Question 1

Unlike a private good, a public good

Accepted Answer

A) has no opportunity costs. 
B) has benefits available to all, including nonpayers. 
C) produces no positive or negative externalities. 
D) is characterized by rivalry and excludability. 
A) has no opportunity costs. 
B) has benefits available to all, including nonpayers. 
C) produces no positive or negative externalities. 
D) is characterized by rivalry and excludability.

Question 2

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

Accepted Answer

A) utility. 
B) consumer surplus. 
C) consumer demand. 
D) market failure. 
A) utility. 
B) consumer surplus. 
C) consumer demand. 
D) market failure.

Question 3

A negative externality or spillover cost occurs when

Accepted Answer

A) firms fail to achieve allocative efficiency. 
B) firms fail to achieve productive efficiency. 
C) the price of a good exceeds the marginal cost of producing it. 
D) the total cost of producing a good exceeds the costs borne by the producer. 
A) firms fail to achieve allocative efficiency. 
B) firms fail to achieve productive efficiency. 
C) the price of a good exceeds the marginal cost of producing it. 
D) the total cost of producing a good exceeds the costs borne by the producer.

Question 4

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

Accepted Answer

A) True 
 B)False

Question 5

Government can reallocate resources away from private goods toward public goods, usually through

Accepted Answer

A) import tariffs and quotas. 
B) the laws of supply and demand. 
C) taxes and government spending. 
D) positive and negative externalities. 
A) import tariffs and quotas. 
B) the laws of supply and demand. 
C) taxes and government spending. 
D) positive and negative externalities.

Question 6

In a free-market economy, a product which entails a positive externality will be

Accepted Answer

A) overproduced. 
B) underproduced. 
C) produced at the optimal level. 
D) provided solely by the government. 
A) overproduced. 
B) underproduced. 
C) produced at the optimal level. 
D) provided solely by the government.

Question 7

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river.As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment.In the situation described above, we would expect an

Accepted Answer

A) overproduction of paper in the mills. 
B) underproduction of paper in the mills. 
C) external cost resulting from the production of hydroelectric power. 
D) overproduction of power by the hydroelectric plants. 
A) overproduction of paper in the mills. 
B) underproduction of paper in the mills. 
C) external cost resulting from the production of hydroelectric power. 
D) overproduction of power by the hydroelectric plants.

Question 8

Suppose an insurance company decided to offer divorce insurance.Based on the concept of moral hazard, economists would expect

Accepted Answer

A) all married couples to purchase divorce insurance. 
B) no married couples to purchase divorce insurance. 
C) mostly the couples with marital problems to purchase divorce insurance. 
D) the divorce rate to decrease. 
A) all married couples to purchase divorce insurance. 
B) no married couples to purchase divorce insurance. 
C) mostly the couples with marital problems to purchase divorce insurance. 
D) the divorce rate to decrease.

Question 9

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle

Accepted Answer

A) under the demand curve and below the actual price. 
B) under the demand curve and above the actual price. 
C) above the supply curve and above the actual price. 
D) above the supply curve and below the actual price. 
A) under the demand curve and below the actual price. 
B) under the demand curve and above the actual price. 
C) above the supply curve and above the actual price. 
D) above the supply curve and below the actual price.

Question 10

If there are external benefits associated with the consumption of a good or service,

Accepted Answer

A) the private demand curve will overestimate the true demand curve. 
B) the private demand curve will underestimate the true demand curve. 
C) consumers are paying for all these benefits in private markets. 
D) the market demand curve will be the vertical summation of the individual demand curves. 
A) the private demand curve will overestimate the true demand curve. 
B) the private demand curve will underestimate the true demand curve. 
C) consumers are paying for all these benefits in private markets. 
D) the market demand curve will be the vertical summation of the individual demand curves.

Question 11

Supply-side market failures occur when

Accepted Answer

A) supply curves don't reflect consumers' full willingness to pay for a good or service. 
B) supply curves don't reflect the full cost of producing a good or service. 
C) government regulates production of a good or service. 
D) a good or service is not supplied because no one wants it. 
A) supply curves don't reflect consumers' full willingness to pay for a good or service. 
B) supply curves don't reflect the full cost of producing a good or service. 
C) government regulates production of a good or service. 
D) a good or service is not supplied because no one wants it.

Question 12

Which of the following statements concerning a pure public good is false?

Accepted Answer

A) It is impossible to exclude nontaxpayers from the enjoyment of the public good. 
B) All benefits associated with the production and use of a public good are received by the government. 
C) The availability of a public good to one person simultaneously makes it available to all members of society. 
D) The private sector does not have an economic incentive to produce a socially optimal amount of a public good. 
A) It is impossible to exclude nontaxpayers from the enjoyment of the public good. 
B) All benefits associated with the production and use of a public good are received by the government. 
C) The availability of a public good to one person simultaneously makes it available to all members of society. 
D) The private sector does not have an economic incentive to produce a socially optimal amount of a public good.

