Question 1

A market transaction causes an externality if someone

Accepted Answer

A)  directly involved in the transaction receives uncompensated benefits or costs from it. 
B)  not directly involved in the transaction receives uncompensated benefits or costs from it. 
C)  directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D)  not directly involved in the transaction interferes in it by imposing regulations or product standards. 
A)  directly involved in the transaction receives uncompensated benefits or costs from it. 
B)  not directly involved in the transaction receives uncompensated benefits or costs from it. 
C)  directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out. 
D)  not directly involved in the transaction interferes in it by imposing regulations or product standards.

Question 2

Which of the following best explains why making automobiles completely safe is not efficient?

Accepted Answer

A)  After some level of safety is reached, making cars even safer will not be worth the additional cost. 
B)  Because human life is priceless, automobile safety generally doesn't matter. 
C)  The benefit from additional automobile safety will generally rise as automobiles are made safer, more than offsetting the opportunity cost involved. 
D)  Economic efficiency suggests that automobiles should be made as safe as humanly possible. 
A)  After some level of safety is reached, making cars even safer will not be worth the additional cost. 
B)  Because human life is priceless, automobile safety generally doesn't matter. 
C)  The benefit from additional automobile safety will generally rise as automobiles are made safer, more than offsetting the opportunity cost involved. 
D)  Economic efficiency suggests that automobiles should be made as safe as humanly possible.

Question 3

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

Accepted Answer

A)  a government-run health care system 
B)  the Walt Disney World amusement park 
C)  national defense 
D)  long-distance telephone service 
A)  a government-run health care system 
B)  the Walt Disney World amusement park 
C)  national defense 
D)  long-distance telephone service

Question 4

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 5

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

Accepted Answer

A)  raising price and reducing output. 
B)  raising price and expanding output. 
C)  lowering price and expanding output. 
D)  raising price and leaving output unchanged. 
A)  raising price and reducing output. 
B)  raising price and expanding output. 
C)  lowering price and expanding output. 
D)  raising price and leaving output unchanged.

Question 6

Which of the following provides the most accurate explanation of what is meant by "government failure"?

Accepted Answer

A)  The government engages in an activity such as the setting of prices that interferes with competitive markets. 
B)  The situation where the structure of incentives is such that government action will tend to result in the inefficient use of resources. 
C)  The presence of widespread voter fraud that alters the outcome of elections. 
D)  The undertaking of unethical and corrupt actions by some political officials. 
A)  The government engages in an activity such as the setting of prices that interferes with competitive markets. 
B)  The situation where the structure of incentives is such that government action will tend to result in the inefficient use of resources. 
C)  The presence of widespread voter fraud that alters the outcome of elections. 
D)  The undertaking of unethical and corrupt actions by some political officials.

Question 7

Economic analysis indicates that

Accepted Answer

A)  there is government failure, but not market failure. 
B)  there is market failure, but not government failure. 
C)  there is both government failure and market failure. 
D)  there is neither government failure nor market failure. 
A)  there is government failure, but not market failure. 
B)  there is market failure, but not government failure. 
C)  there is both government failure and market failure. 
D)  there is neither government failure nor market failure.

Question 8

Market failure will most likely arise from poor information when the product is

Accepted Answer

A)  a repeat-purchase item. 
B)  easily evaluated on inspection. 
C)  often purchased from the same seller. 
D)  unlikely to be purchased from the same seller in the future. 
A)  a repeat-purchase item. 
B)  easily evaluated on inspection. 
C)  often purchased from the same seller. 
D)  unlikely to be purchased from the same seller in the future.

Question 9

When the free-rider problem exists,

Accepted Answer

A)  the market will devote too few resources to the production of the good. 
B)  the cost of the good will always be more than the benefit of the good. 
C)  the good will not be produced. 
D)  entrepreneurs will eventually find a way to make free-riders pay their share. 
A)  the market will devote too few resources to the production of the good. 
B)  the cost of the good will always be more than the benefit of the good. 
C)  the good will not be produced. 
D)  entrepreneurs will eventually find a way to make free-riders pay their share.

Question 10

A hilly, public golf course is often used by sledders in the winter. One of the sledders was quoted as saying, "This is public property, so we have just as much a right to be on these hills as anyone else. Besides, when it snows, golfers can't use the course anyway. Sledding doesn't harm anything." Is he correct? Why or why not?

Accepted Answer

Sledding can inflict external costs to g

Question 11

Use the figure below to answer the following question(s). Figure 5-2
  Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

Accepted Answer

A)  Relative to economic efficiency, output of the good will be too large and the price too low. 
B)  Relative to economic efficiency, output of the good will be too large and the price too high. 
C)  Relative to economic efficiency, output of the good will be too small and the price too low. 
D)  Relative to economic efficiency, output of the good will be too small and the price too high. 
A)  Relative to economic efficiency, output of the good will be too large and the price too low. 
B)  Relative to economic efficiency, output of the good will be too large and the price too high. 
C)  Relative to economic efficiency, output of the good will be too small and the price too low. 
D)  Relative to economic efficiency, output of the good will be too small and the price too high.

