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 most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers?

Accepted Answer

A) The franchiser has a monopoly on the sale of products in his industry. 
B) If quality is not maintained, the franchiser will be limited in his ability to sell other franchises and collect franchise fees. 
C) If quality is not maintained, the government will prohibit future sales of the franchises. 
D) Franchisers do not gain financially by maintaining quality, but they generally maintain quality anyway because they are consumers as well as producers. 
A) The franchiser has a monopoly on the sale of products in his industry. 
B) If quality is not maintained, the franchiser will be limited in his ability to sell other franchises and collect franchise fees. 
C) If quality is not maintained, the government will prohibit future sales of the franchises. 
D) Franchisers do not gain financially by maintaining quality, but they generally maintain quality anyway because they are consumers as well as producers.

Question 3

As a general rule, if pollution costs are external, firms will produce

Accepted Answer

A) too little of a polluting good. 
B) too much of a polluting good. 
C) an optimal amount of a polluting good. 
D) cannot be determined without additional information. 
A) too little of a polluting good. 
B) too much of a polluting good. 
C) an optimal amount of a polluting good. 
D) cannot be determined without additional information.

Question 4

Markets may have difficulty providing the proper quantity of a public good because

Accepted Answer

A) individuals will tend to become free riders, and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good. 
B) the good generally has a very large value to consumers relative to its cost of production. 
C) the good is one that tends to benefit a large number of people. 
D) the large profit involved in the production of a public good is generally too much for private firms to effectively pay out to shareholders. 
A) individuals will tend to become free riders, and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good. 
B) the good generally has a very large value to consumers relative to its cost of production. 
C) the good is one that tends to benefit a large number of people. 
D) the large profit involved in the production of a public good is generally too much for private firms to effectively pay out to shareholders.

Question 5

When there is reason to think that the existing structure of incentives will cause individuals in the market to act in ways that are inconsistent with ideal economic efficiency, economists say that

Accepted Answer

A) market failure is present. 
B) democratic political decision-making will lead to the ideal efficient outcome. 
C) government action, however well intended, cannot improve the situation. 
D) government failure is present. 
A) market failure is present. 
B) democratic political decision-making will lead to the ideal efficient outcome. 
C) government action, however well intended, cannot improve the situation. 
D) government failure is present.

Question 6

If an economic action generates more costs than benefits, the action

Accepted Answer

A) by definition increases the nation's economic welfare. 
B) should not be undertaken from an efficiency standpoint. 
C) should be subsidized by the government in order to make sure that it is undertaken. 
D) is desirable from a public welfare standpoint even though many individuals will be harmed. 
A) by definition increases the nation's economic welfare. 
B) should not be undertaken from an efficiency standpoint. 
C) should be subsidized by the government in order to make sure that it is undertaken. 
D) is desirable from a public welfare standpoint even though many individuals will be harmed.

Question 7

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 8

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

Accepted Answer

A) undertake all actions that generate benefits. 
B) expend the smallest possible amount of resources on this type of activity. 
C) avoid any activity with this characteristic. 
D) stop the activity before perfection is reached.. 
A) undertake all actions that generate benefits. 
B) expend the smallest possible amount of resources on this type of activity. 
C) avoid any activity with this characteristic. 
D) stop the activity before perfection is reached..

Question 9

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

Accepted Answer

A) firm's cost of producing electricity will be higher than the community's true opportunity cost. 
B) firm will tend to produce too little electricity from the viewpoint of economic efficiency. 
C) community generally receives an external benefit from the production of electricity. 
D) firm's cost of producing electricity will be lower than the community's true opportunity cost. 
A) firm's cost of producing electricity will be higher than the community's true opportunity cost. 
B) firm will tend to produce too little electricity from the viewpoint of economic efficiency. 
C) community generally receives an external benefit from the production of electricity. 
D) firm's cost of producing electricity will be lower than the community's true opportunity cost.

Question 10

How does an additional individual's consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers?

Accepted Answer

A) The amount available to others will decline. 
B) The amount available to others will increase. 
C) The amount available to others is unaffected. 
D) The amount available to others is eliminated. 
A) The amount available to others will decline. 
B) The amount available to others will increase. 
C) The amount available to others is unaffected. 
D) The amount available to others is eliminated.

Question 11

Which of these activities will most likely result in an external benefit?

Accepted Answer

A) A college student buys a deck of cards to play solitaire in her dorm room. 
B) An elderly woman plants a flower garden on the vacant lot next to her house. 
C) An executive purchases a book to read on a business trip. 
D) A ten-year-old uses his allowance to buy new Nike shoes. 
A) A college student buys a deck of cards to play solitaire in her dorm room. 
B) An elderly woman plants a flower garden on the vacant lot next to her house. 
C) An executive purchases a book to read on a business trip. 
D) A ten-year-old uses his allowance to buy new Nike shoes.

Question 12

Which of the following correctly describes an external benefit resulting from an individual's purchase of a winter flu shot?

