Question 1

When competitive forces in an industry are weak,

Accepted Answer

A)  the absence of competition generally leads to overproduction. 
B)  prices may exceed the amount consumers are willing to pay. 
C)  the operational efficiency of private firms will be enhanced. 
D)  higher prices and less than optimal production may result. 
A)  the absence of competition generally leads to overproduction. 
B)  prices may exceed the amount consumers are willing to pay. 
C)  the operational efficiency of private firms will be enhanced. 
D)  higher prices and less than optimal production may result.

Question 2

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $30 and market output of 220 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

A)  The efficient price would higher than $30 while the efficient output would be less than 220 units. 
B)  The efficient price would be higher than $30 while the efficient output would be greater than 220 units. 
C)  The efficient price would be lower than $30 while the efficient output would be less than 220 units. 
D)  The efficient price would be lower than $30 while the efficient output would be greater than 220 units. 
A)  The efficient price would higher than $30 while the efficient output would be less than 220 units. 
B)  The efficient price would be higher than $30 while the efficient output would be greater than 220 units. 
C)  The efficient price would be lower than $30 while the efficient output would be less than 220 units. 
D)  The efficient price would be lower than $30 while the efficient output would be greater than 220 units.

Question 3

As more and more resources are dedicated to an activity

Accepted Answer

A)  the benefits will increase proportionately. 
B)  the benefits will become smaller and smaller while the costs will rise. 
C)  the demand for that activity will increase. 
D)  the costs will be offset by the benefits received from the activity. 
A)  the benefits will increase proportionately. 
B)  the benefits will become smaller and smaller while the costs will rise. 
C)  the demand for that activity will increase. 
D)  the costs will be offset by the benefits received from the activity.

Question 4

In economics, a free rider is the term used for a person who

Accepted Answer

A)  receives the benefit of a good without contributing to its costs of production. 
B)  purchases an item during a "buy one, get one free" sale. 
C)  lives in a town in which the city provides free bus service. 
D)  pays for exactly what they receive. 
A)  receives the benefit of a good without contributing to its costs of production. 
B)  purchases an item during a "buy one, get one free" sale. 
C)  lives in a town in which the city provides free bus service. 
D)  pays for exactly what they receive.

Question 5

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

A)  The equilibrium quantity of MBAs will equal the efficient quantity of MBAs. 
B)  The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs. 
C)  The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs. 
D)  The tuition paid by the student would be exceed the efficient amount. 
A)  The equilibrium quantity of MBAs will equal the efficient quantity of MBAs. 
B)  The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs. 
C)  The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs. 
D)  The tuition paid by the student would be exceed the efficient amount.

Question 6

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

Accepted Answer

A)  elementary and secondary education 
B)  residential trash pickups provided by a local government 
C)  an unscrambled television signal 
D)  the medical services provided by a local hospital 
A)  elementary and secondary education 
B)  residential trash pickups provided by a local government 
C)  an unscrambled television signal 
D)  the medical services provided by a local hospital

Question 7

When production of a good provides external benefits, there will be

Accepted Answer

A)  too few resources devoted to its production. 
B)  too many resources devoted to its production. 
C)  the optimal amount of resources devoted to its production. 
D)  abnormally high profits earned by producers of the good. 
A)  too few resources devoted to its production. 
B)  too many resources devoted to its production. 
C)  the optimal amount of resources devoted to its production. 
D)  abnormally high profits earned by producers of the good.

Question 8

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

Accepted Answer

A)  The pollution will be created by those least willing and able to pay the damages. 
B)  The pollution will be created by those most willing and able to pay for the right to pollute. 
C)  The funds collected by the government will be enough to compensate any individuals harmed by the pollution. 
D)  Pollution will increase from zero to 1,000 units per day. 
E)  There will be no incentive for polluters to try to sneak emissions past government monitoring devices. 
A)  The pollution will be created by those least willing and able to pay the damages. 
B)  The pollution will be created by those most willing and able to pay for the right to pollute. 
C)  The funds collected by the government will be enough to compensate any individuals harmed by the pollution. 
D)  Pollution will increase from zero to 1,000 units per day. 
E)  There will be no incentive for polluters to try to sneak emissions past government monitoring devices.

