Question 1

According to Coase,

Accepted Answer

A) externalities do not matter in truly competitive markets because people can always negotiate around them. 
B) people in competitive markets can never negotiate to overcome externalities. 
C) people in competitive markets often fail to overcome externalities because negotiating is costly. 
D) people in competitive markets can overcome the principal-agent problem if the agents negotiate well. 
A) externalities do not matter in truly competitive markets because people can always negotiate around them. 
B) people in competitive markets can never negotiate to overcome externalities. 
C) people in competitive markets often fail to overcome externalities because negotiating is costly. 
D) people in competitive markets can overcome the principal-agent problem if the agents negotiate well. C

Question 2

Market economies produce outcomes that are

Accepted Answer

A) virtually ideal in all respects. 
B) inferior to most other systems. 
C) far from ideal, in some respects. 
D) virtually indistinguishable from command economies. 
A) virtually ideal in all respects. 
B) inferior to most other systems. 
C) far from ideal, in some respects. 
D) virtually indistinguishable from command economies. C

Question 3

If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor? Why? 
a. prohibiting the activity 
b. charging fees for continuing the activity 
c. requiring that the public be informed of the activity 
d. government purchase of the item for the public

Accepted Answer

Any corrective measure should, as much as possible, be marketlike in nature. 
a. This is not generally appropriate because it does not rely on a price mechanism to bring about change.b. If the activity generates detrimental externalities, a fee would be appropriate in order to bring marginal private cost toward marginal social cost.c. If the activity involves asymmetric information, the requirement to inform may improve a person's abilities to make an informed choice.d. If the item is a public good, government purchase may be appropriate. However, in other cases, government purchase is not generally a useful corrective to market failure.

Question 4

Private ownership of rivers and lakes will halt all water pollution.

Accepted Answer

A) True 
 B)False

Question 5

Asymmetric information generally leads to efficient resource allocation.

Accepted Answer

A) True 
 B)False

Question 6

As productivity in the manufacturing sector increases, the service sector must keep pace or it will become more expensive in the long run.

Accepted Answer

A) True 
 B)False

Question 7

The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer. Many who attend make donations for symphony expenses, but the donation is not required. Some who attend make no contributions. Economists would

Accepted Answer

A) classify the noncontributors as detrimental externalities. 
B) call the concerts excludable events. 
C) call the noncontributors free riders. 
D) call the concerts depletable goods. 
A) classify the noncontributors as detrimental externalities. 
B) call the concerts excludable events. 
C) call the noncontributors free riders. 
D) call the concerts depletable goods.

Question 8

Which of the following statements is correct?

Accepted Answer

A) Marginal social cost is the share of marginal cost caused by an activity that is paid for by the persons who carry out the activity. 
B) Marginal private cost is the share of marginal cost caused by an activity that is borne by persons other than those who carry out the activity. 
C) Marginal social cost is the sum of marginal private cost and incidental cost. 
D) Marginal private cost and incidental cost are one and the same. 
A) Marginal social cost is the share of marginal cost caused by an activity that is paid for by the persons who carry out the activity. 
B) Marginal private cost is the share of marginal cost caused by an activity that is borne by persons other than those who carry out the activity. 
C) Marginal social cost is the sum of marginal private cost and incidental cost. 
D) Marginal private cost and incidental cost are one and the same.

Question 9

Private goods are characterized by two important attributes. What are they?

Accepted Answer

A) Marginality and depletability 
B) Scalability and desirability 
C) Repeatability and reliability 
D) Depletability and excludability 
A) Marginality and depletability 
B) Scalability and desirability 
C) Repeatability and reliability 
D) Depletability and excludability

Question 10

The pollution emitted by a power plant is an example of a detrimental externality.

Accepted Answer

A) True 
 B)False

Question 11

Government action can usually perfectly correct the market's shortcomings.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is an imperfection of market economies?

