Question 1

Exhibit 8-2   Refer to Exhibit 8-2.Which of the following observations is correct?

Accepted Answer

A)  The equilibrium at P2 and Q2 is inefficient. 
B)  From society's standpoint, Q1 is the efficient level of output. 
C)  True supply curve is above the demand curve at Q1. 
D)  The equilibrium at P1 and Q1 is efficient. 
A)  The equilibrium at P2 and Q2 is inefficient. 
B)  From society's standpoint, Q1 is the efficient level of output. 
C)  True supply curve is above the demand curve at Q1. 
D)  The equilibrium at P1 and Q1 is efficient.

Question 2

Sellers may choose not to sell in certain markets because:

Accepted Answer

A)  it is possible to practice price discrimination against customers. 
B)  buyers are unable to perceive the high quality of their goods and are, therefore, less willing to pay for them. 
C)  they are able to impose negative externalities on third parties. 
D)  an above-average profit potential is projected. 
A)  it is possible to practice price discrimination against customers. 
B)  buyers are unable to perceive the high quality of their goods and are, therefore, less willing to pay for them. 
C)  they are able to impose negative externalities on third parties. 
D)  an above-average profit potential is projected.

Question 3

Various new cars are sold with sensors that automatically turn on the headlights at night or any low light conditions.Would these sensors create a positive externality or a negative externality? How?

Accepted Answer

Cars with these new sensors would likely

Question 4

Which of the following is not true of adverse selection?

Accepted Answer

A)  It can result when one of the parties to a transaction has little information about the quality of the goods involved. 
B)  It can cause the quality of goods traded to fall, if quality detection costs are high. 
C)  It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure. 
D)  All of the above are true. 
A)  It can result when one of the parties to a transaction has little information about the quality of the goods involved. 
B)  It can cause the quality of goods traded to fall, if quality detection costs are high. 
C)  It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure. 
D)  All of the above are true.

Question 5

Exhibit 8-3   Refer to Exhibit 8-3.What would be the total cost if the government established a standard of 3 tons maximum pollution per firm in order to decrease pollution by a total of 6 tons?

Accepted Answer

A)  $800 
B)  $1,050 
C)  $1,850 
D)  $2,100 
A)  $800 
B)  $1,050 
C)  $1,850 
D)  $2,100

Question 6

Nancy loves to landscape her yard,but her neighbor Tom places a low value on his landscaping.When Tom's grass is neglected and gets long,Nancy will mow for Tom.This is an example of:

Accepted Answer

A)  the fallacy of composition. 
B)  a pollution tax. 
C)  a private solution to a negative externality problem. 
D)  how lazy Tom is. 
A)  the fallacy of composition. 
B)  a pollution tax. 
C)  a private solution to a negative externality problem. 
D)  how lazy Tom is.

Question 7

The optimal quantity of pollution control occurs where:

Accepted Answer

A)  pollution equals zero. 
B)  the total benefit of pollution control equals the total cost. 
C)  the marginal social benefit of pollution control just equals the marginal social cost. 
D)  the marginal external cost of pollution equals zero. 
A)  pollution equals zero. 
B)  the total benefit of pollution control equals the total cost. 
C)  the marginal social benefit of pollution control just equals the marginal social cost. 
D)  the marginal external cost of pollution equals zero.

Question 8

The free rider problem suggests that a producer will tend to:
i.produce more than the optimal quantity of a public good.
ii.produce less than the optimal quantity of a public good.
iii.produce the optimal quantity of a public good if it is funded out of tax revenue.

Accepted Answer

A)  (i) only 
B)  (ii) only 
C)  (i) and (iii) only 
D)  (ii) and (iii) only 
A)  (i) only 
B)  (ii) only 
C)  (i) and (iii) only 
D)  (ii) and (iii) only

Question 9

Economists prefer greater effort made to force internalization of externalities through taxes rather than using alternative approaches.

Accepted Answer

A) True 
 B)False

Question 10

Someone who does not contribute toward covering the cost of a good he desires,and yet he cannot be excluded from receiving the good,is called a free rider.

Accepted Answer

A) True 
 B)False

Question 11

When a good is nonrivalrous in consumption,then:

Accepted Answer

A)  consumption by an additional individual will significantly reduce the benefits derived by others from a public good. 
B)  individuals who refuse to pay for a public good cannot be excluded from benefiting from it. 
C)  consumption by an additional individual does not prevent others from benefiting from a public good. 
D)  individuals who refuse to pay for a public good can be excluded from benefiting from it. 
A)  consumption by an additional individual will significantly reduce the benefits derived by others from a public good. 
B)  individuals who refuse to pay for a public good cannot be excluded from benefiting from it. 
C)  consumption by an additional individual does not prevent others from benefiting from a public good. 
D)  individuals who refuse to pay for a public good can be excluded from benefiting from it.

Question 12

In a competitive market,

Accepted Answer

A)  demand will always reflect all spillover costs. 
B)  demand will always reflect all spillover benefits. 
C)  supply will always reflect all spillover costs. 
D)  none of the above are true. 
A)  demand will always reflect all spillover costs. 
B)  demand will always reflect all spillover benefits. 
C)  supply will always reflect all spillover costs. 
D)  none of the above are true.

