Question 1

Producing more cabbage is efficient if

Accepted Answer

A) cabbage production can be increased without reducing production of other goods. 
B) the opportunity cost of more cabbage is less than its marginal utility. 
C) society values the additional cabbage more highly than the lettuce it must give up to produce the extra cabbage. 
D) All of the above are correct. 
A) cabbage production can be increased without reducing production of other goods. 
B) the opportunity cost of more cabbage is less than its marginal utility. 
C) society values the additional cabbage more highly than the lettuce it must give up to produce the extra cabbage. 
D) All of the above are correct.

Question 2

There is no way that externalities can be corrected.

Accepted Answer

A) True 
 B)False

Question 3

Government often finds it difficult to cope with externalities because

Accepted Answer

A) costs and benefits are difficult to assess in monetary terms. 
B) taxes and subsidies are ineffective in equating 
C) government has no authority to impose fines for air and water pollution. 
D) marginal private cost curves cannot be shifted. 
A) costs and benefits are difficult to assess in monetary terms. 
B) taxes and subsidies are ineffective in equating 
C) government has no authority to impose fines for air and water pollution. 
D) marginal private cost curves cannot be shifted.

Question 4

The marginal cost of serving an additional user of a public good is zero.

Accepted Answer

A) True 
 B)False

Question 5

Marginal social cost is defined as marginal private cost

Accepted Answer

A) plus opportunity cost. 
B) plus marginal opportunity cost. 
C) minus incidental cost. 
D) plus incidental cost. 
A) plus opportunity cost. 
B) plus marginal opportunity cost. 
C) minus incidental cost. 
D) plus incidental cost.

Question 6

The cost disease of personal services stems primarily from the fact that

Accepted Answer

A) prices rise too slowly to provide public receipts. 
B) inflation has been with us since the early 1970s. 
C) personal service requires direct contact between producer and consumer. 
D) sellers of personal services have strong unions. 
A) prices rise too slowly to provide public receipts. 
B) inflation has been with us since the early 1970s. 
C) personal service requires direct contact between producer and consumer. 
D) sellers of personal services have strong unions.

Question 7

Because technology has automated so many functions, personal services have become cheaper in order to compete.

Accepted Answer

A) True 
 B)False

Question 8

Hostile takeovers of corporations have been in the business news for some time now.Several states have passed laws making it harder for out-of-state corporations to acquire firms headquartered in their states.Several corporations have established "golden parachutes" to give executives high payoffs in case of hostile takeover.What market imperfection is likely to be worsened by these actions?
 Explain.

Accepted Answer

The problem of agency is likely to grow

Question 9

What do you mean by Coase theorem?

Accepted Answer

Coase theorem suggests that the market m

Question 10

The cost disease of services explains the problems surrounding the health care crisis.

Accepted Answer

A) True 
 B)False

Question 11

A market transaction causes an externality if someone

Accepted Answer

A) directly involved in the transaction receives uncompensated benefits or costs from it. 
B) not directly involved in the transaction receives uncompensated benefits or costs from it. 
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D) not directly involved in the transaction interferes in it by imposing regulations or product standards. 
A) directly involved in the transaction receives uncompensated benefits or costs from it. 
B) not directly involved in the transaction receives uncompensated benefits or costs from it. 
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D) not directly involved in the transaction interferes in it by imposing regulations or product standards.

Question 12

Which of the following is not a problem for the price system allocating resources among different time periods?

Accepted Answer

A) Interest rates are used for a variety of purposes other than influencing investment. 
B) The market devotes too much to immediate consumption. 
C) Our market system leads to lesser real incomes for later generations. 
D) Our market system despoils irreplaceable natural resources. 
A) Interest rates are used for a variety of purposes other than influencing investment. 
B) The market devotes too much to immediate consumption. 
C) Our market system leads to lesser real incomes for later generations. 
D) Our market system despoils irreplaceable natural resources.

Question 13

If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor?
 Why?
a.prohibiting the activity
b.charging fees for continuing the activity
c.requiring that the public be informed of the activity
d.government purchase of the item for the public

Accepted Answer

Any corrective measure should, as much a

Question 14

Asymmetric information will lead to

Accepted Answer

A) higher prices for some used cars, lower prices for others. 
B) "lemon" prices for good used cars. 
C) new cars selling for prices lower than good used cars. 
D) old cars selling for more than new cars. 
A) higher prices for some used cars, lower prices for others. 
B) "lemon" prices for good used cars. 
C) new cars selling for prices lower than good used cars. 
D) old cars selling for more than new cars.

Question 15

Which of the following could be written into an insurance contract in order to reduce the problem of moral hazard?

Accepted Answer

A) co-payments for repair services 
B) deductibles for repair services 
C) limitations on insurance coverage 
D) All of the above are correct. 
A) co-payments for repair services 
B) deductibles for repair services 
C) limitations on insurance coverage 
D) All of the above are correct.

Question 16

Public goods are

Accepted Answer

A) valuable socially. 
B) not depletable and not excludable. 
C) subject to the "free rider" problem. 
D) All of the above are correct. 
A) valuable socially. 
B) not depletable and not excludable. 
C) subject to the "free rider" problem. 
D) All of the above are correct.

Question 17

Why do markets tend to underproduce public goods?

Accepted Answer

Markets, left to themselves, tend to und

Question 18

Define the following terms and explain their importance to the study of economics.
a.public good
b.externality
c.irreversible decision
d.moral hazard
e.rent seeking

Accepted Answer

a.A public good is a commodity or servic

Question 19

Government gives subsidies to encourage production of products with beneficial externalities.

Accepted Answer

A) True 
 B)False

Exam 15: The Shortcomings of Free Markets

Producing more cabbage is efficient if

There is no way that externalities can be corrected.

Government often finds it difficult to cope with externalities because

The marginal cost of serving an additional user of a public good is zero.

Marginal social cost is defined as marginal private cost

The cost disease of personal services stems primarily from the fact that

Because technology has automated so many functions, personal services have become cheaper in order to compete.

What do you mean by Coase theorem?

The cost disease of services explains the problems surrounding the health care crisis.

A market transaction causes an externality if someone

Which of the following is not a problem for the price system allocating resources among different time periods?

Asymmetric information will lead to

Which of the following could be written into an insurance contract in order to reduce the problem of moral hazard?

Public goods are

Why do markets tend to underproduce public goods?

Define the following terms and explain their importance to the study of economics. a.public good b.externality c.irreversible decision d.moral hazard e.rent seeking

Government gives subsidies to encourage production of products with beneficial externalities.

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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