Question 1

Define the term producer surplus.

Accepted Answer

Producer surplus is the difference betwe

Question 2

What are the two conditions that must exist for markets to produce efficient outcomes?

Accepted Answer

The market demand curve must reflect the

Question 3

When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) externalities. 
D) diminishing utility. 
A) moral hazard. 
B) adverse selection. 
C) externalities. 
D) diminishing utility.

Question 4

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. 
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.

Question 5

Refer to the diagram, in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should

Accepted Answer

A) not intervene because the market outcome is optimal. 
B) subsidize consumers so that the market demand curve shifts leftward. 
C) subsidize producers so that the market supply curve shifts leftward. 
D) tax producers so that the market supply curve shifts leftward. 
A) not intervene because the market outcome is optimal. 
B) subsidize consumers so that the market demand curve shifts leftward. 
C) subsidize producers so that the market supply curve shifts leftward. 
D) tax producers so that the market supply curve shifts leftward.

Question 6

There is an adverse selection problem in the market for used cars because

Accepted Answer

A) owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars. 
B) owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs. 
C) most people prefer new cars, but the high prices for new cars force most of them to buy used cars. 
D) government actions to pass "lemon" laws have reduced information on used cars. 
A) owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars. 
B) owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs. 
C) most people prefer new cars, but the high prices for new cars force most of them to buy used cars. 
D) government actions to pass "lemon" laws have reduced information on used cars.

Question 7

In a situation where an externality occurs, the "third party" refers to those who

Accepted Answer

A) buy the product from others. 
B) produce the product for others. 
C) trade the product with others outside the nation or community. 
D) are not directly involved in the transaction or activity. 
A) buy the product from others. 
B) produce the product for others. 
C) trade the product with others outside the nation or community. 
D) are not directly involved in the transaction or activity.

Question 8

Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S₁ is the optimal supply from the society's perspective. One solution to this externality problem is to

Accepted Answer

A) give consumers a subsidy of the amount FG per unit. 
B) give producers a subsidy of the amount AB per unit. 
C) tax producers by the amount DE per unit. 
D) tax consumers by the amount EF per unit. 
A) give consumers a subsidy of the amount FG per unit. 
B) give producers a subsidy of the amount AB per unit. 
C) tax producers by the amount DE per unit. 
D) tax consumers by the amount EF per unit.

Question 9

Refer to the provided graph of a competitive market. If the output level increases from Q₂ to Q₃, then the

Accepted Answer

A) marginal cost of the product becomes closer to its marginal benefit. 
B) marginal cost of the product increases, while its marginal benefit decreases. 
C) marginal cost of the product decreases, while its marginal benefit increases. 
D) marginal cost of the product stays constant, while its marginal benefit increases. 
A) marginal cost of the product becomes closer to its marginal benefit. 
B) marginal cost of the product increases, while its marginal benefit decreases. 
C) marginal cost of the product decreases, while its marginal benefit increases. 
D) marginal cost of the product stays constant, while its marginal benefit increases.

Question 10

In a free-market economy, a product which entails a positive externality will be

Accepted Answer

A) overproduced. 
B) underproduced. 
C) produced at the optimal level. 
D) provided solely by the government. 
A) overproduced. 
B) underproduced. 
C) produced at the optimal level. 
D) provided solely by the government.

Question 11

Refer to the provided graph. Suppose consumers do not fully appreciate the benefits of the product whose market is shown in the graph. If an external agency is able to provide full information to consumers about the benefits of the product, then

Accepted Answer

A) the supply curve will shift to the left. 
B) the demand curve will shift to the right. 
C) both the new equilibrium price and quantity will be lower. 
D) the new equilibrium price will be higher but the equilibrium quantity will be either higher or lower. 
A) the supply curve will shift to the left. 
B) the demand curve will shift to the right. 
C) both the new equilibrium price and quantity will be lower. 
D) the new equilibrium price will be higher but the equilibrium quantity will be either higher or lower.

