Question 1

In a free-market economy, a product which entails a positive externality will be

Accepted Answer

A)  overproduced. 
B)  underproduced. 
C)  produced at the optimal level. 
D)  provided solely by the government. 
A)  overproduced. 
B)  underproduced. 
C)  produced at the optimal level. 
D)  provided solely by the government.

Question 2

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer
will not buy the product because the consumer surplus will be negative.

Accepted Answer

A) True 
 B)False

Question 3

Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of

Accepted Answer

A)  public goods. 
B)  externalities. 
C)  moral hazard. 
D)  adverse selection. 
A)  public goods. 
B)  externalities. 
C)  moral hazard. 
D)  adverse selection.

Question 4

Other things equal, a fall in the market price caused by a change in supply will

Accepted Answer

A)  increase consumer surplus. 
B)  decrease consumer surplus. 
C)  increase producer surplus while leaving consumer surplus unchanged. 
D)  decrease producer surplus while leaving consumer surplus unchanged. 
A)  increase consumer surplus. 
B)  decrease consumer surplus. 
C)  increase producer surplus while leaving consumer surplus unchanged. 
D)  decrease producer surplus while leaving consumer surplus unchanged.

Question 5

At equilibrium in a market for a product, the total revenues received by sellers equal the

Accepted Answer

A)  market producer surplus. 
B)  total amount spent by buyers on the product. 
C)  total proﬁts of sellers. 
D)  market consumer surplus. 
A)  market producer surplus. 
B)  total amount spent by buyers on the product. 
C)  total proﬁts of sellers. 
D)  market consumer surplus.

Question 6

External beneﬁts in consumption refer to beneﬁts accruing to

Accepted Answer

A)  those who are selling the product to the consumers. 
B)  those who bought and consumed the product. 
C)  those other than the ones who consumed the product. 
D)  those who are consuming the product abroad. 
A)  those who are selling the product to the consumers. 
B)  those who bought and consumed the product. 
C)  those other than the ones who consumed the product. 
D)  those who are consuming the product abroad.

Question 7

Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to
S1 in diagram (a) on the left and from S to S2 in diagram (b) on the right. The shift of the supply curve
From S to S1 in diagram (a) might be caused by a per-unit

Accepted Answer

A)  subsidy paid to the producers of this product. 
B)  tax on the producers of this product. 
C)  subsidy paid to the buyers of this product. 
D)  tax on the buyers of this product. 
A)  subsidy paid to the producers of this product. 
B)  tax on the producers of this product. 
C)  subsidy paid to the buyers of this product. 
D)  tax on the buyers of this product.

Question 8

Refer to the provided supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that
The government could shift demand to its socially optimal level is to

Accepted Answer

A)  tax the sellers. 
B)  tax the buyers. 
C)  subsidize the sellers. 
D)  subsidize the buyers. 
A)  tax the sellers. 
B)  tax the buyers. 
C)  subsidize the sellers. 
D)  subsidize the buyers.

Question 9

Refer to the diagram. The area that identiﬁes the maximum sum of consumer surplus and producer surplus is

Accepted Answer

A)  a + b + c + d + e + f. 
B)  c + d + f. 
C)  a + b + e. 
D)  a + b + c + d. 
A)  a + b + c + d + e + f. 
B)  c + d + f. 
C)  a + b + e. 
D)  a + b + c + d.

Question 10

When there is allocative eﬃciency in a market, the buyers' maximum willingness to pay for the last
unit traded is equal to the sellers' minimum acceptable price for that unit.

Accepted Answer

A) True 
 B)False

Question 11

(Consider This) When you enter a congested roadway,

Accepted Answer

A)  you are the only driver that is experiencing a negative externality from the heavy traﬃc. 
B)  the opportunity cost of idling in slow traﬃc is the only additional cost. 
C)  the increased use of gasoline is the only external cost incurred. 
D)  there are mutual external costs from the slow traﬃc that include increased gasoline costs and more time spent on the roadway. 
A)  you are the only driver that is experiencing a negative externality from the heavy traﬃc. 
B)  the opportunity cost of idling in slow traﬃc is the only additional cost. 
C)  the increased use of gasoline is the only external cost incurred. 
D)  there are mutual external costs from the slow traﬃc that include increased gasoline costs and more time spent on the roadway.

Question 12

An eﬃciency loss (or deadweight loss)

Accepted Answer

A)  is measured as the combined loss of consumer surplus and producer surplus from over- or underproducing. 
B)  results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. 
C)  can result from underproduction, but not from overproduction. 
D)  can result from overproduction, but not from underproduction. 
A)  is measured as the combined loss of consumer surplus and producer surplus from over- or underproducing. 
B)  results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. 
C)  can result from underproduction, but not from overproduction. 
D)  can result from overproduction, but not from underproduction.

