Question 1

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to
pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90. If the actual price of
lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

Accepted Answer

A) True 
 B)False

Question 2

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.
In the situation described above, we would expect an

Accepted Answer

A)   overproduction of paper in the mills.
B)   underproduction of paper in the mills.
C)   external cost resulting from the production of hydroelectric power.
D)   overproduction of power by the hydroelectric plants.E) None of the above
F) C) and D)

Question 3

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

Accepted Answer

A)   the principal-agent problem.
B)   the moral hazard problem.
C)   the free-rider problem.
D)   asymmetric information.E) None of the above
F) B) and D)

Question 4

(Last Word)  Since it's not possible for governments to know the costs of pollution abatement as well as the polluters know themselves, then there is a(n)

Accepted Answer

A)   asymmetric information problem.
B)   externality problem.
C)   moral hazard problem.
D)   problem with the law of demand.E) C) and D)
F) B) and C)

Question 5

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 6

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have AFLAC." This
Response illustrates the

Accepted Answer

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

Question 7

Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas

Accepted Answer

A)   a + b.
B)   a + b + c + d.
C)   c + d.
D)   a + c.E) C) and D)
F) A) and B)

Question 8

Refer to the provided graph of a competitive market. If the output level is Q2, then there will be

Accepted Answer

A)   allocative eﬃciency.
B)   maximum deadweight losses.
C)   maximum consumer surplus.
D)   greater marginal beneﬁts than marginal costs of the product.E) B) and D)
F) A) and B)

Question 9

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 B)
F) B) and C)

Question 10

Consumer surplus arises in a market because

Accepted Answer

A)   the quantity supplied is greater than quantity demanded at the current market price.
B)   the quantity demanded is greater than quantity supplied at the current market price.
C)   the market price is below what some consumers are willing to pay for the product.
D)   the market price is higher than what some consumers are willing to pay for the product.E) A) and B)
F) A) and C)

Question 11

When the marginal beneﬁts exceed the marginal costs of producing a product, then allocative
eﬃciency is not achieved in the market.

Accepted Answer

A) True 
 B)False

Question 12

Deﬁne negative externality, and explain how water pollution is an example.

Accepted Answer

A negative externality is a cost imposed...

Question 13

An effective antipollution policy from the economic perspective requires that all pollution be
eliminated and banned.

Accepted Answer

A) True 
 B)False

Question 14

In dealing with market failures, the government always bases its decisions on economic analysis of
marginal cost and marginal beneﬁt.

Accepted Answer

A) True 
 B)False

Question 15

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences a

Accepted Answer

A)   a consumer surplus of $12, and Nathan experiences a producer surplus of $3.
B)   a producer surplus of $9, and Nathan experiences a consumer surplus of $3.
C)   a consumer surplus of $9, and Nathan experiences a producer surplus of $3.
D)   a producer surplus of $9, and Nathan experiences a producer surplus of $12.E) None of the above
F) B) and C)

Question 16

Upon learning that his auto transmission is about to fail, Ray sells his car to an unsuspecting buyer. This circumstance illustrates the

Accepted Answer

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

Question 17

If a good that generates negative externalities were priced to take these negative externalities into account, then its

Accepted Answer

A)   price would decrease and its quantity would increase.
B)   quantity would increase, but its price would remain constant.
C)   price would increase and its quantity would decrease.
D)   price would increase, but its quantity would remain constant.E) B) and C)
F) A) and C)

Question 18

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

Accepted Answer

A)   utility.
B)   consumer surplus.
C)   consumer demand.
D)   market failure.E) C) and D)
F) A) and D)

Question 19

What are some ways the private sector has found to overcome information diﬃculties without
government intervention?

Accepted Answer

Many ﬁrms offer product warranties to ov...

Question 20

An example of an adverse selection problem is in insurance, where the people most likely to claim
insurance payouts are the people who will seek to buy the most generous policies.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences a

Correct Answer
verified

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90. If the actual price of lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

Correct Answer
verified

Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas

Correct Answer
verified

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

Correct Answer
verified

In dealing with market failures, the government always bases its decisions on economic analysis of marginal cost and marginal beneﬁt.

Correct Answer
verified

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

Correct Answer
verified

Refer to the provided graph of a competitive market. If the output level is Q2, then there will be

Correct Answer
verified

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

Correct Answer
verified

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

An effective antipollution policy from the economic perspective requires that all pollution be eliminated and banned.

Correct Answer
verified

Upon learning that his auto transmission is about to fail, Ray sells his car to an unsuspecting buyer. This circumstance illustrates the

Correct Answer
verified

An example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies.

Correct Answer
verified

Correct Answer
verified

If a good that generates negative externalities were priced to take these negative externalities into account, then its

Correct Answer
verified

What are some ways the private sector has found to overcome information diﬃculties without government intervention?

Correct Answer
verified
Many ﬁrms offer product warranties to ov...
View Answer

(Last Word) Since it's not possible for governments to know the costs of pollution abatement as well as the polluters know themselves, then there is a(n)

Correct Answer
verified

When the marginal beneﬁts exceed the marginal costs of producing a product, then allocative eﬃciency is not achieved in the market.

Correct Answer
verified

Deﬁne negative externality, and explain how water pollution is an example.

Correct Answer
verified
A negative externality is a cost imposed...
View Answer

Consumer surplus arises in a market because

Correct Answer
verified

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have AFLAC." This Response illustrates the

Correct Answer
verified

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences a

Correct AnswerverifiedShow Answer

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90. If the actual price of lemonade is $1.00 per glass, then consumer surplus in this market will be $0.70.

Correct AnswerverifiedShow Answer

Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas

Correct AnswerverifiedShow Answer

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

Correct AnswerverifiedShow Answer

In dealing with market failures, the government always bases its decisions on economic analysis of marginal cost and marginal beneﬁt.

Correct AnswerverifiedShow Answer

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

Correct AnswerverifiedShow Answer

Refer to the provided graph of a competitive market. If the output level is Q2, then there will be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

An effective antipollution policy from the economic perspective requires that all pollution be eliminated and banned.

Correct AnswerverifiedShow Answer

Upon learning that his auto transmission is about to fail, Ray sells his car to an unsuspecting buyer. This circumstance illustrates the

Correct AnswerverifiedShow Answer

An example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a good that generates negative externalities were priced to take these negative externalities into account, then its

Correct AnswerverifiedShow Answer

What are some ways the private sector has found to overcome information diﬃculties without government intervention?

Correct AnswerverifiedMany ﬁrms offer product warranties to ov...View AnswerShow Answer

(Last Word) Since it's not possible for governments to know the costs of pollution abatement as well as the polluters know themselves, then there is a(n)

Correct AnswerverifiedShow Answer

When the marginal beneﬁts exceed the marginal costs of producing a product, then allocative eﬃciency is not achieved in the market.

Correct AnswerverifiedShow Answer

Deﬁne negative externality, and explain how water pollution is an example.

Correct AnswerverifiedA negative externality is a cost imposed...View AnswerShow Answer

Consumer surplus arises in a market because

Correct AnswerverifiedShow Answer

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have AFLAC." This Response illustrates the

Correct AnswerverifiedShow Answer

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Many ﬁrms offer product warranties to ov...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A negative externality is a cost imposed...
View Answer

Correct Answer
verified

Correct Answer
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