Accepted Answer

A) They produce inexpensive services but expensive manufactured goods. 
B) They place undue importance on the needs of future generations. 
C) They cannot provide certain goods such as national defense. 
D) They distribute income too unequally. 
A) They produce inexpensive services but expensive manufactured goods. 
B) They place undue importance on the needs of future generations. 
C) They cannot provide certain goods such as national defense. 
D) They distribute income too unequally.

Question 13

Which of the following is not true for a public good?

Accepted Answer

A) Marginal cost of serving public good to one more person is zero. 
B) Free-rider problem arises in case of public goods. 
C) Exclusion is not possible in most of the public goods. 
D) Public goods include only material commodities. 
A) Marginal cost of serving public good to one more person is zero. 
B) Free-rider problem arises in case of public goods. 
C) Exclusion is not possible in most of the public goods. 
D) Public goods include only material commodities.

Question 14

Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.

Accepted Answer

A) True 
 B)False

Question 15

If a firm's production creates detrimental externalities, then in a competitive market,

Accepted Answer

A) the firm will produce at an inefficiently high level. 
B) the firm will produce at an inefficiently low level. 
C) the firm will produce until marginal social cost equals marginal benefits. 
D) the firm will produce until marginal benefits exceed marginal social cost. 
A) the firm will produce at an inefficiently high level. 
B) the firm will produce at an inefficiently low level. 
C) the firm will produce until marginal social cost equals marginal benefits. 
D) the firm will produce until marginal benefits exceed marginal social cost.

Question 16

As long as the market sets prices above marginal costs, production will be efficient.

Accepted Answer

A) True 
 B)False

Question 17

Market economies produce only a few relatively minor defects.

Accepted Answer

A) True 
 B)False

Question 18

When General Motors pays an outside vendor for auto parts, this is an external cost.

Accepted Answer

A) True 
 B)False

Question 19

There is no way that externalities can be corrected.

Accepted Answer

A) True 
 B)False

Question 20

Producing more cabbage will be inefficient if

Accepted Answer

A) the marginal opportunity cost of cabbage is less than the marginal value. 
B) cabbage production can be increased without reducing production of other goods. 
C) the marginal value of forgone lettuce is greater than the marginal value of cabbage. 
D) the marginal value of forgone lettuce is less than the marginal value of cabbage. 
A) the marginal opportunity cost of cabbage is less than the marginal value. 
B) cabbage production can be increased without reducing production of other goods. 
C) the marginal value of forgone lettuce is greater than the marginal value of cabbage. 
D) the marginal value of forgone lettuce is less than the marginal value of cabbage.

Exam 15: The Shortcomings of Free Markets

According to Coase,

Market economies produce outcomes that are

Private ownership of rivers and lakes will halt all water pollution.

Asymmetric information generally leads to efficient resource allocation.

As productivity in the manufacturing sector increases, the service sector must keep pace or it will become more expensive in the long run.

The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer. Many who attend make donations for symphony expenses, but the donation is not required. Some who attend make no contributions. Economists would

Which of the following statements is correct?

Private goods are characterized by two important attributes. What are they?

The pollution emitted by a power plant is an example of a detrimental externality.

Government action can usually perfectly correct the market's shortcomings.

Which of the following is an imperfection of market economies?

Which of the following is not true for a public good?

Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.

If a firm's production creates detrimental externalities, then in a competitive market,

As long as the market sets prices above marginal costs, production will be efficient.

Market economies produce only a few relatively minor defects.

When General Motors pays an outside vendor for auto parts, this is an external cost.

There is no way that externalities can be corrected.

Producing more cabbage will be inefficient if

What Is Economics

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: an Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: the Importance of Marginal Analysis

The Financial Markets and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

The Case for Free Markets: the Price System

Monopoly

Between Competition and Monopoly

Limiting Market Power: Antitrust and Regulation

Externalities, Externaliteis, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: the Human Inputs

Poverty, Inequality, and Discrimination

International Trade and Comparative Advantage

Contemporary Issues in the Us Economy

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