Question 1

If polluters are forced to pay for their pollution, they will reduce pollution toward a socially optimal amount.

Accepted Answer

A) True 
 B)False

Question 2

Give an appropriate remedy for correcting excessive pollution and note any difficulties in implementing it.

Accepted Answer

A tax on the polluting activity will hel

Question 3

The cost disease of the service sector in recent years is the result of

Accepted Answer

A)  market failure. 
B)  government intervention. 
C)  collective bargaining by unions. 
D)  uneven productivity growth. 
A)  market failure. 
B)  government intervention. 
C)  collective bargaining by unions. 
D)  uneven productivity growth.

Question 4

The observed increase in the salaries of teachers and policemen has been primarily because

Accepted Answer

A)  of the growth of productivity within these occupations. 
B)  the public came to place more value on these services. 
C)  teachers and police became more selfish. 
D)  wages in the private sector for people with comparable skills rose. 
A)  of the growth of productivity within these occupations. 
B)  the public came to place more value on these services. 
C)  teachers and police became more selfish. 
D)  wages in the private sector for people with comparable skills rose.

Question 5

Governments can most effectively encourage a firm to produce the efficient level of output of a good whose production causes a beneficial externality by

Accepted Answer

A)  increasing the demand at every price for the good. 
B)  subsidizing the production of the good. 
C)  taxing the production of the good. 
D)  imposing a price ceiling on the good. 
A)  increasing the demand at every price for the good. 
B)  subsidizing the production of the good. 
C)  taxing the production of the good. 
D)  imposing a price ceiling on the good.

Question 6

Figure 15-1
  
-Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils

Accepted Answer

A)  must cause a detrimental externality. 
B)  must cause a beneficial externality. 
C)  must cause either a detrimental or a beneficial externality, more information is needed to determine which one. 
D)  may or may not cause an externality. 
A)  must cause a detrimental externality. 
B)  must cause a beneficial externality. 
C)  must cause either a detrimental or a beneficial externality, more information is needed to determine which one. 
D)  may or may not cause an externality.

Question 7

There is no way that externalities can be corrected.

Accepted Answer

A) True 
 B)False

Question 8

Public goods could effectively be provided by private markets, but we choose to provide them through government.

Accepted Answer

A) True 
 B)False

Question 9

In the allocation of resources between present and future

Accepted Answer

A)  the market works imperfectly. 
B)  the market works perfectly. 
C)  centrally planned economies are more efficient than market economies. 
D)  the invisible hand guarantees efficiency in market economies. 
A)  the market works imperfectly. 
B)  the market works perfectly. 
C)  centrally planned economies are more efficient than market economies. 
D)  the invisible hand guarantees efficiency in market economies.

Question 10

Students in a class are assigned to groups to work on a project.A grade will be given for each project, and everyone in the group will receive that grade.For the members of a particular group, the grade is a

Accepted Answer

A)  beneficial externality. 
B)  public good. 
C)  detrimental externality. 
D)  moral hazard. 
A)  beneficial externality. 
B)  public good. 
C)  detrimental externality. 
D)  moral hazard.

Question 11

The pollution emitted by a power plant is an example of a detrimental externality.

Accepted Answer

A) True 
 B)False

Question 12

A public good has the quality of excludability but not the quality of depletability.

Accepted Answer

A) True 
 B)False

Question 13

Explain whether the market produces too little, too much, or the right amount: (a) of goods with detrimental externalities; (b) of goods with public good characteristics.

Accepted Answer

For goods with detrimental externalities

Question 14

A process through which a firm seeks to obtain earnings without contributing to production, thus wasting valuable resources, is known as

Accepted Answer

A)  moral hazard. 
B)  rent seeking. 
C)  detrimental externality. 
D)  a defective telescopic faculty. 
A)  moral hazard. 
B)  rent seeking. 
C)  detrimental externality. 
D)  a defective telescopic faculty.

Question 15

Which term refers to the share of an activity's marginal cost that is paid for by the persons who carry out the activity?

Accepted Answer

A)  Beneficial cost 
B)  Incidental cost 
C)  Marginal private cost 
D)  Marginal social cost 
A)  Beneficial cost 
B)  Incidental cost 
C)  Marginal private cost 
D)  Marginal social cost

Question 16

Which of the following best describes a situation of moral hazard?

