Question 1

When negative externalities exist in a market, that market will produce too little output compared to the socially efficient level of output.

Accepted Answer

A) True 
 B)False

Question 2

The figure given below shows the demand and supply curves of automobiles. Figure 13.3  In the figure,
D: Demand curve of automobiles
S: Supply of automobiles prior to the tax
S+t: Supply of automobiles after the tax
According to Figure 13.3, the market attains equilibrium before the tax at:

Accepted Answer

A) point d. 
B) point a. 
C) point b. 
D) point c. 
E) point e.

Question 3

_____ occurs when unobservable qualities are valued incorrectly because of a lack of information.

Accepted Answer

A) Moral hazard 
B) Adverse selection 
C) Conspicuous consumption 
D) Marginal selection 
E) Statistical discrimination

Question 4

The figure given below shows the demand and supply curves of steel.Sp is the private supply curve, and Ss is the social supply curve that includes both private costs and external costs. Figure 13.2  According to Figure 13.2:

Accepted Answer

A) both points a and b are socially efficient. 
B) both points a and b are inefficient. 
C) point a represents the social equilibrium, whereas point b represents the private equilibrium. 
D) point a represents the private equilibrium, whereas point b represents the social equilibrium. 
E) when external costs are zero, the socially efficient output level is equal to 0Qs units.

Question 5

When legislators support one another's project in order to ensure support for their own, it is referred to as:

Accepted Answer

A) rent seeking. 
B) moral hazard. 
C) political hazard. 
D) logrolling. 
E) bribery.

Question 6

Consumers in used car markets can very easily differentiate between high-quality and low-quality cars.

Accepted Answer

A) True 
 B)False

Question 7

In the case of positive externalities, too many people consume and produce the good compared to what is desired by society.

Accepted Answer

A) True 
 B)False

Question 8

Overfishing along the coastline of Helsking village led the government to impose a fee on the boats used for fishing.The fisherman were charged $50 on each boat they sent out for fishing.The following table shows the total pounds of fish caught per hour and the number of boats used for fishing. Table 13.2
 Refer to Table 13.2.Suppose fish sells for $1 per pound.If each fisherman decides whether or not to fish based on the average catch, how many boats per hour will go out to fish?

Accepted Answer

A) 6 
B) 5 
C) 4 
D) 3 
E) 2

Question 9

The free rider problem arises when a good is:

Accepted Answer

A) rivalrous. 
B) excludable. 
C) non excludable. 
D) non rivalrous. 
E) an absolute necessity.

Question 10

If a gas station selling gasoline is asked to incorporate the pollution costs, its supply curve will shift to the right.

Accepted Answer

A) True 
 B)False

Question 11

The government should subsidize the production of goods which generate a positive externality.

Accepted Answer

A) True 
 B)False

Question 12

The following table shows the costs and benefit of producing a commodity. Table 13.1
 According to Table 13.1, at the free market equilibrium:

Accepted Answer

A) 1 unit of output is produced. 
B) 2 units of output is produced. 
C) 5 units of output is produced. 
D) 4 units of output is produced. 
E) 3 units of output is produced.

Question 13

When negative externalities exist in production:

Accepted Answer

A) the social supply curve lies to the left of the private supply curve. 
B) the social supply curve lies to the right of the private supply curve. 
C) the social supply curve is identical to the private supply curve. 
D) the private demand curve lies to the right of the social demand curve. 
E) the private demand curve lies to the left of the social demand curve.

Question 14

Which of the following may be explained by adverse selection?

Accepted Answer

A) When banks raise the interest rate on loans, high-risk applicants leave the market. 
B) When health insurance companies decrease insurance charges but increase deductibles, less healthy people are more willing to purchase insurance. 
C) As the cost of insurance rises, low-risk applicants reduce their coverage. 
D) Products are sold at prices that reflect their true value. 
E) Loan companies do not require down payments.

Question 15

A pollution tax has the effect of reducing the costs of production for a firm, leading to a rightward shift of the supply curve.

Accepted Answer

A) True 
 B)False

Question 16

As opposed to economists like Tinbergen and Galbraith, the "public choice" school argues that:

Accepted Answer

A) the invisible hand of the market is inefficient in allocating resources to their best uses. 
B) the government often does not take correct economic decisions as it is run by self-interested politicians. 
C) the government takes correct decisions as it is run by conscious and educated individuals. 
D) the market fails to maximize social efficiency. 
E) the government is a non-profit making organization which works to maximize social efficiency.

Question 17

For which of the following goods will the free rider problem arise?

Accepted Answer

A) Private golf course 
B) Cable television 
C) Privately owned apartment 
D) National defense 
E) Movie theatres

Question 18

Suppose the American Medical Association has been able to persuade the Congress to pass a no-fault insurance law protecting doctors from malpractice suits.The reduction in costs to doctors is a rent.

Accepted Answer

A) True 
 B)False

Question 19

A market in which adverse selection occurs is often called a lemons market.

Accepted Answer

A) True 
 B)False

Question 20

When the government imposes a tax on production of a commodity:

Accepted Answer

A) production will invariably increase. 
B) the cost of production increases, so the supply curve shifts to the left. 
C) the benefits of consumption increases, so the demand curve shifts to the right. 
D) there is no change in demand or supply. 
E) both the demand and supply curves shift to the right.

Exam 21: Market Failures, Government Failures, and Rent Seeking

When negative externalities exist in a market, that market will produce too little output compared to the socially efficient level of output.

The figure given below shows the demand and supply curves of automobiles. Figure 13.3 In the figure, D: Demand curve of automobiles S: Supply of automobiles prior to the tax S+t: Supply of automobiles after the tax According to Figure 13.3, the market attains equilibrium before the tax at:

_____ occurs when unobservable qualities are valued incorrectly because of a lack of information.

The figure given below shows the demand and supply curves of steel.S_p is the private supply curve, and S_s is the social supply curve that includes both private costs and external costs. Figure 13.2 According to Figure 13.2:

When legislators support one another's project in order to ensure support for their own, it is referred to as:

Consumers in used car markets can very easily differentiate between high-quality and low-quality cars.

In the case of positive externalities, too many people consume and produce the good compared to what is desired by society.

The free rider problem arises when a good is:

If a gas station selling gasoline is asked to incorporate the pollution costs, its supply curve will shift to the right.

The government should subsidize the production of goods which generate a positive externality.

The following table shows the costs and benefit of producing a commodity. Table 13.1 According to Table 13.1, at the free market equilibrium:

When negative externalities exist in production:

Which of the following may be explained by adverse selection?

A pollution tax has the effect of reducing the costs of production for a firm, leading to a rightward shift of the supply curve.

As opposed to economists like Tinbergen and Galbraith, the "public choice" school argues that:

For which of the following goods will the free rider problem arise?

Suppose the American Medical Association has been able to persuade the Congress to pass a no-fault insurance law protecting doctors from malpractice suits.The reduction in costs to doctors is a rent.

A market in which adverse selection occurs is often called a lemons market.

When the government imposes a tax on production of a commodity: