Question 1

An externality is an event which

Accepted Answer

A)  is external to economics. 
B)  always brings harm to someone in the economy. 
C)  is incidental to some market activity. 
D)  harms the economy as a whole rather than a particular person. 
A)  is external to economics. 
B)  always brings harm to someone in the economy. 
C)  is incidental to some market activity. 
D)  harms the economy as a whole rather than a particular person.

Question 2

Marginal social cost is defined as marginal private cost

Accepted Answer

A)  plus opportunity cost. 
B)  plus marginal opportunity cost. 
C)  minus incidental cost. 
D)  plus incidental cost. 
A)  plus opportunity cost. 
B)  plus marginal opportunity cost. 
C)  minus incidental cost. 
D)  plus incidental cost.

Question 3

A production possibilities frontier indicates the most efficient combinations of goods.

Accepted Answer

A) True 
 B)False

Question 4

Due to Pigou's "defective telescopic faculty," a market economy is inefficient in allocating resources between the present and the future.

Accepted Answer

A) True 
 B)False

Question 5

A market economy provides solutions to almost all social ills such as poverty and environmental damage.

Accepted Answer

A) True 
 B)False

Question 6

Productivity growth tends to affect all industries to the same degree.

Accepted Answer

A) True 
 B)False

Question 7

The main shortcoming of the market, in the view of many,

Accepted Answer

A)  lies in the arena of justice and injustice. 
B)  lies in the area of consumer goods production. 
C)  is its inability to stimulate the creation of new products. 
D)  is its drag on growth in productivity. 
A)  lies in the arena of justice and injustice. 
B)  lies in the area of consumer goods production. 
C)  is its inability to stimulate the creation of new products. 
D)  is its drag on growth in productivity.

Question 8

Moral hazard encourages people to take risks.

Accepted Answer

A) True 
 B)False

Question 9

Many economists argue that there is imperfect information in the market and that this is a failure of the market mechanism.

Accepted Answer

A) True 
 B)False

Question 10

High interest rates make a firm's long-term investment in new capital

Accepted Answer

A)  riskless. 
B)  less attractive. 
C)  more attractive. 
D)  no more attractive than short-term investment. 
A)  riskless. 
B)  less attractive. 
C)  more attractive. 
D)  no more attractive than short-term investment.

Question 11

The owner of a garage makes large contributions to a politician who is seeking the office of state governor.If his candidate wins, he will get the contract, which now resides with a competitor, to repair State Police vehicles.This is an example of

Accepted Answer

A)  moral hazard. 
B)  externality. 
C)  rent seeking. 
D)  investment. 
A)  moral hazard. 
B)  externality. 
C)  rent seeking. 
D)  investment.

Question 12

If the price of a commodity is above marginal cost, then the economy will tend to

Accepted Answer

A)  overproduce the item. 
B)  underproduce the item. 
C)  produce the optimal amount of the item. 
D)  overproduce and underproduce the item cyclically. 
A)  overproduce the item. 
B)  underproduce the item. 
C)  produce the optimal amount of the item. 
D)  overproduce and underproduce the item cyclically.

Question 13

An industry that generates detrimental externalities will have a marginal social cost higher than the marginal private cost to the industry.

Accepted Answer

A) True 
 B)False

Question 14

If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,

Accepted Answer

A)  MSC > P. 
B)  MPC > MSC. 
C)  P > MU. 
D)  MPC > P. 
A)  MSC > P. 
B)  MPC > MSC. 
C)  P > MU. 
D)  MPC > P.

Question 15

What rule must be followed to obtain an efficient allocation of resources?

Accepted Answer

A)  P = AC. 
B)  P = MC. 
C)  P = AR. 
D)  MR = AC. 
A)  P = AC. 
B)  P = MC. 
C)  P = AR. 
D)  MR = AC.

Question 16

Rent seeking is the term given

Accepted Answer

A)  to an attempt by firms to create a profitable monopoly even though resources may be wasted in the process. 
B)  to filing a lawsuit, which wastes resources, in the hope of obtaining monetary gain or a strategic market position. 
C)  to attempts by firms to obtain earnings without contributing to production. 
D)  All of the above are correct. 
A)  to an attempt by firms to create a profitable monopoly even though resources may be wasted in the process. 
B)  to filing a lawsuit, which wastes resources, in the hope of obtaining monetary gain or a strategic market position. 
C)  to attempts by firms to obtain earnings without contributing to production. 
D)  All of the above are correct.

Question 17

A public good is

Accepted Answer

A)  always depletable and excludable. 
B)  always depletable and often excludable. 
C)  never depletable and always excludable. 
D)  never depletable and always nonexcludable. 
A)  always depletable and excludable. 
B)  always depletable and often excludable. 
C)  never depletable and always excludable. 
D)  never depletable and always nonexcludable.

Question 18

An economy produces only two goods, paper and scissors.Dyes from paper production pollute a nearby river.Use a production possibilities curve to illustrate your explanation of how the unfettered market would fail to provide the efficient mix of paper and scissors.

Accepted Answer

Label one point on the PPC the efficient

Question 19

If the market mechanism is efficient, the marginal cost accurately measures the opportunity cost of a good or service.

Accepted Answer

A) True 
 B)False

Question 20

Moral hazard

Accepted Answer

A)  makes a free market in insurance hard to operate. 
B)  is the tendency of insurance to encourage the source of risk. 
C)  tends to make the cost of insurance higher and the market for insurance less efficient. 
D)  All of the above are correct. 
A)  makes a free market in insurance hard to operate. 
B)  is the tendency of insurance to encourage the source of risk. 
C)  tends to make the cost of insurance higher and the market for insurance less efficient. 
D)  All of the above are correct.

Exam 15: The Shortcomings of Free Markets

An externality is an event which

Marginal social cost is defined as marginal private cost

A production possibilities frontier indicates the most efficient combinations of goods.

Due to Pigou's "defective telescopic faculty," a market economy is inefficient in allocating resources between the present and the future.

A market economy provides solutions to almost all social ills such as poverty and environmental damage.

Productivity growth tends to affect all industries to the same degree.

The main shortcoming of the market, in the view of many,

Moral hazard encourages people to take risks.

Many economists argue that there is imperfect information in the market and that this is a failure of the market mechanism.

High interest rates make a firm's long-term investment in new capital

The owner of a garage makes large contributions to a politician who is seeking the office of state governor.If his candidate wins, he will get the contract, which now resides with a competitor, to repair State Police vehicles.This is an example of

If the price of a commodity is above marginal cost, then the economy will tend to

An industry that generates detrimental externalities will have a marginal social cost higher than the marginal private cost to the industry.

If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,

What rule must be followed to obtain an efficient allocation of resources?

Rent seeking is the term given

A public good is

An economy produces only two goods, paper and scissors.Dyes from paper production pollute a nearby river.Use a production possibilities curve to illustrate your explanation of how the unfettered market would fail to provide the efficient mix of paper and scissors.

If the market mechanism is efficient, the marginal cost accurately measures the opportunity cost of a good or service.

Moral hazard

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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