Question 9

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

Accepted Answer

A)  not enough of the product is being produced. 
B)  the price charged for the good is too high. 
C)  the good produces a positive externality. 
D)  the good produces a negative externality. 
E)  the government should produce the good. 
A)  not enough of the product is being produced. 
B)  the price charged for the good is too high. 
C)  the good produces a positive externality. 
D)  the good produces a negative externality. 
E)  the government should produce the good.

Question 10

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

Accepted Answer

A)  The bonus structures of most executives were tied to short-term profitability. 
B)  The rating agencies acted independently in assigning ratings to mortgage-backed securities and had no incentive to understate the risks. 
C)  Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings. 
D)  Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits. 
A)  The bonus structures of most executives were tied to short-term profitability. 
B)  The rating agencies acted independently in assigning ratings to mortgage-backed securities and had no incentive to understate the risks. 
C)  Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings. 
D)  Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits.

Question 11

Figure 5-4  
-Refer to Figure 5-4. The figure illustrates an industry that generates

Accepted Answer

A)  external benefits. 
B)  external costs. 
C)  no externalities. 
D)  economies of scale. 
A)  external benefits. 
B)  external costs. 
C)  no externalities. 
D)  economies of scale.

Question 12

If an economic action generates more costs than benefits, the action

Accepted Answer

A)  by definition increases the nation's economic welfare. 
B)  should not be undertaken from an efficiency standpoint. 
C)  should be subsidized by the government in order to make sure that it is undertaken. 
D)  is desirable from a public welfare standpoint even though many individuals will be harmed. 
A)  by definition increases the nation's economic welfare. 
B)  should not be undertaken from an efficiency standpoint. 
C)  should be subsidized by the government in order to make sure that it is undertaken. 
D)  is desirable from a public welfare standpoint even though many individuals will be harmed.

Question 13

A sub-prime loan is a loan extended to borrowers

Accepted Answer

A)  at a subsidized interest rate below the prime rate normally offered to the most creditworthy borrowers. 
B)  with blemished credit or limited documentation of their income, employment history, and other indicators of credit worthiness. 
C)  seeking a 30-year, fixed rate mortgage. 
D)  who have a FICO score above 660. 
A)  at a subsidized interest rate below the prime rate normally offered to the most creditworthy borrowers. 
B)  with blemished credit or limited documentation of their income, employment history, and other indicators of credit worthiness. 
C)  seeking a 30-year, fixed rate mortgage. 
D)  who have a FICO score above 660.

Question 14

From the standpoint of economic efficiency, markets tend to provide

Accepted Answer

A)  less of a public good than would be efficient. 
B)  more of a public good than would be efficient. 
C)  exactly the amount of a public good that is efficient. 
D)  none of the above. 
A)  less of a public good than would be efficient. 
B)  more of a public good than would be efficient. 
C)  exactly the amount of a public good that is efficient. 
D)  none of the above.

Question 15

Because the benefits derived from an activity decline as it is expanded, it is generally wise to

Accepted Answer

A)  undertake all actions that generate benefits. 
B)  expend the smallest possible amount of resources on this type of activity. 
C)  avoid any activity with this characteristic. 
D)  stop the activity before perfection is reached.. 
A)  undertake all actions that generate benefits. 
B)  expend the smallest possible amount of resources on this type of activity. 
C)  avoid any activity with this characteristic. 
D)  stop the activity before perfection is reached..

Question 16

Which of the following provides an example of an externality?

Accepted Answer

A)  a paper pulp mill releasing pollution into the atmosphere 
B)  persons driving during a busy rush hour 
C)  a drunk driver operating a car on a public highway 
D)  all of the above 
A)  a paper pulp mill releasing pollution into the atmosphere 
B)  persons driving during a busy rush hour 
C)  a drunk driver operating a car on a public highway 
D)  all of the above

Question 17

Which of the following describes the relationship between interest rates and interest-sensitive goods, such as housing?

