Deck 7: The Efficiency of Markets

Question 1

Without market coordination,

A)violent force is necessary to motivate individuals.
B)a society disintegrates.
C)the problem of scarcity can be controlled.
D)central direction is necessary.
E)an orderly society can at last be a possibility.

Answer 1

D

Question 2

Adam Smith wrote a book called

A)Invisible Hand.
B)The New Testament.
C)Market Efficiency.
D)Wealth of Nations.
E)Competitive Equilibrium.

Answer 2

D

Question 3

The primary problem with nonmarket economic coordination is

A)that some people get wealthy.
B)the possibility that efficiency will result.
C)the difficulty of collecting and acting on economic information.
D)that, without a market, exchange cannot take place.
E)that no one is providing central direction for the economy.

Answer 3

C

Question 4

A strength of the market system is that cooperation must occur for everyone to be able to meet together and trade.

Question 5

Economists believe that, in a market system,

A)trade takes place at the insistence of government authorities.
B)individual preferences do not matter.
C)individuals behave in an altruistic manner.
D)prices are the only pieces of information to which anyone has access.
E)self-interest is channeled so that it motivates people to coordinate activity.

Question 6

The "invisible hand" is a term coined by

A)Adam Smith.
B)Benjamin Franklin.
C)George Washington.
D)Robert E.Lee.
E)Abraham Lincoln.

Question 7

The market system

A)was born during the first Industrial Revolution in Great Britain.
B)arises spontaneously when individuals wish to trade.
C)is totally absent in state-run economies such as Cuba.
D)was created by Adam Smith in 1776.
E)is forced on a society by government and the capitalists who run it.

Question 8

Which of the following statements is true?

A)In a market system, costs and benefits are publicly posted by individual participants.
B)In a nonmarket system, individuals voluntarily sacrifice self-interest.
C)Only in a market system does greed play a motivational role.
D)It is easy to calculate costs and benefits in a market system.
E)Regardless of the economic system, it is difficult to measure all costs and benefits.

Question 9

The competitive equilibrium model

A)describes in detail how every individual behaves in a real-world market.
B)combines supply and demand to illustrate how prices are established.
C)incorporates only the profit-maximization incentives of firms.
D)explains how a health-care system can be properly managed.
E)incorporates only the utility-maximization incentives of individuals.

Question 10

A market

A)must be located in a single centralized place where all buyers and sellers can meet together at once.
B)generally fails to coordinate trading activity, as evidenced by the apparent chaos on Wall Street.
C)cannot operate without direct government intervention in the conduct of trades.
D)requires little communication.
E)is a group of buyers and sellers buying and selling goods and services.

Question 11

It is easier for buyers and sellers to exchange and process price information in market systems than in nonmarket systems.

Question 12

In the competitive equilibrium model,

A)utility and marginal cost are equated.
B)only seller behavior is analyzed.
C)only buyer behavior is analyzed.
D)the willingness to sell and the willingness to buy are equated.
E)few individuals benefit from market trade.

Question 13

A market system relies primarily on prices to motivate individuals and coordinate economic activity.

Question 14

In a competitive equilibrium model, prices are determined freely by market supply and demand.

Question 15

A market is an easy way for

A)buyers and sellers to communicate costs and benefits.
B)sellers to earn profits without any risk of losses.
C)each seller to control his or her selling price.
D)sellers to provide false information to buyers.
E)the government to control sellers.

Question 16

In a market, buyers and sellers are coordinated through

A)the government.
B)the information about price.
C)personal communication with each other.
D)information gained from outside the market.
E)collective bargaining in large groups.

Question 17

In a market,

A)buyers and sellers must know how the other group thinks to succeed in maximizing their own group's self-interest.
B)information is unnecessary.
C)trade must take place at a single location or economic coordination breaks down.
D)each individual participant knows only a small fraction of the total information produced in the market.
E)income equality results.

Question 18

The invisible hand is term that describes the power of a government.

Question 19

Without market coordination,

A)prices are entirely ignored.
B)only that which is good for a society as a whole is produced.
C)it is difficult for individuals to communicate costs and benefits.
D)money is not used.
E)self-interest ceases to be a motivating factor.

Question 20

According to Adam Smith, the invisible hand leads to

A)higher income only for the rich.
B)a socialist society.
C)market efficiency.
D)undesirable social outcomes such as a higher crime rate.
E)more firm profits at the expense of consumers.

