Deck 14: Government Intervention in the Market

Question 1

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.Which of the following is true?

A)If the price of pecans is $3,the output will be economically efficient but there will be a deadweight loss.
B)If the price of pecans is $9,consumers will purchase more than the economically efficient output.
C)Both 4000 pounds and 12 000 pounds are economically inefficient rates of output.
D)If the price of pecans is $3,producers will sell 12 000 pounds of pecans but this output will be economically inefficient.

Answer 1

C

Question 2

If marginal benefit is greater than marginal cost,output is inefficiently high.

Answer 2

False

Question 3

The market demand for a public good can be determined by

A)adding up the total private benefits and external benefits that each quantity provides the citizens of a country.
B)adding up how much each citizen expects to consume at each possible price.
C)adding up how much each consumer is willing to pay for each unit of the public good.
D)estimating the value of the benefit that each unit provides and multiplying that by the number of consumers.

Answer 3

C

Question 4

Will equilibrium in a market always result in an outcome that is economically efficient? Explain.

Question 5

How does the construction of a market demand curve for a private good differ from that for a public good?

A)There is no difference;in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity of the good.
B)There is no difference;in both cases the demand curve is determined by adding up the quantities demanded by each consumer at each price.
C)The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price,but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good.
D)The market demand curve for a private good is determined by adding up the price each consumer is willing to pay for each quantity of the good,but the market demand curve for a public good is determined by adding up the quantities demanded by each consumer at each price.

Question 6

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $3,what changes in the market would result in an economically efficient output?

A)The price would increase,the quantity supplied would decrease,and the quantity demanded would increase.
B)The quantity supplied would increase,the quantity demanded would decrease and the equilibrium price would increase.
C)The price would increase,the demand would decrease and the supply would increase.
D)The price would increase,the quantity demanded would decrease and the quantity supplied would increase.

Question 7

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $3,

A)the marginal cost of pecans is greater than the marginal benefit;therefore,output is inefficiently low.
B)producers should raise the price to $9 in order to sell the quantity demanded of 12 000.
C)the marginal benefit of pecans is greater than the marginal cost;therefore,output is inefficiently high.
D)the marginal benefit of pecans is greater than the marginal cost;therefore,output is inefficiently low.

Question 8

In a competitive market equilibrium,

A)total consumer surplus equals total producer surplus.
B)marginal benefit and marginal cost are maximised.
C)consumers and producers benefit equally.
D)the marginal benefit equals the marginal cost of the last unit sold.

Question 9

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $9,

A)the marginal cost of pecans is greater than the marginal benefit;therefore,output is inefficiently low.
B)producers should lower the price to $3 in order to sell the quantity demanded of 4000.
C)the marginal benefit of pecans is greater than the marginal cost;therefore,output is inefficiently high.
D)the marginal benefit of pecans is greater than the marginal cost;therefore,output is inefficiently low.

Question 10

Economic efficiency is a market outcome in which the marginal benefit of consumers is equal to the marginal cost of production,and the sum of consumer surplus and producer surplus is maximised.

Question 11

If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production,and consumer surplus plus producer surplus is maximised,then

A)maximum deadweight loss occurs.
B)economic efficiency is achieved.
C)profits are maximised.
D)costs are minimised.

Question 12

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9,what changes in the market would result in an economically efficient output?

A)The price would decrease,the quantity supplied would decrease,and the quantity demanded would increase.
B)The quantity supplied would increase,the quantity demanded would decrease and the equilibrium price would decrease.
C)The price would decrease,the demand would increase and the supply would decrease.
D)The price would increase,the quantity demanded would decrease and the quantity supplied would increase.

Question 13

Which of the following displays these two characteristics: non-rivalry and non-excludability in consumption?

A)public goods
B)private goods
C)quasi-public goods
D)common resources

Question 14

Economic efficiency in a competitive market is achieved when

A)economic surplus is equal to consumer surplus.
B)consumers and producers are satisfied.
C)the marginal benefit equals the marginal cost from the last unit sold.
D)producer surplus equals the total amount firms receive from consumers minus the cost of production.

Question 15

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.If 4000 pounds of pecans are sold,

A)the deadweight loss is equal to $12 000.
B)consumer surplus equals zero.
C)the marginal benefit of each of the 4000 pounds of pecans equals $3.
D)marginal benefit is equal to marginal cost.

Question 16

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9,

A)economic surplus is maximised.
B)too many consumers want to buy pecans.
C)the quantity supplied is greater than the economically efficient quantity.
D)the quantity demanded is economically efficient,but the quantity supplied is economically inefficient.

Question 17

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $3,

A)economic surplus is maximised.
B)not enough consumers want to buy pecans.
C)the quantity supplied is less than the economically efficient quantity.
D)the quantity supplied is economically efficient,but the quantity demanded is economically inefficient.

