Question 1

Rent seeking is a way of earning profit without adding to the product's value.

Accepted Answer

A) True 
 B)False

Question 2

As wages for manufacturing workers rise, wages for service workers will stay the same.

Accepted Answer

A) True 
 B)False

Question 3

The Rand Corporation estimates that external costs imposed by alcohol consumption (e.g., deaths caused by drunk drivers)to be 48 cents per ounce consumed. If taxes on alcohol are 23 cents per ounce consumed, then

Accepted Answer

A) marginal social benefit is greater than marginal social cost. 
B) the alcohol taxes are increasing economic inefficiency and dead-weight loss. 
C) alcohol consumption is greater than socially optimal. 
D) marginal external costs plus marginal private costs are less than price.

Question 4

Government gives subsidies to encourage production of products with beneficial externalities.

Accepted Answer

A) True 
 B)False

Question 5

Because smoking causes illness and disability to smokers, society must maintain more health-service capacity than it would need in the absence of smoking. Since the cost of maintaining this capacity is covered to a substantial degree by health insurance, even nonsmokers must pay higher premiums. Also, smokers hurt nonsmokers as a result of "passive smoke." The Rand Corporation estimates these costs to be 29 cents per pack of cigarettes. Cigarette taxes average 37 cents per pack. Based on the economist's definition of efficiency, it follows that

Accepted Answer

A) cigarette taxes are too high, and cigarette production is lower than the efficient amount. 
B) cigarette taxes should be increased until external costs are zero. 
C) since the tax exceeds the marginal cost, we have a better than efficient outcome. 
D) we are overconsuming cigarettes.

Question 6

Education is subsidized because it generates beneficial externalities.

Accepted Answer

A) True 
 B)False

Question 7

The main shortcoming of the market, in the view of many,

Accepted Answer

A) lies in the arena of justice and injustice. 
B) lies in the area of consumer goods production. 
C) is its inability to stimulate the creation of new products. 
D) is its drag on growth in productivity.

Question 8

A competitive market may misallocate resources over time because

Accepted Answer

A) current profits are worth more than future profits because of the time value of money. 
B) current profits are worth less than future profits because of the time value of money. 
C) the Federal Reserve sets interest rates different than the opportunity cost of consuming now versus later. 
D) the Federal Reserve always prefers capital investment over personal consumption.

Question 9

When there are beneficial externalities in a market,

Accepted Answer

A) marginal social cost is above marginal private cost. 
B) marginal social benefit is above marginal private benefit. 
C) marginal social benefit is below marginal private benefit. 
D) marginal social cost is below marginal private cost.

Question 10

If interest rates fall, the opportunity cost of spending money today rather than tomorrow

Accepted Answer

A) rises. 
B) falls. 
C) rises only if the prices of goods today rise. 
D) falls only if the prices of goods today fall.

Question 11

On balance, markets do some things very well, and some things poorly.

Accepted Answer

A) True 
 B)False

Question 12

It has been said that well-educated citizens are necessary for democracy. Discuss this idea in economic terms. What market imperfection might occur and what are the appropriate government policies to correct it?

Accepted Answer

The answer of It has been said that well-educated citizens...

Question 13

An economy is operating with optimum efficiency if

Accepted Answer

A) the price of the product is greater than marginal cost. 
B) the production of more of commodity A entails the production of less of commodity B. 
C) marginal cost of output is greater than marginal utility of output. 
D) an increase in output would result in a decrease in average cost per unit.

Question 14

An example of a beneficial externality is

Accepted Answer

A) a vaccination to prevent a communicable disease. 
B) loud music from a cool house party. 
C) a sandwich shop that adds a free pickle with each order. 
D) a pasture that all ranchers can freely graze their cattle on.

Question 15

Part of the reason why barely used cars sell for much less than new cars is that

Accepted Answer

A) buyers and sellers have symmetric information about cars and both have less information about used cars than about new cars. 
B) buyers and sellers have symmetric information about cars and both have more information about used cars than about new cars. 
C) buyers have more information about used cars than sellers do. 
D) sellers have more information about used cars than buyers do.

Question 16

Anthony Downs, in The Economic Theory of Democracy , argues that voters choose to remain "rationally ignorant" when they vote in elections, knowing relatively little about the candidates or the issues. What economic principle would you invoke to explain this behavior?

Accepted Answer

A) Public good theory 
B) Moral hazard 
C) The cost of information 
D) Risk aversion

Question 17

The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources among different industries.

Accepted Answer

A) True 
 B)False

Question 18

A 2 percent wage increase for teachers or police officers

Accepted Answer

A) is usually offset by higher output per worker. 
B) leads to increases in municipal budgets. 
C) indicates that teachers and police have become more selfish. 
D) leads to more personalized service.

Question 19

The key explanation for the prevalence of waterway pollution is

Accepted Answer

A) the inclusion in production of all costs involving use of the waterway. 
B) that there are private costs but no costs to society. 
C) that waterways are not private property and can be used free of charge. 
D) that waterways are subject to the market's normal control procedures.

Question 20

A public good is

Accepted Answer

A) always depletable and excludable. 
B) always depletable and often excludable. 
C) never depletable and always excludable. 
D) never depletable and always nonexcludable.

Exam 15: The Shortcomings of Free Markets

Rent seeking is a way of earning profit without adding to the product's value.

As wages for manufacturing workers rise, wages for service workers will stay the same.

The Rand Corporation estimates that external costs imposed by alcohol consumption (e.g., deaths caused by drunk drivers) to be 48 cents per ounce consumed. If taxes on alcohol are 23 cents per ounce consumed, then

Government gives subsidies to encourage production of products with beneficial externalities.

Education is subsidized because it generates beneficial externalities.

The main shortcoming of the market, in the view of many,

A competitive market may misallocate resources over time because

When there are beneficial externalities in a market,

If interest rates fall, the opportunity cost of spending money today rather than tomorrow

On balance, markets do some things very well, and some things poorly.

It has been said that well-educated citizens are necessary for democracy. Discuss this idea in economic terms. What market imperfection might occur and what are the appropriate government policies to correct it?

An economy is operating with optimum efficiency if

An example of a beneficial externality is

Part of the reason why barely used cars sell for much less than new cars is that

Anthony Downs, in The Economic Theory of Democracy , argues that voters choose to remain "rationally ignorant" when they vote in elections, knowing relatively little about the candidates or the issues. What economic principle would you invoke to explain this behavior?

The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources among different industries.

A 2 percent wage increase for teachers or police officers

The key explanation for the prevalence of waterway pollution is

A public good is