Accepted Answer

A) The flu shot is cheaper than the cost of treatment when you get the flu. 
B) The income of doctors increases when you get the flu shot. 
C) The flu shot reduces the likelihood of others catching the flu. 
D) The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income. 
A) The flu shot is cheaper than the cost of treatment when you get the flu. 
B) The income of doctors increases when you get the flu shot. 
C) The flu shot reduces the likelihood of others catching the flu. 
D) The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income.

Question 13

A market is unlikely to provide an efficient quantity of public goods because

Accepted Answer

A) only the government has the vast resources necessary to produce public goods. 
B) the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers. 
C) the technology involved in the production of public goods makes it difficult for private firms to produce them even though they could be produced efficiently. 
D) private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders. 
A) only the government has the vast resources necessary to produce public goods. 
B) the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers. 
C) the technology involved in the production of public goods makes it difficult for private firms to produce them even though they could be produced efficiently. 
D) private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders.

Question 14

Which of the following is a true statement regarding why the government produces public goods?

Accepted Answer

A) Public goods are valued highly by some but not by the majority. 
B) Because of the electoral system, the public sector tends towards producing those goods that help politicians get elected. 
C) Some goods should be produced whether they are economically efficient or not. 
D) Because it is difficult to exclude those who do not pay for public goods. 
A) Public goods are valued highly by some but not by the majority. 
B) Because of the electoral system, the public sector tends towards producing those goods that help politicians get elected. 
C) Some goods should be produced whether they are economically efficient or not. 
D) Because it is difficult to exclude those who do not pay for public goods.

Question 15

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

A) The efficient price would higher than $25 while the efficient output would be less than 1,000 units. 
B) The efficient price would be higher than $25 while the efficient output would be greater than 1,000 units. 
C) The efficient price would be lower than $25 while the efficient output would be less than 1,000 units. 
D) The efficient price would be lower than $25 while the efficient output would be greater than 1,000 units. 
A) The efficient price would higher than $25 while the efficient output would be less than 1,000 units. 
B) The efficient price would be higher than $25 while the efficient output would be greater than 1,000 units. 
C) The efficient price would be lower than $25 while the efficient output would be less than 1,000 units. 
D) The efficient price would be lower than $25 while the efficient output would be greater than 1,000 units.

Question 16

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?

Accepted Answer

A) The price would be too low, and the output would be too large. 
B) The price would be too high, and the output would be too large. 
C) The price would be too low, and the output would be too small. 
D) The price would be too high, and the output would be too small. 
A) The price would be too low, and the output would be too large. 
B) The price would be too high, and the output would be too large. 
C) The price would be too low, and the output would be too small. 
D) The price would be too high, and the output would be too small.

Question 17

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 18

The key explanation for the prevalence of waterway pollution is

Accepted Answer

A) the inclusion in production of all costs involving use of the waterway. 
B) that there are private costs but no costs to society. 
C) that waterways are often an open access, commonly owned resource. 
D) that waterways are subject to the market's normal control procedures. 
A) the inclusion in production of all costs involving use of the waterway. 
B) that there are private costs but no costs to society. 
C) that waterways are often an open access, commonly owned resource. 
D) that waterways are subject to the market's normal control procedures.

Question 19

Which of the following statements is true regarding potential information problems faced by consumers?

Accepted Answer

A) Sellers have little incentive to inform customers about their products. 
B) The market provides consumers with a strong incentive to acquire information. 
C) Information problems tend to be most problematic for items consumers purchase regularly. 
D) In markets, people make all decisions with full information. 
A) Sellers have little incentive to inform customers about their products. 
B) The market provides consumers with a strong incentive to acquire information. 
C) Information problems tend to be most problematic for items consumers purchase regularly. 
D) In markets, people make all decisions with full information.

Question 20

When market failure is present,

Accepted Answer

A) democratic political decision-making can be counted on to improve the efficiency of resource allocation. 
B) market allocation will achieve idealized economic efficiency. 
C) the conditions implied by idealized efficient allocation of resources will be absent, but it does not follow that political action will improve the situation. 
D) democratic political decision-making will never be able to improve the efficiency of resource allocation. 
A) democratic political decision-making can be counted on to improve the efficiency of resource allocation. 
B) market allocation will achieve idealized economic efficiency. 
C) the conditions implied by idealized efficient allocation of resources will be absent, but it does not follow that political action will improve the situation. 
D) democratic political decision-making will never be able to improve the efficiency of resource allocation.

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 most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers?

As a general rule, if pollution costs are external, firms will produce

Markets may have difficulty providing the proper quantity of a public good because

When there is reason to think that the existing structure of incentives will cause individuals in the market to act in ways that are inconsistent with ideal economic efficiency, economists say that

If an economic action generates more costs than benefits, the action

When production of a good generates external benefits, the

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

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

How does an additional individual's consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers?

Which of these activities will most likely result in an external benefit?

Which of the following correctly describes an external benefit resulting from an individual's purchase of a winter flu shot?

A market is unlikely to provide an efficient quantity of public goods because

Which of the following is a true statement regarding why the government produces public goods?

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium?

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?

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

The key explanation for the prevalence of waterway pollution is

Which of the following statements is true regarding potential information problems faced by consumers?

When market failure is present,

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

B: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

B: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: the Crisis of 2008: Causes and Lessons for the Future

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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