Question 1

Lance's demand schedule for pizza is indicated below:TABLE 6-2
 
-Refer to Table 6-2. If the current price of pizza is $1.00 per slice, what is Lance's consumer surplus?

Accepted Answer

A)  0 
B)  $1.00 
C)  $1.20 
D)  $1.50

Question 2

Which of the following activities represents an external cost?

Accepted Answer

A)  the costs a company imposes on others 
B)  the pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard 
C)  the increase in property values of vacant lots in an area near where a new amusement park is constructed 
D)  the benefits that accrue to society when an individual receives a college education

Question 3

Phil and Lasca have always wanted to take a cruise. Although willing to pay $5000 for a Caribbean cruise for two, they were able to purchase a cruise vacation for two for $3500. What was their total consumer surplus?

Accepted Answer

A)  $750 
B)  $1500 
C)  $3500 
D)  $5000

Question 4

What are external costs?

Accepted Answer

A)  costs borne by the government 
B)  costs borne by free riders 
C)  costs borne by exporting firms 
D)  costs borne by parties not directly involved in a transaction

Question 5

Which of the following does NOT provide an example of an externality?

Accepted Answer

A)  the view that passers-by and neighbours enjoy when observing your rose garden 
B)  the pleasure you get from purchasing a new pair of shoes 
C)  the air pollution generated when you drive your car 
D)  the free concerts neighbours hear when an accomplished musician practices at home

Question 6

An externality is present whenever an activity has a physical impact (costs or benefits) on individuals not directly involved in the activity.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following will most likely generate positive externalities?

Accepted Answer

A)  a city bus 
B)  public education 
C)  an automobile 
D)  a hot dog vendor

Question 8

Ruth loves to get up early and get busy in the morning. Her roommate, Elizabeth, likes to sleep in every morning. When Ruth gets up she likes to hum, sing, and clean up the kitchen, rattling pots and pans. Which of the following statements best describes Ruth?

Accepted Answer

A)  She is a great and thoughtful roommate. 
B)  She is inflicting a negative externality on Elizabeth. 
C)  She is providing Elizabeth with a positive externality. 
D)  She is demonstrating the fallacy of composition.

Question 9

What results from the imposition of a tax on a product?

Accepted Answer

A)  Some government surplus is transferred to the consumers and producers. 
B)  Some consumer surplus is transferred from buyers to producers. 
C)  Some producer surplus is transferred from sellers to consumers. 
D)  Some consumer and producer surplus is transferred from buyers and sellers to the government.

Question 10

TABLE 6-6
 
-Refer to Table 6-6. The table gives Lola's total utility from purchasing pairs of shoes. As Lola purchases more pairs of shoes, what happens to her utility?

Accepted Answer

A)  She experiences diminishing total utility. 
B)  She experiences diminishing marginal utility. 
C)  She receives less total utility. 
D)  She receives increasing amounts of marginal utility.

Question 11

FIGURE 6-3
 
-Refer to Figure 6-3. Suppose that education provides spillover benefits to the community as illustrated in the above diagram. Based on this information, which of the following statements is the most accurate?

Accepted Answer

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

Question 12

What is the term for the benefit that your neighbour receives when you landscape your front yard?

Accepted Answer

A)  a positive externality 
B)  an external cost 
C)  a social externality 
D)  social efficiency

Question 13

Total welfare gains from trade to the economy can be measured by the sum of consumer and producer surplus.

Accepted Answer

A) True 
 B)False

Question 14

When does an externality occur?

Accepted Answer

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

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A consumer must allocate their income so that their total utility is the same for every good consumed in order to reach consumer equilibrium.

Accepted Answer

A) True 
 B)False

Question 17

If Ming is willing to pay $75 to attend the Broadway production of The Lion King but actually pays $40, she receives a consumer surplus of $35.

Accepted Answer

A) True 
 B)False

Question 18

A consumer will reach consumer equilibrium if they allocate their income such that the marginal utility per dollar spent on Good A is equal to the marginal utility per dollar spent on Good B.

Accepted Answer

A) True 
 B)False

Question 19

What effect would a tax equal to the external cost on firms that emit pollutants have?

Accepted Answer

A)  It would provide firms with very little incentive to become eco-friendly. 
B)  It would provide firms with little incentive to search for less environmentally damaging production methods. 
C)  It would provide firms with the incentive to decrease the level of activity creating the pollution. 
D)  It would provide firms with the incentive to slightly increase the level of activity creating the pollution to cover the costs of the tax.

Question 20

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

Accepted Answer

A)  a DVD player 
B)  a cake 
C)  a personal computer 
D)  a city park

Exam 6: Market Efficiency and Market Failure

Lance's demand schedule for pizza is indicated below:TABLE 6-2 -Refer to Table 6-2. If the current price of pizza is $1.00 per slice, what is Lance's consumer surplus?

Which of the following activities represents an external cost?

Phil and Lasca have always wanted to take a cruise. Although willing to pay $5000 for a Caribbean cruise for two, they were able to purchase a cruise vacation for two for $3500. What was their total consumer surplus?

What are external costs?

Which of the following does NOT provide an example of an externality?

An externality is present whenever an activity has a physical impact (costs or benefits) on individuals not directly involved in the activity.

Which of the following will most likely generate positive externalities?

Ruth loves to get up early and get busy in the morning. Her roommate, Elizabeth, likes to sleep in every morning. When Ruth gets up she likes to hum, sing, and clean up the kitchen, rattling pots and pans. Which of the following statements best describes Ruth?

What results from the imposition of a tax on a product?

TABLE 6-6 -Refer to Table 6-6. The table gives Lola's total utility from purchasing pairs of shoes. As Lola purchases more pairs of shoes, what happens to her utility?

FIGURE 6-3 -Refer to Figure 6-3. Suppose that education provides spillover benefits to the community as illustrated in the above diagram. Based on this information, which of the following statements is the most accurate?

What is the term for the benefit that your neighbour receives when you landscape your front yard?

Total welfare gains from trade to the economy can be measured by the sum of consumer and producer surplus.

When does an externality occur?

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

A consumer must allocate their income so that their total utility is the same for every good consumed in order to reach consumer equilibrium.

If Ming is willing to pay $75 to attend the Broadway production of The Lion King but actually pays $40, she receives a consumer surplus of $35.

A consumer will reach consumer equilibrium if they allocate their income such that the marginal utility per dollar spent on Good A is equal to the marginal utility per dollar spent on Good B.

What effect would a tax equal to the external cost on firms that emit pollutants have?

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