Question 1

Asymmetric information always results in adverse selection.

Accepted Answer

A) True 
 B)False

Question 2

Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the greatest amount.

Accepted Answer

A) True 
 B)False

Question 3

The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in danger of failing because they are too big and could bring the system down, leads to which of the following problems?

Accepted Answer

A) adverse selection 
B) externalities 
C) moral hazard 
D) public goods

Question 4

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it.This characteristic is called

Accepted Answer

A) nonrivalry. 
B) nonexcludability. 
C) nontaxability. 
D) nondiscrimination.

Question 5

Alex, Kara, and Susie are the only three people in a community.Alex is willing to pay $40 for the third unit of a public good; Kara is willing to pay $25.If the marginal cost of producing the third unit is $100, what is the minimum amount that Susie must be willing to pay for it to be efficient for government to produce the third unit?

Accepted Answer

A) $35 
B) $100 
C) $65 
D) The amount cannot be determined with the information provided.

Question 6

Depositors do not check their banks carefully for stability anymore, because of the Federal deposit insurance program.This illustrates the problem of

Accepted Answer

A) adverse selection. 
B) externalities. 
C) moral hazard. 
D) public goods.

Question 7

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to take is called the producer

Accepted Answer

A) revenues. 
B) surplus. 
C) costs. 
D) utility.

Question 8

Which of the following antipollution policies is least likely to make use of cost-benefit analysis?

Accepted Answer

A) creating a market for pollution rights 
B) charging polluters an emission fee 
C) enacting legislation that bans pollution 
D) private bargaining

Question 9

If a good that generates negative externalities were priced to take these negative externalities into account, then its

Accepted Answer

A) price would decrease and its quantity would increase. 
B) quantity would increase, but its price would remain constant. 
C) price would increase and its quantity would decrease. 
D) price would increase, but its quantity would remain constant.

Question 10

The amount of revenue that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

Accepted Answer

A) production costs. 
B) producers' supply. 
C) producer surplus. 
D) surplus production.

Question 11

Because in any period of time and in any region the quantity of pollutants that can be absorbed by nature is fixed, the supply of "pollution rights" in a cap-and-trade system will be perfectly elastic (horizontal).

Accepted Answer

A) True 
 B)False

Question 12

When there is overproduction of a good,

Accepted Answer

A) the marginal benefit of the good exceeds its marginal cost. 
B) the marginal cost of the good exceeds its marginal benefit. 
C) the net benefit of producing extra units if the good is positive. 
D) the allocative efficiency is enhanced.

Question 13

According to the marginal-cost-marginal-benefit rule,

Accepted Answer

A) only government projects (as opposed to private projects) should be assessed by comparing marginal costs and marginal benefits. 
B) the optimal project size is the one for which MB = MC. 
C) the optimal project size is the one for which MB exceeds MC by the greatest amount. 
D) project managers should attempt to minimize both MB and MC.

Question 14

A moral hazard problem occurs before a transaction-when people alter their behavior before they sign a contract, imposing costs on the other party.

Accepted Answer

A) True 
 B)False

Question 15

External benefits in consumption refer to benefits accruing to

Accepted Answer

A) those who are selling the product to the consumers. 
B) those who bought and consumed the product. 
C) those other than the ones who consumed the product. 
D) those who are consuming the product abroad.

Question 16

Along a demand curve, product price and consumer surplus are inversely related.

Accepted Answer

A) True 
 B)False

Question 17

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem in banking.

Accepted Answer

A) True 
 B)False

Question 18

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution.This will lead to the equilibrium price of cars

Accepted Answer

A) decreasing and the quantity increasing. 
B) decreasing and the quantity decreasing. 
C) increasing and the quantity increasing. 
D) increasing and the quantity decreasing.

Question 19

The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a result of the contract in ways that are costly to the other party.

Accepted Answer

A) True 
 B)False

Question 20

The two main characteristics of a public good are

Accepted Answer

A) production at constant marginal cost and rising demand. 
B) nonexcludability and production at rising marginal cost. 
C) nonrivalry and nonexcludability. 
D) nonrivalry and large negative externalities.

Exam 4: Market Failures: Public Goods and Externalities

Asymmetric information always results in adverse selection.

Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the greatest amount.

The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in danger of failing because they are too big and could bring the system down, leads to which of the following problems?

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it.This characteristic is called

Depositors do not check their banks carefully for stability anymore, because of the Federal deposit insurance program.This illustrates the problem of

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to take is called the producer

Which of the following antipollution policies is least likely to make use of cost-benefit analysis?

If a good that generates negative externalities were priced to take these negative externalities into account, then its

The amount of revenue that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

Because in any period of time and in any region the quantity of pollutants that can be absorbed by nature is fixed, the supply of "pollution rights" in a cap-and-trade system will be perfectly elastic (horizontal).

When there is overproduction of a good,

According to the marginal-cost-marginal-benefit rule,

A moral hazard problem occurs before a transaction-when people alter their behavior before they sign a contract, imposing costs on the other party.

External benefits in consumption refer to benefits accruing to

Along a demand curve, product price and consumer surplus are inversely related.

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem in banking.

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution.This will lead to the equilibrium price of cars

The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a result of the contract in ways that are costly to the other party.

The two main characteristics of a public good are