Question 1

An unregulated market economy provides material wealth, but does not generate effective control of environmental damage.

Accepted Answer

A) True 
 B)False

Question 2

In the event of a detrimental externality which affects the public interest, government action is the only solution.

Accepted Answer

A) True 
 B)False

Question 3

Marginal social costs are the sum of marginal private costs and incidental costs.

Accepted Answer

A) True 
 B)False

Question 4

Productivity growth tends to affect all industries to the same degree.

Accepted Answer

A) True 
 B)False

Question 5

The principle of "comparable worth" asserts that people with comparable, if not identical, skills and responsibilities should receive the same pay.If this principle were to become law, it would tend to

Accepted Answer

A) reduce the problem of the "cost disease of services." 
B) exacerbate the problem of the "cost disease" of the service sector. 
C) be irrelevant to the "cost disease" problem. 
D) eliminate the problem of externalities. 
A) reduce the problem of the "cost disease of services." 
B) exacerbate the problem of the "cost disease" of the service sector. 
C) be irrelevant to the "cost disease" problem. 
D) eliminate the problem of externalities.

Question 6

It is true of externalities that they

Accepted Answer

A) arise when all costs, social and private, are included in production cost. 
B) are always beneficial. 
C) are always detrimental. 
D) None of the above are correct. 
A) arise when all costs, social and private, are included in production cost. 
B) are always beneficial. 
C) are always detrimental. 
D) None of the above are correct.

Question 7

SouthState Chemical Co.produces pine oil cleaners in a process that produces emissions that discolor the paint on nearby houses, although the emissions have been declared nontoxic to humans.
a.Is the price for the cleaner likely to be allocatively efficient? Use a graphic illustration in your answer.
b.If your answer to (a) is no, what is an appropriate government policy to correct the problem?

Accepted Answer

No, the price for the cleaner is too low

Question 8

If the price of a commodity is above marginal cost, then the economy will tend to

Accepted Answer

A) overproduce the item. 
B) underproduce the item. 
C) produce the optimal amount of the item. 
D) overproduce and underproduce the item cyclically. 
A) overproduce the item. 
B) underproduce the item. 
C) produce the optimal amount of the item. 
D) overproduce and underproduce the item cyclically.

Question 9

Which of the following is not true for a public good?

Accepted Answer

A) Marginal cost of serving public good to one more person is zero. 
B) Free rider problem arises in case of public goods. 
C) Exclusion is not possible in most of the public goods. 
D) Public goods include only material commodities. 
A) Marginal cost of serving public good to one more person is zero. 
B) Free rider problem arises in case of public goods. 
C) Exclusion is not possible in most of the public goods. 
D) Public goods include only material commodities.

Question 10

If polluters are forced to pay for their pollution, they will reduce pollution toward a socially optimal amount.

Accepted Answer

A) True 
 B)False

Question 11

Government can deal with externalities through the use of taxes and subsidies.

Accepted Answer

A) True 
 B)False

Question 12

Most Americans would voluntarily support defense without required taxation.

Accepted Answer

A) True 
 B)False

Question 13

An efficient allocation of resources requires each product's price to equal its marginal cost.

Accepted Answer

A) True 
 B)False

Question 14

Free market economies

Accepted Answer

A) often have dirty air and rivers. 
B) acting on their own do not do enough to efficiently deal with externality problems. 
C) while not protecting the environment automatically do offer a powerful tool that may be used for that purpose. 
D) All of the above are correct. 
A) often have dirty air and rivers. 
B) acting on their own do not do enough to efficiently deal with externality problems. 
C) while not protecting the environment automatically do offer a powerful tool that may be used for that purpose. 
D) All of the above are correct.

Question 15

Market economies produce outcomes that

Accepted Answer

A) are virtually ideal in all respects. 
B) are inferior to most other systems. 
C) are, in some respects, far from ideal. 
D) are virtually indistinguishable from command economies. 
A) are virtually ideal in all respects. 
B) are inferior to most other systems. 
C) are, in some respects, far from ideal. 
D) are virtually indistinguishable from command economies.

Question 16

Society would be better off with more products that create beneficial externalities.

Accepted Answer

A) True 
 B)False

Question 17

Activities that indiscriminately impose costs on others are externalities.

Accepted Answer

A) True 
 B)False

Question 18

Asymmetric information generally leads to efficient resource allocation.

Accepted Answer

A) True 
 B)False

Question 19

Because smoking causes illness and disability to smokers, society must maintain more health-service capacity than it would need in the absence of smoking.Since the cost of maintaining this capacity is covered to a substantial degree by health insurance, even nonsmokers must pay higher premiums.Also, smokers hurt nonsmokers as a result of "passive smoke." The Rand Corporation estimates these costs to be 29 cents per pack of cigarettes.Cigarette taxes average 37 cents per pack.Based on the economist's definition of efficiency, it follows that

Accepted Answer

A) cigarette taxes are too high, and cigarette production is lower than the efficient amount. 
B) cigarette taxes should be increased until external costs are zero. 
C) since the tax exceeds the marginal cost, we have a better than efficient outcome. 
D) we are overconsuming cigarettes. 
A) cigarette taxes are too high, and cigarette production is lower than the efficient amount. 
B) cigarette taxes should be increased until external costs are zero. 
C) since the tax exceeds the marginal cost, we have a better than efficient outcome. 
D) we are overconsuming cigarettes.

Question 20

A main cause of the cost disease of personal services is

Accepted Answer

A) the change from an agrarian to an industrial society. 
B) labor-saving innovations in the service industries. 
C) the unevenness in growth of productivity in the economy. 
D) massive increases in industrial production at the expense of consumer goods production. 
A) the change from an agrarian to an industrial society. 
B) labor-saving innovations in the service industries. 
C) the unevenness in growth of productivity in the economy. 
D) massive increases in industrial production at the expense of consumer goods production.

Exam 15: The Shortcomings of Free Markets

An unregulated market economy provides material wealth, but does not generate effective control of environmental damage.

In the event of a detrimental externality which affects the public interest, government action is the only solution.

Marginal social costs are the sum of marginal private costs and incidental costs.

Productivity growth tends to affect all industries to the same degree.

The principle of "comparable worth" asserts that people with comparable, if not identical, skills and responsibilities should receive the same pay.If this principle were to become law, it would tend to

It is true of externalities that they

If the price of a commodity is above marginal cost, then the economy will tend to

Which of the following is not true for a public good?

If polluters are forced to pay for their pollution, they will reduce pollution toward a socially optimal amount.

Government can deal with externalities through the use of taxes and subsidies.

Most Americans would voluntarily support defense without required taxation.

An efficient allocation of resources requires each product's price to equal its marginal cost.

Free market economies

Market economies produce outcomes that

Society would be better off with more products that create beneficial externalities.

Activities that indiscriminately impose costs on others are externalities.

Asymmetric information generally leads to efficient resource allocation.

A main cause of the cost disease of personal services is

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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