Question 13

Which of the following is the best example of a supply-side market failure?

Accepted Answer

A) No one provides street lights in a town because, once the lights are in operation, people donâ€™t have to pay to use them. 
B) A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area. 
C) Government imposes taxes on the production of a socially desirable good. 
D) Street performers donâ€™t get full payment for the value of their output because people watch and enjoy the shows without paying the artist. 
A) No one provides street lights in a town because, once the lights are in operation, people donâ€™t have to pay to use them. 
B) A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area. 
C) Government imposes taxes on the production of a socially desirable good. 
D) Street performers donâ€™t get full payment for the value of their output because people watch and enjoy the shows without paying the artist.

Question 14

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90.If the actual price of lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following conditions does not need to occur for a market to achieve allocative efficiency?

Accepted Answer

A) Consumers' maximum willingness to pay equals producers' minimum acceptable price for the last unit of output. 
B) The sum of producer and consumer surplus is maximized. 
C) The total revenue received by producers equals the total cost of production. 
D) The marginal benefit of the last unit produced equals the marginal cost of producing that unit. 
A) Consumers' maximum willingness to pay equals producers' minimum acceptable price for the last unit of output. 
B) The sum of producer and consumer surplus is maximized. 
C) The total revenue received by producers equals the total cost of production. 
D) The marginal benefit of the last unit produced equals the marginal cost of producing that unit.

Question 16

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality.These warranties help reduce the chance of what occurring?

Accepted Answer

A) negative externalities 
B) adverse selection 
C) spillover benefits 
D) moral hazard 
A) negative externalities 
B) adverse selection 
C) spillover benefits 
D) moral hazard

Question 17

The value that consumers get (from consuming a product) over and above what they actually paid for the product is called

Accepted Answer

A) consumer utility. 
B) consumption expenditures. 
C) consumer surplus. 
D) consumer demand. 
A) consumer utility. 
B) consumption expenditures. 
C) consumer surplus. 
D) consumer demand.

Question 18

When a competitive market achieves allocative efficiency, it implies that

Accepted Answer

A) the marginal benefit of having the product is greater than the marginal cost. 
B) the buyers are getting the maximum consumer surplus from the product. 
C) the combined consumer and producer surplus is maximized. 
D) the quantity demanded is lower than the quantity supplied. 
A) the marginal benefit of having the product is greater than the marginal cost. 
B) the buyers are getting the maximum consumer surplus from the product. 
C) the combined consumer and producer surplus is maximized. 
D) the quantity demanded is lower than the quantity supplied.

Question 19

Which of the following would be an example of a moral hazard problem?

Accepted Answer

A) a person in poor health who purchases life insurance 
B) a person who is taxed on the purchase of a carton of cigarettes 
C) a person who purchases auto insurance and then drives more recklessly 
D) a person who receives a subsidy from the Federal government to insulate a home 
A) a person in poor health who purchases life insurance 
B) a person who is taxed on the purchase of a carton of cigarettes 
C) a person who purchases auto insurance and then drives more recklessly 
D) a person who receives a subsidy from the Federal government to insulate a home

Question 20

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair.The actual price that each has to pay for a pair of these shoes is $65.What is the total amount of the two girls' combined consumer surplus?

Accepted Answer

A) $10 
B) $30 
C) $195 
D) $160 
A) $10 
B) $30 
C) $195 
D) $160

Exam 4: Market Failures: Public Goods and Externalities

Unlike a private good, a public good

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

A negative externality or spillover cost occurs when

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

Government can reallocate resources away from private goods toward public goods, usually through

In a free-market economy, a product which entails a positive externality will be

Suppose an insurance company decided to offer divorce insurance.Based on the concept of moral hazard, economists would expect

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle

If there are external benefits associated with the consumption of a good or service,

Supply-side market failures occur when

Which of the following statements concerning a pure public good is false?

Which of the following is the best example of a supply-side market failure?

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90.If the actual price of lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

Which of the following conditions does not need to occur for a market to achieve allocative efficiency?

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality.These warranties help reduce the chance of what occurring?

The value that consumers get (from consuming a product) over and above what they actually paid for the product is called

When a competitive market achieves allocative efficiency, it implies that

Which of the following would be an example of a moral hazard problem?

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair.The actual price that each has to pay for a pair of these shoes is $65.What is the total amount of the two girls' combined consumer surplus?

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Governments Role and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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