Question 1

When a supply-side market failure occurs, the costs are greater than the benefits for the last unit(s) of output produced.

Accepted Answer

A) True 
 B)False

Question 2

Graphically, producer surplus is measured as the area

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 3

Nonrivalry in the use or consumption of a good means that only one person is consuming the good without any rivals.

Accepted Answer

A) True 
 B)False

Question 4

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

Accepted Answer

A) True 
 B)False

Question 5

Among the following examples, the one that best illustrates a public good is

Accepted Answer

A) the laptops used by students in a college or university. 
B) the movies produced by Hollywood companies. 
C) the bike paths around a city or town. 
D) the airline tickets bought by vacationers. 
A) the laptops used by students in a college or university. 
B) the movies produced by Hollywood companies. 
C) the bike paths around a city or town. 
D) the airline tickets bought by vacationers.

Question 6

If the production of a product or service involves external benefits, then the government can improve efficiency in the market by

Accepted Answer

A) providing a subsidy to correct for an overallocation of resources. 
B) providing a subsidy to correct for an underallocation of resources. 
C) imposing a corrective tax to correct for an overallocation of resources. 
D) imposing a corrective tax to correct for an underallocation of resources. 
A) providing a subsidy to correct for an overallocation of resources. 
B) providing a subsidy to correct for an underallocation of resources. 
C) imposing a corrective tax to correct for an overallocation of resources. 
D) imposing a corrective tax to correct for an underallocation of resources.

Question 7

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Accepted Answer

A) True 
 B)False

Question 8

The optimal quantity of a public good is where the total benefits from it are equal to the total costs of producing it.

Accepted Answer

A) True 
 B)False

Question 9

Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars.This is an example of

Accepted Answer

A) the moral hazard problem. 
B) a spillover cost. 
C) a positive externality. 
D) asymmetric information. 
A) the moral hazard problem. 
B) a spillover cost. 
C) a positive externality. 
D) asymmetric information.

Question 10

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of

Accepted Answer

A) diminishing marginal utility. 
B) conservation of matter and energy. 
C) demand. 
D) diminishing returns. 
A) diminishing marginal utility. 
B) conservation of matter and energy. 
C) demand. 
D) diminishing returns.

Question 11

As it applies to insurance, the moral hazard problem is the tendency for

Accepted Answer

A) those most likely to collect on insurance to buy it. 
B) those who buy insurance to take less precaution in avoiding the insured risk. 
C) sellers to price discriminate. 
D) sellers to restrict output and charge high prices. 
A) those most likely to collect on insurance to buy it. 
B) those who buy insurance to take less precaution in avoiding the insured risk. 
C) sellers to price discriminate. 
D) sellers to restrict output and charge high prices.

Question 12

The market system does not produce public goods because

Accepted Answer

A) there is no need or demand for such goods. 
B) private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them. 
C) public enterprises can produce such goods at lower cost than can private enterprises. 
D) their production seriously distorts the distribution of income. 
A) there is no need or demand for such goods. 
B) private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them. 
C) public enterprises can produce such goods at lower cost than can private enterprises. 
D) their production seriously distorts the distribution of income.

Question 13

(Consider This) Augi is the hottest new pop singer, but her agent discovers that Internet sales of Augi's music have been poor due to Internet piracy.However, concerts are regularly sold out and merchandise (such as T-shirts) sells well.If Augi wants to enhance profits, economists would most likely recommend that she

Accepted Answer

A) charge more for downloads, concerts, and merchandise. 
B) cut prices for downloads, concerts, and merchandise. 
C) only give concerts. 
D) keep prices of downloads low and raise prices for concerts and merchandise. 
A) charge more for downloads, concerts, and merchandise. 
B) cut prices for downloads, concerts, and merchandise. 
C) only give concerts. 
D) keep prices of downloads low and raise prices for concerts and merchandise.

Question 14

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve?

Accepted Answer

A) frozen yogurt 
B) bubble gum 
C) microwave popcorn 
D) courts of law 
A) frozen yogurt 
B) bubble gum 
C) microwave popcorn 
D) courts of law

Question 15

Which of the following is an example of a market failure?

