Question 1

An externality is:

Accepted Answer

A)  always a benefit to the recipient. 
B)  always a detriment to the recipient. 
C)  an activity that occurs in a business which is unknown to management. 
D)  unintended benefits or costs imposed on third parties as a result of economic activity. 
E)  an act, caused by a firm located in this country, which has an effect on a person in a foreign country. 
A)  always a benefit to the recipient. 
B)  always a detriment to the recipient. 
C)  an activity that occurs in a business which is unknown to management. 
D)  unintended benefits or costs imposed on third parties as a result of economic activity. 
E)  an act, caused by a firm located in this country, which has an effect on a person in a foreign country.

Question 2

Which of the following is not an example of an externality?

Accepted Answer

A)  Drunk drivers raise everyone's auto insurance premiums. 
B)  The price of lumber increases as lumberjacks' wages increase. 
C)  The neighbor's beautiful front yard increases your home value. 
D)  Someone drives a car that emits thick black smoke. 
E)  People who live near a bakery enjoy the smell of baked bread. 
A)  Drunk drivers raise everyone's auto insurance premiums. 
B)  The price of lumber increases as lumberjacks' wages increase. 
C)  The neighbor's beautiful front yard increases your home value. 
D)  Someone drives a car that emits thick black smoke. 
E)  People who live near a bakery enjoy the smell of baked bread.

Question 3

An increase in consumers' incomes will have what effect on the equilibrium in the restaurant meals market?

Accepted Answer

A)  Price will increase, and quantity will increase. 
B)  Price will decrease, and quantity will increase. 
C)  Price will increase, and quantity will decrease. 
D)  Price will decrease, and quantity will decrease. 
E)  Price will increase, and quantity will stay the same. 
A)  Price will increase, and quantity will increase. 
B)  Price will decrease, and quantity will increase. 
C)  Price will increase, and quantity will decrease. 
D)  Price will decrease, and quantity will decrease. 
E)  Price will increase, and quantity will stay the same.

Question 4

The existence of an externality is proof that there is a(n):

Accepted Answer

A)  market failure. 
B)  undervaluation of a good. 
C)  undervaluation of a cost. 
D)  property dispute. 
E)  free-rider problem 
A)  market failure. 
B)  undervaluation of a good. 
C)  undervaluation of a cost. 
D)  property dispute. 
E)  free-rider problem

Question 5

Exhibit 4-11 Data on supply and demand
  
-Which of the following is an example of market failure?

Accepted Answer

A)  Public goods. 
B)  Externalities. 
C)  Lack of competition. 
D)  all of the above. 
A)  Public goods. 
B)  Externalities. 
C)  Lack of competition. 
D)  all of the above.

Question 6

Which of the following would be a private cost to a cigarette manufacturer?

Accepted Answer

A)  Price of leaf tobacco. 
B)  Cost to the government of the hospital expenses of indigent smokers. 
C)  Increased risk of cancer to the nonsmoking passengers in the smoker's carpool. 
D)  Price of a pack of cigarettes. 
E)  The loss in utility received because the smoker must stand outside her office building in the winter to smoke. 
A)  Price of leaf tobacco. 
B)  Cost to the government of the hospital expenses of indigent smokers. 
C)  Increased risk of cancer to the nonsmoking passengers in the smoker's carpool. 
D)  Price of a pack of cigarettes. 
E)  The loss in utility received because the smoker must stand outside her office building in the winter to smoke.

Question 7

In the presence of positive externalities,a free market will choose a price which is too ____ and produce an output which is too ____ compared with the social optimum.

Accepted Answer

A)  high; low 
B)  low; low 
C)  high; high 
D)  low; high 
E)  marginal; inequitable 
A)  high; low 
B)  low; low 
C)  high; high 
D)  low; high 
E)  marginal; inequitable

Question 8

One of the problems created by price floors set above the equilibrium is:

Accepted Answer

A)  consumers complain about high prices. 
B)  firms don't have incentives to reduce costs. 
C)  the creation of surplus. 
D)  how to cope with the shortages. 
E)  the impact on firm profitability. 
A)  consumers complain about high prices. 
B)  firms don't have incentives to reduce costs. 
C)  the creation of surplus. 
D)  how to cope with the shortages. 
E)  the impact on firm profitability.

