Question 1

The construction of the TransCanada highway is an example of government intervention through

Accepted Answer

A) public provision. 
B) redistribution. 
C) regulation. 
D) restructuring of economic incentives. 
E) subsidization. 
A) public provision. 
B) redistribution. 
C) regulation. 
D) restructuring of economic incentives. 
E) subsidization. A

Question 2

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
   FIGURE 16-4
-Refer to Figure 16-4.Suppose the optimal amount of this good is provided,but that Individual B was only consuming Q2 units of the good.What would be the marginal cost of Individual B consuming an extra unit of this good?

Accepted Answer

A) P2 
B) P4 
C) P4-P2 
D) MB 
E) zero 
A) P2 
B) P4 
C) P4-P2 
D) MB 
E) zero E

Question 3

If typical firms in a competitive industry are earning economic profits,the industry

Accepted Answer

A) is in a long-run equilibrium. 
B) has too many resources allocated to it. 
C) must be experiencing an increase in monopoly power. 
D) can be expected to experience the entry of new firms. 
E) is allocatively efficient. 
A) is in a long-run equilibrium. 
B) has too many resources allocated to it. 
C) must be experiencing an increase in monopoly power. 
D) can be expected to experience the entry of new firms. 
E) is allocatively efficient. D

Question 4

When prices are determined in a free-market system

Accepted Answer

A) changes in the economy can be foreseen by officials. 
B) resources are allocated without conscious central coordination. 
C) firms respond to changes in the economy mainly by altering the wage rate. 
D) demand shifts,caused by price changes,coordinate all necessary changes in the economy. 
E) supply shifts,caused by price changes,coordinate all necessary changes in the economy. 
A) changes in the economy can be foreseen by officials. 
B) resources are allocated without conscious central coordination. 
C) firms respond to changes in the economy mainly by altering the wage rate. 
D) demand shifts,caused by price changes,coordinate all necessary changes in the economy. 
E) supply shifts,caused by price changes,coordinate all necessary changes in the economy.

Question 5

The government has seatbelt and airbag requirements in cars,and laws requiring individual drivers to use them.What broader social goal is being met in this case?

Accepted Answer

A) income distribution 
B) preference for public provision 
C) protecting individuals from others or themselves 
D) social responsibility 
E) regulation of an imperfectly competitive economic activity 
A) income distribution 
B) preference for public provision 
C) protecting individuals from others or themselves 
D) social responsibility 
E) regulation of an imperfectly competitive economic activity

Question 6

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

Accepted Answer

A) a municipal swimming pool 
B) a seat on an airplane flight 
C) light from a lighthouse 
D) a school bus 
E) a publicly owned subway system 
A) a municipal swimming pool 
B) a seat on an airplane flight 
C) light from a lighthouse 
D) a school bus 
E) a publicly owned subway system

Question 7

Economic losses in an industry are a signal that

Accepted Answer

A) too few resources are allocated to the industry. 
B) all of the firms should leave the industry. 
C) a government subsidy is necessary. 
D) will lead resources to leave the industry (until the losses disappear). 
E) the economy is in a recession. 
A) too few resources are allocated to the industry. 
B) all of the firms should leave the industry. 
C) a government subsidy is necessary. 
D) will lead resources to leave the industry (until the losses disappear). 
E) the economy is in a recession.

Question 8

An example of a common-property resource is

Accepted Answer

A) a congested toll highway. 
B) a national park with an entrance fee. 
C) privately owned ranch land. 
D) an unregulated sport-fishing river in BC. 
E) privately owned cattle grazing land in Alberta. 
A) a congested toll highway. 
B) a national park with an entrance fee. 
C) privately owned ranch land. 
D) an unregulated sport-fishing river in BC. 
E) privately owned cattle grazing land in Alberta.

Question 9

Consider an industry producing good X.The quantity of good X produced in a competitive free market will be less than the socially optimal level if

Accepted Answer

A) the consumption of good X generates a negative externality. 
B) the consumption of good X generates a positive externality. 
C) the production of good X generates a negative externality. 
D) the government is subsidizing the production of good X. 
E) good X has negative third party effects associated with its consumption. 
A) the consumption of good X generates a negative externality. 
B) the consumption of good X generates a positive externality. 
C) the production of good X generates a negative externality. 
D) the government is subsidizing the production of good X. 
E) good X has negative third party effects associated with its consumption.

