Question 1

The condition P = MC implies that

Accepted Answer

A)  there is no consumer surplus for any consumer. 
B)  an individual who values the product at more than P will receive consumer surplus. 
C)  an individual who values the product at less than P will receive consumer surplus. 
D)  the amount of consumer surplus is infinite.

Question 2

Suppose a policy change will generate $100,000 of benefits for low-income families and $120,000 of costs for high-income families. This change can best be described as

Accepted Answer

A)  Pareto efficient. 
B)  inefficient. 
C)  potentially efficient. 
D)  equitable.

Question 3

Bill sells Mary a worthless coin that Bill deviously told Mary "belonged to an ancient Persian king and is of enormous value to coin collectors." Economists would call this an

Accepted Answer

A)  efficient exchange, as any type of voluntary exchange promotes efficiency. 
B)  inefficient exchange, as at least one party used false market information. 
C)  efficient exchange, assuming Bill was not intentionally trying to trick Mary. 
D)  inefficient exchange because there were externalities involved.

Question 4

National defense is an example of a public good.

Accepted Answer

A) True 
 B)False

Question 5

Assume that the marginal cost of producing steel does not include the cost of the damage to the environment as a result of pollution. By producing where P = MC, the firm will be producing

Accepted Answer

A)  the efficient amount of steel. 
B)  more than the efficient amount of steel. 
C)  less than the efficient amount of steel. 
D)  a zero quantity of steel.

Question 6

In order to have ________ distribution of final products to households, free and open markets are essential.

Accepted Answer

A)  an efficient 
B)  an equitable 
C)  a fair 
D)  All of the above are correct.

Question 7

Sources of market failure include

Accepted Answer

A)  private goods. 
B)  imperfect information. 
C)  inflation. 
D)  perfect competition.

Question 8

Some contend that the outcome of any free market is ultimately inequitable because

Accepted Answer

A)  public goods will be underprovided by the government. 
B)  some people become rich while others remain very poor. 
C)  firms are not forced to take external costs into account. 
D)  periods of unemployment and inflation still occur.

Question 9

Because we collectively consume ________ goods, firms in the private sector may not provide them because they ________ exclude those who do not pay.

Accepted Answer

A)  public; can 
B)  private; cannot 
C)  private; can 
D)  public; cannot

Question 10

Capital tends to flow into markets earning short-run profits and out of markets suffering short-term losses.

Accepted Answer

A) True 
 B)False

Question 11

________ are generally produced by the government.

Accepted Answer

A)  Public goods 
B)  Private goods 
C)  Externalities 
D)  Market failures

Question 12

If after a change in an allocation it can be demonstrated that the value of the gains exceeds the value of the losses, then the change is said to be potentially efficient.

Accepted Answer

A) True 
 B)False

Question 13

If society will gain by producing more X, then it must be the case that currently

Accepted Answer

A)  PX = MCX. 
B)  PX > MCX. 
C)  PX X. 
D)  either PX > MCX or PX X.

Question 14

If no one can be excluded from consuming its benefits and there is no rivalry in consumption, then the good is a ________ good.

Accepted Answer

A)  private 
B)  Pareto 
C)  public 
D)  free

Question 15

The condition P = MC implies that an individual who values the product at P will receive

Accepted Answer

A)  positive consumer surplus. 
B)  no consumer surplus. 
C)  negative consumer surplus. 
D)  only producer surplus.

Question 16

A voluntary exchange between Mike (the purchaser) and Wayne (the seller) occurs because

Accepted Answer

A)  Mike stands to gain and Wayne to lose. 
B)  Mike stands to lose and Wayne to gain. 
C)  they both gain from the transaction. 
D)  they had no choice.

Question 17

It is because firms consciously try to balance social costs and benefits that efficiency conditions of perfect competition come about.

Accepted Answer

A) True 
 B)False

Question 18

Which one of the following is not a source of market failure?

Accepted Answer

A)  externalities 
B)  public goods 
C)  imperfect information 
D)  price increases

Question 19

Houston trades his golf club for Austin's tennis racket, and both are happy with the exchange. This is an example of Pareto efficiency.

Accepted Answer

A) True 
 B)False

Question 20

Assume that price underestimates the value that society places on the flu vaccine. If firms produce where P = MC, firms will be producing

Accepted Answer

A)  the socially efficient amount of flu vaccine. 
B)  more than the socially efficient amount of flu vaccine 
C)  less than the socially efficient amount of flu vaccine. 
D)  so that consumer surplus is zero.

Exam 12: General Equilibrium and the Efficiency of Perfect Competition

The condition P = MC implies that

Suppose a policy change will generate $100,000 of benefits for low-income families and $120,000 of costs for high-income families. This change can best be described as

Bill sells Mary a worthless coin that Bill deviously told Mary "belonged to an ancient Persian king and is of enormous value to coin collectors." Economists would call this an

National defense is an example of a public good.

Assume that the marginal cost of producing steel does not include the cost of the damage to the environment as a result of pollution. By producing where P = MC, the firm will be producing

In order to have ________ distribution of final products to households, free and open markets are essential.

Sources of market failure include

Some contend that the outcome of any free market is ultimately inequitable because

Because we collectively consume goods, firms in the private sector may not provide them because they exclude those who do not pay.

Capital tends to flow into markets earning short-run profits and out of markets suffering short-term losses.

________ are generally produced by the government.

If after a change in an allocation it can be demonstrated that the value of the gains exceeds the value of the losses, then the change is said to be potentially efficient.

If society will gain by producing more X, then it must be the case that currently

If no one can be excluded from consuming its benefits and there is no rivalry in consumption, then the good is a ________ good.

The condition P = MC implies that an individual who values the product at P will receive

A voluntary exchange between Mike (the purchaser) and Wayne (the seller) occurs because

It is because firms consciously try to balance social costs and benefits that efficiency conditions of perfect competition come about.

Which one of the following is not a source of market failure?

Houston trades his golf club for Austin's tennis racket, and both are happy with the exchange. This is an example of Pareto efficiency.

Assume that price underestimates the value that society places on the flu vaccine. If firms produce where P = MC, firms will be producing