Question 1

An economist has estimated that the maintenance of a public park costs $25,000 a year and that the public park generates $30,000 a year in revenue for merchants near the park. From society's point of view, the maintenance of this park is

Accepted Answer

A)  inefficient because everyone in the community pays taxes to support the park, but only the merchants near the park benefit. 
B)  inefficient because the additional revenues generated by the park are so low. 
C)  potentially efficient because the value of the gains exceed the value of the costs. 
D)  potentially efficient because no one would be made worse off as a result of maintaining the park.

Question 2

________ is the cost of using resources to produce another unit of a good.

Accepted Answer

A)  Marginal revenue 
B)  Marginal cost 
C)  Price 
D)  Total cost

Question 3

Refer to the information provided in Figure 12.4 below to answer the question(s) that follow.  Figure 12.4
There are two sectors in the economy, X and Y, and both are in long-run, zero-profit equilibrium at the intersections of SS1U1P10 and S1S1P0S1U1P1DS1S1P0S1U1P10.S1S1P0
-Refer to Figure 12.4. Assume consumer preference changes toward X and away from Y. Ceteris paribus, the likely change in capital flow in sector Y will cause the industry's short-run ________ curve to shift to the ________.

Accepted Answer

A)  supply; left 
B)  supply; right 
C)  demand; left 
D)  demand; right

Question 4

Refer to the information provided in Figure 12.4 below to answer the question(s) that follow.  Figure 12.4
There are two sectors in the economy, X and Y, and both are in long-run, zero-profit equilibrium at the intersections of SS1U1P10 and S1S1P0S1U1P1DS1S1P0S1U1P10.S1S1P0
-Refer to Figure 12.4. Assume consumer preference changes toward X and away from Y. Ceteris paribus, the likely change in capital flow in sector X will eventually

Accepted Answer

A)  eliminate all profits. 
B)  eliminate all losses. 
C)  generate excess profits. 
D)  result in excess losses.

Question 5

Suppose a new government policy generates $6,000 of benefits for local businesses and $4,000 of costs. We can best describe the policy as

Accepted Answer

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

Question 6

With respect to private goods, a Pareto optimal system is one in which ________ that make(s) some societal members better off without making others worse off have (has) been exhausted.

Accepted Answer

A)  at least one trade 
B)  all possible trades 
C)  no trades 
D)  all profitable trades

Question 7

Under perfect competition, the person that ends up with the marginal unit is the person that values it

Accepted Answer

A)  at an amount above its price. 
B)  at an amount lower than its price. 
C)  exactly at its price. 
D)  above its marginal cost.

Question 8

Your next-door neighbor has a beautiful rose garden, but you are allergic to roses and cannot use your yard because of the rose pollen that drifts into your yard. In this case, the rose garden is an example of a

Accepted Answer

A)  public good. 
B)  good that imposes an external cost. 
C)  good that provides an external benefit. 
D)  Pareto good.

Question 9

An externality exists when the cost or benefit resulting from some activity or transaction is experienced by parties external to the activity or transaction.

Accepted Answer

A) True 
 B)False

Question 10

Imperfect information on the part of buyers and sellers

Accepted Answer

A)  will not stop the economy from achieving market efficiency, assuming the other conditions for market efficiency hold. 
B)  is no longer a problem because the "truth-in-advertising" regulations have been instituted. 
C)  remains a barrier to achieving market efficiency, at least in some industries. 
D)  cannot persist in a market economy.

Question 11

Refer to the information provided in Figure 12.4 below to answer the question(s) that follow.  Figure 12.4
There are two sectors in the economy, X and Y, and both are in long-run, zero-profit equilibrium at the intersections of SS1U1P10 and S1S1P0S1U1P1DS1S1P0S1U1P10.S1S1P0
-Refer to Figure 12.4. Assume consumer preference changes toward X and away from Y. Ceteris paribus, a new general equilibrium will eventually be reached in sector X with a price of ________ and a quantity of ________.

