Question 1

An externality is an event which

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. C

Question 2

A production possibilities frontier indicates the most efficient combinations of goods.

Accepted Answer

A) True 
 B)False  True

Question 3

The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources among different industries.

Accepted Answer

A) True 
 B)False  False

Question 4

Suppose that the government decided to increase interest rates in order to encourage saving.Would this likely lead to an increase in investment and higher future economic growth rates?
 Explain.

Accepted Answer

No.The increase in interest rates might

Question 5

An "optimally imperfect" decision is one that

Accepted Answer

A) is vaguely right instead of precisely wrong. 
B) recognizes that the decision could always be better if given more time. 
C) recognizes that the cost of additional information probably exceeds the potential gain from making a better decision. 
D) recognizes that any decision is imperfect because humans have limited intellectual capacities. 
A) is vaguely right instead of precisely wrong. 
B) recognizes that the decision could always be better if given more time. 
C) recognizes that the cost of additional information probably exceeds the potential gain from making a better decision. 
D) recognizes that any decision is imperfect because humans have limited intellectual capacities.

Question 6

High interest rates make a firm's long-term investment in new capital

Accepted Answer

A) riskless. 
B) less attractive. 
C) more attractive. 
D) no more attractive than short-term investment. 
A) riskless. 
B) less attractive. 
C) more attractive. 
D) no more attractive than short-term investment.

Question 7

When a motorist speeds down the road at well above the posted limit, economists believe that the principle of ____ may be directing his actions.

Accepted Answer

A) rent seeking 
B) defective telescopic faculty 
C) moral hazard 
D) resource misallocation 
A) rent seeking 
B) defective telescopic faculty 
C) moral hazard 
D) resource misallocation

Question 8

If both a buyer and a seller have the same information, they are said to have symmetric information.

Accepted Answer

A) True 
 B)False

Question 9

Figure 15-1
  
-Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils

Accepted Answer

A) must cause a detrimental externality. 
B) must cause a beneficial externality. 
C) must cause either a detrimental or a beneficial externality, more information is needed to determine which one. 
D) may or may not cause an externality. 
A) must cause a detrimental externality. 
B) must cause a beneficial externality. 
C) must cause either a detrimental or a beneficial externality, more information is needed to determine which one. 
D) may or may not cause an externality.

Question 10

Markets are primarily responsible for the rapid rise in productivity during the twentieth century.

Accepted Answer

A) True 
 B)False

Question 11

Effective methods of dealing with externalities would include

Accepted Answer

A)  taxing firms that generate beneficial externalities. 
B)  imposing fines equal to the difference between MSC and MPC on firms that generate beneficial externalities. 
C)  giving a subsidy per unit equal to the difference between MSC and MPC to firms that generate beneficial externalities. 
D)  restricting the output of firms that generate beneficial externalities. 
A)  taxing firms that generate beneficial externalities. 
B)  imposing fines equal to the difference between MSC and MPC on firms that generate beneficial externalities. 
C)  giving a subsidy per unit equal to the difference between MSC and MPC to firms that generate beneficial externalities. 
D)  restricting the output of firms that generate beneficial externalities.

Question 12

Which of the following would be classified as an externality?

Accepted Answer

A) Smoke from a chimney causes discolored and peeling paint on other houses in the neighborhood. 
B) Noise from an unmuffled car wakes a sleeping person. 
C) A neighbor cleans up a yard and repaints a house. 
D) All of the above are externalities. 
A) Smoke from a chimney causes discolored and peeling paint on other houses in the neighborhood. 
B) Noise from an unmuffled car wakes a sleeping person. 
C) A neighbor cleans up a yard and repaints a house. 
D) All of the above are externalities.

Question 13

Individuals cannot buy unemployment insurance for themselves.The most likely reason for this is

Accepted Answer

A) moral hazard. 
B) imperfect information. 
C) a culture of poverty. 
D) the free-rider problem. 
A) moral hazard. 
B) imperfect information. 
C) a culture of poverty. 
D) the free-rider problem.