Accepted Answer

A)  As interest rates decline, the demand for interest-sensitive goods increases. 
B)  As interest rates decline, the demand for interest-sensitive goods decreases. 
C)  As interest rates increase, the demand for interest-sensitive goods increases, driving prices upward. 
D)  As interest rates increase, the demand for interest-sensitive goods decreases, driving prices upward. 
A)  As interest rates decline, the demand for interest-sensitive goods increases. 
B)  As interest rates decline, the demand for interest-sensitive goods decreases. 
C)  As interest rates increase, the demand for interest-sensitive goods increases, driving prices upward. 
D)  As interest rates increase, the demand for interest-sensitive goods decreases, driving prices upward.

Question 18

People who receive the benefit of a good without contributing to its costs of production are called

Accepted Answer

A)  contributors in kind. 
B)  free riders. 
C)  frequent flyers. 
D)  cost maximizers. 
A)  contributors in kind. 
B)  free riders. 
C)  frequent flyers. 
D)  cost maximizers.

Question 19

Which of the following is most central to the understanding of the economic crisis of 2008?

Accepted Answer

A)  The decline of the stock market in late 2007. 
B)  The housing boom (2001-2005) and bust (2007-2008). 
C)  The sharp rise in oil prices in 2008. 
D)  Unethical investment practices beginning in 2000. 
A)  The decline of the stock market in late 2007. 
B)  The housing boom (2001-2005) and bust (2007-2008). 
C)  The sharp rise in oil prices in 2008. 
D)  Unethical investment practices beginning in 2000.

Question 20

Figure 5-4  
-Refer to Figure 5-4. The inefficient equilibrium price and quantity are

Accepted Answer

A)  $1.90 and 38 units, respectively. 
B)  $1.80 and 35 units, respectively. 
C)  $1.60 and 42 units, respectively. 
D)  $1.35 and 58 units, respectively. 
A)  $1.90 and 38 units, respectively. 
B)  $1.80 and 35 units, respectively. 
C)  $1.60 and 42 units, respectively. 
D)  $1.35 and 58 units, respectively.

When competitive forces in an industry are weak,

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $30 and market output of 220 units. How does this outcome compare to the efficient, ideal equilibrium?

As more and more resources are dedicated to an activity

In economics, a free rider is the term used for a person who

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

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

When production of a good provides external benefits, there will be

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

Figure 5-4 -Refer to Figure 5-4. The figure illustrates an industry that generates

If an economic action generates more costs than benefits, the action

A sub-prime loan is a loan extended to borrowers

From the standpoint of economic efficiency, markets tend to provide

Because the benefits derived from an activity decline as it is expanded, it is generally wise to

Which of the following provides an example of an externality?

Which of the following describes the relationship between interest rates and interest-sensitive goods, such as housing?

People who receive the benefit of a good without contributing to its costs of production are called

Which of the following is most central to the understanding of the economic crisis of 2008?

Figure 5-4 -Refer to Figure 5-4. The inefficient equilibrium price and quantity are

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

The Economics of Political Action

Consumer Choice and Elasticity

Costs and the Supply of Goods

Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Gaining From International Trade

Filters

Exam 5: Difficult Cases for the Market, and the Role of Government

When competitive forces in an industry are weak,

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $30 and market output of 220 units. How does this outcome compare to the efficient, ideal equilibrium?

As more and more resources are dedicated to an activity

In economics, a free rider is the term used for a person who

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

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

When production of a good provides external benefits, there will be

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

Figure 5-4 -Refer to Figure 5-4. The figure illustrates an industry that generates

If an economic action generates more costs than benefits, the action

A sub-prime loan is a loan extended to borrowers

From the standpoint of economic efficiency, markets tend to provide

Because the benefits derived from an activity decline as it is expanded, it is generally wise to

Which of the following provides an example of an externality?

Which of the following describes the relationship between interest rates and interest-sensitive goods, such as housing?

People who receive the benefit of a good without contributing to its costs of production are called

Which of the following is most central to the understanding of the economic crisis of 2008?

Figure 5-4 -Refer to Figure 5-4. The inefficient equilibrium price and quantity are

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

The Economics of Political Action

Consumer Choice and Elasticity

Costs and the Supply of Goods

Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Gaining From International Trade

Filters