Question 12

"Government failure" exists when political decision-makers choose actions that

Accepted Answer

A)  seek efficient outcomes rather than fair outcomes. 
B)  seek fair outcomes rather than efficient outcomes. 
C)  conflict with efficient allocation of resources. 
D)  conflict with the outcome favored by the majority of voters. 
A)  seek efficient outcomes rather than fair outcomes. 
B)  seek fair outcomes rather than efficient outcomes. 
C)  conflict with efficient allocation of resources. 
D)  conflict with the outcome favored by the majority of voters.

Question 13

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 14

When economists say that an activity meets the criterion for economic efficiency, they mean

Accepted Answer

A)  a majority of citizens favor the activity. 
B)  the benefits that result from the activity exceed the costs. 
C)  the number of people who gain from the activity exceeds the number on whom costs are imposed. 
D)  the costs that result from the activity exceed the benefits. 
A)  a majority of citizens favor the activity. 
B)  the benefits that result from the activity exceed the costs. 
C)  the number of people who gain from the activity exceeds the number on whom costs are imposed. 
D)  the costs that result from the activity exceed the benefits.

Question 15

Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?

Accepted Answer

A)  When the government provides economic goods, they are free; costs are only incurred when such goods are provided by private firms. 
B)  Voters tend to be better informed than market consumers. 
C)  Decision makers in the market are motivated by self-interest, whereas, political decision makers are primarily motivated by the desire to help others. 
D)  Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem. 
A)  When the government provides economic goods, they are free; costs are only incurred when such goods are provided by private firms. 
B)  Voters tend to be better informed than market consumers. 
C)  Decision makers in the market are motivated by self-interest, whereas, political decision makers are primarily motivated by the desire to help others. 
D)  Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem.

Question 16

A good is considered nonexcludable if

Accepted Answer

A)  many individuals can share in the consumption of the same unit of the good. 
B)  the consumption of the good by one individual lowers the amount available for others. 
C)  it is impossible or very costly to exclude nonpaying customers from receiving the good. 
D)  its production is financed through tax revenue rather than market prices. 
A)  many individuals can share in the consumption of the same unit of the good. 
B)  the consumption of the good by one individual lowers the amount available for others. 
C)  it is impossible or very costly to exclude nonpaying customers from receiving the good. 
D)  its production is financed through tax revenue rather than market prices.

Question 17

The economic way of thinking indicates that government action will

Accepted Answer

A)  never improve on the allocation of resources through markets. 
B)  always improve on the results of markets if the political process is democratic. 
C)  reflect the actions of political decision-makers seeking to advance the public interest, rather than their own personal interests. 
D)  either improve the well-being of the general public, or harm it, depending on the circumstances. 
A)  never improve on the allocation of resources through markets. 
B)  always improve on the results of markets if the political process is democratic. 
C)  reflect the actions of political decision-makers seeking to advance the public interest, rather than their own personal interests. 
D)  either improve the well-being of the general public, or harm it, depending on the circumstances.

Question 18

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

Accepted Answer

Perhaps. Beaches, parks, and public swim

Question 19

In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will

Accepted Answer

A)  produce the economically efficient outcome. 
B)  result in a market price that is higher than the efficient one. 
C)  register a price that is lower than the efficient one. 
D)  result in too little of the good being produced compared to the ideal efficient outcome. 
A)  produce the economically efficient outcome. 
B)  result in a market price that is higher than the efficient one. 
C)  register a price that is lower than the efficient one. 
D)  result in too little of the good being produced compared to the ideal efficient outcome.

Question 20

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

A)  The efficient price would higher than $18 while the efficient output would be less than 400 units. 
B)  The efficient price would be higher than $18 while the efficient output would be greater than 400 units. 
C)  The efficient price would be lower than $18 while the efficient output would be less than 400 units. 
D)  The efficient price would be lower than $18 while the efficient output would be greater than 400 units. 
A)  The efficient price would higher than $18 while the efficient output would be less than 400 units. 
B)  The efficient price would be higher than $18 while the efficient output would be greater than 400 units. 
C)  The efficient price would be lower than $18 while the efficient output would be less than 400 units. 
D)  The efficient price would be lower than $18 while the efficient output would be greater than 400 units.

A market transaction causes an externality if someone

Which of the following best explains why making automobiles completely safe is not efficient?

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

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 a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

Which of the following provides the most accurate explanation of what is meant by "government failure"?

Economic analysis indicates that

Market failure will most likely arise from poor information when the product is

When the free-rider problem exists,

Use the figure below to answer the following question(s). Figure 5-2 Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

"Government failure" exists when political decision-makers choose actions that

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

When economists say that an activity meets the criterion for economic efficiency, they mean

Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?

A good is considered nonexcludable if

The economic way of thinking indicates that government action will

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

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

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad--As Model

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy: Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Special Topics

Filters

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

A market transaction causes an externality if someone

Which of the following best explains why making automobiles completely safe is not efficient?

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

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 a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

Which of the following provides the most accurate explanation of what is meant by "government failure"?

Economic analysis indicates that

Market failure will most likely arise from poor information when the product is

When the free-rider problem exists,

Use the figure below to answer the following question(s). Figure 5-2 Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

"Government failure" exists when political decision-makers choose actions that

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

When economists say that an activity meets the criterion for economic efficiency, they mean

Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?

A good is considered nonexcludable if

The economic way of thinking indicates that government action will

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

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

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad--As Model

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy: Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Special Topics

Filters

Use the figure below to answer the following question(s). Figure 5-2 Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?