Question 9

If you were a government official that wanted to raise the equilibrium price of milk,which of the following actions would you take?

Accepted Answer

A)  Take milk from government storage and sell it. 
B)  Encourage farmers to produce more milk. 
C)  Subsidize purchases of dairy equipment. 
D)  Encourage farmers to produce less milk. 
A)  Take milk from government storage and sell it. 
B)  Encourage farmers to produce more milk. 
C)  Subsidize purchases of dairy equipment. 
D)  Encourage farmers to produce less milk.

Question 10

One method of correcting for ____ externalities is to create a ____ to make sure the market accounts for all costs and benefits.

Accepted Answer

A)  market failure; tax 
B)  negative; tax 
C)  positive; mechanism 
D)  positive; tax 
E)  negative; free market 
A)  market failure; tax 
B)  negative; tax 
C)  positive; mechanism 
D)  positive; tax 
E)  negative; free market

Question 11

If an increase in the government-imposed minimum wage pushes the price (wage)of unskilled labor above market equilibrium,which of the following will most likely occur in the unskilled labor market?

Accepted Answer

A)  An increase in quantity of unskilled labor demanded. 
B)  A decrease in the quantity of unskilled labor supplied. 
C)  A shortage of unskilled labor. 
D)  A surplus of unskilled labor (unemployment). 
A)  An increase in quantity of unskilled labor demanded. 
B)  A decrease in the quantity of unskilled labor supplied. 
C)  A shortage of unskilled labor. 
D)  A surplus of unskilled labor (unemployment).

Question 12

Which of the following is an example of a pure public good?

Accepted Answer

A)  A bus. 
B)  A mall. 
C)  A teddy bear. 
D)  An army. 
E)  An automobile. 
A)  A bus. 
B)  A mall. 
C)  A teddy bear. 
D)  An army. 
E)  An automobile.

Question 13

Exhibit 4-2 Supply and demand curves
  
-Beginning from an equilibrium at point E₁ in Exhibit 4-2,an increase in demand for good X,other things being equal,would move the equilibrium point to:

Accepted Answer

A)  E₁, no change. 
B)  E₂. 
C)  E₃. 
D)  E₄. 
A)  E₁, no change. 
B)  E₂. 
C)  E₃. 
D)  E₄.

Question 14

Albert and Betty hire Christine and David to play music at their wedding.Elizabeth,who lives behind the church,cannot study because of the loud music.The third party is:

Accepted Answer

A)  Albert. 
B)  Betty. 
C)  Christine. 
D)  David. 
E)  Elizabeth. 
A)  Albert. 
B)  Betty. 
C)  Christine. 
D)  David. 
E)  Elizabeth.

Question 15

When the consumption of a good generates an external benefit:

Accepted Answer

A)  the private benefit consumers receive from the good will be higher than the true social benefit. 
B)  too much of the good will tend to be produced from the viewpoint of economic efficiency. 
C)  the community generally suffers an exactly offsetting external cost from the production of the good. 
D)  the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed. 
A)  the private benefit consumers receive from the good will be higher than the true social benefit. 
B)  too much of the good will tend to be produced from the viewpoint of economic efficiency. 
C)  the community generally suffers an exactly offsetting external cost from the production of the good. 
D)  the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.

Question 16

Suppose the government imposes rent control (a price ceiling)below the equilibrium price for rental housing.Which of the following could result?

Accepted Answer

A)  Tenants risk breaking rent control law. 
B)  The quality of existing rental housing deteriorates. 
C)  Shortages. 
D)  All of the above. 
A)  Tenants risk breaking rent control law. 
B)  The quality of existing rental housing deteriorates. 
C)  Shortages. 
D)  All of the above.

