Question 1

Refer to the diagram. Which of the following areas best represents the efficiency loss from underproduction?

Accepted Answer

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

Question 2

Jennifer buys a piece of costume jewelry for $30, for which she was willing to pay $35. The minimum acceptable price to the seller, Nathan, was $15. Jennifer experiences a

Accepted Answer

A) consumer surplus of $15, and Nathan experiences a producer surplus of $20. 
B) producer surplus of $5, and Nathan experiences a consumer surplus of $15. 
C) producer surplus of $65, and Nathan experiences a producer surplus of $50. 
D) consumer surplus of $5, and Nathan experiences a producer surplus of $15. 
E) consumer surplus of $5, and Nathan experiences a consumer surplus of $5. 
A) consumer surplus of $15, and Nathan experiences a producer surplus of $20. 
B) producer surplus of $5, and Nathan experiences a consumer surplus of $15. 
C) producer surplus of $65, and Nathan experiences a producer surplus of $50. 
D) consumer surplus of $5, and Nathan experiences a producer surplus of $15. 
E) consumer surplus of $5, and Nathan experiences a consumer surplus of $5.

Question 3

Allocative efficiency occurs only at that output where

Accepted Answer

A) marginal benefit exceeds marginal cost by the greatest amount. 
B) consumer surplus exceeds producer surplus by the greatest amount. 
C) the combined amounts of consumer surplus and producer surplus are maximized. 
D) the areas of consumer and producer surplus are equal. 
A) marginal benefit exceeds marginal cost by the greatest amount. 
B) consumer surplus exceeds producer surplus by the greatest amount. 
C) the combined amounts of consumer surplus and producer surplus are maximized. 
D) the areas of consumer and producer surplus are equal.

Question 4

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Accepted Answer

A) the adverse selection problem. 
B) the moral hazard problem. 
C) the special interest effect. 
D) logrolling. 
A) the adverse selection problem. 
B) the moral hazard problem. 
C) the special interest effect. 
D) logrolling.

Question 5

It has been proposed that a government agency be charged with the task of determining the amount of pollution that the atmosphere (or a body of water)can safely absorb, establish "rights" to this limited amount of pollution, and sell those limited amount of rights to firms. The firms can then buy and sell these rights among themselves later. This approach is known as the

Accepted Answer

A) taxes and subsidies system. 
B) cap-and-trade system. 
C) property rights system. 
D) market and command system. 
A) taxes and subsidies system. 
B) cap-and-trade system. 
C) property rights system. 
D) market and command system.

Question 6

Charlie is willing to pay $12 for a T-shirt that is priced at $10. If Charlie buys the T-shirt, then his consumer surplus is

Accepted Answer

A) $2. 
B) $12. 
C) $22. 
D) more than $10. 
E) $120. 
A) $2. 
B) $12. 
C) $22. 
D) more than $10. 
E) $120.

Question 7

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, consumer surplus would be represented by the area

Accepted Answer

A) a + b. 
B) a + b + c. 
C) a. 
D) b + c. 
A) a + b. 
B) a + b + c. 
C) a. 
D) b + c.

Question 8

What is a Pigouvian tax? The U.S. government has placed a Pigouvian tax on CFCs; explain how this tax works.

Accepted Answer

A Pigouvian tax is a charge levied on th

Question 9

A cap-and-trade program

Accepted Answer

A) assigns a property right to the atmosphere. 
B) mandates that every firm individually cut its emissions to below a certain level. 
C) assigns a property right to polluting the atmosphere. 
D) is easy to establish and enforce. 
A) assigns a property right to the atmosphere. 
B) mandates that every firm individually cut its emissions to below a certain level. 
C) assigns a property right to polluting the atmosphere. 
D) is easy to establish and enforce.

Question 10

An efficiency loss (or deadweight loss)declines in size when a unit of output is produced for which

Accepted Answer

A) marginal cost exceeds marginal benefit. 
B) maximum willingness to pay exceeds minimum acceptable price. 
C) consumer surplus exceeds producer surplus. 
D) producer surplus exceeds consumer surplus. 
A) marginal cost exceeds marginal benefit. 
B) maximum willingness to pay exceeds minimum acceptable price. 
C) consumer surplus exceeds producer surplus. 
D) producer surplus exceeds consumer surplus.

Question 11

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 12

The amount of revenue that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

Accepted Answer

A) production costs. 
B) producers' supply. 
C) producer surplus. 
D) surplus production. 
A) production costs. 
B) producers' supply. 
C) producer surplus. 
D) surplus production.

Question 13

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 supply to its socially optimal level is to

Accepted Answer

A) tax the sellers. 
B) subsidize the buyers. 
C) provide the product. 
D) regulate the production of the good. 
A) tax the sellers. 
B) subsidize the buyers. 
C) provide the product. 
D) regulate the production of the good.

Question 14

Along a supply curve, product price and producer surplus are inversely related.

Accepted Answer

A) True 
 B)False

Question 15

Along a demand curve, product price and consumer surplus are inversely related.

Accepted Answer

A) True 
 B)False

Question 16

Explain how governments can use direct controls for dealing with negative externalities.

Accepted Answer

One way that governments can counter the

Question 17

If the market price of a product increases, then the total

Accepted Answer

A) consumer surplus will decrease. 
B) consumer surplus will increase. 
C) revenues of sellers will definitely increase. 
D) revenues of sellers will definitely decrease. 
A) consumer surplus will decrease. 
B) consumer surplus will increase. 
C) revenues of sellers will definitely increase. 
D) revenues of sellers will definitely decrease.

Question 18

What two conditions must hold for a competitive market to produce efficient outcomes?

Accepted Answer

A) Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay. 
B) Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay. 
C) Firms must minimize production costs, and consumers must minimize total expenditures. 
D) Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay. 
A) Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay. 
B) Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay. 
C) Firms must minimize production costs, and consumers must minimize total expenditures. 
D) Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay.

Question 19

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is the total amount of the two girls' combined consumer surplus?

Accepted Answer

A) $10 
B) $30 
C) $195 
D) $160 
A) $10 
B) $30 
C) $195 
D) $160

Question 20

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.

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Refer to the diagram. Which of the following areas best represents the efficiency loss from underproduction?

Jennifer buys a piece of costume jewelry for $30, for which she was willing to pay $35. The minimum acceptable price to the seller, Nathan, was $15. Jennifer experiences a

Allocative efficiency occurs only at that output where

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Charlie is willing to pay $12 for a T-shirt that is priced at $10. If Charlie buys the T-shirt, then his consumer surplus is

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, consumer surplus would be represented by the area

What is a Pigouvian tax? The U.S. government has placed a Pigouvian tax on CFCs; explain how this tax works.

A cap-and-trade program

An efficiency loss (or deadweight loss)declines in size when a unit of output is produced for which

An efficiency loss (or deadweight loss)

The amount of revenue that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

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 supply to its socially optimal level is to

Along a supply curve, product price and producer surplus are inversely related.

Along a demand curve, product price and consumer surplus are inversely related.

Explain how governments can use direct controls for dealing with negative externalities.

If the market price of a product increases, then the total

What two conditions must hold for a competitive market to produce efficient outcomes?

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is the total amount of the two girls' combined consumer surplus?

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

Limits, Alternatives, and Choices

The Market System and the Circular Flow

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Public Goods, Public Choice, and Government Failure

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Pure Competition in the Short Run

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The Demand for Resources

Wage Determination

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Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

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The Balance of Payments, Exchange Rates, and Trade Deficits

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