Question 10

Consider a remote village with a limited,freely available water supply and no government intervention in the allocation of water.Economic theory predicts that the water will be

Accepted Answer

A) allocated efficiently because users will tend to use the water until marginal cost and marginal benefit are both equal to zero. 
B) overexploited because users will tend to use the water until the marginal cost of providing the water is zero. 
C) allocated efficiently because users will tend to use the water until the supply and demand are in equilibrium. 
D) overexploited because users will tend to use the water until their marginal benefit is zero. 
E) allocated efficiently because users will tend to use the water as though it were a public good. 
A) allocated efficiently because users will tend to use the water until marginal cost and marginal benefit are both equal to zero. 
B) overexploited because users will tend to use the water until the marginal cost of providing the water is zero. 
C) allocated efficiently because users will tend to use the water until the supply and demand are in equilibrium. 
D) overexploited because users will tend to use the water until their marginal benefit is zero. 
E) allocated efficiently because users will tend to use the water as though it were a public good.

Question 11

An efficient level of provision of a public good is achieved when

Accepted Answer

A) the cost of providing an extra unit of the good is equal to the valuation of each consumer of the extra unit. 
B) the cost of providing an extra unit of the good is equal to the sum of the valuations of all consumers for that unit. 
C) the cost of providing an extra unit of the good is equal to the price of the good. 
D) the valuation of each consumer for the last unit of the good produced is zero. 
E) voters are satisfied that an adequate amount of the good is being produced. 
A) the cost of providing an extra unit of the good is equal to the valuation of each consumer of the extra unit. 
B) the cost of providing an extra unit of the good is equal to the sum of the valuations of all consumers for that unit. 
C) the cost of providing an extra unit of the good is equal to the price of the good. 
D) the valuation of each consumer for the last unit of the good produced is zero. 
E) voters are satisfied that an adequate amount of the good is being produced.

Question 12

A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon.An externality associated with this decision is

Accepted Answer

A) the increased work for the homeowner in yard cleanup. 
B) the cost of purchasing the dogs. 
C) the neighboursʹ lost sleep. 
D) the homeownerʹs lost sleep. 
E) the veterinary costs of keeping the dogs healthy. 
A) the increased work for the homeowner in yard cleanup. 
B) the cost of purchasing the dogs. 
C) the neighboursʹ lost sleep. 
D) the homeownerʹs lost sleep. 
E) the veterinary costs of keeping the dogs healthy.

Question 13

One reason that national defence is a classic example of a public good is that

Accepted Answer

A) all citizens want national defence. 
B) society deems it to be too important to be provided by the private sector. 
C) the benefits of national defence cannot be kept from those who do not pay. 
D) military technology is too expensive for private firms to provide. 
E) it would be immoral for private firms to provide this essential commodity. 
A) all citizens want national defence. 
B) society deems it to be too important to be provided by the private sector. 
C) the benefits of national defence cannot be kept from those who do not pay. 
D) military technology is too expensive for private firms to provide. 
E) it would be immoral for private firms to provide this essential commodity.

Question 14

Consider an ordinary rivalrous good,provided in a competitive market.At the socially optimal level of provision of this good,the marginal

Accepted Answer

A) cost of production of this good is zero. 
B) cost of production of the last unit of the good is equal to the consumersʹ marginal willingness to pay. 
C) sacrifice society needs to make to supply the last unit of the good is more than each consumerʹs marginal willingness to pay. 
D) cost of production of the last unit of the good is more than all consumersʹ combined marginal willingness to pay. 
E) cost of production of the last unit of the good is equal to all consumersʹ combined marginal willingness to pay. 
A) cost of production of this good is zero. 
B) cost of production of the last unit of the good is equal to the consumersʹ marginal willingness to pay. 
C) sacrifice society needs to make to supply the last unit of the good is more than each consumerʹs marginal willingness to pay. 
D) cost of production of the last unit of the good is more than all consumersʹ combined marginal willingness to pay. 
E) cost of production of the last unit of the good is equal to all consumersʹ combined marginal willingness to pay.