Accepted Answer

A)  P1; Q1 
B)  P0; Q0 
C)  P1; Q0 
D)  P0; > Q1

Question 12

To conduct a partial equilibrium analysis of a change in consumer preferences toward coffee and away from tea, you must consider

Accepted Answer

A)  changes in the equilibrium price and quantity of coffee. 
B)  changes in the amount of resources allocated to the production of coffee. 
C)  changes in the price of resources allocated to the production of coffee. 
D)  all of the above

Question 13

Which assumption(s) is (are) necessary for an efficient allocation of resources among firms?

Accepted Answer

A)  Factor markets are open and competitive. 
B)  All firms pay the same prices for inputs. 
C)  Firms behave so as to maximize their profits. 
D)  All of the above are correct.

Question 14

National defense is an example of an externality.

Accepted Answer

A) True 
 B)False

Question 15

Society will produce the efficient mix of output if all firms equate price and marginal cost.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following questions is not answered by general equilibrium analysis?

Accepted Answer

A)  Are equilibria in different markets compatible with one another? 
B)  Can all markets simultaneously be in equilibrium? 
C)  How will a change in one market affect another market? 
D)  What outcome is most desirable for the whole society?

Question 17

You value your economics textbook at $10. Someone else values it at $25, and that person is willing to pay you $20 for your textbook. Would selling your textbook to this person for $20 be Pareto efficient?

Accepted Answer

A)  No, because you did not receive the maximum amount the other person would have been willing to pay for the textbook. 
B)  No, the person paid you $20 for the book so his net benefit was only $5, whereas your net benefit was $10. For this change to be Pareto efficient, each of you should have the same net benefit. 
C)  Yes, because both of you are better off as a result of the trade. 
D)  Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss.

Question 18

Externalities are only inefficient when they impose a cost. They are not inefficient when they bestow a benefit.

Accepted Answer

A) True 
 B)False

Question 19

Absent market imperfections, when firms ________ profits and households ________ utility Pareto optimality has been obtained.

Accepted Answer

A)  maximize; maximize 
B)  maximize; minimize 
C)  minimize; maximize 
D)  minimize; minimize

Question 20

Scientists find that eating corn three times a day will prolong life. This leads to a shift in preferences away from wheat and toward corn. As we move from one equilibrium to another, we can predict that

Accepted Answer

A)  all input markets are affected. 
B)  all input markets except land are affected because both products use land as an input. 
C)  labor markets are not affected because the wheat industry and the corn industry use laborers to drive tractors. 
D)  even if they use different technologies, no input markets are affected because they use the same inputs.

Exam 12: General Equilibrium and the Efficiency of Perfect Competition

An economist has estimated that the maintenance of a public park costs $25,000 a year and that the public park generates $30,000 a year in revenue for merchants near the park. From society's point of view, the maintenance of this park is

________ is the cost of using resources to produce another unit of a good.

Suppose a new government policy generates $6,000 of benefits for local businesses and $4,000 of costs. We can best describe the policy as

With respect to private goods, a Pareto optimal system is one in which ________ that make(s) some societal members better off without making others worse off have (has) been exhausted.

Under perfect competition, the person that ends up with the marginal unit is the person that values it

Your next-door neighbor has a beautiful rose garden, but you are allergic to roses and cannot use your yard because of the rose pollen that drifts into your yard. In this case, the rose garden is an example of a

An externality exists when the cost or benefit resulting from some activity or transaction is experienced by parties external to the activity or transaction.

Imperfect information on the part of buyers and sellers

To conduct a partial equilibrium analysis of a change in consumer preferences toward coffee and away from tea, you must consider

Which assumption(s) is (are) necessary for an efficient allocation of resources among firms?

National defense is an example of an externality.

Society will produce the efficient mix of output if all firms equate price and marginal cost.

Which of the following questions is not answered by general equilibrium analysis?

You value your economics textbook at $10. Someone else values it at $25, and that person is willing to pay you $20 for your textbook. Would selling your textbook to this person for $20 be Pareto efficient?

Externalities are only inefficient when they impose a cost. They are not inefficient when they bestow a benefit.

Absent market imperfections, when firms profits and households utility Pareto optimality has been obtained.

Scientists find that eating corn three times a day will prolong life. This leads to a shift in preferences away from wheat and toward corn. As we move from one equilibrium to another, we can predict that