Question 18

Which of the following displays these two characteristics: rivalry and non-excludability?

A)a public good
B)a private good
C)a quasi-public good
D)a common resource

Question 19

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production,and in which

A)the sum of consumer surplus and producer surplus is at a maximum.
B)economic surplus is minimised.
C)the sum of the benefits to firms is equal to the sum of the benefits to consumers.
D)the sum of consumer surplus and producer surplus is minimised.

Question 20

Figure 14-1
Refer to Figure 14-1.The figure above represents the market for pecans.Assume that this is a competitive market.If 8000 pounds of pecans are sold,

A)the deadweight loss is equal to economic surplus.
B)producer surplus equals consumer surplus.
C)the marginal benefit of each of the 8000 pounds of pecans equals $9.
D)marginal benefit is equal to marginal cost.

Question 21

Figure 14-2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14-2 shows their willingness to pay for different quantities of street lights,the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14-2.How much is Amit willing to pay to have 4 street lights installed?

A)$3600
B)$2700
C)$1800
D)$900

Question 22

The 'tragedy of the commons' refers to the phenomenon where

A)individuals are free riders.
B)people overuse a common resource.
C)people do not internalise an externality.
D)there is rivalry in consumption.

Question 23

Which of the following is an example of a common resource?

A)elephants in the wild
B)lions in a zoo
C)a university education
D)public transportation

Question 24

Figure 14-2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14-2 shows their willingness to pay for different quantities of street lights,the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14-2.What is the optimal quantity of street lights to install?

A)3
B)4
C)6
D)9

Question 25

Haiti was once a heavily forested country.Today,80 per cent of Haiti's forests have been cut down,primarily to be burned to create charcoal.The reduction in the number of trees has led to devastating floods when it rains heavily.This is an example of

A)tragic externalities.
B)the tragedy of the commons.
C)human greed.
D)the consequences of not having a market economic system.

Question 26

Private producers have no incentive to provide public goods because

A)the government subsidy granted is usually insufficient to enable private producers to make a profit.
B)production of huge quantities of public goods entails huge fixed costs.
C)they cannot avoid the tragedy of the commons.
D)once produced,it will not be possible to exclude those who do not pay for the good.

Question 27

It is difficult for a private market to provide the economically efficient quantity of a public good because

A)by law,governments cannot use cost-benefit analysis to determine this quantity.
B)public goods produce positive and negative externalities.
C)individual preferences are not revealed in the market for the good.
D)it is too expensive to produce the necessary amount of the good.

Question 28

Negative externalities and the tragedy of the commons are problems that have a common source.What is this common source?

A)self-interest motives of producers and consumers
B)a lack of concern for human rights
C)a lack of competition
D)a lack of clearly defined and enforced property rights

Question 29

An important difference between the demand for a private good and the demand for a public good is that

A)individuals reveal their preferences for a public good,but they do not have to reveal their preferences a private good.
B)the resources used to provide public goods are common resources or government owned;the resources used to produce private goods are all privately owned.
C)individuals reveal their preferences for a private good,but they do not have to reveal their preferences for a public good.
D)the demand for a private good produces consumption externalities;the demand for a public good produces production externalities.

Question 30

The efficient output level of a public good occurs where the

A)greatest number of free riders occurs.
B)marginal cost of producing the last unit is equal to the marginal benefit realised by consumers.
C)total cost of production is affordable.
D)marginal cost of production is at its lowest.

Question 31

In England during the Middle Ages,each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge.Eventually,the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat.The reason the grass was depleted was

A)the area of pasture was non-excludable and the consumption of the grass was rival.
B)self-interest motives led livestock owners to raise too many cows and sheep.
C)due to a policy of neglect on the part of the English government.
D)it did not get enough rainfall.

Question 32

The tragedy of the commons was avoided in the Middle Ages by

A)selling common grounds to individuals.
B)the local police who monitored entry into the commons.
C)social pressure to uphold traditionally accepted limits on family use of the commons.
D)the government which imposed a tax for the use of the commons.

Question 33

Figure 14-2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14-2 shows their willingness to pay for different quantities of street lights,the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14-2.How much is Bree willing to pay to have 4 street lights installed?

A)$1500
B)$1800
C)$2700
D)$7200

Question 34

Public goods are distinguished by two primary characteristics.What are they?

A)non-rivalry and non-excludability
B)government intervention and low prices
C)market failure and high prices
D)rivalry and exclusivity

Question 35

A tragedy of the commons occurs when a resource is

A)rival and excludable.
B)rival and non-excludable.
C)non-rival and non-excludable.
D)non-rival and excludable.

Question 36

The supply curve of a public goods shows

A)the total quantities that all producers are willing and able to supply at each price.
B)the maximum amount suppliers require to produce each quantity of the good.
C)the total cost of producing each unit of the good.
D)the marginal cost of producing each unit of the good.