Question 14

Land on both sides of the border of Brazil and Venezuela has long been occupied by the Yanomamo people.These "fierce people" are the last Stone Age tribe left in South America.Following discovery of gold, approximately 45,000 garimperios (gold miners) invaded the Yanomamo territory.The mining process pollutes the rivers and scares away game, so traditional Yanomamo sources of food, are almost impossible to find now.The Yanomamo are starving.Economists call this problem

Accepted Answer

A) the cost disease. 
B) an externality. 
C) specialization. 
D) rent seeking. 
A) the cost disease. 
B) an externality. 
C) specialization. 
D) rent seeking.

Question 15

A local flower grower grows products in a plot of land which is exceptionally colorful, and is admired by many passersby.There is no way to charge for this in the price of the flowers.We can safely conclude that

Accepted Answer

A) the florist produces too many flowers. 
B) the florist produces too few flowers. 
C) the florist produces the right amount of flowers. 
D) society pays the socially optimal amount for the flowers. 
A) the florist produces too many flowers. 
B) the florist produces too few flowers. 
C) the florist produces the right amount of flowers. 
D) society pays the socially optimal amount for the flowers.

Question 16

Which of the following is not a public good?

Accepted Answer

A) a coastal lighthouse 
B) national defense 
C) a flood-control levee 
D) the latest Walt Disney movie 
A) a coastal lighthouse 
B) national defense 
C) a flood-control levee 
D) the latest Walt Disney movie

Question 17

In an ideal free unregulated market

Accepted Answer

A) supply curves reflect all negative externalities. 
B) external benefits are abundant. 
C) all individual and social needs are met by the market. 
D) optimal quantities of all goods and services are produced. 
A) supply curves reflect all negative externalities. 
B) external benefits are abundant. 
C) all individual and social needs are met by the market. 
D) optimal quantities of all goods and services are produced.

Question 18

The cost disease of the service sector in recent years is the result of

Accepted Answer

A) market failure. 
B) government intervention. 
C) collective bargaining by unions. 
D) uneven productivity growth. 
A) market failure. 
B) government intervention. 
C) collective bargaining by unions. 
D) uneven productivity growth.

Question 19

Are national forests public goods?
 Explain.

Accepted Answer

Yes.Forests provide soil reten

Question 20

Increasing productivity in a society

Accepted Answer

A) always results in a better quality of life as society views it. 
B) can never make a nation poorer. 
C) guarantees that personal services will cost less. 
D) makes improved personal services available to everyone. 
A) always results in a better quality of life as society views it. 
B) can never make a nation poorer. 
C) guarantees that personal services will cost less. 
D) makes improved personal services available to everyone.

Exam 15: The Shortcomings of Free Markets

An externality is an event which

A production possibilities frontier indicates the most efficient combinations of goods.

The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources among different industries.

Suppose that the government decided to increase interest rates in order to encourage saving.Would this likely lead to an increase in investment and higher future economic growth rates? Explain.

An "optimally imperfect" decision is one that

High interest rates make a firm's long-term investment in new capital

When a motorist speeds down the road at well above the posted limit, economists believe that the principle of ____ may be directing his actions.

If both a buyer and a seller have the same information, they are said to have symmetric information.

Figure 15-1 -Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils

Markets are primarily responsible for the rapid rise in productivity during the twentieth century.

Effective methods of dealing with externalities would include

Which of the following would be classified as an externality?

Individuals cannot buy unemployment insurance for themselves.The most likely reason for this is

A local flower grower grows products in a plot of land which is exceptionally colorful, and is admired by many passersby.There is no way to charge for this in the price of the flowers.We can safely conclude that

Which of the following is not a public good?

In an ideal free unregulated market

The cost disease of the service sector in recent years is the result of

Are national forests public goods? Explain.

Increasing productivity in a society

What Is Economics

The Economy: 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

Securities: Business Finance and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets: the Price System

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: the Human Inputs

Poverty, Inequality, and Discrimination

Is Useconomic Leadership Threatened

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

He 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

Filters