Question 13

Beginning from a situation where there were no clear property rights to clean air and water:

Accepted Answer

A)  subsidies could not improve efficiency in cases of external benefits. 
B)  subsidies could not improve efficiency in cases of external costs. 
C)  taxes could not improve efficiency in cases of external costs. 
D)  neither external benefits nor external costs could improve efficiency in either the case of external benefits or the case of external costs. 
A)  subsidies could not improve efficiency in cases of external benefits. 
B)  subsidies could not improve efficiency in cases of external costs. 
C)  taxes could not improve efficiency in cases of external costs. 
D)  neither external benefits nor external costs could improve efficiency in either the case of external benefits or the case of external costs.

Question 14

When city beautification programs are funded privately:

Accepted Answer

A)  only contributing citizens are likely to benefit from a more beautiful city. 
B)  only free riders are likely to benefit from a more beautiful city. 
C)  an underallocation of resources toward the beautification project is likely to occur relative to what is socially efficient. 
D)  none of the above 
A)  only contributing citizens are likely to benefit from a more beautiful city. 
B)  only free riders are likely to benefit from a more beautiful city. 
C)  an underallocation of resources toward the beautification project is likely to occur relative to what is socially efficient. 
D)  none of the above

Question 15

Differentiate between a public good and common resources.

Accepted Answer

A public good is neither rival nor exclu

Question 16

An externality occurs when:

Accepted Answer

A)  people other than those making the demand and supply decisions share the benefits or the costs of an activity. 
B)  only the people making the demand and supply decisions share the benefits or the costs of an activity. 
C)  private costs of production equal the full social costs associated with production of a good. 
D)  private costs of production are ignored. 
A)  people other than those making the demand and supply decisions share the benefits or the costs of an activity. 
B)  only the people making the demand and supply decisions share the benefits or the costs of an activity. 
C)  private costs of production equal the full social costs associated with production of a good. 
D)  private costs of production are ignored.

Question 17

Exhibit 8-1   Refer to Exhibit 8-1.Suppose that education provides spillover benefits to the community as illustrated in the diagram.Based on this information,we can say that:

Accepted Answer

A)  the market would fall short of the desirable level of education, Q0. 
B)  education is overproduced by Q1 minus Q0 units. 
C)  the socially optimal quantity of education is Q1 units. 
D)  the socially optimal quantity of education is Q0 units. 
A)  the market would fall short of the desirable level of education, Q0. 
B)  education is overproduced by Q1 minus Q0 units. 
C)  the socially optimal quantity of education is Q1 units. 
D)  the socially optimal quantity of education is Q0 units.

Question 18

Assume that production of a good imposes external costs on others.The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Accepted Answer

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

Question 19

Public goods are those that are consumed:

Accepted Answer

A)  only by those who have paid for them. 
B)  only by the government that provides them. 
C)  by the private group that funds them. 
D)  by the paying and nonpaying public alike. 
A)  only by those who have paid for them. 
B)  only by the government that provides them. 
C)  by the private group that funds them. 
D)  by the paying and nonpaying public alike.

Question 20

If a subsidy was imposed on an industry whose production imposed external benefits on others,then the goods' consumers of the good would be ____ and the result would be a(n)____ in efficiency.

Accepted Answer

A)  better off; increase. 
B)  better off; decrease. 
C)  worse off; increase. 
D)  worse off; decrease. 
A)  better off; increase. 
B)  better off; decrease. 
C)  worse off; increase. 
D)  worse off; decrease.

Exam 8: Market Failure

Exhibit 8-2 Refer to Exhibit 8-2.Which of the following observations is correct?

Sellers may choose not to sell in certain markets because:

Various new cars are sold with sensors that automatically turn on the headlights at night or any low light conditions.Would these sensors create a positive externality or a negative externality? How?

Which of the following is not true of adverse selection?

Exhibit 8-3 Refer to Exhibit 8-3.What would be the total cost if the government established a standard of 3 tons maximum pollution per firm in order to decrease pollution by a total of 6 tons?

Nancy loves to landscape her yard,but her neighbor Tom places a low value on his landscaping.When Tom's grass is neglected and gets long,Nancy will mow for Tom.This is an example of:

The optimal quantity of pollution control occurs where:

The free rider problem suggests that a producer will tend to: i.produce more than the optimal quantity of a public good. ii.produce less than the optimal quantity of a public good. iii.produce the optimal quantity of a public good if it is funded out of tax revenue.

Economists prefer greater effort made to force internalization of externalities through taxes rather than using alternative approaches.

Someone who does not contribute toward covering the cost of a good he desires,and yet he cannot be excluded from receiving the good,is called a free rider.

When a good is nonrivalrous in consumption,then:

In a competitive market,

Beginning from a situation where there were no clear property rights to clean air and water:

When city beautification programs are funded privately:

Differentiate between a public good and common resources.

An externality occurs when:

Exhibit 8-1 Refer to Exhibit 8-1.Suppose that education provides spillover benefits to the community as illustrated in the diagram.Based on this information,we can say that:

Assume that production of a good imposes external costs on others.The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Public goods are those that are consumed:

If a subsidy was imposed on an industry whose production imposed external benefits on others,then the goods' consumers of the good would be ____ and the result would be a(n)____ in efficiency.

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

Assume that production of a good imposes external costs on others.The equilibrium price will be and the equilibrium quantity for efficient resource allocation.

If a subsidy was imposed on an industry whose production imposed external benefits on others,then the goods' consumers of the good would be and the result would be a(n) in efficiency.