Question 1

The criticism that benefit-cost analysis does not reflect distributional or equity considerations:

Accepted Answer

A) implies that the analysis is of little value when benefits are inequitably distributed. 
B) is not valid as benefit-cost analysis is focused on equity and not efficiency. 
C) is addressed by using the tax and redistribution systems to address economic inequities. 
D) holds that equity is more important than efficiency in a market economy. 
E) implies that benefit-cost analysis should not be used to analyze public programs. 
A) implies that the analysis is of little value when benefits are inequitably distributed. 
B) is not valid as benefit-cost analysis is focused on equity and not efficiency. 
C) is addressed by using the tax and redistribution systems to address economic inequities. 
D) holds that equity is more important than efficiency in a market economy. 
E) implies that benefit-cost analysis should not be used to analyze public programs. E

Question 2

Figure 11-1 shows the marginal internal cost [CS1U1B11S1U1B0],the marginal total cost [CS1U1B12S1U1B0] of producing a good,and the demand curve for the good [D].
  
-Refer to Figure 11-1.If the external cost of producing the good is not taken into account,what is the deadweight loss in the market?

Accepted Answer

A) $2 
B) $4 
C) $5 
D) $10 
E) $15 
A) $2 
B) $4 
C) $5 
D) $10 
E) $15 C

Question 3

In the absence of regulation,which of the following is true of a good or service that generates a positive externality?

Accepted Answer

A) The supply of the good will be less than the socially optimal level of output. 
B) The producer will be able to capture the benefit from the positive externality in the form of increased profits. 
C) The market price of the good will be equal to its marginal external cost [MEC]. 
D) The market price of the good will be lower than the socially optimal price. 
E) The producer will produce the good at the point where marginal total cost [MTC] equals price. 
A) The supply of the good will be less than the socially optimal level of output. 
B) The producer will be able to capture the benefit from the positive externality in the form of increased profits. 
C) The market price of the good will be equal to its marginal external cost [MEC]. 
D) The market price of the good will be lower than the socially optimal price. 
E) The producer will produce the good at the point where marginal total cost [MTC] equals price. A

Question 4

What are the possible actions that the government can take to reduce the concentration of market power in the hands of a few firms in the market?

Accepted Answer

Antitrust legislation (specifically the

Question 5

The production of a good with positive externalities will increase when:

Accepted Answer

A) the government provides a subsidy for the good. 
B) the marginal internal cost of the good is higher than the marginal total cost. 
C) there is a price ceiling of zero in the market. 
D) the producer sells the good for a very high price-marginal cost markup. 
E) there are a large number of buyers and sellers in the market. 
A) the government provides a subsidy for the good. 
B) the marginal internal cost of the good is higher than the marginal total cost. 
C) there is a price ceiling of zero in the market. 
D) the producer sells the good for a very high price-marginal cost markup. 
E) there are a large number of buyers and sellers in the market.

Question 6

How does decision making under profit-maximization compare with benefit-cost analysis?

Accepted Answer

A) Benefit-cost analysis is more comprehensive than profit-maximization since it includes the value of consumer surplus. 
B) Even in the presence of externalities,profit-maximization leads to efficient outcomes,while benefit-cost analysis does not. 
C) Profit maximization internalizes the cost of externalities unlike benefit-cost analysis. 
D) A public program should be implemented on the basis of profit-maximization principles and not benefit-cost analysis. 
E) With profit-maximization the benefits and costs from a program are usually overstated. 
A) Benefit-cost analysis is more comprehensive than profit-maximization since it includes the value of consumer surplus. 
B) Even in the presence of externalities,profit-maximization leads to efficient outcomes,while benefit-cost analysis does not. 
C) Profit maximization internalizes the cost of externalities unlike benefit-cost analysis. 
D) A public program should be implemented on the basis of profit-maximization principles and not benefit-cost analysis. 
E) With profit-maximization the benefits and costs from a program are usually overstated.

Question 7

What is meant by rent-seeking?

Accepted Answer

A) It refers to the loss in consumer surplus due to monopoly power in a market. 
B) It refers to the collusive practices undertaken by dominant firms in an oligopoly. 
C) It refers to the excess profits that are associated with a monopoly. 
D) It refers to activities that are directed towards securing a monopoly position. 
E) It refers to the economic rent that is secured by monopoly firms. 
A) It refers to the loss in consumer surplus due to monopoly power in a market. 
B) It refers to the collusive practices undertaken by dominant firms in an oligopoly. 
C) It refers to the excess profits that are associated with a monopoly. 
D) It refers to activities that are directed towards securing a monopoly position. 
E) It refers to the economic rent that is secured by monopoly firms.

Question 8

A city is deliberating whether to undertake a major infrastructure investment to provide free,high-speed WIFI internet access within its city limits.Alternatively,the city could rely on the private sector to provide access.The city estimates internet demand to be P = 20 - 5Q,where Q denotes number of users (in millions)and P is price per month in dollars.The emerging private market for internet access is considered to be highly competitive,and the typical provider exhibits LAC = LMC = $5 per subscriber per month,where LAC is long-run average cost and LMC is long-run marginal cost.According to the city's estimates,the initial cost for constructing the high-speed network is $600 million and network maintenance costs are $80 million per year.Prepare a benefit-cost analysis to guide the city's decision.Assume that the public and private alternatives will last indefinitely,and that each will be held to a 5% discount rate.

