Question 1

There is substantial agreement among scholars that at least two functions of government are legitimate.These two functions are the

Accepted Answer

A) protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets. 
B) redistribution of income from some individuals to others and the waging of war to expand the nation's territory. 
C) production of postal services and cable television. 
D) taxation of goods that are generally considered immoral or bad and the regulation of large corporations.

Question 2

If government taxes a firm which pollutes this will

Accepted Answer

A) increase the demand for the good produced. 
B) decrease the supply of the good produced. 
C) increase the equilibrium quantity of the good produced in the market. 
D) decrease the equilibrium price of the good produced in the market. 
E) all of the above.

Question 3

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway,the

Accepted Answer

A) firm's cost of producing electricity will be higher than the community's true opportunity cost. 
B) firm will tend to produce too little electricity from the viewpoint of economic efficiency. 
C) community generally receives an external benefit from the production of electricity. 
D) firm's cost of producing electricity will be lower than the community's true opportunity cost.

Question 4

Economic efficiency indicates that

Accepted Answer

A) if something is worth doing,you should do it as well as humanly possible. 
B) all pollution should be eliminated. 
C) automobiles should be made as safe as possible 
D) it nearly always makes sense to stop an activity well before perfection is achieved.

Question 5

Use the figure below to answer the following question(s).
Figure 5-3
 
-Figure 5-3 illustrates the market for a product that generates an external benefit.D₁ is the private market demand curve,while D₂ is the demand curve including the external benefit.Which of the following is true?

Accepted Answer

A) Relative to economic efficiency,output of the good will be too large and the price too low. 
B) Relative to economic efficiency,output of the good will be too large and the price too high. 
C) Relative to economic efficiency,output of the good will be too small and the price too low. 
D) Relative to economic efficiency,output of the good will be too small and the price too high.

Question 6

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day.Which of the following is true?

Accepted Answer

A) The pollution will be created by those least willing and able to pay the damages. 
B) The pollution will be created by those most willing and able to pay for the right to pollute. 
C) The funds collected by the government will be enough to compensate any individuals harmed by the pollution. 
D) Pollution will increase from zero to 1,000 units per day. 
E) There will be no incentive for polluters to try to sneak emissions past government monitoring devices.

Question 7

Use the figure below to answer the following question(s).
Figure 5-2
 
-Figure 5-2 illustrates the market for a product that generates an external cost.S₁ is the private market supply curve,while S₂ is the supply curve including the external cost.Which of the following is true?

Accepted Answer

A) Point a illustrates the competitive private market outcome,while point b illustrates the outcome consistent with economic efficiency. 
B) Point b illustrates the competitive private market outcome,while point a illustrates the outcome consistent with economic efficiency. 
C) The competitive private market outcome is consistent with the conditions for economic efficiency. 
D) The good will tend to be undersupplied relative to the conditions for economic efficiency.

Question 8

When a good is nonexcludable,

Accepted Answer

A) it is impossible or very costly to exclude nonpaying customers from receiving the good. 
B) individuals will have an incentive to become free riders. 
C) it will be difficult for a private firm producing the good to generate revenue sufficient to cover the cost of production. 
D) all of the above are true.

Question 9

Which of the following is a true statement regarding why the government produces public goods?

Accepted Answer

A) Public goods are valued highly by some but not by the majority. 
B) Because of the electoral system,the public sector tends towards producing those goods that help politicians get elected. 
C) Some goods should be produced whether they are economically efficient or not. 
D) Because it is difficult to exclude those who do not pay for public goods.

Question 10

If the construction of a new elementary school would create $5 million worth of benefits for citizens and cost $7 million to construct,then using the criterion of economic efficiency,the school

Accepted Answer

A) should be built. 
B) should not be built. 
C) results in a substantial improvement to the welfare of society. 
D) should be built if it passes by a majority vote.

Question 11

If production of a good creates external benefits,a competitive market will likely produce

Accepted Answer

A) less output than would maximize profit. 
B) more output than would maximize profit. 
C) less output than is efficient. 
D) more output than is efficient.

Question 12

Competitive markets generally give consumers and producers correct incentives when

Accepted Answer

A) externalities are present in the market. 
B) property rights are well-defined and enforced. 
C) the good being produced and consumed is a pure public good. 
D) there is a substantial lack of information on the part of either buyers or sellers.

Question 13

Which one of the following would reduce the efficiency of the market process?

Accepted Answer

A) promoting competitive markets 
B) protecting persons from fraud and theft 
C) providing a stable monetary environment 
D) protecting consumers by imposing legally mandated price ceilings

Question 14

Which of the following are ways in which the private market provides consumers with valuable information to help them make better decisions?

Accepted Answer

A) brand names 
B) franchising 
C) private sector certification firms and consumer report magazines 
D) all of the above

Question 15

Is education a public good? Focus on whether it meets the two criteria for being a public good.

Accepted Answer

The answer of Is education a public good? Focus on...

Question 16

Which of the following is true?

Accepted Answer

A) Consumption of a public good by one individual reduces the availability of the good for others. 
B) It is extremely difficult to limit the benefits of a public good to only the people who pay for it. 
C) Public goods are free to a society when they are produced by the government. 
D) From an efficiency standpoint,a market will generally supply too much of a public good.

Question 17

Which English philosopher argued that people own themselves and,as a result,own the fruits of their labor,and thus,the role of government is to protect these natural rights of individuals?

Accepted Answer

A) Karl Marx 
B) John Locke 
C) Immanuel Kant 
D) Ralph Nader

Question 18

When competitive forces in an industry are weak,

Accepted Answer

A) the absence of competition generally leads to overproduction. 
B) prices may exceed the amount consumers are willing to pay. 
C) the operational efficiency of private firms will be enhanced. 
D) higher prices and less than optimal production may result.

Question 19

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages.If the government offers subsidies for MBAs,then which of the following statements is correct?

Accepted Answer

A) The equilibrium quantity of MBAs will equal the efficient quantity of MBAs. 
B) The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs. 
C) The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs. 
D) The tuition paid by the student would be exceed the efficient amount.

Question 20

When production of a good provides external benefits,there will be

Accepted Answer

A) too few resources devoted to its production. 
B) too many resources devoted to its production. 
C) the optimal amount of resources devoted to its production. 
D) abnormally high profits earned by producers of the good.

Exam 5: Difficult Cases for the Market and the Role of Government