Question 1

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

Accepted Answer

A) new cars declining in quality because of competition from used cars. 
B) a declining quality of used cars for sale in the market. 
C) a rising quality of used cars for sale in the market. 
D) used-car buyers willing to pay higher prices in the market. 
A) new cars declining in quality because of competition from used cars. 
B) a declining quality of used cars for sale in the market. 
C) a rising quality of used cars for sale in the market. 
D) used-car buyers willing to pay higher prices in the market.

Question 2

An example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies.

Accepted Answer

A) True 
 B)False

Question 3

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have AFLAC." This response illustrates the

Accepted Answer

A) principal-agent problem. 
B) adverse selection problem. 
C) moral hazard problem. 
D) free-rider problem. 
A) principal-agent problem. 
B) adverse selection problem. 
C) moral hazard problem. 
D) free-rider problem.

Question 4

A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good.

Accepted Answer

A) True 
 B)False

Question 5

Sellers will opt out of markets in which

Accepted Answer

A) there are significant negative externalities. 
B) standardized products exist. 
C) there are only foreign buyers. 
D) information about buyers is inadequate, and some buyers can impose high costs on the sellers. 
A) there are significant negative externalities. 
B) standardized products exist. 
C) there are only foreign buyers. 
D) information about buyers is inadequate, and some buyers can impose high costs on the sellers.

Question 6

Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product.

Accepted Answer

A) True 
 B)False

Question 7

Asymmetric information in a market transaction occurs when there is unequal knowledge possessed by the

Accepted Answer

A) buyer and the government. 
B) seller and the government. 
C) taxpayer and the government. 
D) buyer and the seller. 
A) buyer and the government. 
B) seller and the government. 
C) taxpayer and the government. 
D) buyer and the seller.

Question 8

When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) externalities. 
D) diminishing utility. 
A) moral hazard. 
B) adverse selection. 
C) externalities. 
D) diminishing utility.

Question 9

Which of the following would be considered an example of adverse selection?

Accepted Answer

A) Malpractice insurance may increase the amount of malpractice. 
B) Drivers may be less cautious because they have airbags installed in a car. 
C) Those individuals who most need insurance are the ones most likely to buy it. 
D) Work contracts that give a set number of sick-days may encourage more workers to call in sick. 
A) Malpractice insurance may increase the amount of malpractice. 
B) Drivers may be less cautious because they have airbags installed in a car. 
C) Those individuals who most need insurance are the ones most likely to buy it. 
D) Work contracts that give a set number of sick-days may encourage more workers to call in sick.

Question 10

Rivalry means that when one person buys and consumes a product, it is not available for purchase and consumption by another person.

Accepted Answer

A) True 
 B)False

Question 11

A market for pollution rights can be expected to

Accepted Answer

A) eliminate all pollution. 
B) produce a shortage of pollution. 
C) encourage potential polluters to increase emissions. 
D) provide potential polluters with a monetary incentive to reduce emissions. 
A) eliminate all pollution. 
B) produce a shortage of pollution. 
C) encourage potential polluters to increase emissions. 
D) provide potential polluters with a monetary incentive to reduce emissions.

Question 12

An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which

Accepted Answer

A) marginal cost exceeds marginal benefit. 
B) maximum willingness to pay exceeds minimum acceptable price. 
C) consumer surplus exceeds producer surplus. 
D) producer surplus exceeds consumer surplus. 
A) marginal cost exceeds marginal benefit. 
B) maximum willingness to pay exceeds minimum acceptable price. 
C) consumer surplus exceeds producer surplus. 
D) producer surplus exceeds consumer surplus.

Question 13

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Accepted Answer

A) True 
 B)False

Question 14

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

Accepted Answer

A) True 
 B)False

Question 15

When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to find jobs because of the unemployment benefits, they are referring to the moral hazard problem.

Accepted Answer

A) True 
 B)False

Question 16

Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or service.

Accepted Answer

A) True 
 B)False

Question 17

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

Accepted Answer

A) True 
 B)False

Question 18

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42.The minimum acceptable price to the seller, Nathan, was $30.Jennifer experiences

Accepted Answer

A) a consumer surplus of $12, and Nathan experiences a producer surplus of $3. 
B) a producer surplus of $9, and Nathan experiences a consumer surplus of $3. 
C) a consumer surplus of $9, and Nathan experiences a producer surplus of $3. 
D) a producer surplus of $9, and Nathan experiences a producer surplus of $12. 
A) a consumer surplus of $12, and Nathan experiences a producer surplus of $3. 
B) a producer surplus of $9, and Nathan experiences a consumer surplus of $3. 
C) a consumer surplus of $9, and Nathan experiences a producer surplus of $3. 
D) a producer surplus of $9, and Nathan experiences a producer surplus of $12.

Question 19

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

Accepted Answer

A) True 
 B)False

Question 20

According to the Coase Theorem, externality problems

Accepted Answer

A) do not exist in reality, because all costs and benefits are internal to firms. 
B) can be solved through private negotiations without the need for government intervention. 
C) must only be resolved by government action, through either taxes or subsidies. 
D) can never be resolved adequately, because one party always gains while the other loses. 
A) do not exist in reality, because all costs and benefits are internal to firms. 
B) can be solved through private negotiations without the need for government intervention. 
C) must only be resolved by government action, through either taxes or subsidies. 
D) can never be resolved adequately, because one party always gains while the other loses.

Exam 4: Market Failures: Public Goods and Externalities

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

An example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies.

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have AFLAC." This response illustrates the

A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good.

Sellers will opt out of markets in which

Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product.

Asymmetric information in a market transaction occurs when there is unequal knowledge possessed by the

When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of

Which of the following would be considered an example of adverse selection?

Rivalry means that when one person buys and consumes a product, it is not available for purchase and consumption by another person.

A market for pollution rights can be expected to

An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to find jobs because of the unemployment benefits, they are referring to the moral hazard problem.

Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or service.

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42.The minimum acceptable price to the seller, Nathan, was $30.Jennifer experiences

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

According to the Coase Theorem, externality problems

Limits, Alternatives, and Choices

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