Accepted Answer

Considering the private Internet alterna

Question 9

Suppose the government plans to build a dam at one of several locations in the country.The government should build the dam in the location where:

Accepted Answer

A) it can get the highest revenue from levying taxes on the dam. 
B) the cost of building the dam is the lowest irrespective of the revenue generated. 
C) the marginal external cost of building the dam is the highest. 
D) the net benefit of building the dam is the highest. 
E) the marginal benefit from the dam just covers the marginal internal cost. 
A) it can get the highest revenue from levying taxes on the dam. 
B) the cost of building the dam is the lowest irrespective of the revenue generated. 
C) the marginal external cost of building the dam is the highest. 
D) the net benefit of building the dam is the highest. 
E) the marginal benefit from the dam just covers the marginal internal cost.

Question 10

Explain why a private golf club might charge (1)an initiation fee, (2)an annual membership fee, (3)rental fees for carts on the golf course,and (4)dining fees for eating a required number of meals in the club's restaurant.(Hint: Use the concepts of an individual's downward-sloping demand curve and consumer surplus)

Accepted Answer

The law of downward sloping demand sugge

Question 11

Janet's Silk Printing company is located in a small university town.The major portion of their business is custom printed sweatshirts for university bookstores.As a sideline they also retail printed sweatshirts locally.The local demand for sweatshirts is: Q = 200 - 5P.The average and marginal cost per printed sweatshirt is $8.
(a)Calculate output,price,and profit under the monopoly conditions they enjoy locally.

Accepted Answer

The deadweight loss is: D = (1/2)(24 - 8

Question 12

Which of the following is the best example of a pure public good?

Accepted Answer

A) Government-sponsored medical care 
B) Textbooks 
C) Used clothing 
D) Municipal mosquito abatement programs 
E) Social security benefits 
A) Government-sponsored medical care 
B) Textbooks 
C) Used clothing 
D) Municipal mosquito abatement programs 
E) Social security benefits

Question 13

Which of the following correctly states the Coase theorem?

Accepted Answer

A) The outcome of a negotiation to resolve an externality will depend on the initial assignment of property rights. 
B) Parties that are affected by an externality will bargain to reach an efficient outcome,even in the presence of positive transaction costs. 
C) When two parties are affected by an externality,the party that caused the externality will pay the affected party the entire cost of the externality. 
D) In the absence of property rights assigned to parties that are affected by an externality,the efficient outcome will need to be negotiated by the government. 
E) Bargaining between the parties affected by an externality will result in an efficient outcome,regardless of the property-rights assignment. 
A) The outcome of a negotiation to resolve an externality will depend on the initial assignment of property rights. 
B) Parties that are affected by an externality will bargain to reach an efficient outcome,even in the presence of positive transaction costs. 
C) When two parties are affected by an externality,the party that caused the externality will pay the affected party the entire cost of the externality. 
D) In the absence of property rights assigned to parties that are affected by an externality,the efficient outcome will need to be negotiated by the government. 
E) Bargaining between the parties affected by an externality will result in an efficient outcome,regardless of the property-rights assignment.

Question 14

How would national security be valued in benefit-cost analysis?

Accepted Answer

A) Public goods like national security are excluded from benefit-cost analysis because valuation of benefits from such goods is not possible. 
B) Goods like national security are valued at $0 since national security is not provided through private markets. 
C) Goods like national security are valued using surveys and indirect proxies based on market prices. 
D) The value of a public good like national security is the difference between the taxes paid to the government and the salaries paid to army personnel. 
E) The value of national security is equal to the difference between revenues and expenses in the government's defense budget. 
A) Public goods like national security are excluded from benefit-cost analysis because valuation of benefits from such goods is not possible. 
B) Goods like national security are valued at $0 since national security is not provided through private markets. 
C) Goods like national security are valued using surveys and indirect proxies based on market prices. 
D) The value of a public good like national security is the difference between the taxes paid to the government and the salaries paid to army personnel. 
E) The value of national security is equal to the difference between revenues and expenses in the government's defense budget.

Question 15

What are some of the major problems of benefit-cost analysis? How can they be minimized?

Accepted Answer

The major problems with benefit-cost ana

Question 16

What is an externality? List the various types of externalities.Discuss why externalities justify government intervention.

Accepted Answer

Externalities are side effects of produc

Question 17

Which of the following statements is true regarding the efficiency of using pollution fees or quantity standards to regulate pollution?