Question 12

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 13

Which of the following would be an example of government intervention to correct a market failure caused by buyers having inadequate information about sellers?

Accepted Answer

A) providing unemployment compensation insurance 
B) sponsoring legislation to reduce pollution 
C) licensing of medical doctors and surgeons 
D) requiring all car drivers to buy auto insurance 
A) providing unemployment compensation insurance 
B) sponsoring legislation to reduce pollution 
C) licensing of medical doctors and surgeons 
D) requiring all car drivers to buy auto insurance

Question 14

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. 
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.

Question 15

Production subsidies are a way of internalizing external costs among polluting firms.

Accepted Answer

A) True 
 B)False

Question 16

The market supply curve indicates the

Accepted Answer

A) minimum acceptable prices that sellers are willing to accept for the product. 
B) maximum prices that buyers are willing and able to pay for the product. 
C) total revenues that sellers would receive from selling various quantities of the product. 
D) total amount that buyers will pay in buying a given quantity of the product. 
A) minimum acceptable prices that sellers are willing to accept for the product. 
B) maximum prices that buyers are willing and able to pay for the product. 
C) total revenues that sellers would receive from selling various quantities of the product. 
D) total amount that buyers will pay in buying a given quantity of the product.

Question 17

In the market for a particular pair of shoes, Geri is willing to pay $75 for a pair, while Jane is willing to pay $95 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is the total amount of the two women's combined consumer surplus?

Accepted Answer

A) $20 
B) less than $20 
C) $195 
D) $10 
E) $40 
A) $20 
B) less than $20 
C) $195 
D) $10 
E) $40

Question 18

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

Accepted Answer

A) True 
 B)False

Question 19

In a cap-and-trade program,

Accepted Answer

A) government fixes the price of pollution rights and firms choose how many permits to purchase. 
B) government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other. 
C) each firm is provided a fixed number of permits for a particular pollutant and no individual firm is allowed to acquire additional permits. 
D) firms can emit whatever type of pollutant they want, so long as the total tonnage does not exceed a government-established quantity. 
A) government fixes the price of pollution rights and firms choose how many permits to purchase. 
B) government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other. 
C) each firm is provided a fixed number of permits for a particular pollutant and no individual firm is allowed to acquire additional permits. 
D) firms can emit whatever type of pollutant they want, so long as the total tonnage does not exceed a government-established quantity.

Question 20

At equilibrium in a market for a product, the total revenues received by sellers equal the

Accepted Answer

A) market producer surplus. 
B) total amount spent by buyers on the product. 
C) total profits of sellers. 
D) market consumer surplus. 
A) market producer surplus. 
B) total amount spent by buyers on the product. 
C) total profits of sellers. 
D) market consumer surplus.

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Define the term producer surplus.

What are the two conditions that must exist for markets to produce efficient outcomes?

When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of

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

There is an adverse selection problem in the market for used cars because

In a situation where an externality occurs, the "third party" refers to those who

Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S₁ is the optimal supply from the society's perspective. One solution to this externality problem is to

Refer to the provided graph of a competitive market. If the output level increases from Q₂ to Q₃, then the

In a free-market economy, a product which entails a positive externality will be

Refer to the provided graph. Suppose consumers do not fully appreciate the benefits of the product whose market is shown in the graph. If an external agency is able to provide full information to consumers about the benefits of the product, then

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.

Which of the following would be an example of government intervention to correct a market failure caused by buyers having inadequate information about sellers?

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?

Production subsidies are a way of internalizing external costs among polluting firms.

The market supply curve indicates the

In the market for a particular pair of shoes, Geri is willing to pay $75 for a pair, while Jane is willing to pay $95 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is the total amount of the two women's combined consumer surplus?

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

In a cap-and-trade program,

At equilibrium in a market for a product, the total revenues received by sellers equal the

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Public Goods, Public Choice, and Government Failure

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The Demand for Resources

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