Question 1

Refer to the graph above. Suppose that it is shows the market for an insurance product. If something happens to heighten the adverse selection problem in this market, then:

Accepted Answer

A)  The supply curve will shift to the left 
B)  The supply curve will shift to the right 
C)  The demand curve will shift to the left 
D)  The supply curve will not be affected

Question 2

The equilibrium point in the market is where S and D curve intersect.  Refer to the graph above. At equilibrium, the total amount of spending that consumers would be paying for the product is represented by the area:

Accepted Answer

A)  a + b 
B)  a + b + c 
C)  a 
D)  b + c

Question 3

The minimum acceptable price for a product that producer Sam is willing to receive is $15. The price he could get for the product in the market is $18. How much is Sam's producer surplus?

Accepted Answer

A)  $3 
B)  $33 
C)  $45 
D)  $270

Question 4

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 5

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 6

Street entertainers face the free-rider problem when they perform because of the:

Accepted Answer

A)  Law of Demand 
B)  Diminishing marginal utility 
C)  Nonexcludability characteristic 
D)  Rivalry characteristic

Question 7

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table.  Refer to the above table and information. What is the total cost and total benefit of doing projects A, B, and 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 8

Which of the following antipollution policies is least likely to make use of cost-benefit analysis?

Accepted Answer

A)  Creating a market for pollution rights 
B)  Charging polluters an emission fee 
C)  Enacting legislation that bans pollution 
D)  Private bargaining

Question 9

Answer the question on the basis of the following information is for public good. Pa and Pb represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Qc) of the public good. Qs represents the quantity of the public good supplied by government at each of the collective prices.  Refer to the above information. If only 1 unit of this public good is produced, then the marginal benefit is:

Accepted Answer

A)  $3 and the marginal cost is $9 
B)  $4 and the marginal cost is $7 
C)  $6 and the marginal cost is $3 
D)  $9 and the marginal cost is $3

Question 10

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem?

Accepted Answer

A)  Levy a tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources 
B)  Levy a tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products 
C)  Levy a tax on the producers of electricity and use the tax revenues to clean up the river 
D)  Levy a tax on the producers of paper products and use the tax revenues to clean up the river

Question 11

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 12

Better Business Bureaus in various cities exist partly in order to try to deal with inadequate buyer information about sellers.

Accepted Answer

A) True 
 B)False

Question 13

E-bay, 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 14

When there is overproduction of a good:

Accepted Answer

A)  The marginal benefit of the good exceeds its marginal cost 
B)  The marginal cost of the good exceeds its marginal benefit 
C)  The net benefit of producing extra units if the good is positive 
D)  The allocative efficiency is enhanced

Question 15

Which of the following is an example of a market failure?

Accepted Answer

A)  There are not enough tickets available to concerts of extremely popular performers and artists 
B)  The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and procedures 
C)  Successful public schools provide benefits to the students who attend them, as well as to the community as a whole including those who don't go to those public schools 
D)  Extensive decreases in the prices of electronic equipment resulted in large numbers of bankruptcies in the computer industry

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

Which of the following statements concerning a pure public good is false?

Accepted Answer

A)  It is impossible to exclude non-taxpayers from the enjoyment of the public good 
B)  All benefits associated with the production and use of a public good are received by the government 
C)  The availability of a public good to one person simultaneously makes it available to all members of society 
D)  The private sector does not have an economic incentive to produce a socially optimal amount of a public good

Question 18

It has been proposed that a government agency be charged with the task of determining the amount of pollution that the atmosphere (or a body of water) can safely absorb, establish "rights" to this limited amount of pollution, and sell those limited amount of rights to firms. The firms can then buy and sell these rights among themselves later. This approach is known as the:

Accepted Answer

A)  Taxes and subsidies system 
B)  Cap and trade system 
C)  Property rights system 
D)  Market and command system

Question 19

Insurance policies typically stipulate a deductible amount which the insured must shoulder; this is to address the problem of:

Accepted Answer