Question 1

The following data are for a series of increasingly extensive flood-control projects.  For Plan D marginal costs and marginal benefits are

Accepted Answer

A)  $72,000 and $64,000, respectively. 
B)  $28,000 and $12,000, respectively. 
C)  $24,000 and $18,000, respectively. 
D)  $16,000 and $28,000, respectively.

Question 2

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

Accepted Answer

A) True 
 B)False

Question 3

Suppose an insurance company decided to offer divorce insurance. Based on the concept of moral hazard, economists would expect

Accepted Answer

A)  all married couples to purchase divorce insurance. 
B)  no married couples to purchase divorce insurance. 
C)  mostly the couples with marital problems to purchase divorce insurance. 
D)  the divorce rate to decrease.

Question 4

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality. These warranties help reduce the chance of what occurring?

Accepted Answer

A)  negative externalities 
B)  adverse selection 
C)  spillover benefits 
D)  moral hazard

Question 5

When a competitive market achieves allocative efficiency, it implies that

Accepted Answer

A)  the marginal benefit of having the product is greater than the marginal cost. 
B)  the buyers are getting the maximum consumer surplus from the product. 
C)  the combined consumer and producer surplus is maximized. 
D)  the quantity demanded is lower than the quantity supplied.

Question 6

Which of the following situations is not an example of market failure?

Accepted Answer

A)  Ben's Department Store cannot charge passers-by for using the sidewalk outside the store. 
B)  Ben cannot afford to buy a high-end Mercedes Benz luxury car. 
C)  Ben's Place is the only restaurant in town, and thus he has significant power to set menu prices. 
D)  Ben's Industries is dumping its wastewater into the unregulated river behind the factory.

Question 7

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 8

What two conditions must hold for a competitive market to produce efficient outcomes?

Accepted Answer

A)  Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay. 
B)  Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay. 
C)  Firms must minimize production costs, and consumers must minimize total expenditures. 
D)  Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay.

Question 9

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 10

Assume that a government is considering a new social program and may choose to include in this program one of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table below.  Suppose that the government chooses to do project C What is the total cost and total benefit of doing project C?

Accepted Answer

A)  Total cost is $5 billion, and total benefit is $7 billion. 
B)  Total cost is $4 billion, and total benefit is $7 billion. 
C)  Total cost is $9 billion, and total benefit is $12 billion. 
D)  Total cost is $16 billion, and total benefit is $20 billion.

Question 11

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 12

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of

Accepted Answer

A)  increasing costs. 
B)  diminishing returns. 
C)  diminishing marginal utility. 
D)  conservation of matter and energy.

Question 13

Where there is asymmetric information between buyers and sellers,

Accepted Answer

A)  product shortages will occur at the equilibrium price. 
B)  product surpluses will occur at the equilibrium price. 
C)  markets can produce inefficient outcomes. 
D)  markets will fail due to the "free-rider problem."

Question 14

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve?

Accepted Answer

A)  frozen yogurt 
B)  bubble gum 
C)  microwave popcorn 
D)  courts of law

Question 15

Which of the following statements is not true?

Accepted Answer

A)  Some public goods are paid for by private philanthropy. 
B)  Private provision of public goods is usually unprofitable. 
C)  The free-rider problem results from the characteristics of nonrivalry and nonexcludability. 
D)  Public goods are only provided by government.

Question 16

Private firms can hardly produce a public good profitably because of

Accepted Answer

A)  liability rules and lawsuits. 
B)  the free-rider problem. 
C)  shortages and surpluses. 
D)  moral hazard and adverse selection.

Question 17

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Accepted Answer

A)  the adverse selection problem. 
B)  the moral hazard problem. 
C)  the special interest effect. 
D)  logrolling.

Question 18

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

Accepted Answer

A)  the principal-agent problem. 
B)  the moral hazard problem. 
C)  the free-rider problem. 
D)  asymmetric information.

Question 19

Demand-side market failures occur when

Accepted Answer

A)  demand curves don't reflect consumers' full willingness to pay for a good or service. 
B)  demand curves don't reflect the full cost of producing a good or service. 
C)  government imposes a tax on a good or service. 
D)  a good or service is not produced because no one wants it.

Question 20

When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to find jobs because of the unemployment benefits, they are referring to the moral hazard problem.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures: Public Goods and Externalities

The following data are for a series of increasingly extensive flood-control projects. For Plan D marginal costs and marginal benefits are

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

Suppose an insurance company decided to offer divorce insurance. Based on the concept of moral hazard, economists would expect

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality. These warranties help reduce the chance of what occurring?

When a competitive market achieves allocative efficiency, it implies that

Which of the following situations is not an example of market failure?

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

What two conditions must hold for a competitive market to produce efficient outcomes?

External benefits in consumption refer to benefits accruing to

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?

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of

Where there is asymmetric information between buyers and sellers,

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve?

Which of the following statements is not true?

Private firms can hardly produce a public good profitably because of

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

Demand-side market failures occur when

When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to find jobs because of the unemployment benefits, they are referring to the moral hazard problem.