Question 1

Which of the following best describes a situation of moral hazard?

Accepted Answer

A) Sicker people are more likely to buy health insurance. 
B) Prospective used-car buyers have less information about a particular car than its seller does. 
C) Drivers with collision insurance drive more recklessly. 
D) Drivers with collision insurance wear seatbelts less often. 
A) Sicker people are more likely to buy health insurance. 
B) Prospective used-car buyers have less information about a particular car than its seller does. 
C) Drivers with collision insurance drive more recklessly. 
D) Drivers with collision insurance wear seatbelts less often.

Question 2

Many economists argue that there is imperfect information in the market and that this is a failure of the market mechanism.

Accepted Answer

A) True 
 B)False

Question 3

An increase in wages in the public sector is caused solely by increased labor productivity in that sector.

Accepted Answer

A) True 
 B)False

Question 4

The "free rider" problem occurs when a good is

Accepted Answer

A) not available. 
B) not excludable. 
C) not depletable. 
D) not sold in free markets. 
A) not available. 
B) not excludable. 
C) not depletable. 
D) not sold in free markets.

Question 5

Motorcycle helmet laws have been controversial in some states.Riders prefer the feel of the wind on their faces.Others, however, point out that riders without helmets are more likely to suffer severe injury and run up hospital bills at public expense.Which of the following would most likely reduce the incidence of high bills for helmetless riders?

Accepted Answer

A) raise insurance rates for helmetless riders 
B) lower insurance rates for helmetless riders 
C) publish information on injury rates for helmetless riders 
D) subsidize hospitals 
A) raise insurance rates for helmetless riders 
B) lower insurance rates for helmetless riders 
C) publish information on injury rates for helmetless riders 
D) subsidize hospitals

Question 6

If a detrimental externality is being produced in the course of producing a good, then

Accepted Answer

A) P > MSC. B) MSC < MPC. C) incidental costs are negative. D) output is inefficiently large. A) P > MSC. B) MSC < MPC. C) incidental costs are negative. D) output is inefficiently large.

Question 7

As long as the market sets prices above marginal costs, production will be efficient.

Accepted Answer

A) True 
 B)False

Question 8

A car sells at different prices at different dealerships in an oligopolistic market.If a consumer has imperfect information about the price of a car at each dealership, he should

Accepted Answer

A) always gather all available information about prices. 
B) gather information about prices until the expected marginal utility of more information equals the marginal cost of gathering it. 
C) gather information about prices only if it can be gathered without cost. 
D) ignore information about prices because it is irrelevant to making an "optimally imperfect" decision. 
A) always gather all available information about prices. 
B) gather information about prices until the expected marginal utility of more information equals the marginal cost of gathering it. 
C) gather information about prices only if it can be gathered without cost. 
D) ignore information about prices because it is irrelevant to making an "optimally imperfect" decision.

Question 9

The prices of most services have risen much faster than inflation in recent years because

Accepted Answer

A) wages and salaries of service providers have risen much faster than inflation. 
B) wages and salaries of service providers have risen but their productivity has not. 
C) the productivity of service providers has risen dramatically. 
D) the demand for services has risen. 
A) wages and salaries of service providers have risen much faster than inflation. 
B) wages and salaries of service providers have risen but their productivity has not. 
C) the productivity of service providers has risen dramatically. 
D) the demand for services has risen.

Question 10

Which of the following observations is true?

Accepted Answer

A) A market produced with allocative efficiency if a monopoly exists. 
B) A market can provide "public goods." 
C) A market makes public and personal services inexpensive. 
D) A market distributes income equally. 
A) A market produced with allocative efficiency if a monopoly exists. 
B) A market can provide "public goods." 
C) A market makes public and personal services inexpensive. 
D) A market distributes income equally.

Question 11

Markets can efficiently handle irreversible decisions without involvement of government.

Accepted Answer

A) True 
 B)False

Question 12

It is possible to charge a price for a pure public good.