Accepted Answer

A) Quantity standards are more efficient than pollution fees because they can be used even in the presence of incomplete information. 
B) Pollution fees are more efficient than quantity standards because the cost of abatement of pollution is equal across firms. 
C) Quantity standards are more efficient than pollution fees because they allow for more flexibility and adjustment. 
D) Pollution fees are more efficient than quantity standards because they reduce the cost of abatement of pollution. 
E) Pollution fees are more efficient than quantity standards because they reduce the total amount of pollution in the environment. 
A) Quantity standards are more efficient than pollution fees because they can be used even in the presence of incomplete information. 
B) Pollution fees are more efficient than quantity standards because the cost of abatement of pollution is equal across firms. 
C) Quantity standards are more efficient than pollution fees because they allow for more flexibility and adjustment. 
D) Pollution fees are more efficient than quantity standards because they reduce the cost of abatement of pollution. 
E) Pollution fees are more efficient than quantity standards because they reduce the total amount of pollution in the environment.

Question 18

What is meant by a pure public good?

Accepted Answer

A) A pure public good is a good that is provided by private firms for the benefit of the public. 
B) A pure public good is a good which reduces in quantity as increasing amounts are consumed. 
C) A pure public good is a good which is nonrival and nonexclusive. 
D) A pure public good is a good that gives the same level of utility to each consumer. 
E) A pure public good is a good for which consumption is restricted to paying consumers. 
A) A pure public good is a good that is provided by private firms for the benefit of the public. 
B) A pure public good is a good which reduces in quantity as increasing amounts are consumed. 
C) A pure public good is a good which is nonrival and nonexclusive. 
D) A pure public good is a good that gives the same level of utility to each consumer. 
E) A pure public good is a good for which consumption is restricted to paying consumers.

Question 19

What is meant by rent-seeking by a monopoly firm?

Accepted Answer

A monopoly firm will work towards securi

Question 20

Which of the following is true of a monopoly market as compared to a perfectly competitive one?

Accepted Answer

A) In a monopoly market,prices are lower than in a perfectly competitive market. 
B) In a monopoly market,the total output produced is higher but the price is the same as in a perfectly competitive market. 
C) The total consumer surplus in a monopoly market is lower than a perfectly competitive market. 
D) The deadweight loss is smaller in a monopoly market than a perfectly competitive market. 
E) The equilibrium output is greater in a monopoly market than a perfectly competitive market. 
A) In a monopoly market,prices are lower than in a perfectly competitive market. 
B) In a monopoly market,the total output produced is higher but the price is the same as in a perfectly competitive market. 
C) The total consumer surplus in a monopoly market is lower than a perfectly competitive market. 
D) The deadweight loss is smaller in a monopoly market than a perfectly competitive market. 
E) The equilibrium output is greater in a monopoly market than a perfectly competitive market.

The criticism that benefit-cost analysis does not reflect distributional or equity considerations:

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D]. -Refer to Figure 11-1.If the external cost of producing the good is not taken into account,what is the deadweight loss in the market?

In the absence of regulation,which of the following is true of a good or service that generates a positive externality?

What are the possible actions that the government can take to reduce the concentration of market power in the hands of a few firms in the market?

The production of a good with positive externalities will increase when:

How does decision making under profit-maximization compare with benefit-cost analysis?

What is meant by rent-seeking?

Suppose the government plans to build a dam at one of several locations in the country.The government should build the dam in the location where:

Which of the following is the best example of a pure public good?

Which of the following correctly states the Coase theorem?

How would national security be valued in benefit-cost analysis?

What are some of the major problems of benefit-cost analysis? How can they be minimized?

What is an externality? List the various types of externalities.Discuss why externalities justify government intervention.

Which of the following statements is true regarding the efficiency of using pollution fees or quantity standards to regulate pollution?

What is meant by a pure public good?

What is meant by rent-seeking by a monopoly firm?

Which of the following is true of a monopoly market as compared to a perfectly competitive one?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Auctions and Competitive Bidding

Linear Programming

Filters

Exam 11: Regulation, Public Goods, and Benefit-Cost Analysis

The criticism that benefit-cost analysis does not reflect distributional or equity considerations:

Figure 11-1 shows the marginal internal cost [C1],the marginal total cost [C2] of producing a good,and the demand curve for the good [D]. -Refer to Figure 11-1.If the external cost of producing the good is not taken into account,what is the deadweight loss in the market?

In the absence of regulation,which of the following is true of a good or service that generates a positive externality?

What are the possible actions that the government can take to reduce the concentration of market power in the hands of a few firms in the market?

The production of a good with positive externalities will increase when:

How does decision making under profit-maximization compare with benefit-cost analysis?

What is meant by rent-seeking?

Suppose the government plans to build a dam at one of several locations in the country.The government should build the dam in the location where:

Which of the following is the best example of a pure public good?

Which of the following correctly states the Coase theorem?

How would national security be valued in benefit-cost analysis?

What are some of the major problems of benefit-cost analysis? How can they be minimized?

What is an externality? List the various types of externalities.Discuss why externalities justify government intervention.

Which of the following statements is true regarding the efficiency of using pollution fees or quantity standards to regulate pollution?

What is meant by a pure public good?

What is meant by rent-seeking by a monopoly firm?

Which of the following is true of a monopoly market as compared to a perfectly competitive one?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Auctions and Competitive Bidding

Linear Programming

Filters

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D]. -Refer to Figure 11-1.If the external cost of producing the good is not taken into account,what is the deadweight loss in the market?