Accepted Answer

A) There are not enough tickets available to concerts of extremely popular performers and artists. 
B) The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and procedures. 
C) Successful public schools provide benefits to the students who attend them, as well as to the community as a whole, including those who don't go to those public schools. 
D) Sharply declining prices of electronic equipment result in large numbers of bankruptcies in the computer industry. 
A) There are not enough tickets available to concerts of extremely popular performers and artists. 
B) The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and procedures. 
C) Successful public schools provide benefits to the students who attend them, as well as to the community as a whole, including those who don't go to those public schools. 
D) Sharply declining prices of electronic equipment result in large numbers of bankruptcies in the computer industry.

Question 16

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.Refer to the above information.Which of the following policies would be most appropriate for dealing with this problem?

Accepted Answer

A) levy a Pigovian tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources 
B) levy a Pigovian tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products 
C) levy a Pigovian tax on the producers of electricity and use the tax revenues to clean up the river 
D) levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river 
A) levy a Pigovian tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources 
B) levy a Pigovian tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products 
C) levy a Pigovian tax on the producers of electricity and use the tax revenues to clean up the river 
D) levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river

Question 17

Allocative efficiency occurs only at that output where

Accepted Answer

A) marginal benefit exceeds marginal cost by the greatest amount. 
B) consumer surplus exceeds producer surplus by the greatest amount. 
C) the combined amounts of consumer surplus and producer surplus are maximized. 
D) the areas of consumer and producer surplus are equal. 
A) marginal benefit exceeds marginal cost by the greatest amount. 
B) consumer surplus exceeds producer surplus by the greatest amount. 
C) the combined amounts of consumer surplus and producer surplus are maximized. 
D) the areas of consumer and producer surplus are equal.

Question 18

The free-rider problem makes a good highly profitable for a private firm to provide.

Accepted Answer

A) True 
 B)False

Question 19

If Congress decreases the amount of government insurance on bank deposits, then this action would

Accepted Answer

A) create a moral hazard problem in banking. 
B) reduce a moral hazard problem in banking. 
C) create an adverse selection problem in banking. 
D) reduce an adverse selection problem in banking. 
A) create a moral hazard problem in banking. 
B) reduce a moral hazard problem in banking. 
C) create an adverse selection problem in banking. 
D) reduce an adverse selection problem in banking.

Question 20

Which of the following does not illustrate the asymmetric information problem?

Accepted Answer

A) Ordinary financial investors do not know the motivations of financial advisers. 
B) Ordinary customers do not know how sanitarily the food is prepared in a restaurant. 
C) Ordinary stock buyers do not know what will happen to the stock's price next week. 
D) Ordinary car buyers do not know the actual quality of the various cars in the dealer's lot. 
A) Ordinary financial investors do not know the motivations of financial advisers. 
B) Ordinary customers do not know how sanitarily the food is prepared in a restaurant. 
C) Ordinary stock buyers do not know what will happen to the stock's price next week. 
D) Ordinary car buyers do not know the actual quality of the various cars in the dealer's lot.

Exam 4: Market Failures: Public Goods and Externalities

When a supply-side market failure occurs, the costs are greater than the benefits for the last unit(s) of output produced.

Graphically, producer surplus is measured as the area

Nonrivalry in the use or consumption of a good means that only one person is consuming the good without any rivals.

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

Among the following examples, the one that best illustrates a public good is

If the production of a product or service involves external benefits, then the government can improve efficiency in the market by

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

The optimal quantity of a public good is where the total benefits from it are equal to the total costs of producing it.

Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars.This is an example of

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of

As it applies to insurance, the moral hazard problem is the tendency for

The market system does not produce public goods because

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve?

Which of the following is an example of a market failure?

Allocative efficiency occurs only at that output where

The free-rider problem makes a good highly profitable for a private firm to provide.

If Congress decreases the amount of government insurance on bank deposits, then this action would

Which of the following does not illustrate the asymmetric information problem?

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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