Question 21

The equilibrium price in a competitive equilibrium model is determined by supply and demand.

Question 22

At an equilibrium price,

A)both producers and consumers are satisfied with the quantity traded.
B)only consumers are satisfied with the amount they can buy.
C)only producers are satisfied with the amount traded.
D)neither consumers nor producers are satisfied with the quantity traded.
E)the willingness to sell and the willingness to buy are left out of balance.

Question 23

The competitive equilibrium model gets its name from the

A)fact that the number of participants eliminated from the market equals the number of new participants.
B)competition between buyers and sellers, each trying to drive the other out of business.
C)competition between buyers and sellers, which establishes a market price equating the amounts people wish to buy and sell.
D)steady-state nature of the model, in which prices can never change.
E)way that the government is trying to balance the market's supply and demand forces.

Question 24

Which of the following statements is false?

A)If marginal cost exceeds marginal benefit, too much is being produced.
B)Taking money from the rich and giving it to the poor does not improve efficiency.
C)Three conditions must be met to achieve efficiency.
D)If all consumers experience the same marginal benefit, equity has resulted.
E)To achieve efficiency, a producer whose marginal cost is lower than his or her competitors should produce more than his or her competitors.

Question 25

In a market, price provides information only to sellers but not to buyers.

Question 26

A shortage

A)occurs when sellers are willing to sell more than consumers are willing to buy.
B)can never occur in a market that is functioning properly and without interference.
C)occurs when the market price is below the equilibrium price.
D)is an example of market failure.
E)causes a price decrease in a market.

Question 27

Pareto efficiency cannot be achieved when

A)price equals marginal benefit.
B)marginal benefit is the same for all consumers.
C)marginal cost is the same for all producers.
D)price equals marginal cost.
E)marginal benefit exceeds marginal cost.

Question 28

Pareto efficiency is defined as a state where

A)poverty does not exist.
B)no one can possibly be made worse off.
C)everyone can benefit from a change.
D)no one can benefit from a change without someone being harmed.
E)the lowest cost of production is achieved.

Question 29

If the price of concert tickets is determined by a government concert agency and the price is set below the equilibrium price, then

A)no one who is willing to pay the price will see the concert.
B)some who are willing to pay the price will not see the concert.
C)those who are most willing to pay the price will see the concert.
D)those who are least willing to pay the price will see the concert.
E)everyone who is willing to pay the price will see the concert.

Question 30

When it is possible to make someone better off without hurting someone else, the condition is

A)Pareto unequal.
B)Pareto equal.
C)Pareto inefficient.
D)Pareto efficient.
E)absolutely equitable.

Question 31

At any given market price, a consumer

A)will never be able to buy a quantity of a good that maximizes utility.
B)holds out (refuses to buy) until the price falls.
C)will feel cheated by the individual seller.
D)will seek to buy a quantity of a good that maximizes utility.
E)will always be able to buy a quantity of a good that maximizes utility.

Question 32

Besides processing information, an economic system must perform two other tasks. Name them.

Question 33

The function of price in a market economy is to

A)make producers wealthy at the expense of consumers.
B)provide information to producers and consumers.
C)provide a base on which government can build a tax system.
D)prevent market adjustment from being necessary.
E)cause consumers to be certain that they desire a product before they buy it.

Question 34

Pareto efficiency is achieved when

A)no one feels he or she has been overcharged for something just bought.
B)the greatest possible good for society has been achieved.
C)no individual can achieve greater utility without someone else losing utility.
D)everyone can be made better off without hurting anyone.
E)no one has more than anyone else.

Question 35

If the price of a good increases, other things held constant, then

A)more resources might flow into the production of the good.
B)the good has become less scarce than all other goods.
C)the relative price of the good decreases.
D)either buyers or sellers respond to the new price, whereas the opposite group does not.
E)the good becomes more desirable to consumers.

Question 36

How is information conveyed from one individual participant to another in a market system?

Question 37

A surplus

A)can never occur in a market that is functioning properly and without interference.
B)occurs when market price is below equilibrium price.
C)occurs when sellers are willing to sell more than consumers are willing to buy.
D)is an example of failure on the part of a market.
E)causes a price increase in a market.

