as well as producers.

Question 11

Which of the following is the most fundamental function of government?

Accepted Answer

A) protection of individuals and their property 
B) imposing progressive taxes to fund income-transfer programs 
C) regulating prices and wages 
D) provision of postal services and garbage collection 
A) protection of individuals and their property 
B) imposing progressive taxes to fund income-transfer programs 
C) regulating prices and wages 
D) provision of postal services and garbage collection

Question 12

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

Accepted Answer

Perhaps. Beaches, parks, and public swim

Question 13

Anne has just purchased a new house in a lovely neighborhood. Her neighbors are friendly and even brought her house-warming gifts. Anne, however, has a problem. Her neighbors have cats, and Anne hates cats. Even though the city has a law requiring all outdoor pets to be on a leash, her neighbors ignore it, and the cats roam all over Anne's property. How would an economist describe this situation? Is there anything Anne can do?

Accepted Answer

An economist would say negative external

Question 14

A market is unlikely to provide an efficient quantity of public goods because

Accepted Answer

A) only the government has the vast resources necessary to produce public goods. 
B) the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers. 
C) the technology involved in the production of public goods makes it difficult for private firms to produce them even though they could be produced efficiently. 
D) private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders. 
A) only the government has the vast resources necessary to produce public goods. 
B) the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers. 
C) the technology involved in the production of public goods makes it difficult for private firms to produce them even though they could be produced efficiently. 
D) private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders.

Question 15

Which of the following is true of public goods?

Accepted Answer

A) They can only be supplied by the government. 
B) They will tend to be supplied efficiently by the private sector when markets are competitive. 
C) It is difficult to establish a one-to-one link between payment and receipt of such goods. 
D) From an efficiency standpoint, private markets will tend to supply an excessively large amount of public goods. 
A) They can only be supplied by the government. 
B) They will tend to be supplied efficiently by the private sector when markets are competitive. 
C) It is difficult to establish a one-to-one link between payment and receipt of such goods. 
D) From an efficiency standpoint, private markets will tend to supply an excessively large amount of public goods.

Question 16

Suppose external costs are present in a market which results in the actual market price of $70 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

A) The efficient price would be higher than $70. 
B) The efficient price would be lower than $70. 
C) The efficient price would also be $70. 
D) The efficient output would be greater than 150 units. 
A) The efficient price would be higher than $70. 
B) The efficient price would be lower than $70. 
C) The efficient price would also be $70. 
D) The efficient output would be greater than 150 units.

Question 17

In a market that lacks sufficient competition,

Accepted Answer

A) output will generally be less than the output that is ideal from the standpoint of economic efficiency. 
B) output will generally be greater than the output that is ideal from the standpoint of economic efficiency. 
C) price will generally be less than the price that would result if the market was competitive. 
D) profit rates will generally be so low that government subsidies will be necessary to ensure that the firms remain in business. 
A) output will generally be less than the output that is ideal from the standpoint of economic efficiency. 
B) output will generally be greater than the output that is ideal from the standpoint of economic efficiency. 
C) price will generally be less than the price that would result if the market was competitive. 
D) profit rates will generally be so low that government subsidies will be necessary to ensure that the firms remain in business.

Question 18

Use the figure below to answer the following question(s).
Figure 5-2  
-Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

Accepted Answer

A) Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency. 
B) Point b illustrates the competitive private market outcome, while point a illustrates the outcome consistent with economic efficiency. 
C) The competitive private market outcome is consistent with the conditions for economic efficiency. 
D) The good will tend to be undersupplied relative to the conditions for economic efficiency. 
A) Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency. 
B) Point b illustrates the competitive private market outcome, while point a illustrates the outcome consistent with economic efficiency. 
C) The competitive private market outcome is consistent with the conditions for economic efficiency. 
D) The good will tend to be undersupplied relative to the conditions for economic efficiency.

Question 19

Because of the free-rider problem,

Accepted Answer

A) competitive markets will tend to undersupply public goods. 
B) the federal government spends too much on national defense. 
C) fireworks displays have become increasingly dangerous. 
D) poverty has increased. 
A) competitive markets will tend to undersupply public goods. 
B) the federal government spends too much on national defense. 
C) fireworks displays have become increasingly dangerous. 
D) poverty has increased.

Question 20

The government sometimes provides public goods because

Accepted Answer

A) private markets are incapable of producing public goods. 
B) free-riders make it difficult for private markets to supply the efficient quantity. 
C) markets are always better off with some government oversight. 
D) external benefits will accrue to private producers. 
A) private markets are incapable of producing public goods. 
B) free-riders make it difficult for private markets to supply the efficient quantity. 
C) markets are always better off with some government oversight. 
D) external benefits will accrue to private producers.

A market transaction causes an externality if someone

Figure 5-4 -Refer to Figure 5-4. If the government uses a pollution tax, how much of a tax must be imposed on each unit of production?

After spending $400,000 to build your dream home, you recently discovered that after less than one year the foundation is cracking. Further investigation reveals that the contractor used substandard concrete. Is there a role for the public sector in this situation?

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

Which of the following about public goods is true?

Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?

Use the figure below to answer the following question(s). Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

The standard economists use to assess whether an activity should be undertaken is

Which of the following most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers?

Which of the following is the most fundamental function of government?

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

A market is unlikely to provide an efficient quantity of public goods because

Which of the following is true of public goods?

Suppose external costs are present in a market which results in the actual market price of $70 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

In a market that lacks sufficient competition,

Use the figure below to answer the following question(s). Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

Because of the free-rider problem,

The government sometimes provides public goods because

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Exam 5: Difficult Cases for the Market, and the Role of Government

A market transaction causes an externality if someone

Figure 5-4 -Refer to Figure 5-4. If the government uses a pollution tax, how much of a tax must be imposed on each unit of production?

After spending $400,000 to build your dream home, you recently discovered that after less than one year the foundation is cracking. Further investigation reveals that the contractor used substandard concrete. Is there a role for the public sector in this situation?

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

Which of the following about public goods is true?

Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?

Use the figure below to answer the following question(s). Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

The standard economists use to assess whether an activity should be undertaken is

Which of the following most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers?

Which of the following is the most fundamental function of government?

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

A market is unlikely to provide an efficient quantity of public goods because

Which of the following is true of public goods?

Suppose external costs are present in a market which results in the actual market price of $70 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

In a market that lacks sufficient competition,

Use the figure below to answer the following question(s). Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

Because of the free-rider problem,

The government sometimes provides public goods because

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Use the figure below to answer the following question(s). Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

Use the figure below to answer the following question(s). Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?