Question 15

Economists use the term ʺmarket failureʺ to refer to those free-market situations where

Accepted Answer

A) income is not distributed equitably. 
B) allocatively efficient outcomes are not achieved. 
C) externalities are present in the economy. 
D) the economy is not in equilibrium. 
E) government has intervened in the economy. 
A) income is not distributed equitably. 
B) allocatively efficient outcomes are not achieved. 
C) externalities are present in the economy. 
D) the economy is not in equilibrium. 
E) government has intervened in the economy.

Question 16

Government intervention in a particular industry is unnecessary if each of the industryʹs firms is operating where

Accepted Answer

A) there are no positive externalities. 
B) there are no negative externalities. 
C) price is equal to private marginal cost. 
D) marginal social benefit is equal to marginal social cost. 
E) the demand curve is perfectly elastic. 
A) there are no positive externalities. 
B) there are no negative externalities. 
C) price is equal to private marginal cost. 
D) marginal social benefit is equal to marginal social cost. 
E) the demand curve is perfectly elastic.

Question 17

The problem with externalities is essentially one of

Accepted Answer

A) a discrepancy between private and social costs. 
B) asymmetric information. 
C) the inability of a firm in an industry characterized by increasing returns to scale to make positive profits if it sets price equal to marginal cost. 
D) a failure of the market to generate socially valued outcomes. 
E) the failure of the market to solve social problems. 
A) a discrepancy between private and social costs. 
B) asymmetric information. 
C) the inability of a firm in an industry characterized by increasing returns to scale to make positive profits if it sets price equal to marginal cost. 
D) a failure of the market to generate socially valued outcomes. 
E) the failure of the market to solve social problems.

Question 18

Which of the following phenomena is NOT an example of market failure?

Accepted Answer

A) moral hazard 
B) a positive externality 
C) asymmetric information 
D) diminishing marginal returns 
E) public goods 
A) moral hazard 
B) a positive externality 
C) asymmetric information 
D) diminishing marginal returns 
E) public goods

Question 19

An efficient amount of a public good is unlikely to be produced in a free market because

Accepted Answer

A) there is no way to prevent a person who is not willing to pay for the good from receiving benefits from the good. 
B) of the high cost of producing the public good. 
C) social benefits exceed social costs. 
D) of the existence of moral hazard. 
E) of the existence of adverse selection. 
A) there is no way to prevent a person who is not willing to pay for the good from receiving benefits from the good. 
B) of the high cost of producing the public good. 
C) social benefits exceed social costs. 
D) of the existence of moral hazard. 
E) of the existence of adverse selection.

Question 20

What is meant by the term ʺmarket failureʺ?

Accepted Answer

A) that a small group in society is affected 
B) that allocative efficiency has not been achieved 
C) that the market economy is a failure 
D) that one or more markets are not in equilibrium 
E) that the free market has failed to achieve desirable social goals 
A) that a small group in society is affected 
B) that allocative efficiency has not been achieved 
C) that the market economy is a failure 
D) that one or more markets are not in equilibrium 
E) that the free market has failed to achieve desirable social goals

Exam 16: Market Failures and Government Intervention

The construction of the TransCanada highway is an example of government intervention through

If typical firms in a competitive industry are earning economic profits,the industry

When prices are determined in a free-market system

The government has seatbelt and airbag requirements in cars,and laws requiring individual drivers to use them.What broader social goal is being met in this case?

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

Economic losses in an industry are a signal that

An example of a common-property resource is

Consider an industry producing good X.The quantity of good X produced in a competitive free market will be less than the socially optimal level if

Consider a remote village with a limited,freely available water supply and no government intervention in the allocation of water.Economic theory predicts that the water will be

An efficient level of provision of a public good is achieved when

A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon.An externality associated with this decision is

One reason that national defence is a classic example of a public good is that

Consider an ordinary rivalrous good,provided in a competitive market.At the socially optimal level of provision of this good,the marginal

Economists use the term ʺmarket failureʺ to refer to those free-market situations where

Government intervention in a particular industry is unnecessary if each of the industryʹs firms is operating where

The problem with externalities is essentially one of

Which of the following phenomena is NOT an example of market failure?

An efficient amount of a public good is unlikely to be produced in a free market because

What is meant by the term ʺmarket failureʺ?

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