Question 1

In markets with asymmetric information

Accepted Answer

A) moral hazard causes adverse selection which in turn causes asymmetric information. 
B) adverse selection causes moral hazard which in turn causes asymmetric information. 
C) asymmetric information causes moral hazard and then it causes adverse selection. 
D) asymmetric information causes adverse selection and then it causes moral hazard. 
A) moral hazard causes adverse selection which in turn causes asymmetric information. 
B) adverse selection causes moral hazard which in turn causes asymmetric information. 
C) asymmetric information causes moral hazard and then it causes adverse selection. 
D) asymmetric information causes adverse selection and then it causes moral hazard. D

Question 2

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

Accepted Answer

A) the sum of consumer surplus and producer surplus is at a maximum. 
B) economic surplus is minimised. 
C) the sum of the benefits to firms is equal to the sum of the benefits to consumers. 
D) the sum of consumer surplus and producer surplus is minimised. 
A) the sum of consumer surplus and producer surplus is at a maximum. 
B) economic surplus is minimised. 
C) the sum of the benefits to firms is equal to the sum of the benefits to consumers. 
D) the sum of consumer surplus and producer surplus is minimised. A

Question 3

Which of the following displays these two characteristics: rivalry and non-excludability?

Accepted Answer

A) A public good 
B) A private good 
C) A quasi-public good 
D) A common resource 
A) A public good 
B) A private good 
C) A quasi-public good 
D) A common resource D

Question 4

One reason patent protection is vitally important to pharmaceutical firms is

Accepted Answer

A) successful new drugs are not profitable.If firms are not granted patents, many would go out of business and health care would be severely diminished. 
B) the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly.Patents enable firms to recover costs incurred during this process. 
C) that taxes on profits from drugs are very high; profits from patent protection enable firms to pay these taxes. 
D) the high salaries pharmaceutical firms pay to scientists and doctors make their labour costs higher than for any other business.Profits from patents are needed to pay these labour costs. 
A) successful new drugs are not profitable.If firms are not granted patents, many would go out of business and health care would be severely diminished. 
B) the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly.Patents enable firms to recover costs incurred during this process. 
C) that taxes on profits from drugs are very high; profits from patent protection enable firms to pay these taxes. 
D) the high salaries pharmaceutical firms pay to scientists and doctors make their labour costs higher than for any other business.Profits from patents are needed to pay these labour costs.

Question 5

Figure 14.1  
-Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If 8000 metrics of pecans are sold,

Accepted Answer

A) the deadweight loss is equal to economic surplus. 
B) producer surplus equals consumer surplus. 
C) the marginal benefit of each of the 8000 metrics of pecans equals $9. 
D) marginal benefit is equal to marginal cost. 
A) the deadweight loss is equal to economic surplus. 
B) producer surplus equals consumer surplus. 
C) the marginal benefit of each of the 8000 metrics of pecans equals $9. 
D) marginal benefit is equal to marginal cost.

Question 6

A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.

Accepted Answer

A) True 
 B)False

Question 7

Ordinarily, governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?

Accepted Answer

A) Patents encourage firms to spend money on research necessary to create new products. 
B) Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons. 
C) Patents are an important source of government revenue. 
D) Patents are justified because they are an important means for creating network externalities. 
A) Patents encourage firms to spend money on research necessary to create new products. 
B) Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons. 
C) Patents are an important source of government revenue. 
D) Patents are justified because they are an important means for creating network externalities.

Question 8

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is

Accepted Answer

A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat. 
B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses. 
C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls. 
D) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug. 
A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat. 
B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses. 
C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls. 
D) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.

Question 9

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

Accepted Answer

A) It conducts public surveys to determine if consumers want the product. 
B) It hires economists to estimate the market demand for the product. 
C) It takes a vote in Congress. 
D) It evaluates the costs and benefits of producing the good. 
A) It conducts public surveys to determine if consumers want the product. 
B) It hires economists to estimate the market demand for the product. 
C) It takes a vote in Congress. 
D) It evaluates the costs and benefits of producing the good.

Question 10

If a state requires all drivers to buy insurance, the problem of adverse selection is eliminated.

Accepted Answer

A) True 
 B)False

Question 11

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

Accepted Answer

A) True 
 B)False

Question 12

Figure 14.2   Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14.2 shows their willingness to pay for different quantities of street lights, the market demand for street lights and the marginal cost of installing the street lights.
-Refer to Figure 14.2.The optimal quantity of street lights to install is

Accepted Answer

A) 3 
B) 4 
C) 6 
D) 9 
A) 3 
B) 4 
C) 6 
D) 9

Question 13

If a buyer in an economic transaction has more information than the seller, the buyer benefits at the expense of the seller.This phenomenon is due to

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) economically irrational behaviour. 
D) gains from trade. 
A) moral hazard. 
B) adverse selection. 
C) economically irrational behaviour. 
D) gains from trade.

