Question 1

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. This will lead to the equilibrium price of cars

Accepted Answer

A)  decreasing and the quantity increasing.
B)  decreasing and the quantity decreasing.
C)  increasing and the quantity increasing.
D)  increasing and the quantity decreasing.E) C) and D)
F) B) and C)

Question 2

Antipollution policies can be severe in their design and implementation, resulting in

Accepted Answer

A)  the social costs of pollution reduction becoming greater than the benefits.
B)  the social benefits of pollution reduction becoming zero.
C)  too few resources being devoted toward reducing pollution.
D)  the social costs of pollution reduction becoming less than the benefits.E) A) and B)
F) All of the above

Question 3

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the producer surplus would be represented by the area

Accepted Answer

A)  b.
B)  b + c.
C)  a + b.
D)  b + c + d.E) All of the above
F) A) and D)

Question 4

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

Question 5

2, A) efficiency is achieved. B) an efficiency loss (or deadweight loss) of a + b + c + d occurs. C) an efficiency loss (or deadweight loss) of a + c occurs. D) an efficiency loss (or deadweight loss) of e + f occurs." class="answers-bank-image d-inline" rel="preload" > Refer to the diagram. If actual production and consumption occur at Q2,

Accepted Answer

A)  efficiency is achieved.
B)  an efficiency loss (or deadweight loss) of a + b + c + d occurs.
C)  an efficiency loss (or deadweight loss) of a + c occurs.
D)  an efficiency loss (or deadweight loss) of e + f occurs.E) A) and B)
F) A) and C)

Question 6

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that

Accepted Answer

A)  the display creates negative externalities.
B)  government should tax the producers of holiday lighting.
C)  resources are currently overallocated to the provision of holiday lighting in Anytown.
D)  resources are currently underallocated to the provision of holiday lighting in Anytown.E) B) and C)
F) C) and D)

Question 7

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₁ and S₁. If there are substantial external benefits associated with the production of Z, then

Accepted Answer

A)  government can improve the allocation of resources by subsidizing consumers of Z.
B)  government can improve the allocation of resources by imposing a per-unit tax on Z.
C)  a government subsidy for producers of Z would ensure that consumers are paying directly for all of the benefits they receive from Z.
D)  consumers are paying too much for the good.E) A) and D)
F) B) and D)

Question 8

Define the term consumer surplus.

Accepted Answer

Consumer surplus is the difference betwe...

Question 9

The MC curves in the diagram slope upward because of the law of

Accepted Answer

A)  demand.
B)  conservation of matter and energy.
C)  diminishing marginal utility.
D)  diminishing returns.E) A) and B)
F) None of the above

Question 10

When a competitive market achieves allocative efficiency, it implies that

Accepted Answer

A)  the marginal benefit of having the product is greater than the marginal cost.
B)  the buyers are getting the maximum consumer surplus from the product.
C)  the combined consumer and producer surplus is maximized.
D)  the quantity demanded is lower than the quantity supplied.E) A) and B)
F) All of the above

Question 11

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem in banking.

Accepted Answer

A) True 
 B)False

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 D)
F) A) and D)

Question 13

A positive externality or spillover benefit occurs when

Accepted Answer

A)  product differentiation increases the variety of products available to consumers.
B)  the benefits associated with a product exceed those accruing to people who consume it.
C)  a firm does not bear all of the costs of producing a good or service.
D)  firms earn positive economic profits.E) A) and D)
F) A) and C)

Question 14

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean for the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings

Accepted Answer

A)  can be resolved by the owners themselves through private bargaining.
B)  has to be resolved by city government officials.
C)  can only be resolved by a zoning ordinance restricting high-rise buildings.
D)  should be resolved by a government fine for the builder of the high-rise.E) A) and D)
F) None of the above

Question 15

Suppose an insurance company decided to offer divorce insurance. Based on the concept of moral hazard, economists would expect

Accepted Answer

A)  all married couples to purchase divorce insurance.
B)  no married couples to purchase divorce insurance.
C)  mostly the couples with marital problems to purchase divorce insurance.
D)  the divorce rate to decrease.E) None of the above
F) B) and C)

Question 16

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) C) and D)
F) B) and D)

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

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

Define the term efficiency loss. What is the other term for this?

Accepted Answer

Efficiency loss refers to reductions in ...

Question 20

The MB curves in the diagram slope downward because of the law of

Accepted Answer

A)  conservation of matter and energy.
B)  diminishing returns.
C)  diminishing marginal utility.
D)  increasing cost.E) B) and C)
F) A) and D)

Exam 4: Market Failures Caused by Externalities Asymmetric Information

A positive externality or spillover benefit occurs when

Correct AnswerverifiedShow Answer

Refer to the diagram. If actual production and consumption occur at Q2,

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When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem in banking.

Correct AnswerverifiedShow Answer

Antipollution policies can be severe in their design and implementation, resulting in

Correct AnswerverifiedShow Answer

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. This will lead to the equilibrium price of cars

Correct AnswerverifiedShow Answer

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₁ and S₁. If there are substantial external benefits associated with the production of Z, then

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that

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 AnswerverifiedShow Answer

When a competitive market achieves allocative efficiency, it implies that

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In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the producer surplus would be represented by the area

Correct AnswerverifiedShow Answer

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean for the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings

Correct AnswerverifiedShow Answer

Suppose an insurance company decided to offer divorce insurance. Based on the concept of moral hazard, economists would expect

Correct AnswerverifiedShow Answer

Define the term efficiency loss. What is the other term for this?

Correct AnswerverifiedEfficiency loss refers to reductions in ...View AnswerShow Answer

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.

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The MB curves in the diagram slope downward because of the law of

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The MC curves in the diagram slope upward because of the law of

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

Correct AnswerverifiedShow Answer

Define the term consumer surplus.

Correct AnswerverifiedConsumer surplus is the difference betwe...View AnswerShow Answer

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

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Refer to the diagram. If actual production and consumption occur at Q₂,

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Efficiency loss refers to reductions in ...
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Consumer surplus is the difference betwe...
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