Question 1

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.E) A) and B)
F) All of the above

Question 2

When producers do not have to pay the full cost of producing a product, they tend to

Accepted Answer

A)  overproduce the product because of a demand-side market failure.
B)  underproduce the product because of a demand-side market failure.
C)  underproduce the product because of a supply-side market failure.
D)  overproduce the product because of a supply-side market failure.E) B) and C)
F) A) and C) D

Question 3

A public good

Accepted Answer

A)  generally results in substantial negative externalities.
B)  can never be provided by a nongovernmental organization.
C)  costs essentially nothing to produce and is thus provided by the government at a zero price.
D)  can't be provided to one person without making it available to others as well.E) A) and D)
F) A) and B)

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.E) A) and C)
F) A) and B)

Question 5

A competitive market produces the economically efficient outcome if the following conditions are met, except

Accepted Answer

A)  the market produces only units for which benefits are at least equal to cost.
B)  the market demand curve reflects the buyers' full willingness to pay.
C)  the market supply curve reflects all costs of production.
D)  the market produces only units for which costs are at least equal to benefits.E) A) and D)
F) A) and C)

Question 6

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.E) C) and D)
F) B) and D)

Question 7

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

Accepted Answer

A)  adverse selection.
B)  externalities.
C)  moral hazard.
D)  public goods.E) B) and C)
F) All of the above

Question 8

(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.E) B) and D)
F) B) and C) B

Question 9

When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we have a demand-side market failure.

Accepted Answer

A) True 
 B)False

Question 10

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others.If Transcontinental does not pay for the damage it causes, what has occurred?

Accepted Answer

A)  positive externality
B)  demand-side market failure
C)  supply-side market failure
D)  all of theseE) B) and C)
F) A) and D)

Question 11

Upon buying a car with airbags, Indy begins to drive recklessly.This is an example of the

Accepted Answer

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

Question 12

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.E) B) and C)
F) None of the above

Question 13

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.If the government intervenes and corrects the externality in the situation described above, we would expect

Accepted Answer

A)  the output of the paper mills to increase.
B)  the price of paper from the mills to decrease.
C)  production of the hydroelectric power plants to decrease.
D)  production in the paper mills to decrease.E) C) and D)
F) A) and B)

Question 14

Professor Gullible agreed to cancel the final examination if students promised to study for it anyway.The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Accepted Answer

A) True 
 B)False

Question 15

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.E) C) and D)
F) A) and B)

Question 16

If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be

Accepted Answer

A)  taxed.
B)  prohibited.
C)  subsidized.
D)  left alone.E) A) and B)
F) B) and C)

Question 17

Asymmetric information occurs when the two parties in a market transaction do not have the same amount of information regarding the product or process involved in the transaction.

Accepted Answer

A) True 
 B)False  True

Question 18

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.

Accepted Answer

A) True 
 B)False

Question 19

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

Question 20

In a well-functioning cap-and-trade system for pollution rights, society benefits because pollution will be brought down to insignificant levels.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures: Public Goods and Externalities

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

Correct Answer
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When producers do not have to pay the full cost of producing a product, they tend to

Correct Answer
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D

A public good

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

Correct Answer
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A competitive market produces the economically efficient outcome if the following conditions are met, except

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

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

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

Correct Answer
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B

When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we have a demand-side market failure.

Correct Answer
verified

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others.If Transcontinental does not pay for the damage it causes, what has occurred?

Correct Answer
verified

Upon buying a car with airbags, Indy begins to drive recklessly.This is an example of the

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
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Professor Gullible agreed to cancel the final examination if students promised to study for it anyway.The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Correct Answer
verified

Correct Answer
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If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be

Correct Answer
verified

Asymmetric information occurs when the two parties in a market transaction do not have the same amount of information regarding the product or process involved in the transaction.

Correct Answer
verified
True

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.

Correct Answer
verified

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.

Correct Answer
verified

In a well-functioning cap-and-trade system for pollution rights, society benefits because pollution will be brought down to insignificant levels.

Correct Answer
verified

Exam 4: Market Failures: Public Goods and Externalities

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

Correct AnswerverifiedShow Answer

When producers do not have to pay the full cost of producing a product, they tend to

Correct AnswerverifiedD

A public good

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A competitive market produces the economically efficient outcome if the following conditions are met, except

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedB

When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we have a demand-side market failure.

Correct AnswerverifiedShow Answer

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others.If Transcontinental does not pay for the damage it causes, what has occurred?

Correct AnswerverifiedShow Answer

Upon buying a car with airbags, Indy begins to drive recklessly.This is an example of the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Professor Gullible agreed to cancel the final examination if students promised to study for it anyway.The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be

Correct AnswerverifiedShow Answer

Asymmetric information occurs when the two parties in a market transaction do not have the same amount of information regarding the product or process involved in the transaction.

Correct AnswerverifiedTrue

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

In a well-functioning cap-and-trade system for pollution rights, society benefits because pollution will be brought down to insignificant levels.

Correct AnswerverifiedShow Answer

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D

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B

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True

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