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Exam 4: Market Failures Caused by Externalities Asymmetric Information

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Question 21

Multiple Choice

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Refer to the diagram of the market for product X. Curve St embodies all costs (including externalities) , and Dt embodies all benefits (including externalities) associated with the production And consumption of X. Assuming the market equilibrium output is Q1, we can conclude that the Existence of external

A) costs has resulted in an overallocation of resources to X.
B) benefits has resulted in an overallocation of resources to X.
C) costs has resulted in an underallocation of resources to X.
D) benefits has resulted in an underallocation of resources to X.

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

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Question 22

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Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality. These warranties help reduce the chance of what occurring?

A) negative externalities
B) adverse selection
C) spillover benefits
D) moral hazard

E) All of the above
F) C) and D)

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Question 23

Multiple Choice

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Refer to the diagram. Which one of the following might shift the marginal cost curve from MC1 to MC2?

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral hazard.

When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting on their mortgages, there is no moral hazard problem.

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, we would Expect

Refer to the diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these External costs is large. If the government wishes to establish an optimal allocation of resources in This market, it should

When a competitive market achieves allocative efficiency, it implies that

$\begin{array} { | c | c | c | } \hline \text { Producer } & \begin{array} { c } \text { Minimum } \\\text { Acceptable Price }\end{array} & \begin{array} { c } \text { Actual Price } \\\text { (Equilibrium Price) }\end{array} \\\hline A & \$ 6 & \$ 13 \\\hline B & 7 & 13 \\\hline C & 9 & 13 \\\hline D & 11 & 13 \\\hline\end{array}$ Refer to the provided table. The producer surplus is $4 for producer

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the total maximum amount that consumers would have been willing to pay for the Product is represented by the area

If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then which of the following is true?

(Consider This) People with high opportunity costs for time won't mind sitting in traffic.

Refer to the diagram. If actual production and consumption occur at Q1,

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 have about their customers.

An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which

Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. One Solution to this externality problem is to

Refer to the provided graph. Suppose consumers do not know the safety risks associated with a particular good and that the free-market equilibrium is at E, as shown in the diagram above. If an Independent agency now provides accurate information to consumers about the harmful Characteristics of the product, then

Refer to the diagram. From society's perspective, if MB2 and MC1 are relevant,

(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation Describes

Refer to the diagram. Which one of the following might shift the marginal benefit curve from MB1 to MB2?