Question 1

Which of the following does not cause competitive market failure?

Accepted Answer

A) Detrimental externalities 
B) Beneficial externalities 
C) Poorly defined property rights 
D) The cost disease 
A) Detrimental externalities 
B) Beneficial externalities 
C) Poorly defined property rights 
D) The cost disease

Question 2

Many motorcycle riders want to feel the wind of the open road without the constriction of helmets.But riders without helmets are more likely to suffer severe injuries that run up hospital bills at public expense.Which of the following is most likely to reduce the costs imposed on hospitals by helmetless riders?

Accepted Answer

A) Fining riders caught not wearing helmets 
B) Taxing motorcycle helmet sales 
C) Reimbursing injured rider's hospital bills 
D) Subsidizing hospitals 
A) Fining riders caught not wearing helmets 
B) Taxing motorcycle helmet sales 
C) Reimbursing injured rider's hospital bills 
D) Subsidizing hospitals

Question 3

The "free rider" problem occurs when a good is

Accepted Answer

A) not available. 
B) not excludable. 
C) not depletable. 
D) not sold in free markets. 
A) not available. 
B) not excludable. 
C) not depletable. 
D) not sold in free markets.

Question 4

Discuss the role of trust as a critical piece of any principal-agent situation.In particular, what role did trust play in the recent stock market scandals?

Accepted Answer

The main problem in a principal-agent si

Question 5

In a market where the seller has more information than the buyer,

Accepted Answer

A) the seller can never gain by increasing the buyer's information. 
B) both the buyer and seller can gain by increasing the buyer's information. 
C) the buyer can never gain from increasing the seller's information. 
D) the buyer can only gain from additional information if it is costless. 
A) the seller can never gain by increasing the buyer's information. 
B) both the buyer and seller can gain by increasing the buyer's information. 
C) the buyer can never gain from increasing the seller's information. 
D) the buyer can only gain from additional information if it is costless.

Question 6

An economy is operating with optimum efficiency if

Accepted Answer

A) the price of the product is greater than marginal cost. 
B) the production of more of commodity A entails the production of less of commodity B. 
C) marginal cost of output is greater than marginal utility of output. 
D) an increase in output would result in a decrease in average cost per unit. 
A) the price of the product is greater than marginal cost. 
B) the production of more of commodity A entails the production of less of commodity B. 
C) marginal cost of output is greater than marginal utility of output. 
D) an increase in output would result in a decrease in average cost per unit.

Question 7

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 8

A true public good is characterized by

Accepted Answer

A) depletability but not excludability. 
B) excludability but not depletability. 
C) both depletability and excludability. 
D) neither depletability nor excludability. 
A) depletability but not excludability. 
B) excludability but not depletability. 
C) both depletability and excludability. 
D) neither depletability nor excludability.

Question 9

Which of the following is not true about moral hazard?

Accepted Answer

A) It increases the difficulty of operating private insurance markets. 
B) It increases the difficulty of operating public insurance markets. 
C) It is the tendency of people to change behavior when insured. 
D) It is the tendency of people with higher risks to buy more insurance. 
A) It increases the difficulty of operating private insurance markets. 
B) It increases the difficulty of operating public insurance markets. 
C) It is the tendency of people to change behavior when insured. 
D) It is the tendency of people with higher risks to buy more insurance.

Question 10

The cost of trash removal goes up, in part at least, because labor productivity in auto manufacturing goes up.

Accepted Answer

A) True 
 B)False

Question 11

Marginal social cost is made up of marginal private cost and external cost.

Accepted Answer

A) True 
 B)False

Question 12

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 13

An appropriate government policy toward negative externalities is to

Accepted Answer

A) subsidize the activity that creates the negative externality. 
B) impose a tax or fine on the activity that creates the negative externality. 
C) pay money to the party that creates the negative externality. 
D) impose a tax on recipients of the negative externality. 
A) subsidize the activity that creates the negative externality. 
B) impose a tax or fine on the activity that creates the negative externality. 
C) pay money to the party that creates the negative externality. 
D) impose a tax on recipients of the negative externality.

Question 14

Government action can usually perfectly correct the market's shortcomings.

Accepted Answer

A) True 
 B)False

Question 15

Where a firm generates beneficial externalities, society would be better off if

Accepted Answer

A) the firm produced a larger output level. 
B) the firm reduced its output level. 
C) a tax was levied on the firm equal to the dollar amount of the externalities. 
D) price was reduced below marginal private cost. 
A) the firm produced a larger output level. 
B) the firm reduced its output level. 
C) a tax was levied on the firm equal to the dollar amount of the externalities. 
D) price was reduced below marginal private cost.

Question 16

Regarding government manipulation of the interest rate, all of these statements are correct, except

Accepted Answer

A) to address business fluctuations, governments may reduce interest rates to induce people to borrow. 
B) such manipulations may give little thought to the effects on resource allocation between present and future. 
C) economists agree with the concept of using of interest rates to allocate resources among different time periods. 
D) generally, the price system reflects public preference between present and future resource allocation. 
A) to address business fluctuations, governments may reduce interest rates to induce people to borrow. 
B) such manipulations may give little thought to the effects on resource allocation between present and future. 
C) economists agree with the concept of using of interest rates to allocate resources among different time periods. 
D) generally, the price system reflects public preference between present and future resource allocation.

Question 17

An externality is an event that

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 18

The most threatening and damaging detrimental externality at issue today is

Accepted Answer

A) the explosion and oil spill at the Deepwater Horizon. 
B) the continued pollution of city air due to factory emissions. 
C) water shortages. 
D) global warming. 
A) the explosion and oil spill at the Deepwater Horizon. 
B) the continued pollution of city air due to factory emissions. 
C) water shortages. 
D) global warming.

Question 19

When insurance causes people to take more risks, this is called

Accepted Answer

A) defective telescopic faculty. 
B) adverse selection. 
C) asymmetric information. 
D) moral hazard. 
A) defective telescopic faculty. 
B) adverse selection. 
C) asymmetric information. 
D) moral hazard.

Question 20

Part of the reason why barely used cars sell for much less than new cars is that

Accepted Answer

A) buyers and sellers have symmetric information about cars and both have less information about used cars than about new cars. 
B) buyers and sellers have symmetric information about cars and both have more information about used cars than about new cars. 
C) buyers have more information about used cars than sellers do. 
D) sellers have more information about used cars than buyers do. 
A) buyers and sellers have symmetric information about cars and both have less information about used cars than about new cars. 
B) buyers and sellers have symmetric information about cars and both have more information about used cars than about new cars. 
C) buyers have more information about used cars than sellers do. 
D) sellers have more information about used cars than buyers do.

Exam 15: The Shortcomings of Free Markets

Which of the following does not cause competitive market failure?

The "free rider" problem occurs when a good is

Discuss the role of trust as a critical piece of any principal-agent situation.In particular, what role did trust play in the recent stock market scandals?

In a market where the seller has more information than the buyer,

An economy is operating with optimum efficiency if

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

A true public good is characterized by

Which of the following is not true about moral hazard?

The cost of trash removal goes up, in part at least, because labor productivity in auto manufacturing goes up.

Marginal social cost is made up of marginal private cost and external cost.

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

An appropriate government policy toward negative externalities is to

Government action can usually perfectly correct the market's shortcomings.

Where a firm generates beneficial externalities, society would be better off if

Regarding government manipulation of the interest rate, all of these statements are correct, except

An externality is an event that

The most threatening and damaging detrimental externality at issue today is

When insurance causes people to take more risks, this is called

Part of the reason why barely used cars sell for much less than new cars is that

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

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