Deck 2: Efficiency, Markets, and Government 

Question 1

Monopoly power causes losses in efficiency because the marginal social benefit of output exceeds its marginal social cost at the monopoly output.

Answer 1

True

Question 2

If the marginal social benefit of smoke detectors exceeds its marginal social cost, then additional net gains are possible from increased annual smoke detector production.

Answer 2

True

Question 3

A tax on a product shifts the demand curve.

Answer 3

False

Question 4

When comparing the allocation of two goods relative to two consumers with individual utility functions, multiple points of Pareto efficiency can exist.

Question 5

All points on a utility possibility curve are efficient but differ in terms of the distribution of well-being.

Question 6

Government programs can achieve efficiency when the gains to gainers from those policies exceed the losses to those who bear the costs.

Question 7

Compensation criteria are used to argue that changes in resource allocation should be made if the gains to some groups outweigh the losses to others, even though compensation for losses is not actually made.

Question 8

The efficient annual output of any given good is attained if that good is made available in amounts up to the point at which the total social benefit of the good equals the total social cost.

Question 9

Positive economic analysis is based on underlying value judgments.

Question 10

It is possible for efficiency not to be attained even if all production is carried on without waste.

Question 11

"The government should abolish tariffs to achieve efficiency" is a normative statement.

Question 12

A government-subsidized price for a commodity that is higher than the market-driven price results in oversupply relative to the efficient allocation.

Question 13

Government regulations that require airlines to serve routes for which the maximum price that pas?sengers are willing to pay for a trip fall short of the minimum price that sellers are willing to accept are likely to cause losses in efficiency.

Question 14

Positive economics:

A)makes recommendations designed to achieve certain goals.
B)establishes cause-and-effect relationships between economic variables.
C)is based on value judgments.
D)can never be used to make predictions.

Question 15

If the marginal social cost of beer production exceeds its marginal social benefit, then more than the efficient amount of beer is being produced.

Question 16

Efficiency is attained when resources are used each year in such a way that no further net gain is possible.

Question 17

If it is not possible to make someone better off without harming another, then resource allocation is efficient.

Question 18

Points lying below a utility possibility curve are efficient.

Question 19

Efficient outcomes are often viewed as inequitable.

Question 20

The normative approach to public finance prescribes certain actions to achieve predetermined criteria.

Question 21

Positive economics is:

A)an equity-based approach in which income should be redistributed.
B)an objective approach without a particular goal based on underlying values.
C)a goal-oriented approach based on desired policy outcomes.
D)a belief that governments can implement economic policies for the greater good of society.

Question 22

If efficiency has been attained,

A)it will be possible to make any one person better off without harming another.
B)it will not be possible to make any one person better off without harming another.
C)perfect competition must exist.
D)the opportunity cost of any change in resource use must be zero.

Question 23

Points on a utility possibility curve represent:

A)a given distribution of well-being between two persons.
B)an efficient allocation of resources.
C)the maximum well-being of any one person, given the resources available and the well-being of another person.
D)all of these are correct.

Question 24

Pareto efficiency between two consumers is achieved:

A)only when the individual marginal rates of substitution are equal to the marginal rate of transformation.
B)only when the individual marginal rates of substitution are less than one, but not necessarily equal.
C)only when the individual marginal rates of substitution are greater than one and equal.
D)only when the individual marginal rates of substitution are equal.

Question 25

If the marginal social benefit of a good exceeds the marginal social cost at the current monthly output, then:

A)it will be possible to make buyers of the good better off without harming sellers of the good.
B)it will be possible to make sellers of the good better off without harming buyers of the good.
C)both (a) or (b) are correct.
D)a reduction in monthly output will be required for efficiency.

Question 26

If the efficient output of a good is produced each week, then the:

A)marginal social benefit of the good equals its marginal social cost each week.
B)marginal social benefit of the good is at a maximum.
C)total social benefit of the good is at a maximum.
D)total social benefit of the good equals its total social cost.

Question 27

Diamonds are sold by a monopoly firm that maximizes profits.It then follows that:

A)the marginal social benefit of diamonds exceeds its marginal social cost.
B)the marginal social cost of diamonds exceeds its marginal social benefit.
C)the price of diamonds equals its marginal social cost.
D)the price of diamonds exceeds its marginal social benefit.