Accepted Answer

A)  Sicker people are more likely to buy health insurance. 
B)  Prospective used-car buyers have less information about a particular car than its seller does. 
C)  Drivers with collision insurance drive more recklessly. 
D)  Drivers with collision insurance wear seatbelts less often. 
A)  Sicker people are more likely to buy health insurance. 
B)  Prospective used-car buyers have less information about a particular car than its seller does. 
C)  Drivers with collision insurance drive more recklessly. 
D)  Drivers with collision insurance wear seatbelts less often.

Question 17

If P = MC for all goods in a free-market economy, then

Accepted Answer

A)  the desire for utility maximization will lead consumers to buy the amount of each good at which MU = MC. 
B)  the desire for profit maximization will lead consumers to buy the amount of each good at which MU = MC. 
C)  the desire for utility maximization will lead consumers to buy only those goods that have low opportunity costs. 
D)  the desire for profit maximization will lead all firms to stop producing in the long run (though possibly not in the short run). 
A)  the desire for utility maximization will lead consumers to buy the amount of each good at which MU = MC. 
B)  the desire for profit maximization will lead consumers to buy the amount of each good at which MU = MC. 
C)  the desire for utility maximization will lead consumers to buy only those goods that have low opportunity costs. 
D)  the desire for profit maximization will lead all firms to stop producing in the long run (though possibly not in the short run).

Question 18

One of the reasons why firms pollute air and water is that

Accepted Answer

A)  air and water are often not priced. 
B)  managers desire to pollute. 
C)  air and water have no value to society. 
D)  managers are profit maximizers. 
A)  air and water are often not priced. 
B)  managers desire to pollute. 
C)  air and water have no value to society. 
D)  managers are profit maximizers.

Question 19

It is true of externalities that they

Accepted Answer

A)  arise when all costs, social and private, are included in production cost. 
B)  are always beneficial. 
C)  are always detrimental. 
D)  None of the above are correct. 
A)  arise when all costs, social and private, are included in production cost. 
B)  are always beneficial. 
C)  are always detrimental. 
D)  None of the above are correct.

Question 20

It is efficient to increase the output of computers if

Accepted Answer

A)  society considers the extra computers more valuable than other goods foregone to produce the computers. 
B)  the opportunity cost of more computers is greater than their marginal utility. 
C)  computer production can be increased only if production of other goods is decreased. 
D)  the price of the computers is equal to their average cost. 
A)  society considers the extra computers more valuable than other goods foregone to produce the computers. 
B)  the opportunity cost of more computers is greater than their marginal utility. 
C)  computer production can be increased only if production of other goods is decreased. 
D)  the price of the computers is equal to their average cost.

Exam 15: The Shortcomings of Free Markets

If polluters are forced to pay for their pollution, they will reduce pollution toward a socially optimal amount.

Give an appropriate remedy for correcting excessive pollution and note any difficulties in implementing it.

The cost disease of the service sector in recent years is the result of

The observed increase in the salaries of teachers and policemen has been primarily because

Governments can most effectively encourage a firm to produce the efficient level of output of a good whose production causes a beneficial externality by

Figure 15-1 -Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils

There is no way that externalities can be corrected.

Public goods could effectively be provided by private markets, but we choose to provide them through government.

In the allocation of resources between present and future

Students in a class are assigned to groups to work on a project.A grade will be given for each project, and everyone in the group will receive that grade.For the members of a particular group, the grade is a

The pollution emitted by a power plant is an example of a detrimental externality.

A public good has the quality of excludability but not the quality of depletability.

Explain whether the market produces too little, too much, or the right amount: (a) of goods with detrimental externalities; (b) of goods with public good characteristics.

A process through which a firm seeks to obtain earnings without contributing to production, thus wasting valuable resources, is known as

Which term refers to the share of an activity's marginal cost that is paid for by the persons who carry out the activity?

Which of the following best describes a situation of moral hazard?

If P = MC for all goods in a free-market economy, then

One of the reasons why firms pollute air and water is that

It is true of externalities that they

It is efficient to increase the output of computers if

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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