Question 13

The socially optimal amount of pollution abatement occurs where society's marginal

Accepted Answer

A)  beneﬁt of abatement exceeds its marginal cost of abatement by the greatest amount. 
B)  beneﬁt of abatement equals its marginal cost of abatement. 
C)  beneﬁt of abatement is zero. 
D)  cost of abatement is at its maximum. 
A)  beneﬁt of abatement exceeds its marginal cost of abatement by the greatest amount. 
B)  beneﬁt of abatement equals its marginal cost of abatement. 
C)  beneﬁt of abatement is zero. 
D)  cost of abatement is at its maximum.

Question 14

Pigovian taxes

Accepted Answer

A)  are used to correct negative externalities. 
B)  are used to correct positive externalities. 
C)  are primarily designed to fund government. 
D)  are a form of income tax. 
A)  are used to correct negative externalities. 
B)  are used to correct positive externalities. 
C)  are primarily designed to fund government. 
D)  are a form of income tax.

Question 15

What are the limitations to government's role in the economy?

Accepted Answer

Government oﬃcials must ﬁrst correctly i

Question 16

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the
Production of Z, then

Accepted Answer

A)  a price lower than B and an output greater than G would improve resource allocation. 
B)  government should levy a per-unit excise tax on Z to shift the demand curve to the right. 
C)  government should levy a per-unit excise tax on Z to shift the supply curve toward S1. 
D)  government should subsidize the production of Z to lower equilibrium price and increase equilibrium output. 
A)  a price lower than B and an output greater than G would improve resource allocation. 
B)  government should levy a per-unit excise tax on Z to shift the demand curve to the right. 
C)  government should levy a per-unit excise tax on Z to shift the supply curve toward S1. 
D)  government should subsidize the production of Z to lower equilibrium price and increase equilibrium output.

Question 17

According to the Coase theorem, externality problems

Accepted Answer

A)  do not exist in reality, because all costs and beneﬁts are internal to ﬁrms. 
B)  can be solved through private negotiations without the need for government intervention. 
C)  must only be resolved by government action, through either taxes or subsidies. 
D)  can never be resolved adequately, because one party always gains while the other loses. 
A)  do not exist in reality, because all costs and beneﬁts are internal to ﬁrms. 
B)  can be solved through private negotiations without the need for government intervention. 
C)  must only be resolved by government action, through either taxes or subsidies. 
D)  can never be resolved adequately, because one party always gains while the other loses.

Question 18

Production subsidies are a way of internalizing external costs among polluting ﬁrms.

Accepted Answer

A) True 
 B)False

Question 19

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

Accepted Answer

A)  new cars declining in quality because of competition from used cars. 
B)  a declining quality of used cars for sale in the market. 
C)  a rising quality of used cars for sale in the market. 
D)  used-car buyers willing to pay higher prices in the market. 
A)  new cars declining in quality because of competition from used cars. 
B)  a declining quality of used cars for sale in the market. 
C)  a rising quality of used cars for sale in the market. 
D)  used-car buyers willing to pay higher prices in the market.

Question 20

(Consider This) The principle that private negotiation can resolve potential externalities without
resorting to government intervention is known as the Coase theorem.

Accepted Answer

A) True 
 B)False

In a free-market economy, a product which entails a positive externality will be

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of

Other things equal, a fall in the market price caused by a change in supply will

At equilibrium in a market for a product, the total revenues received by sellers equal the

External beneﬁts in consumption refer to beneﬁts accruing to

Refer to the provided supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that The government could shift demand to its socially optimal level is to

Refer to the diagram. The area that identiﬁes the maximum sum of consumer surplus and producer surplus is

When there is allocative eﬃciency in a market, the buyers' maximum willingness to pay for the last unit traded is equal to the sellers' minimum acceptable price for that unit.

(Consider This) When you enter a congested roadway,

An eﬃciency loss (or deadweight loss)

The socially optimal amount of pollution abatement occurs where society's marginal

Pigovian taxes

What are the limitations to government's role in the economy?

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the Production of Z, then

According to the Coase theorem, externality problems

Production subsidies are a way of internalizing external costs among polluting ﬁrms.

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Public Goods, Public Choice, and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

Filters

Exam 4: Market Failures Caused by Externalities Asymmetric Information

In a free-market economy, a product which entails a positive externality will be

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of

Other things equal, a fall in the market price caused by a change in supply will

At equilibrium in a market for a product, the total revenues received by sellers equal the

External beneﬁts in consumption refer to beneﬁts accruing to

Refer to the provided supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that The government could shift demand to its socially optimal level is to

Refer to the diagram. The area that identiﬁes the maximum sum of consumer surplus and producer surplus is

When there is allocative eﬃciency in a market, the buyers' maximum willingness to pay for the last unit traded is equal to the sellers' minimum acceptable price for that unit.

(Consider This) When you enter a congested roadway,

An eﬃciency loss (or deadweight loss)

The socially optimal amount of pollution abatement occurs where society's marginal

Pigovian taxes

What are the limitations to government's role in the economy?

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the Production of Z, then

According to the Coase theorem, externality problems

Production subsidies are a way of internalizing external costs among polluting ﬁrms.

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Public Goods, Public Choice, and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

Filters