Question 14

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

Accepted Answer

A) most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs. 
B) prices remain high without patent protection because of a lack of competition.Firms that are not granted patents cannot compete with firms that are granted patents. 
C) other firms are free to produce chemically identical drugs.Competition reduces the profits that had been earned by the firms that received patents. 
D) firms will find ways to obtain additional patent protection-often by making cosmetic changes in drugs that were patented-so that they can continue charging high prices. 
A) most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs. 
B) prices remain high without patent protection because of a lack of competition.Firms that are not granted patents cannot compete with firms that are granted patents. 
C) other firms are free to produce chemically identical drugs.Competition reduces the profits that had been earned by the firms that received patents. 
D) firms will find ways to obtain additional patent protection-often by making cosmetic changes in drugs that were patented-so that they can continue charging high prices.

Question 15

Why do private producers have no incentive to provide public goods?

Accepted Answer

A) Because the government subsidy granted is usually insufficient to enable private producers to make a profit. 
B) Because production of huge quantities of public goods entails huge fixed costs. 
C) Because they cannot avoid the tragedy of the commons. 
D) Because once produced, it will not be possible to exclude those who do not pay for the good. 
A) Because the government subsidy granted is usually insufficient to enable private producers to make a profit. 
B) Because production of huge quantities of public goods entails huge fixed costs. 
C) Because they cannot avoid the tragedy of the commons. 
D) Because once produced, it will not be possible to exclude those who do not pay for the good.

Question 16

A patent or copyright is a barrier to entry based on

Accepted Answer

A) ownership of a key necessary raw material. 
B) large economies of scale as output increases. 
C) government action to protect a producer. 
D) widespread network externalities. 
A) ownership of a key necessary raw material. 
B) large economies of scale as output increases. 
C) government action to protect a producer. 
D) widespread network externalities.

Question 17

Figure 14.1  
-Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9,

Accepted Answer

A) economic surplus is maximised. 
B) too many consumers want to buy pecans. 
C) the quantity supplied is greater than the economically efficient quantity. 
D) the quantity demanded is economically efficient, but the quantity supplied is economically inefficient. 
A) economic surplus is maximised. 
B) too many consumers want to buy pecans. 
C) the quantity supplied is greater than the economically efficient quantity. 
D) the quantity demanded is economically efficient, but the quantity supplied is economically inefficient.

Question 18

Adverse selection occurs in the market for used cars because used car buyers

Accepted Answer

A) have more information than used car sellers. 
B) have less information than used car sellers. 
C) have less incentive to maintain the value of their cars than new car buyers. 
D) tend to have more accidents than new car buyers. 
A) have more information than used car sellers. 
B) have less information than used car sellers. 
C) have less incentive to maintain the value of their cars than new car buyers. 
D) tend to have more accidents than new car buyers.

Question 19

Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured.In other words, the automobile insurance market is subject to

Accepted Answer

A) asymmetric information. 
B) market signaling. 
C) moral hazard. 
D) adverse selection. 
A) asymmetric information. 
B) market signaling. 
C) moral hazard. 
D) adverse selection.

Question 20

Figure 14.1  
-Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $3,

Accepted Answer

A) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low. 
B) producers should raise the price to $9 in order to sell the quantity demanded of 12 000. 
C) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high. 
D) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low. 
A) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low. 
B) producers should raise the price to $9 in order to sell the quantity demanded of 12 000. 
C) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high. 
D) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.

In markets with asymmetric information

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

Which of the following displays these two characteristics: rivalry and non-excludability?

One reason patent protection is vitally important to pharmaceutical firms is

Figure 14.1 -Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If 8000 metrics of pecans are sold,

A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.

Ordinarily, governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

If a state requires all drivers to buy insurance, the problem of adverse selection is eliminated.

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

If a buyer in an economic transaction has more information than the seller, the buyer benefits at the expense of the seller.This phenomenon is due to

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

Why do private producers have no incentive to provide public goods?

A patent or copyright is a barrier to entry based on

Figure 14.1 -Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9,

Adverse selection occurs in the market for used cars because used car buyers

Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured.In other words, the automobile insurance market is subject to

Figure 14.1 -Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $3,

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: The Interaction of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Consumer Choice and Behavioural Economics

Technology Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition: The Competitive Model in a More Realistic

Oligopoly: Markets With Few Competitors

The Markets for Labour and Other Factors of Production

Comparative Advantage and the Gains From International Trade

Externalities, Environmental Policy and Public Goods

The Distribution of Income and Social Policy

Filters

Exam 14: Government Intervention in the Market

In markets with asymmetric information

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

Which of the following displays these two characteristics: rivalry and non-excludability?

One reason patent protection is vitally important to pharmaceutical firms is

Figure 14.1 -Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If 8000 metrics of pecans are sold,

A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.

Ordinarily, governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

If a state requires all drivers to buy insurance, the problem of adverse selection is eliminated.

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

If a buyer in an economic transaction has more information than the seller, the buyer benefits at the expense of the seller.This phenomenon is due to

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

Why do private producers have no incentive to provide public goods?

A patent or copyright is a barrier to entry based on

Figure 14.1 -Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9,

Adverse selection occurs in the market for used cars because used car buyers

Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured.In other words, the automobile insurance market is subject to

Figure 14.1 -Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $3,

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: The Interaction of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Consumer Choice and Behavioural Economics

Technology Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition: The Competitive Model in a More Realistic

Oligopoly: Markets With Few Competitors

The Markets for Labour and Other Factors of Production

Comparative Advantage and the Gains From International Trade

Externalities, Environmental Policy and Public Goods

The Distribution of Income and Social Policy

Filters