Question 38

What do all individuals seek to maximize, according to economists?

Question 39

A shortage or a surplus always exists in the competitive equilibrium model.

Question 40

All of the following are conditions of Pareto efficiency except

A)price equals marginal benefit.
B)marginal benefit is the same for all consumers.
C)marginal cost is the same for all producers.
D)income is the same for all consumers and producers.
E)marginal benefit equals marginal cost.

Question 41

Exhibit 7-1
Refer to Exhibit 7-1. Firm A has much higher costs of production, and under no circumstances should it produce when Firm B is already producing.

Question 42

Exhibit 7-1
Refer to Exhibit 7-1. If it is somehow determined in the market that 5 units of the output should be produced, Firm A will produce 1 unit whereas Firm B will produce 4 because

A)neither firm knows what the other's costs are, making it impossible for them to coordinate their activities properly.
B)Firm B will undercut Firm A's price, willingly sacrificing short-term profit to eliminate the competition.
C)market planners will examine the data and conclude that it is efficient for the firms to share production in this way.
D)Firm A will not have as good a reputation as Firm B, which has been in business longer.
E)Firm A will not be able to produce a second unit and sell it at a lower price than Firm B is willing to do.

Question 43

Pareto efficiency occurs when it is not possible to improve one person's situation without hurting someone else.

Question 44

Market competition leads to economic inefficiency.

Question 45

Society achieves Pareto efficiency when individuals can achieve more utility while no one loses any utility.

Question 46

A market is efficient if the price that buyers pay is equal to the marginal cost of producers.

Question 47

Pareto efficiency is achieved when

A)consumers maximize their utility.
B)markets achieve equilibrium.
C)producers price below marginal cost.
D)consumers behave altruistically.
E)producers produce at least cost.

Question 48

A principle states that when the supply and demand curves cross in a competitive market, Pareto efficiency is achieved. This principle is called

A)the first theorem of cost minimization.
B)the first theorem of utility maximization.
C)equilibrium.
D)the first theorem of welfare economics.
E)price equals marginal cost.

Question 49

Exhibit 7-1
Refer to Exhibit 7-1. If Firm A is producing 5 units and Firm B is producing 3 units, then

A)both firms should produce more because there is no way only 8 units could fulfill demand in a market.
B)Firm A should produce more and Firm B should produce less.
C)if Firm B reduced production by 1 unit, the savings would allow Firm A to produce 6 more units.
D)if Firm A reduced production by 1 unit, the savings would allow Firm B to produce 2 more units.
E)Pareto efficiency is achieved.

Question 50

Exhibit 7-1
Efficiency is achieved when marginal benefit is equal to marginal cost.

Question 51

If a market is in equilibrium, then we know that price equals marginal cost because

A)the market demand curve reflects marginal cost.
B)marginal cost never changes.
C)the market supply curve reflects marginal cost.
D)every firm has the same costs.
E)firms are required by law to equate marginal cost to price.

Question 52

Exhibit 7-1
Refer to Exhibit 7-1. If it is determined that output should be 3 units and Firm B produces the first 2 units, for efficiency it does not matter if the third unit is produced by Firm A or Firm B.

Question 53

If a market is in equilibrium, then we know that price equals marginal benefit because

A)the market supply curve reflects marginal cost.
B)marginal benefit never changes.
C)the market demand curve reflects marginal benefit.
D)consumers are required by law to equate marginal benefit to price.
E)every consumer experiences the same benefits.

Question 54

Suppose Jack waits in line and gets in to see a movie he values at $6, while Sam, farther back in line, does not get to see the movie he values at $12 because the theater fills up. Which of the following statements is true?

A)The movie theater management needs to install more seats.
B)Pareto efficiency is a concept that is not applicable here.
C)Pareto efficiency is achieved because Jack can tell Sam about the movie.
D)Jack must have stolen his ticket from Sam.
E)Pareto efficiency is not achieved.

Question 55

The first theorem of welfare economics states that

A)government action is never Pareto efficient.
B)Pareto efficiency is achieved in competitive markets.
C)Pareto efficiency can be achieved only in competitive markets.
D)Pareto efficiency is unattainable.
E)government intervention is needed to achieve Pareto efficiency.

Question 56

If a market is efficient, then it is possible that an increase in one person's consumption would not lower another person's consumption.

