Question 1

Externalities can be either detrimental or beneficial to others.

Accepted Answer

A) True 
 B)False

Question 2

Rent seeking is a way of earning profit without adding to the product's value.

Accepted Answer

A) True 
 B)False

Question 3

The cable and subscription TV business is plagued with the problem of "signal theft." People use illegal receivers to capture the company's signal without paying.Enforcement of the company's property right is very expensive.This problem emerges because TV signals are basically

Accepted Answer

A)  economic goods. 
B)  invisible goods. 
C)  depletable goods. 
D)  public goods. 
A)  economic goods. 
B)  invisible goods. 
C)  depletable goods. 
D)  public goods.

Question 4

In a free market where a firm's activity causes detrimental externalities,

Accepted Answer

A)  marginal benefits will be less than marginal social costs. 
B)  smaller outputs than those that maximize profits will be socially desirable. 
C)  marginal social cost will be greater than marginal private cost. 
D)  All of the above are correct. 
A)  marginal benefits will be less than marginal social costs. 
B)  smaller outputs than those that maximize profits will be socially desirable. 
C)  marginal social cost will be greater than marginal private cost. 
D)  All of the above are correct.

Question 5

Private goods are not excludable.

Accepted Answer

A) True 
 B)False

Question 6

Anthony Downs, in The Economic Theory of Democracy, argues that voters choose to remain "rationally ignorant" when they vote in elections, knowing relatively little about the candidates or the issues.What economic principle would you invoke to explain this behavior?

Accepted Answer

A)  public good theory 
B)  moral hazard 
C)  the cost of information 
D)  risk aversion 
A)  public good theory 
B)  moral hazard 
C)  the cost of information 
D)  risk aversion

Question 7

The Rand Corporation estimates that the external costs imposed by alcohol consumption (for example, deaths caused by drunk drivers) to be 48 cents per ounce consumed.Taxes on alcohol amount to 23 cents per ounce consumed.This information suggests:
(i) alcohol is overconsumed; (ii) alcohol taxes should be raised.Which of these statements is correct?

Accepted Answer

A)  i and ii 
B)  i not ii 
C)  ii not i 
D)  neither i nor ii 
A)  i and ii 
B)  i not ii 
C)  ii not i 
D)  neither i nor ii

Question 8

The marginal cost of serving an additional user of a public good is zero.

Accepted Answer

A) True 
 B)False

Question 9

Asymmetric information generally leads to efficient resource allocation.

Accepted Answer

A) True 
 B)False

Question 10

Society would be better off with more products that create beneficial externalities.

Accepted Answer

A) True 
 B)False

Question 11

Efficient resource allocation is defined as MC = AC.

Accepted Answer

A) True 
 B)False

Question 12

It has been said that well-educated citizens are necessary for democracy.Discuss this idea in economic terms.What market imperfection might occur and what are the appropriate government policies to correct it?

Accepted Answer

Education provides a beneficial external

Question 13

The interest rate is determined purely by market forces, and not by government involvement.

Accepted Answer

A) True 
 B)False

Question 14

If the interest rate rises, a profit-maximizing firm will tend to

Accepted Answer

A)  invest in more projects (such as new plants) with payoffs in the future. 
B)  invest in fewer projects with payoffs in the future. 
C)  increase both current output and future output. 
D)  reduce both current output and future output. 
A)  invest in more projects (such as new plants) with payoffs in the future. 
B)  invest in fewer projects with payoffs in the future. 
C)  increase both current output and future output. 
D)  reduce both current output and future output.

Question 15

A main cause of the cost disease of personal services is

Accepted Answer

A)  the change from an agrarian to an industrial society. 
B)  labor-saving innovations in the service industries. 
C)  the unevenness in growth of productivity in the economy. 
D)  massive increases in industrial production at the expense of consumer goods production. 
A)  the change from an agrarian to an industrial society. 
B)  labor-saving innovations in the service industries. 
C)  the unevenness in growth of productivity in the economy. 
D)  massive increases in industrial production at the expense of consumer goods production.

Question 16

An efficient allocation of resources requires that a product's price equal its average cost.

Accepted Answer

A) True 
 B)False

Question 17

Free market economies

Accepted Answer

A)  often have dirty air and rivers. 
B)  acting on their own do not do enough to efficiently deal with externality problems. 
C)  while not protecting the environment automatically do offer a powerful tool that may be used for that purpose. 
D)  All of the above are correct. 
A)  often have dirty air and rivers. 
B)  acting on their own do not do enough to efficiently deal with externality problems. 
C)  while not protecting the environment automatically do offer a powerful tool that may be used for that purpose. 
D)  All of the above are correct.

Question 18

It is possible to charge a price for a pure public good.

Accepted Answer

A) True 
 B)False

Question 19

In a properly functioning free market

Accepted Answer

A)  the price of any good reflects its marginal utility to consumers. 
B)  price will equal marginal cost. 
C)  the invisible hand will assure that society's resources are used efficiently. 
D)  All of the above are correct. 
A)  the price of any good reflects its marginal utility to consumers. 
B)  price will equal marginal cost. 
C)  the invisible hand will assure that society's resources are used efficiently. 
D)  All of the above are correct.

Question 20

During the 1992 presidential campaign, H.Ross Perot made much of the various "special interests" which lobby in Washington, D.C.How might an economist view this? Which specific market breakdown may occur if there is lobbying? Relate your answer to the study of monopoly and oligopoly.

Accepted Answer

Lobbying may be a manifestation of rent

Exam 15: The Shortcomings of Free Markets

Externalities can be either detrimental or beneficial to others.

Rent seeking is a way of earning profit without adding to the product's value.

The cable and subscription TV business is plagued with the problem of "signal theft." People use illegal receivers to capture the company's signal without paying.Enforcement of the company's property right is very expensive.This problem emerges because TV signals are basically

In a free market where a firm's activity causes detrimental externalities,

Private goods are not excludable.

Anthony Downs, in The Economic Theory of Democracy, argues that voters choose to remain "rationally ignorant" when they vote in elections, knowing relatively little about the candidates or the issues.What economic principle would you invoke to explain this behavior?

The marginal cost of serving an additional user of a public good is zero.

Asymmetric information generally leads to efficient resource allocation.

Society would be better off with more products that create beneficial externalities.

Efficient resource allocation is defined as MC = AC.

It has been said that well-educated citizens are necessary for democracy.Discuss this idea in economic terms.What market imperfection might occur and what are the appropriate government policies to correct it?

The interest rate is determined purely by market forces, and not by government involvement.

If the interest rate rises, a profit-maximizing firm will tend to

A main cause of the cost disease of personal services is

An efficient allocation of resources requires that a product's price equal its average cost.

Free market economies

It is possible to charge a price for a pure public good.

In a properly functioning free market

During the 1992 presidential campaign, H.Ross Perot made much of the various "special interests" which lobby in Washington, D.C.How might an economist view this? Which specific market breakdown may occur if there is lobbying? Relate your answer to the study of monopoly and oligopoly.

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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