Question 28

If a government desires to increase production beyond the current competitively determined efficient level, the government should:

A)tax the good.
B)subsidize the good at a price higher than its current price.
C)set the price below its current price.
D)impose a fixed fee whenever the good is purchased.

Question 29

Eggs are sold in a perfectly competitive market.No persons other than the buyers and sellers of eggs are affected in any way when eggs are traded in the market.It then follows that:

A)the price of eggs equals the marginal social cost of eggs.
B)the price of eggs equals the marginal social benefit of eggs.
C)the price of eggs exceeds the marginal social benefit of eggs.
D)both (a) and (b) are correct.

Question 30

The extra benefit on one more unit of a good or service is its:

A)marginal cost.
B)marginal benefit.
C)total benefit.
D)total cost.

Question 31

Suppose the efficient output currently prevails in the market for ice cream.A tax on ice cream con?sumption will:

A)allow efficiency to continue to prevail in the market.
B)result in more than the efficient output in the market.
C)result in less than the efficient output in the market.
D)cause the marginal social cost of ice cream to exceed its marginal social benefit at the market equilibrium output.

Question 32

Normative economics is:

A)completely free of any value system.
B)completely objective.
C)based on a conscious effort to implement a particular social goal.
D)an approach that determines the effect of particular actions without judgment of the result being good or bad.

Question 33

Which of the following is a normative statement?

A)When interest rates rise, the quantity of loanable funds demanded for new mortgages will decline.
B)To achieve efficiency, governments should prevent monopoly in markets.
C)Unemployment increases during a recession.
D)When governments increase income tax rates, people work less.

Question 34

The marginal social cost of bread exceeds the marginal social benefit at the current weekly output.Therefore,

A)the marginal net benefit of bread is positive.
B)the output of bread is efficient.
C)a reduction in weekly output of bread is necessary to achieve efficiency.
D)an increase in weekly output of bread is necessary to achieve efficiency.

Question 35

Normative economics:

A)is not based on underlying value judgments.
B)makes recommendations to achieve efficient outcomes.
C)establishes cause-and-effect relationships between economic variables.
D)makes "if…then" type statements and checks them against the facts.

Question 36

The wine industry is currently composed of many firms, and wine is sold in a perfectly competitive market.The wine industry produces the efficient annual output of wine, which is 100,000 bottles per year.The market equilibrium price is $5 per bottle.
a.Draw the market demand and supply of wine and label the curves to show why the market out?put is the efficient output.
b.Suppose that the wine industry is consolidated into one large monopoly firm.As a result of the monopolization of the industry, the price of wine increases to $7 per bottle, and the annual quantity demanded falls to 75,000 bottles.Explain why this output is not efficient and show the loss in net benefits resulting from monopolization of the industry.

Question 37

The total social benefit of automobiles equals the total social cost at current annual output.It then follows that:

A)the annual output of automobiles is efficient.
B)the annual output of automobiles exceeds the efficient amount.
C)less than the efficient annual output of automobiles is produced.
D)it is not possible to make buyers of automobiles better off without harming sellers.

Question 38

A move from an inefficient resource allocation to an efficient one:

A)will always be unanimously approved, even if gainers do not compensate losers.
B)will be unanimously opposed.
C)will be unanimously approved if gainers compensate losers.
D)can never result in losers.

Question 39

An efficient level of output means:

A)the total social benefit less the total social cost is maximized.
B)the total social benefit is below the total social cost.
C)the total social cost equals the total social benefit.
D)the total social benefit less the total social cost can be improved.

Question 40

If the efficient output of computers is achieved this year, then market price of computers is equal to:

A)the marginal social benefit of computers.
B)the marginal social cost of computers.
C)the total social benefit of computers.
D)both (a) and (b) are correct

Question 41

Explain why points on a utility possibility curve represent efficient allocations of resources.Why must the utility possibility curve be downward sloping? Draw a utility possibility curve and show how it is possible to achieve efficiency by moving from a point within the curve and the axes to a point on the curve.