Question 1

Which of the following is an example of moral hazard?

Accepted Answer

A)  There are likely more cars of low quality than of high quality offered for sale without warranties in the used car market. 
B)  An individual who eats well and exercises regularly chooses not to purchase health insurance. 
C)  An individual drives less cautiously after obtaining automobile insurance. 
D)  A car salesman offers a full warranty on a used car for 90 days. 
A)  There are likely more cars of low quality than of high quality offered for sale without warranties in the used car market. 
B)  An individual who eats well and exercises regularly chooses not to purchase health insurance. 
C)  An individual drives less cautiously after obtaining automobile insurance. 
D)  A car salesman offers a full warranty on a used car for 90 days.

Question 2

Since it is difficult to establish and enforce ownership rights over air,people have less incentive to preserve air quality than if its ownership was clearly defined.

Accepted Answer

A) True 
 B)False

Question 3

Because of the problem of second-hand smoke,if unregulated,the market for cigarettes would produce a quantity that is too ____ at a price that is too ____ when compared to the socially optimal results.

Accepted Answer

A)  low; low 
B)  high; low 
C)  low; high 
D)  high; high 
A)  low; low 
B)  high; low 
C)  low; high 
D)  high; high

Question 4

A public good is nonrivalrous and excludable.

Accepted Answer

A) True 
 B)False

Question 5

Public goods are characterized by:

Accepted Answer

A)  rivalry in consumption. 
B)  nonrivalry in consumption. 
C)  excludability of nonpayers. 
D)  none of the above 
A)  rivalry in consumption. 
B)  nonrivalry in consumption. 
C)  excludability of nonpayers. 
D)  none of the above

Question 6

If pollution is reduced below the socially efficient level:

Accepted Answer

A)  the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement. 
B)  the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement. 
C)  the marginal cost of pollution abatement equals the marginal benefit of pollution abatement. 
D)  nothing can be said about the relationship between the marginal cost and marginal benefit of pollution abatement. 
A)  the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement. 
B)  the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement. 
C)  the marginal cost of pollution abatement equals the marginal benefit of pollution abatement. 
D)  nothing can be said about the relationship between the marginal cost and marginal benefit of pollution abatement.

Question 7

If mining companies are able to shift some of their production costs onto outside parties,the actual output of mines is likely to fall short of society's ideal.

Accepted Answer

A) True 
 B)False

Question 8

The Coase theorem holds well in situations where information and transaction costs are significant.

Accepted Answer

A) True 
 B)False

Question 9

Currently Q0 of electrical power is being produced.The demand curve is represented by D,and the current market supply is represented by S0.It is discovered that the Rocky Mountain Electrical Co-op and Power Company is discharging waste into the area water supply.As a result,S1 represents ____ and a price of ____ would represent the true internalized cost of production at that level of output.

Accepted Answer

A)  the supply curve with external costs included; P2 
B)  the supply curve with external costs included; P1 
C)  the supply curve with external costs included; P0 
D)  There is insufficient information available to provide an accurate answer. 
A)  the supply curve with external costs included; P2 
B)  the supply curve with external costs included; P1 
C)  the supply curve with external costs included; P0 
D)  There is insufficient information available to provide an accurate answer.

Question 10

To internalize a negative externality:

Accepted Answer

A)  a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good. 
B)  a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good. 
C)  a producer could receive a subsidy equal to the external cost resulting from the production of a good. 
D)  None of the above are correct. 
A)  a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good. 
B)  a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good. 
C)  a producer could receive a subsidy equal to the external cost resulting from the production of a good. 
D)  None of the above are correct.

Question 11

Which of the following is true?

Accepted Answer

A)  The private market provides too much of goods that generate external benefits. 
B)  In the case of external benefits, if we could add the benefits that are derived by non-paying consumers, the supply curve would shift to the right, increasing output. 
C)  In the case of external benefits, a tax equal to external benefits would result in an efficient level of output. 
D)  In the case of public goods, when people act as free-riders, some goods having benefits greater than costs will not be produced. 
A)  The private market provides too much of goods that generate external benefits. 
B)  In the case of external benefits, if we could add the benefits that are derived by non-paying consumers, the supply curve would shift to the right, increasing output. 
C)  In the case of external benefits, a tax equal to external benefits would result in an efficient level of output. 
D)  In the case of public goods, when people act as free-riders, some goods having benefits greater than costs will not be produced.

Question 12

Evidence suggests that the marginal social cost of pollution reduction:

Accepted Answer

A)  increases as pollution reduction increases. 
B)  remains constant as pollution reduction increases. 
C)  decreases as pollution reduction increases. 
D)  equals zero since it is beneficial to reduce pollution. 
A)  increases as pollution reduction increases. 
B)  remains constant as pollution reduction increases. 
C)  decreases as pollution reduction increases. 
D)  equals zero since it is beneficial to reduce pollution.

Question 13

Which of the following is false?

Accepted Answer

A)  Product liability laws can make it unprofitable to sell shoddy merchandise, providing a substantial incentive to provide safe products independent of government regulations. 
B)  Asymmetric information exists when the available information is initially distributed in favor of one party to a transaction relative to another. 
C)  In adverse selection situations, it is rational for a seller with more information about a product to provide a truthful and complete disclosure and make that fact known to a potential buyer. 
D)  Moral hazard arises from the fact that it is costly for an insurer to monitor the behaviors of the insured party. 
A)  Product liability laws can make it unprofitable to sell shoddy merchandise, providing a substantial incentive to provide safe products independent of government regulations. 
B)  Asymmetric information exists when the available information is initially distributed in favor of one party to a transaction relative to another. 
C)  In adverse selection situations, it is rational for a seller with more information about a product to provide a truthful and complete disclosure and make that fact known to a potential buyer. 
D)  Moral hazard arises from the fact that it is costly for an insurer to monitor the behaviors of the insured party.

