Question 1

The problem created when it is difficult to exclude nonpaying customers is called the

Accepted Answer

A) consumption-payment link problem. 
B) free-rider problem. 
C) public sector dilemma. 
D) asymmetric information problem. 
A) consumption-payment link problem. 
B) free-rider problem. 
C) public sector dilemma. 
D) asymmetric information problem.

Question 2

Which of the following activities is least likely to give rise to external costs or benefits?

Accepted Answer

A) spraying to control mosquitos in your backyard 
B) driving one's car during rush hour 
C) inoculating your children during a flu epidemic 
D) buying a hamburger and eating it for lunch 
A) spraying to control mosquitos in your backyard 
B) driving one's car during rush hour 
C) inoculating your children during a flu epidemic 
D) buying a hamburger and eating it for lunch

Question 3

Which of the following "goods" is the best example of a pure public good?

Accepted Answer

A) highways 
B) national defense 
C) mail delivery 
D) welfare programs 
A) highways 
B) national defense 
C) mail delivery 
D) welfare programs

Question 4

An item purchased often by the same buyer is known as a

Accepted Answer

A) frequent transaction good. 
B) repeat-purchase item. 
C) free rider good. 
D) public good. 
A) frequent transaction good. 
B) repeat-purchase item. 
C) free rider good. 
D) public good.

Question 5

Figure 5-4
  
-Refer to Figure 5-4.The efficient price and quantity are

Accepted Answer

A) $1.90 and 38 units,respectively. 
B) $1.80 and 35 units,respectively. 
C) $1.60 and 42 units,respectively. 
D) $1.35 and 58 units,respectively. 
A) $1.90 and 38 units,respectively. 
B) $1.80 and 35 units,respectively. 
C) $1.60 and 42 units,respectively. 
D) $1.35 and 58 units,respectively.

Question 6

Which of the following provides an example of an externality?

Accepted Answer

A) a paper pulp mill releasing pollution into the atmosphere 
B) persons driving during a busy rush hour 
C) a drunk driver operating a car on a public highway 
D) all of the above 
A) a paper pulp mill releasing pollution into the atmosphere 
B) persons driving during a busy rush hour 
C) a drunk driver operating a car on a public highway 
D) all of the above

Question 7

If consumption of education creates an external benefit,then in order to increase efficiency relative to the outcome determined by private decisions,

Accepted Answer

A) more education must be produced. 
B) the same amount of education must be produced,and the price should be lower. 
C) less education must be produced,and the price should be higher. 
D) less education must be produced,and the price should be lower. 
E) less education must be produced at the same price. 
A) more education must be produced. 
B) the same amount of education must be produced,and the price should be lower. 
C) less education must be produced,and the price should be higher. 
D) less education must be produced,and the price should be lower. 
E) less education must be produced at the same price.

Question 8

Figure 5-4
  
-Refer to Figure 5-4.The inefficient equilibrium price and quantity are

Accepted Answer

A) $1.90 and 38 units,respectively. 
B) $1.80 and 35 units,respectively. 
C) $1.60 and 42 units,respectively. 
D) $1.35 and 58 units,respectively. 
A) $1.90 and 38 units,respectively. 
B) $1.80 and 35 units,respectively. 
C) $1.60 and 42 units,respectively. 
D) $1.35 and 58 units,respectively.

Question 9

Because the benefits derived from an activity decline as it is expanded,it is generally

Accepted Answer

A) wise to undertake all actions that generate benefits. 
B) efficient to stop well before perfection is achieved. 
C) best to continue as long as it is possible to derive some additional benefits. 
D) unwise to engage in activities for which the benefits decline as you do more of it. 
A) wise to undertake all actions that generate benefits. 
B) efficient to stop well before perfection is achieved. 
C) best to continue as long as it is possible to derive some additional benefits. 
D) unwise to engage in activities for which the benefits decline as you do more of it.

Question 10

Because of the free-rider problem,

Accepted Answer

A) competitive markets will tend to undersupply public goods. 
B) the federal government spends too much on national defense. 
C) fireworks displays have become increasingly dangerous. 
D) poverty has increased. 
A) competitive markets will tend to undersupply public goods. 
B) the federal government spends too much on national defense. 
C) fireworks displays have become increasingly dangerous. 
D) poverty has increased.

Question 11

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

Accepted Answer

A) Human greed and selfishness. 
B) Capital markets. 
C) The absence of an enforceable property right. 
D) The lack of understanding of pollution and its effects. 
A) Human greed and selfishness. 
B) Capital markets. 
C) The absence of an enforceable property right. 
D) The lack of understanding of pollution and its effects.

Question 12

When production of a good generates external benefits,the

Accepted Answer

A) demand curve for the good will overstate the true social benefits from consumption of the good. 
B) demand curve for the good will understate the true social benefits from consumption of the good. 
C) supply curve for the good will overstate the true social cost of producing the good. 
D) supply curve for the good will understate the true social cost of producing the good. 
A) demand curve for the good will overstate the true social benefits from consumption of the good. 
B) demand curve for the good will understate the true social benefits from consumption of the good. 
C) supply curve for the good will overstate the true social cost of producing the good. 
D) supply curve for the good will understate the true social cost of producing the good.