Question 57

Pareto efficiency occurs when there is no difference in the levels of income among individuals.

Question 58

Exhibit 7-1
Refer to Exhibit 7-1. Total output in the market is 6 units. To achieve efficiency, Firm B should produce

A)1 unit.
B)3 units.
C)4 units.
D)5 units.
E)6 units.

Question 59

In a market, the sum of producer and consumer surplus is maximized when marginal benefit is greater than marginal cost.

Question 60

All of the following contribute to the attainment of efficiency in a competitive market except

A)marginal benefit equals marginal cost because of the establishment of market equilibrium
B)every consumer maximizes his or her utility.
C)every producer seeks to get the minimum price he or she is willing to accept.
D)every consumer consumes to the point where price equals marginal benefit.
E)every firm produces to the point where price equals marginal cost.

Question 61

Income equality is usually defined as a state of the world in which all individuals have

A)the same abilities.
B)ally the same income.
C)the same amount of wealth.
D)the same education.
E)an equal vote in government.

Question 62

Market competition ensures that

A)consumer surplus equals producer surplus.
B)consumer surplus is greater than producer surplus.
C)consumer surplus is less than producer surplus.
D)the sum of consumer surplus and producer surplus is maximized.
E)the sum of consumer surplus and producer surplus equals zero.

Question 63

The best way to achieve income equality and efficiency is to regulate prices so that everyone can afford what they need.

Question 64

Competitive markets lead to Pareto efficiency but not necessarily income equality.

Question 65

The first theorem of welfare economics concerns the efficiency of competitive markets.

Question 66

Exhibit 7-2
Refer to Exhibit 7-2. What is the least cost for the production of 8 units of output?

Question 67

Exhibit 7-2
The sum of producer and consumer surplus is maximized when

A)the difference between marginal benefit and marginal cost is at its maximum.
B)producers produce at the point where marginal cost is equal to zero.
C)equity is achieved.
D)consumers buy to the point that marginal benefit is equal to zero.
E)marginal benefit and marginal cost are equal.

Question 68

Which of the following statements is false?

A)The sum of producer and consumer surplus is maximized when equilibrium is achieved.
B)Any successful effort to keep price from going to equilibrium decreases the sum of producer and consumer surplus in a market.
C)The sum of producer and consumer surplus is maximized when Pareto efficiency is achieved.
D)Consumer surplus is at its maximum when the price of a product is zero.
E)Producer surplus is all that is maximized when Pareto efficiency is achieved.

Question 69

Exhibit 7-2
Refer to Exhibit 7-2. What would be the total cost of Firm A and Firm B producing 4 units of output each? Is it possible to reduce this total cost and still produce the same total output? How?

Question 70

In economics, income inequality means Pareto inefficiency.

Question 71

Can income equality and efficiency be achieved at the same time? Why or why not?

Question 72

What three conditions for Pareto efficiency are met when market equilibrium is reached?

Question 73

Realistically speaking, complete income equality can be achieved only when

A)government taxes high incomes and redistributes the money to those with low incomes.
B)all consumers face the same market price.
C)individuals voluntarily give above-average income to below-average income earners to equalize incomes.
D)individuals stop acting in their own self-interest and produce all they can for the common good.
E)every individual receives exactly the same education.

Question 74

When market supply equals market demand, then

A)both consumer surplus and producer surplus equal zero.
B)consumer surplus is greater than producer surplus.
C)consumer surplus is less than producer surplus.
D)the sum of consumer surplus and producer surplus is maximized.
E)the sum of consumer surplus and producer surplus equals zero.

Question 75

What is the first theorem of welfare economics?

Question 76

The transfer of income from high-income to low-income individuals

A)cannot be achieved through any means other than the coercive use of government power.
B)can result in the achievement of Pareto efficiency.
C)has no effect on work incentives that individuals face in a market economy.
D)achieves Pareto efficiency where it was not achieved before.
E)does not distort markets in any way.

Question 77

In economics, inefficiency means a waste of resources.

Question 78

Income equality is achieved when society achieves efficiency.

Question 79

Exhibit 7-3
Refer to Exhibit 7-3. The sum of producer surplus and consumer surplus is at the maximum when price equals

A)$0.
B)$2.5.
C)$5.
D)$7.5.
E)$10.

Question 80

Define Pareto efficiency.