Question 17

Examples of market failure include lack of competition,externalities,public goods,and income inequality.

Accepted Answer

A) True 
 B)False

Question 18

Public goods differ from private goods in that:

Accepted Answer

A)  they produce negative externalities. 
B)  they are not scarce. 
C)  their benefits cannot be denied to anyone. 
D)  their consumption must be regulated by the government. 
E)  their benefits are very narrow. 
A)  they produce negative externalities. 
B)  they are not scarce. 
C)  their benefits cannot be denied to anyone. 
D)  their consumption must be regulated by the government. 
E)  their benefits are very narrow.

Question 19

A decrease in consumer income decreases the demand for compact discs.As a result of the change to a new equilibrium,there is a(n):

Accepted Answer

A)  leftward shift of the supply curve. 
B)  rightward shift of the supply curve. 
C)  upward movement along the supply curve. 
D)  downward movement along the supply curve. 
A)  leftward shift of the supply curve. 
B)  rightward shift of the supply curve. 
C)  upward movement along the supply curve. 
D)  downward movement along the supply curve.

Question 20

A technological breakthrough lowers the cost of manufacturing DVDs.As a result,the market changes to a new equilibrium because of a(n):

Accepted Answer

A)  upward movement along the demand curve for DVDs. 
B)  rightward shift in the demand curve for DVDs. 
C)  rightward shift in the supply curve for DVDs. 
D)  shortage of DVDs. 
A)  upward movement along the demand curve for DVDs. 
B)  rightward shift in the demand curve for DVDs. 
C)  rightward shift in the supply curve for DVDs. 
D)  shortage of DVDs.

Exam 4: Markets in Action

An externality is:

Which of the following is not an example of an externality?

An increase in consumers' incomes will have what effect on the equilibrium in the restaurant meals market?

The existence of an externality is proof that there is a(n):

Exhibit 4-11 Data on supply and demand -Which of the following is an example of market failure?

Which of the following would be a private cost to a cigarette manufacturer?

In the presence of positive externalities,a free market will choose a price which is too ____ and produce an output which is too ____ compared with the social optimum.

One of the problems created by price floors set above the equilibrium is:

If you were a government official that wanted to raise the equilibrium price of milk,which of the following actions would you take?

One method of correcting for ____ externalities is to create a ____ to make sure the market accounts for all costs and benefits.

If an increase in the government-imposed minimum wage pushes the price (wage)of unskilled labor above market equilibrium,which of the following will most likely occur in the unskilled labor market?

Which of the following is an example of a pure public good?

Exhibit 4-2 Supply and demand curves -Beginning from an equilibrium at point E₁ in Exhibit 4-2,an increase in demand for good X,other things being equal,would move the equilibrium point to:

Albert and Betty hire Christine and David to play music at their wedding.Elizabeth,who lives behind the church,cannot study because of the loud music.The third party is:

When the consumption of a good generates an external benefit:

Suppose the government imposes rent control (a price ceiling)below the equilibrium price for rental housing.Which of the following could result?

Examples of market failure include lack of competition,externalities,public goods,and income inequality.

Public goods differ from private goods in that:

A decrease in consumer income decreases the demand for compact discs.As a result of the change to a new equilibrium,there is a(n):

A technological breakthrough lowers the cost of manufacturing DVDs.As a result,the market changes to a new equilibrium because of a(n):

Introducing the Economic Way of Thinking

A: Appendix: Applying Graphs to Economics

Production Possibilities,Opportunity Cost,and Economic Growth

Part 1: Market Demand and Supply

Part 2: Market Demand and Supply

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

A: Appendix: The Self-Correcting Aggregate Demand and Supply Model

Fiscal Policy

The Public Sector

Federal Deficits,Surpluses,and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

A: Appendix: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Filters

In the presence of positive externalities,a free market will choose a price which is too and produce an output which is too compared with the social optimum.

One method of correcting for externalities is to create a to make sure the market accounts for all costs and benefits.