Question 1

Which of the following is an example of a negative externality?

Accepted Answer

A)   an increase in the value of land you own when a nearby development is completed
B)   the costs paid by a company to build an automated factory
C)   falling property values in a neighborhood where a disreputable nightclub is operating
D)   the higher price you pay when you buy a heavily advertised productE) A) and B)
F) All of the above

Question 2

What resource problem is created by positive externalities?

Accepted Answer

Positive externalities occur when an und...

Question 3

There is an adverse selection problem in the market for used cars because

Accepted Answer

A)   owners of poor-quality cars have a strong incentive to sell their cars, while owners of high- quality used cars have more incentive to keep their cars.
B)   owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
C)   most people prefer new cars, but the high prices for new cars force most of them to buy used cars.
D)   government actions to pass "lemon" laws have reduced information on used cars.E) A) and C)
F) A) and B)

Question 4

If there are external beneﬁts associated with the consumption of a good or service,

Accepted Answer

A)   the market demand curve will overestimate the true demand curve.
B)   the market demand curve will underestimate the true demand curve.
C)   consumers are paying for all these beneﬁts.
D)   the market demand curve will be the vertical summation of the individual demand curves.E) B) and C)
F) A) and B)

Question 5

At the output level deﬁning allocative eﬃciency,

Accepted Answer

A)   the areas of consumer and producer surplus necessarily are equal.
B)   marginal beneﬁt exceeds marginal cost by the greatest amount.
C)   consumer surplus exceeds producer surplus by the greatest amount.
D)   the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.E) A) and B)
F) A) and D)

Question 6

When the production of a good generates external costs, the producing ﬁrm's supply curve will be

Accepted Answer

A)   below (to the right of)  the total-cost supply curve.
B)   above (to the left of)  the total-cost supply curve.
C)   vertical.
D)   horizontal.E) B) and C)
F) B) and D)

Question 7

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 8

Explain the term market failure, and list its two types.

Accepted Answer

The term market failure refers to situat...

Question 9

The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a
result of the contract in ways that are costly to the other party.

Accepted Answer

A) True 
 B)False

Question 10

Market failure is said to occur whenever

Accepted Answer

A)   competitive markets do not allocate resources in the most economically desirable way.
B)   prices rise.
C)   some consumers who want a good do not obtain it because the price is higher than they are willing to pay.
D)   government intervenes in the functioning of competitive markets.E) None of the above
F) A) and B)

Question 11

A negative externality or spillover cost occurs when

Accepted Answer

A)   ﬁrms fail to achieve allocative eﬃciency.
B)   ﬁrms fail to achieve productive eﬃciency.
C)   the price of a good exceeds the marginal cost of producing it.
D)   the total cost of producing a good exceeds the costs borne by the producer.E) B) and D)
F) B) and C)

Question 12

When there is overproduction of a good,

Accepted Answer

A)   the marginal beneﬁt of the good exceeds its marginal cost.
B)   the marginal cost of the good exceeds its marginal beneﬁt.
C)   the net beneﬁt of producing extra units of the good is positive.
D)   allocative eﬃciency is enhanced.E) B) and C)
F) A) and C)

Question 13

Refer to the provided supply and demand graph of Product X. What would happen if the government decided to also start providing Product X in the market?

Accepted Answer

A)   demand would decrease
B)   demand would increase
C)   supply would decrease
D)   price would decreaseE) A) and D)
F) A) and B)

Question 14

Where there are spillover (or external)  beneﬁts from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the
Following, except

Accepted Answer

A)   subsiding the buyers of the product.
B)   taxing the sellers of the product.
C)   subsidizing the sellers of the product.
D)   providing the product itself.E) B) and D)
F) All of the above

Question 15

When economic eﬃciency is attained, it implies all of the following, except

Accepted Answer

A)   per-unit cost of output produced is at minimum.
B)   allocative eﬃciency is achieved.
C)   total consumer and producer surplus is at a maximum.
D)   the gap between marginal beneﬁts and marginal costs of production is at maximum.E) A) and B)
F) C) and D)

Question 16

When the marginal beneﬁt of an output exceeds the marginal cost,

Accepted Answer

A)   production of that output should be increased, in order to achieve eﬃciency.
B)   production of that output should be decreased, in order to achieve eﬃciency.
C)   increasing the production of that output would increase the deadweight loss.
D)   reducing the production of that output would reduce eﬃciency losses.E) None of the above
F) All of the above

Question 17

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to

Accepted Answer

A)   P × Q.
B)   P + Q.
C)   P - Q.
D)   Q - P.E) A) and B)
F) All of the above

Question 18

Which of the following antipollution policies is least likely to make use of cost-beneﬁt analysis?

Accepted Answer

A)   creating a market for pollution rights
B)   charging polluters an emission fee
C)   enacting legislation that bans pollution
D)   private bargainingE) C) and D)
F) All of the above

Question 19

At the output where the combined amounts of consumer and producer surplus are largest,

Accepted Answer

A)   the areas of consumer and producer surplus necessarily are equal.
B)   the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
C)   consumer surplus exceeds producer surplus by the greatest amount.
D)   marginal beneﬁt exceeds marginal cost by the greatest amount.E) A) and D)
F) B) and D)

Question 20

If the production of a product or service involves external beneﬁts, then the government can improve eﬃciency in the market by

Accepted Answer

A)   providing a subsidy to correct for an overallocation of resources.
B)   providing a subsidy to correct for an underallocation of resources.
C)   imposing a corrective tax to correct for an overallocation of resources.
D)   imposing a corrective tax to correct for an underallocation of resources.E) A) and B)
F) A) and C)

Exam 4: Market Failures Caused by Externalities Asymmetric Information

When economic eﬃciency is attained, it implies all of the following, except

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At the output where the combined amounts of consumer and producer surplus are largest,

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The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a result of the contract in ways that are costly to the other party.

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There is an adverse selection problem in the market for used cars because

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Market failure is said to occur whenever

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When there is overproduction of a good,

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If there are external beneﬁts associated with the consumption of a good or service,

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Refer to the provided supply and demand graph of Product X. What would happen if the government decided to also start providing Product X in the market?

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When the marginal beneﬁt of an output exceeds the marginal cost,

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What resource problem is created by positive externalities?

Correct AnswerverifiedPositive externalities occur when an und...View AnswerShow Answer

When the production of a good generates external costs, the producing ﬁrm's supply curve will be

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Which of the following antipollution policies is least likely to make use of cost-beneﬁt analysis?

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Where there are spillover (or external) beneﬁts from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the Following, except

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If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to

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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.

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If the production of a product or service involves external beneﬁts, then the government can improve eﬃciency in the market by

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A negative externality or spillover cost occurs when

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Explain the term market failure, and list its two types.

Correct AnswerverifiedThe term market failure refers to situat...View AnswerShow Answer

At the output level deﬁning allocative eﬃciency,

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Which of the following is an example of a negative externality?

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Positive externalities occur when an und...
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The term market failure refers to situat...
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