Question 1

Which of the following would be an example of a moral hazard problem?

Accepted Answer

A)  a person in poor health who purchases life insurance 
B)  a person who is taxed on the purchase of a carton of cigarettes 
C)  a person who purchases auto insurance and then drives more recklessly 
D)  a person who receives a subsidy from the Federal government to insulate a home

Question 2

New Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected total annual costs and benefits of these alternatives.  The marginal benefits of crime control for Level Two are

Accepted Answer

A)  $ 90,000. 
B)  $40,000. 
C)  $ 60,000. 
D)  $200,000.

Question 3

A government is considering undertaking a construction project of an increasing scale (ranging from 1, 2, 3, to 4). The estimated marginal costs and marginal benefits of each successive scale of the project are given in the table below.  What is the net benefit of project scale 2?

Accepted Answer

A)  $2 million 
B)  $3 million 
C)  $4 million 
D)  $5 million

Question 4

A producer's minimum acceptable price for a particular unit of a good

Accepted Answer

A)  is the same for all units of the good. 
B)  will, for most units produced, equal the maximum that consumers are willing to pay for the good. 
C)  equals the marginal cost of producing that particular unit. 
D)  must cover the wages, rent, and interest payments necessary to produce the good but need not include profit.

Question 5

Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. If this good were a private good instead of a public one, the total quantity demanded at a $3 market price would be

Accepted Answer

A)  2 units. 
B)  3 units. 
C)  6 units. 
D)  4 units.

Question 6

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 7

As it applies to insurance, the moral hazard problem is the tendency for

Accepted Answer

A)  those most likely to collect on insurance to buy it. 
B)  those who buy insurance to take less precaution in avoiding the insured risk. 
C)  sellers to price discriminate. 
D)  sellers to restrict output and charge high prices.

Question 8

Product reviews help to alleviate problems associated with

Accepted Answer

A)  asymmetric information. 
B)  moral hazard. 
C)  positive externalities. 
D)  negative externalities.

Question 9

Which of the following is an example of market failure?

Accepted Answer

A)  negative externalities 
B)  positive externalities 
C)  public goods 
D)  all of these

Question 10

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement.

Accepted Answer

A) True 
 B)False

Question 11

Suppose a firm offers its workers a cafeteria plan in which it allows workers to allocate a set amount of fringe benefit money toward specific insurance. Mary, who has five kids needing braces, selects the family dental coverage. This is an example of the

Accepted Answer

A)  free-rider problem. 
B)  principal-agent problem. 
C)  adverse selection problem. 
D)  moral hazard problem.

Question 12

If many people in a community get flu shots, the whole community benefits, including those that did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of

Accepted Answer

A)  the market allocating resources efficiently. 
B)  monopoly power due to lack of competition. 
C)  supply-side market failure. 
D)  demand-side market failure.

Question 13

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

Accepted Answer

A) True 
 B)False

Question 14

(Last Word) In a cap-and-trade program,

Accepted Answer

A)  government fixes the price of pollution rights and firms choose how many permits to purchase. 
B)  government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other. 
C)  each firm is provided a fixed number of permits for a particular pollutant and no individual firm is allowed to acquire additional permits. 
D)  firms can emit whatever type of pollutant they want, so long as the total tonnage does not exceed a government-established quantity.

Question 15

In a free-market economy, a product which entails a positive externality will be

Accepted Answer

A)  overproduced. 
B)  underproduced. 
C)  produced at the optimal level. 
D)  provided solely by the government.

Question 16

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90. If the actual price of lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

Accepted Answer

A) True 
 B)False

Question 17

eBay, Amazon, and other Internet shopping sites provide "seller ratings" done by previous buyers, in order to help deal with the problem of

Accepted Answer

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

Question 18

Which of the following would be an example of government intervention to correct a market failure caused by buyers having inadequate information about sellers?

Accepted Answer

A)  providing unemployment compensation insurance 
B)  sponsoring legislation to reduce pollution 
C)  licensing of medical doctors and surgeons 
D)  requiring all car drivers to buy auto insurance

Question 19

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 20

eBay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures: Public Goods and Externalities

Which of the following would be an example of a moral hazard problem?

A government is considering undertaking a construction project of an increasing scale (ranging from 1, 2, 3, to 4) . The estimated marginal costs and marginal benefits of each successive scale of the project are given in the table below. What is the net benefit of project scale 2?

A producer's minimum acceptable price for a particular unit of a good

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).

As it applies to insurance, the moral hazard problem is the tendency for

Product reviews help to alleviate problems associated with

Which of the following is an example of market failure?

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement.

Suppose a firm offers its workers a cafeteria plan in which it allows workers to allocate a set amount of fringe benefit money toward specific insurance. Mary, who has five kids needing braces, selects the family dental coverage. This is an example of the

If many people in a community get flu shots, the whole community benefits, including those that did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

(Last Word) In a cap-and-trade program,

In a free-market economy, a product which entails a positive externality will be

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90. If the actual price of lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

eBay, Amazon, and other Internet shopping sites provide "seller ratings" done by previous buyers, in order to help deal with the problem of

Which of the following would be an example of government intervention to correct a market failure caused by buyers having inadequate information about sellers?

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

eBay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.