Question 1

Economists consider governments to be "wasteful"

Accepted Answer

A)   whenever they over- or underallocate resources to a project.
B)   only when they overallocate resources to a project.
C)   only when they underallocate resources to a project.
D)   whenever they attempt to correct a market failure.E) A) and B)
F) A) and C)

Question 2

Upon learning that his auto transmission is about to fail, Ray Roma 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) B) and C)
F) C) and D)

Question 3

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 4

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.

Accepted Answer

A) True 
 B)False

Question 5

The market demand curve for a public good

Accepted Answer

A)   is derived in the same manner as demand curves for private goods.
B)   is derived by horizontally summing all individual demand curves.
C)   shows the total value that all individuals place on each additional unit of the good.
D)   shows the total number of units that would be produced by the public sector at each possible price.E) None of the above
F) All of the above

Question 6

Market failures

Accepted Answer

A)   are only a concern when they result in prices that are too high.
B)   apply exclusively to situations where private markets do not produce any of an economically desirable good.
C)   result in overproduction or underproduction of a good.
D)   result from government interference in private markets.E) A) and B)
F) A) and C)

Question 7

Assume that a government is considering a new social program and may choose to include in this program one of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table below.  Which project should the government select to achieve the maximum net benefit?

Accepted Answer

A)   A
B)   B
C)   C
D)   DE) A) and B)
F) A) and C)

Question 8

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) B) and D)
F) A) and B)

Question 9

When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we have a demand-side market failure.

Accepted Answer

A) True 
 B)False

Question 10

A competitive market produces the economically efficient outcome if the following conditions are met, except

Accepted Answer

A)   the market produces only units for which benefits are at least equal to cost.
B)   the market demand curve reflects the buyers' full willingness to pay.
C)   the market supply curve reflects all costs of production.
D)   the market produces only units for which costs are at least equal to benefits.E) C) and D)
F) A) and B)

Question 11

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of

Accepted Answer

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

Question 12

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 D)
F) None of the above

Question 13

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

Question 14

In a market where negative externalities are associated with consumption and production, the equilibrium will not be efficient because

Accepted Answer

A)   too few resources will be allocated toward producing the good.
B)   firms will shut down until costs are reduced.
C)   costs of production will, on average, be too high.
D)   too many resources will be allocated toward producing the good.E) All of the above
F) B) and D)

Question 15

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

Question 16

New Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected total annual costs and benefits of these alternatives.  Based on cost-benefit analysis, New Normal University should undertake Level

Accepted Answer

A)   Two.
B)   Three.
C)   Four.
D)   Five.E) All of the above
F) B) and C)

Question 17

A market for pollution rights can be expected to

Accepted Answer

A)   eliminate all pollution.
B)   produce a shortage of pollution.
C)   encourage potential polluters to increase emissions.
D)   provide potential polluters with a monetary incentive to reduce emissions.E) None of the above
F) A) and B)

Question 18

If Congress decreases the amount of government insurance on bank deposits, then this action would

Accepted Answer

A)   create a moral hazard problem in banking.
B)   reduce a moral hazard problem in banking.
C)   create an adverse selection problem in banking.
D)   reduce an adverse selection problem in banking.E) A) and D)
F) None of the above

Question 19

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) None of the above
F) A) and C)

Question 20

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?

Accepted Answer

A)   The benefit surpluses shared between consumers and producers will be maximized.
B)   The benefit surpluses received by consumers and producers will be equal.
C)   There will be no consumer or producer surplus.
D)   Consumer surplus will be maximized, and producer surplus will be minimized.E) B) and C)
F) A) and B)

Exam 4: Market Failures: Public Goods and Externalities

In a market where negative externalities are associated with consumption and production, the equilibrium will not be efficient because

Correct Answer
verified

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

A competitive market produces the economically efficient outcome if the following conditions are met, except

Correct Answer
verified

The market demand curve for a public good

Correct Answer
verified

Economists consider governments to be "wasteful"

Correct Answer
verified

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?

Correct Answer
verified

If Congress decreases the amount of government insurance on bank deposits, then this action would

Correct Answer
verified

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

Correct Answer
verified

Market failures

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

Correct Answer
verified

When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we have a demand-side market failure.

Correct Answer
verified

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.

Correct Answer
verified

A market for pollution rights can be expected to

Correct Answer
verified

A positive externality or spillover benefit occurs when

Correct Answer
verified

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

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

Exam 4: Market Failures: Public Goods and Externalities

In a market where negative externalities are associated with consumption and production, the equilibrium will not be efficient because

Correct AnswerverifiedShow Answer

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A competitive market produces the economically efficient outcome if the following conditions are met, except

Correct AnswerverifiedShow Answer

The market demand curve for a public good

Correct AnswerverifiedShow Answer

Economists consider governments to be "wasteful"

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

If Congress decreases the amount of government insurance on bank deposits, then this action would

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Market failures

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

Correct AnswerverifiedShow Answer

When a producer cannot get all consumers of their product to pay for enjoying it, such as in the case of a fireworks display, then we have a demand-side market failure.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

A market for pollution rights can be expected to

Correct AnswerverifiedShow Answer

A positive externality or spillover benefit occurs when

Correct AnswerverifiedShow Answer

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

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

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