Question 14

The ____ is the government agency with the task of developing and enforcing policies that are aimed at protecting the environment.

Accepted Answer

A)  FDA 
B)  DOI 
C)  FEMA 
D)  EPA 
E)  None of the above 
A)  FDA 
B)  DOI 
C)  FEMA 
D)  EPA 
E)  None of the above

Question 15

One way to overcome an adverse selection problem when buying a used car is to hire an independent mechanic to inspect the car before making a purchase.

Accepted Answer

A) True 
 B)False

Question 16

Global warming,which causes unfavorable climatic changes due to the burning of fossil fuels,would be an example of a(n):

Accepted Answer

A)  positive externality. 
B)  negative externality. 
C)  internalized externality. 
D)  Coase externality. 
A)  positive externality. 
B)  negative externality. 
C)  internalized externality. 
D)  Coase externality.

Question 17

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

Accepted Answer

A)  A flu shot is less expensive than the cost of treatment when you get the flu. 
B)  The income of doctors increases when you get a flu shot. 
C)  A flu shot reduces the likelihood that others will catch the flu from you. 
D)  A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income. 
A)  A flu shot is less expensive than the cost of treatment when you get the flu. 
B)  The income of doctors increases when you get a flu shot. 
C)  A flu shot reduces the likelihood that others will catch the flu from you. 
D)  A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income.

Question 18

In the absence of government action,the private market would probably not provide as much police protection as is socially desirable because:

Accepted Answer

A)  individuals are too poorly informed about the value of police protection. 
B)  the private benefits are greater than the private costs of providing police protection. 
C)  it is difficult to prevent free riders from benefiting from some police protection services. 
D)  the use of police services by one person will significantly reduce the police protection available to others. 
A)  individuals are too poorly informed about the value of police protection. 
B)  the private benefits are greater than the private costs of providing police protection. 
C)  it is difficult to prevent free riders from benefiting from some police protection services. 
D)  the use of police services by one person will significantly reduce the police protection available to others.

Question 19

The noise from the low altitude combat training the Air Force conducts over the Yippy I-O Ranch causes the ranch's cattle to lose weight.Which of the following actions is not consistent with recognition that the Yippy I-O has a property right to its skies?

Accepted Answer

A)  The Air Force equips its planes with mufflers. 
B)  The Air Force compensates the Yippy I-O for the value of the lost weight. 
C)  The ranch compensates the Air Force for the cost of moving the exercises to another location. 
D)  The Air Force pays for cow earplugs for the ranch herd. 
A)  The Air Force equips its planes with mufflers. 
B)  The Air Force compensates the Yippy I-O for the value of the lost weight. 
C)  The ranch compensates the Air Force for the cost of moving the exercises to another location. 
D)  The Air Force pays for cow earplugs for the ranch herd.

Question 20

Which of the following is the best example of a public good?

Accepted Answer

A)  a national system of healthcare 
B)  an amusement park 
C)  city street lights 
D)  telephone service 
A)  a national system of healthcare 
B)  an amusement park 
C)  city street lights 
D)  telephone service

Exam 8: Market Failure

Which of the following is an example of moral hazard?

Since it is difficult to establish and enforce ownership rights over air,people have less incentive to preserve air quality than if its ownership was clearly defined.

Because of the problem of second-hand smoke,if unregulated,the market for cigarettes would produce a quantity that is too ____ at a price that is too ____ when compared to the socially optimal results.

A public good is nonrivalrous and excludable.

Public goods are characterized by:

If pollution is reduced below the socially efficient level:

If mining companies are able to shift some of their production costs onto outside parties,the actual output of mines is likely to fall short of society's ideal.

The Coase theorem holds well in situations where information and transaction costs are significant.

To internalize a negative externality:

Which of the following is true?

Evidence suggests that the marginal social cost of pollution reduction:

Which of the following is false?

The ____ is the government agency with the task of developing and enforcing policies that are aimed at protecting the environment.

One way to overcome an adverse selection problem when buying a used car is to hire an independent mechanic to inspect the car before making a purchase.

Global warming,which causes unfavorable climatic changes due to the burning of fossil fuels,would be an example of a(n):

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

In the absence of government action,the private market would probably not provide as much police protection as is socially desirable because:

The noise from the low altitude combat training the Air Force conducts over the Yippy I-O Ranch causes the ranch's cattle to lose weight.Which of the following actions is not consistent with recognition that the Yippy I-O has a property right to its skies?

Which of the following is the best example of a public good?

The Role and Method of Economics

Economics: Eight Powerful Ideas

Scarcity, Trade-Offs, and Production Possibilities

Demand, Supply, and Market Equilibrium

Markets in Motion and Price Controls

Elasticities

Market Efficiency and Welfare

Public Finance and Public Choice

Consumer Choice Theory

The Firm: Production and Costs

Firms in Perfectly Competitive Markets

Monopoly and Antitrust

Monopolistic Competition and Product Differentiation

Oligopoly and Strategic Behavior

The Markets for Labor, Capital, and Land

Income, Poverty, and Health Care

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Measuring Economic Performance

Economic Growth in the Global Economy

Financial Markets, Saving, and Investment

Aggregate Demand and Aggregate Supply

The Aggregate Expenditure Model

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Trade

International Finance

Filters

Because of the problem of second-hand smoke,if unregulated,the market for cigarettes would produce a quantity that is too at a price that is too when compared to the socially optimal results.