Question 13

The standard economists use to assess whether an activity should be undertaken is

Accepted Answer

A) majority vote 
B) the marginal benefit assessment. 
C) the gold standard 
D) economic efficiency. 
A) majority vote 
B) the marginal benefit assessment. 
C) the gold standard 
D) economic efficiency.

Question 14

Consider two goods - one that generates external benefits and another that generates external costs.The actual market outcome would

Accepted Answer

A) result in a price that is lower than the efficient price for both goods. 
B) result in a price that is higher than the efficient price for both goods. 
C) result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost. 
D) result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost. 
A) result in a price that is lower than the efficient price for both goods. 
B) result in a price that is higher than the efficient price for both goods. 
C) result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost. 
D) result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost.

Question 15

In the absence of government intervention,goods with external costs tend to be

Accepted Answer

A) overproduced. 
B) underproduced. 
C) efficiently produced. 
D) offset by goods generating external benefits. 
A) overproduced. 
B) underproduced. 
C) efficiently produced. 
D) offset by goods generating external benefits.

Question 16

New products provide a classic case of the consumer information problem.However,in some cases consumers partially solve the problem by trusting the "brand name" of the producer of the new product.Because firms spend millions of dollars advertising and maintaining their brand names,the likelihood of a "brand name" firm intentionally selling a dangerous or shoddy new product is

Accepted Answer

A) high because big firms are always after a quick dollar. 
B) high because their brand name is a communal property right. 
C) low because big firms do not make mistakes. 
D) low because the firm with a brand name has a lot to lose if word spreads about bad consumer experiences. 
A) high because big firms are always after a quick dollar. 
B) high because their brand name is a communal property right. 
C) low because big firms do not make mistakes. 
D) low because the firm with a brand name has a lot to lose if word spreads about bad consumer experiences.

Question 17

Externalities are fundamentally the result of

Accepted Answer

A) the absence of competition in a market. 
B) the lack of well-defined or enforced property rights. 
C) poor information on the part of consumers. 
D) the presence of significant comparative advantages in production. 
A) the absence of competition in a market. 
B) the lack of well-defined or enforced property rights. 
C) poor information on the part of consumers. 
D) the presence of significant comparative advantages in production.

Question 18

If the consumption of a good by one individual does not change the amount of the good available to others,the good is considered to be

Accepted Answer

A) durable. 
B) nonrival-in-consumption. 
C) a common good. 
D) a natural resource. 
A) durable. 
B) nonrival-in-consumption. 
C) a common good. 
D) a natural resource.

Question 19

Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?

Accepted Answer

A) When the government provides economic goods,they are free;costs are only incurred when such goods are provided by private firms. 
B) Voters tend to be better informed than market consumers. 
C) Decision makers in the market are motivated by self-interest,whereas,political decision makers are primarily motivated by the desire to help others. 
D) Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers,while the government can use taxes to overcome this problem. 
A) When the government provides economic goods,they are free;costs are only incurred when such goods are provided by private firms. 
B) Voters tend to be better informed than market consumers. 
C) Decision makers in the market are motivated by self-interest,whereas,political decision makers are primarily motivated by the desire to help others. 
D) Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers,while the government can use taxes to overcome this problem.

Question 20

If pollutants emitted by firms in the steel industry increase,but there is no increase in the costs borne by these firms,you could conclude that

Accepted Answer

A) pollution is not a serious problem in this industry. 
B) the consumers of steel are unwilling to bear the costs of pollution generated from steel production. 
C) pollution is an externality in this market,since producers and purchasers of steel do not bear the full costs of the pollution. 
D) pollution creates an external benefit rather than an external cost in this case. 
A) pollution is not a serious problem in this industry. 
B) the consumers of steel are unwilling to bear the costs of pollution generated from steel production. 
C) pollution is an externality in this market,since producers and purchasers of steel do not bear the full costs of the pollution. 
D) pollution creates an external benefit rather than an external cost in this case.

Exam 5: Difficult Cases for the Market and the Role of Government

The problem created when it is difficult to exclude nonpaying customers is called the

Which of the following activities is least likely to give rise to external costs or benefits?

Which of the following "goods" is the best example of a pure public good?

An item purchased often by the same buyer is known as a

Figure 5-4 -Refer to Figure 5-4.The efficient price and quantity are

Which of the following provides an example of an externality?

If consumption of education creates an external benefit,then in order to increase efficiency relative to the outcome determined by private decisions,

Figure 5-4 -Refer to Figure 5-4.The inefficient equilibrium price and quantity are

Because the benefits derived from an activity decline as it is expanded,it is generally

Because of the free-rider problem,

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

When production of a good generates external benefits,the

The standard economists use to assess whether an activity should be undertaken is

Consider two goods - one that generates external benefits and another that generates external costs.The actual market outcome would

In the absence of government intervention,goods with external costs tend to be

Externalities are fundamentally the result of

If the consumption of a good by one individual does not change the amount of the good available to others,the good is considered to be

Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?

If pollutants emitted by firms in the steel industry increase,but there is no increase in the costs borne by these firms,you could conclude that

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