Question 1

Transitioning from a centrally planned economy to a market economy

Accepted Answer

A) cannot occur. 
B) is a theoretical concern only. 
C) requires simply adopting market economy rules and laws. 
D) is possible but faces many challenges. 
A) cannot occur. 
B) is a theoretical concern only. 
C) requires simply adopting market economy rules and laws. 
D) is possible but faces many challenges.

Question 2

Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.

Accepted Answer

A) True 
 B)False

Question 3

An increase in wages in the public sector is caused solely by increased labor productivity in that sector.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The cost disease of personal services is caused by

Accepted Answer

A) falling labor productivity across industries. 
B) uneven productivity growth across industries. 
C) the excludability of personal services. 
D) the nonexcludability of personal services. 
A) falling labor productivity across industries. 
B) uneven productivity growth across industries. 
C) the excludability of personal services. 
D) the nonexcludability of personal services.

Question 6

Government often finds it difficult to cope with externalities because

Accepted Answer

A) costs and benefits are difficult to assess in monetary terms. 
B) taxes and subsidies are ineffective in equating MSC and MSB. 
C) government has no authority to impose fines for air and water pollution. 
D) marginal private cost curves cannot be shifted. 
A) costs and benefits are difficult to assess in monetary terms. 
B) taxes and subsidies are ineffective in equating MSC and MSB. 
C) government has no authority to impose fines for air and water pollution. 
D) marginal private cost curves cannot be shifted.

Question 7

It was once common for people to have servants who helped with the cooking and cleaning.Use the cost disease of the personal services dilemma to explain why these services have declined, even though one would expect an increased use in this age of the two-worker household.

Accepted Answer

Personal servants are a labor-intensive

Question 8

It is true of externalities that they

Accepted Answer

A) are always detrimental. 
B) are always beneficial. 
C) arise when all costs, social and private, are included in production cost. 
D) cause the price system to misallocate resources. 
A) are always detrimental. 
B) are always beneficial. 
C) arise when all costs, social and private, are included in production cost. 
D) cause the price system to misallocate resources.

Question 9

The factor that most often leads to underpricing and overuse of an economic resource is human greed.

Accepted Answer

A) True 
 B)False

Question 10

As long as the market sets prices above marginal costs, production will be efficient.

Accepted Answer

A) True 
 B)False

Question 11

For most industrial nations, health-care costs have increased faster than the rate of inflation.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following additions to an insurance contract will not act to reduce moral hazard?

Accepted Answer

A) Co-payments for covered costs. 
B) Deductibles for covered costs, that is, the first X dollars of claims are paid by the insured. 
C) Cost caps, that is, limitations on total payments that can be made from a claim. 
D) Age limitations on who can be insured. 
A) Co-payments for covered costs. 
B) Deductibles for covered costs, that is, the first X dollars of claims are paid by the insured. 
C) Cost caps, that is, limitations on total payments that can be made from a claim. 
D) Age limitations on who can be insured.

Question 13

Because smoking causes illness and disability to smokers, society must maintain more health-service capacity than it would need in the absence of smoking.Since the cost of maintaining this capacity is covered to a substantial degree by health insurance, even nonsmokers must pay higher premiums.Also, smokers hurt nonsmokers as a result of "passive smoke." The Rand Corporation estimates these costs to be 29 cents per pack of cigarettes.Cigarette taxes average 37 cents per pack.Based on the economist's definition of efficiency, it follows that

Accepted Answer

A) cigarette taxes are too high, and cigarette production is lower than the efficient amount. 
B) cigarette taxes should be increased until external costs are zero. 
C) since the tax exceeds the marginal cost, we have a better than efficient outcome. 
D) we are overconsuming cigarettes. 
A) cigarette taxes are too high, and cigarette production is lower than the efficient amount. 
B) cigarette taxes should be increased until external costs are zero. 
C) since the tax exceeds the marginal cost, we have a better than efficient outcome. 
D) we are overconsuming cigarettes.

Question 14

AZT is a drug that inhibits the reproduction of the AIDS virus, thus preventing the full development of the disease.The drug, which is sold in an unregulated market, is very expensive, and many AIDS patients who cannot afford it die from the disease.This case provides ammunition to critics of the market system on the basis of its

Accepted Answer

A) fairness. 
B) externalities. 
C) cost disease in services. 
D) inefficiency. 
A) fairness. 
B) externalities. 
C) cost disease in services. 
D) inefficiency.

Question 15

An efficient tax for a product with detrimental externalities would equal

Accepted Answer

A) marginal social cost minus marginal external cost. 
B) marginal private cost plus marginal external cost. 
C) marginal external cost minus marginal private cost. 
D) marginal social cost minus marginal private cost. 
A) marginal social cost minus marginal external cost. 
B) marginal private cost plus marginal external cost. 
C) marginal external cost minus marginal private cost. 
D) marginal social cost minus marginal private cost.

Question 16

An efficient allocation of resources requires each product's price equals its marginal cost.

Accepted Answer

A) True 
 B)False

Question 17

Markets will always create more efficient outcomes without government intervention.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is not an example of rent seeking?

Accepted Answer

A) A firm uses resources to convince a legislature to direct subsidies toward the firm. 
B) A mastermind hires a crew to tunnel into a bank vault. 
C) A person listens to an outdoor concert without paying. 
D) A window salesman throws bricks through perfectly fine windows. 
A) A firm uses resources to convince a legislature to direct subsidies toward the firm. 
B) A mastermind hires a crew to tunnel into a bank vault. 
C) A person listens to an outdoor concert without paying. 
D) A window salesman throws bricks through perfectly fine windows.

Question 19

A market transaction causes an externality if someone

Accepted Answer

A) directly involved in the transaction receives uncompensated benefits or costs from it. 
B) not directly involved in the transaction receives uncompensated benefits or costs from it. 
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D) not directly involved in the transaction interferes in it by imposing regulations or product standards. 
A) directly involved in the transaction receives uncompensated benefits or costs from it. 
B) not directly involved in the transaction receives uncompensated benefits or costs from it. 
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D) not directly involved in the transaction interferes in it by imposing regulations or product standards.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 15: The Shortcomings of Free Markets

Transitioning from a centrally planned economy to a market economy

Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.

An increase in wages in the public sector is caused solely by increased labor productivity in that sector.

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

The cost disease of personal services is caused by

Government often finds it difficult to cope with externalities because

It was once common for people to have servants who helped with the cooking and cleaning.Use the cost disease of the personal services dilemma to explain why these services have declined, even though one would expect an increased use in this age of the two-worker household.

It is true of externalities that they

The factor that most often leads to underpricing and overuse of an economic resource is human greed.

As long as the market sets prices above marginal costs, production will be efficient.

For most industrial nations, health-care costs have increased faster than the rate of inflation.

Which of the following additions to an insurance contract will not act to reduce moral hazard?

An efficient tax for a product with detrimental externalities would equal

An efficient allocation of resources requires each product's price equals its marginal cost.

Markets will always create more efficient outcomes without government intervention.

Which of the following is not an example of rent seeking?

A market transaction causes an externality if someone

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

What Is Economics

The Economony: 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

The Financial Markets and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

The Case for Free Markets: the Price System

Monopoly

Between Competition and Monopoly

Limiting Market Power: Antitrust and Regulation

The Economics of 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

Contemporary Issues in the Useconomy

Filters