Accepted Answer

A) True 
 B)False

Question 13

If the interest rate rises, a profit-maximizing firm will tend to

Accepted Answer

A) invest in more projects (such as new plants) with payoffs in the future. 
B) invest in fewer projects with payoffs in the future. 
C) increase both current output and future output. 
D) reduce both current output and future output. 
A) invest in more projects (such as new plants) with payoffs in the future. 
B) invest in fewer projects with payoffs in the future. 
C) increase both current output and future output. 
D) reduce both current output and future output.

Question 14

Education is subsidized because it generates beneficial externalities.

Accepted Answer

A) True 
 B)False

Question 15

If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,

Accepted Answer

A)  MSC > P. 
B)  MPC > MSC. 
C)  P > MU. 
D)  MPC > P. 
A)  MSC > P. 
B)  MPC > MSC. 
C)  P > MU. 
D)  MPC > P.

Question 16

On balance, markets do some things very well, and some things poorly.

Accepted Answer

A) True 
 B)False

Question 17

The cost disease of the service sector is evidenced by

Accepted Answer

A) a failure of the market mechanism. 
B) increased quality of public and private services. 
C) dramatic increases in municipal budget burdens for education, health care, and police and fire protection. 
D) the increased productivity in the services area. 
A) a failure of the market mechanism. 
B) increased quality of public and private services. 
C) dramatic increases in municipal budget burdens for education, health care, and police and fire protection. 
D) the increased productivity in the services area.

Question 18

Which of the following statements is correct?

Accepted Answer

A) Marginal social cost is the share of marginal cost caused by an activity that is paid for by the persons who carry out the activity. 
B) Marginal private cost is the share of marginal cost caused by an activity that is borne by persons other than those who carry out the activity. 
C) Marginal social cost is the sum of marginal private cost and incidental cost. 
D) Marginal private cost and incidental cost are one and the same. 
A) Marginal social cost is the share of marginal cost caused by an activity that is paid for by the persons who carry out the activity. 
B) Marginal private cost is the share of marginal cost caused by an activity that is borne by persons other than those who carry out the activity. 
C) Marginal social cost is the sum of marginal private cost and incidental cost. 
D) Marginal private cost and incidental cost are one and the same.

Question 19

A public good has the quality of excludability but not the quality of depletability.

Accepted Answer

A) True 
 B)False

Question 20

How does imperfect information affect market decisions?

Accepted Answer

A) It doesn't, because information is generally excellent. 
B) It leads to inefficient outcomes in which expected benefits and actual benefits diverge. 
C) It leads to wasteful attempts to improve information. 
D) It leads to exploitation of sellers by buyers. 
A) It doesn't, because information is generally excellent. 
B) It leads to inefficient outcomes in which expected benefits and actual benefits diverge. 
C) It leads to wasteful attempts to improve information. 
D) It leads to exploitation of sellers by buyers.

Exam 15: The Shortcomings of Free Markets

Which of the following best describes a situation of moral hazard?

Many economists argue that there is imperfect information in the market and that this is a failure of the market mechanism.

An increase in wages in the public sector is caused solely by increased labor productivity in that sector.

The "free rider" problem occurs when a good is

If a detrimental externality is being produced in the course of producing a good, then

As long as the market sets prices above marginal costs, production will be efficient.

A car sells at different prices at different dealerships in an oligopolistic market.If a consumer has imperfect information about the price of a car at each dealership, he should

The prices of most services have risen much faster than inflation in recent years because

Which of the following observations is true?

Markets can efficiently handle irreversible decisions without involvement of government.

It is possible to charge a price for a pure public good.

If the interest rate rises, a profit-maximizing firm will tend to

Education is subsidized because it generates beneficial externalities.

If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,

On balance, markets do some things very well, and some things poorly.

The cost disease of the service sector is evidenced by

Which of the following statements is correct?

A public good has the quality of excludability but not the quality of depletability.

How does imperfect information affect market decisions?

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

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