Question 1

The free-rider problem refers to the local government's problem of finding funds to subsidize public transportation.

Accepted Answer

A) True 
 B)False

Question 2

The value that consumers get (from consuming a product) over and above that they actually paid for the product is called:

Accepted Answer

A)  Consumer utility 
B)  Consumption expenditures 
C)  Consumer surplus 
D)  Consumer demand

Question 3

The licensing and regulation of financial advisers is one way by which the government tries to deal with the problem of inadequate information that financial firms about their customers.

Accepted Answer

A) True 
 B)False

Question 4

Refer to the above graph. If the output level is Q1, then the sum of the consumer and producer surplus is:

Accepted Answer

A)  bce 
B)  ac0 
C)  0abe 
D)  0eQ1

Question 5

Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of:

Accepted Answer

A)  Public goods 
B)  Externalities 
C)  Moral hazard 
D)  Adverse selection

Question 6

A government is considering undertaking one or more construction projects. The estimated marginal costs and benefits of each project are given in the table.  Refer to the above table and information. What is the total amount that the government should spend on construction projects?

Accepted Answer

A)  $8 million 
B)  $14 million 
C)  $19 million 
D)  $37 million

Question 7

When there is allocative efficiency in a market, the buyers' maximum willingness to pay for the last unit traded is equal to the sellers' minimum acceptable price for that unit.

Accepted Answer

A) True 
 B)False

Question 8

Government can reallocate resources away from private goods towards public goods, usually through:

Accepted Answer

A)  Import tariffs and quotas 
B)  The laws of supply and demand 
C)  Taxes and government spending 
D)  Positive and negative externalities

Question 9

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to:

Accepted Answer

A)  P x Q 
B)  P + Q 
C)  P - Q 
D)  Q - P

Question 10

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 11

In a market where negative externalities are associated with consumption and production, the equilibrium will not be efficient because:

Accepted Answer

A)  Too few resources will be allocated towards producing the good 
B)  Firms will shut down until costs are reduced 
C)  Costs of production will, on average, be too high 
D)  Too many resources will be allocated towards producing the good

Question 12

The government receives all of the benefits associated with the production of a public good.

Accepted Answer

A) True 
 B)False

Question 13

The market demand curve for a public good:

Accepted Answer

A)  Is derived in the same manner as demand curves for private goods 
B)  Is derived by horizontally summing all individual demand curves 
C)  Shows the total value that all individuals place on each additional unit of the good 
D)  Shows the total number of units that would be produced by the public sector at each possible price

Question 14

If car makers are required to install gadgets to improve the cleanliness of car-exhaust, we would expect the equilibrium quantity in the car market to decrease.

Accepted Answer

A) True 
 B)False

Question 15

Refer to the above supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that the government could shift demand to its socially optimal level is to:

Accepted Answer

A)  Tax the sellers 
B)  Tax the buyers 
C)  Subsidize the sellers 
D)  Subsidize the buyers

Question 16

Refer to the above supply and demand graph of Product X. What would happen if the government decided to also start providing Product X in the market?

Accepted Answer

A)  Demand would decrease 
B)  Demand would increase 
C)  Supply would decrease 
D)  Price would decrease

Question 17

Refer to the above supply and demand graph of Product X. If there are positive externalities from the consumption of Product X, then the socially optimal demand curve would be:

Accepted Answer

A)  To the left of line D on the graph 
B)  To the right of line D on the graph 
C)  At the position of line D on the graph 
D)  An upward-sloping line

Question 18

Refer to the above supply and demand graph for a public good. If Q1 units of the public good are produced, then:

Accepted Answer

A)  Users are willing to pay more for the public good than it costs to produce it 
B)  Users are willing to pay less for the public good than it costs to produce it 
C)  There is an over-allocation of resources towards producing this public good 
D)  Allocative efficiency is achieved in the market

Question 19

If Congress decreases the amount of government insurance on bank deposits, then this action would:

Accepted Answer

A)  Create a moral hazard problem 
B)  Reduce a moral hazard problem 
C)  Create an adverse selection problem 
D)  Reduce an adverse selection problem

Question 20

Nonrivalry in the use or consumption of a good means that only one person is consuming the good without any rivals.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures: Public Goods and Externalities

The free-rider problem refers to the local government's problem of finding funds to subsidize public transportation.

The value that consumers get (from consuming a product) over and above that they actually paid for the product is called:

The licensing and regulation of financial advisers is one way by which the government tries to deal with the problem of inadequate information that financial firms about their customers.

Refer to the above graph. If the output level is Q₁, then the sum of the consumer and producer surplus is:

Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of:

A government is considering undertaking one or more construction projects. The estimated marginal costs and benefits of each project are given in the table. Refer to the above table and information. What is the total amount that the government should spend on construction projects?

When there is allocative efficiency in a market, the buyers' maximum willingness to pay for the last unit traded is equal to the sellers' minimum acceptable price for that unit.

Government can reallocate resources away from private goods towards public goods, usually through:

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal 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?

In a market where negative externalities are associated with consumption and production, the equilibrium will not be efficient because:

The government receives all of the benefits associated with the production of a public good.

The market demand curve for a public good:

If car makers are required to install gadgets to improve the cleanliness of car-exhaust, we would expect the equilibrium quantity in the car market to decrease.

Refer to the above supply and demand graph. S₁ and D₁ represent the current market supply and demand, respectively. S₂ and D₂ represent the socially optimal supply and demand. One way that the government could shift demand to its socially optimal level is to:

Refer to the above supply and demand graph of Product X. What would happen if the government decided to also start providing Product X in the market?

Refer to the above supply and demand graph of Product X. If there are positive externalities from the consumption of Product X, then the socially optimal demand curve would be:

Refer to the above supply and demand graph for a public good. If Q₁ units of the public good are produced, then:

If Congress decreases the amount of government insurance on bank deposits, then this action would:

Nonrivalry in the use or consumption of a good means that only one person is consuming the good without any rivals.