Question 1

What are the limitations to government's role in the economy?

Accepted Answer

Government oﬃcials must ﬁrst correctly i...

Question 2

Refer to the diagram. The area that identiﬁes the maximum sum of consumer surplus and producer surplus is

Accepted Answer

A)   a + b + c + d + e + f.
B)   c + d + f.
C)   a + b + e.
D)   a + b + c + d.E) None of the above
F) A) and D)

Question 3

(Consider This) The principle that private negotiation can resolve potential externalities without
resorting to government intervention is known as the Coase theorem.

Accepted Answer

A) True 
 B)False

Question 4

Other things equal, a fall in the market price caused by a change in supply will

Accepted Answer

A)   increase consumer surplus.
B)   decrease consumer surplus.
C)   increase producer surplus while leaving consumer surplus unchanged.
D)   decrease producer surplus while leaving consumer surplus unchanged.E) B) and C)
F) A) and D)

Question 5

The socially optimal amount of pollution abatement occurs where society's marginal

Accepted Answer

A)   beneﬁt of abatement exceeds its marginal cost of abatement by the greatest amount.
B)   beneﬁt of abatement equals its marginal cost of abatement.
C)   beneﬁt of abatement is zero.
D)   cost of abatement is at its maximum.E) B) and C)
F) B) and D)

Question 6

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 7

Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to
S1 in diagram (a)  on the left and from S to S2 in diagram (b)  on the right. The shift of the supply curve
From S to S1 in diagram (a)  might be caused by a per-unit

Accepted Answer

A)   subsidy paid to the producers of this product.
B)   tax on the producers of this product.
C)   subsidy paid to the buyers of this product.
D)   tax on the buyers of this product.E) B) and C)
F) None of the above

Question 8

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer
will not buy the product because the consumer surplus will be negative.

Accepted Answer

A) True 
 B)False

Question 9

At equilibrium in a market for a product, the total revenues received by sellers equal the

Accepted Answer

A)   market producer surplus.
B)   total amount spent by buyers on the product.
C)   total proﬁts of sellers.
D)   market consumer surplus.E) A) and B)
F) B) and C)

Question 10

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the
Production of Z, then

Accepted Answer

A)   a price lower than B and an output greater than G would improve resource allocation.
B)   government should levy a per-unit excise tax on Z to shift the demand curve to the right.
C)   government should levy a per-unit excise tax on Z to shift the supply curve toward S1.
D)   government should subsidize the production of Z to lower equilibrium price and increase equilibrium output.E) A) and D)
F) A) and C)

Question 11

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) A) and B)
F) B) and C)

Question 12

External beneﬁts in consumption refer to beneﬁts accruing to

Accepted Answer

A)   those who are selling the product to the consumers.
B)   those who bought and consumed the product.
C)   those other than the ones who consumed the product.
D)   those who are consuming the product abroad.E) C) and D)
F) A) and B)

Question 13

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

Accepted Answer

A)   new cars declining in quality because of competition from used cars.
B)   a declining quality of used cars for sale in the market.
C)   a rising quality of used cars for sale in the market.
D)   used-car buyers willing to pay higher prices in the market.E) A) and C)
F) None of the above

Question 14

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.E) None of the above
F) All of the above

Question 15

According to the Coase theorem, externality problems

Accepted Answer

A)   do not exist in reality, because all costs and beneﬁts are internal to ﬁrms.
B)   can be solved through private negotiations without the need for government intervention.
C)   must only be resolved by government action, through either taxes or subsidies.
D)   can never be resolved adequately, because one party always gains while the other loses.E) B) and C)
F) None of the above

Question 16

Refer to the provided 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.E) All of the above
F) None of the above

Question 17

Production subsidies are a way of internalizing external costs among polluting ﬁrms.

Accepted Answer

A) True 
 B)False

Question 18

Pigovian taxes

Accepted Answer

A)   are used to correct negative externalities.
B)   are used to correct positive externalities.
C)   are primarily designed to fund government.
D)   are a form of income tax.E) A) and C)
F) A) and B)

Question 19

An eﬃciency loss (or deadweight loss)

Accepted Answer

A)   is measured as the combined loss of consumer surplus and producer surplus from over- or underproducing.
B)   results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price.
C)   can result from underproduction, but not from overproduction.
D)   can result from overproduction, but not from underproduction.E) B) and C)
F) None of the above

Question 20

(Consider This)  When you enter a congested roadway,

Accepted Answer

A)   you are the only driver that is experiencing a negative externality from the heavy traﬃc.
B)   the opportunity cost of idling in slow traﬃc is the only additional cost.
C)   the increased use of gasoline is the only external cost incurred.
D)   there are mutual external costs from the slow traﬃc that include increased gasoline costs and more time spent on the roadway.E) A) and B)
F) B) and C)

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Pigovian taxes

Correct Answer
verified

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

Correct Answer
verified

According to the Coase theorem, externality problems

Correct Answer
verified

Refer to the provided 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

Correct Answer
verified

Production subsidies are a way of internalizing external costs among polluting ﬁrms.

Correct Answer
verified

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Correct Answer
verified

(Consider This) When you enter a congested roadway,

Correct Answer
verified

Refer to the diagram. The area that identiﬁes the maximum sum of consumer surplus and producer surplus is

Correct Answer
verified

Correct Answer
verified

What are the limitations to government's role in the economy?

Correct Answer
verified
Government oﬃcials must ﬁrst correctly i...
View Answer

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.

Correct Answer
verified

Other things equal, a fall in the market price caused by a change in supply will

Correct Answer
verified

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

Correct Answer
verified

At equilibrium in a market for a product, the total revenues received by sellers equal the

Correct Answer
verified

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the Production of Z, then

Correct Answer
verified

An eﬃciency loss (or deadweight loss)

Correct Answer
verified

External beneﬁts in consumption refer to beneﬁts accruing to

Correct Answer
verified

The socially optimal amount of pollution abatement occurs where society's marginal

Correct Answer
verified

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

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

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Pigovian taxes

Correct AnswerverifiedShow Answer

One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of

Correct AnswerverifiedShow Answer

According to the Coase theorem, externality problems

Correct AnswerverifiedShow Answer

Refer to the provided 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

Correct AnswerverifiedShow Answer

Production subsidies are a way of internalizing external costs among polluting ﬁrms.

Correct AnswerverifiedShow Answer

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Correct AnswerverifiedShow Answer

(Consider This) When you enter a congested roadway,

Correct AnswerverifiedShow Answer

Refer to the diagram. The area that identiﬁes the maximum sum of consumer surplus and producer surplus is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What are the limitations to government's role in the economy?

Correct AnswerverifiedGovernment oﬃcials must ﬁrst correctly i...View AnswerShow Answer

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.

Correct AnswerverifiedShow Answer

Other things equal, a fall in the market price caused by a change in supply will

Correct AnswerverifiedShow Answer

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

Correct AnswerverifiedShow Answer

At equilibrium in a market for a product, the total revenues received by sellers equal the

Correct AnswerverifiedShow Answer

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the Production of Z, then

Correct AnswerverifiedShow Answer

An eﬃciency loss (or deadweight loss)

Correct AnswerverifiedShow Answer

External beneﬁts in consumption refer to beneﬁts accruing to

Correct AnswerverifiedShow Answer

The socially optimal amount of pollution abatement occurs where society's marginal

Correct AnswerverifiedShow Answer

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

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 Answer
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Correct Answer
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Correct Answer
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Government oﬃcials must ﬁrst correctly i...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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