Question 37

Overuse of a common resource may be avoided by all of the following methods except

A)charging for the use of a common resource.
B)issuing tradable permits for the use of a common resource.
C)government taking over ownership of all private common resources.
D)setting quotas or legal limits on the quantity consumed of the common resource.

Question 38

Figure 14-2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14-2 shows their willingness to pay for different quantities of street lights,the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14-2.Suppose Amit and Bree know each other's preferences so that it is not possible for one to deceive the other.Which of the following statements best describes the circumstances under which the optimal quantity of street lights could be achieved?

A)The optimal quantity will be installed only if the two parties agree to pay according to their willingness to pay as indicated by their respective demand curves.
B)Because there are only two consumers,it is likely that private bargaining will result in the optimal quantity being installed.
C)The optimal quantity will be installed only if the two parties split the cost of installation equally.
D)The optimal quantity will be installed only if Bree pays for the entire installation cost.

Question 39

One difference between the demand for a private good and that for a public good is that

A)with a private good,each consumer chooses the quantity she wants to consume but with a public good,each consumer chooses the price she is willing to pay for a fixed quantity.
B)with a private good,each consumer chooses the quantity she wants to consume but with a public good,everyone consumes the same quantity.
C)with a private good,each consumer receives different amounts of benefit from consuming the product but with a public good,every consumer realises the same amount of benefit from consuming the product.
D)the marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from consuming the last unit of a private good because there are externalities in the consumption of the former.

Question 40

For certain public projects such as building a dam on a river or a bridge to an island,what procedure is a government likely to use to determine what quantity of a public good should be supplied?

A)It conducts public surveys to determine if consumers want the product.
B)It hires economists to estimate the market demand for the product.
C)It takes a vote in Congress.
D)It evaluates the costs and benefits of producing the good.

Question 41

Which of the following statements about rent seeking is false?

A)Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for.
B)A person is engaging in rent-seeking behaviour when he uses the political process to acquire ownership of a resource that belongs to the public.
C)Because rent seeking redistributes society's resources,anyone engaging in such behaviour is violating the law.
D)If a firm can benefit from government intervention in the economy,it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market.

Question 42

What is the relationship between market failure and government failure?

Question 43

Rent-seeking behaviour,unlike profit maximising behaviour in competitive markets,wastes society's scarce resources.

Question 44

Economic rent is defined as

A)what you pay to rent your apartment or house.
B)the revenue received by a factor of production with an upward sloping supply curve.
C)the price of a factor of production that is fixed in supply.
D)the surplus received by employing a factor of production in its highest valued use.

Question 45

Which of the following is not an example of rent-seeking behaviour?

A)competition for subsidies
B)lobbying the government to impose tariffs on certain imported products
C)competition for the exclusive right to import a product
D)engaging in aggressive advertising that slams a competitor's product

Question 46

Some individuals seek to use government action to make themselves better off at the expense of others.The actions of these individuals

A)are examples of fraud;but these individuals usually avoid prosecution because of logrolling and rational ignorance.
B)are examples of rent seeking.
C)offer proof that Adam Smith's 'invisible hand' is not valid.
D)are evidence of the voting paradox.

Question 47

Logrolling refers to attempts by individuals to use government action to make themselves better off at the expense of others.

Question 48

Define the tragedy of the commons.Give three examples of common resources.Briefly explain why common property resources are subject to overuse.

Question 49

What is rent seeking and how is it related to regulatory capture?

Question 50

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

Question 51

A modern example of the tragedy of the commons is the forests in many poor countries.

Question 52

Economic rent refers to the price of a factor of production which is fixed in supply.

Question 53

Which of the following is a possible solution when a scarce resource is subject to the tragedy of the commons?

A)Access to the commons can be restricted through community norms and laws.
B)Offer subsidies to consumers.
C)Force people to move away from the commons.
D)Persuade people to use less of the scarce resource through an advertising campaign.

Question 54

Goods differ on the basis of whether their consumption is rival and excludable.Explain the terms 'rivalry' and 'excludability' as they are used to define goods.List the four categories of goods,and define these categories in terms of rivalry and excludability.

Question 55

'When it comes to public goods,individuals do not reveal their true preferences because it is not in their self-interest to do so.' Evaluate this statement.

Question 56

The price of a factor of production that is in fixed supply is called

A)economic rent.
B)economic profit.
C)a compensating differential.
D)opportunity cost.

Question 57

Economists often analyse the interaction of individuals and firms in markets.Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others,a process that is referred to as

A)rent seeking.
B)logrolling.
C)government failure.
D)the public choice initiative.

Question 58

One result of the public choice model is that most economists believe that

A)when market failure occurs,government intervention will always lead to a more efficient outcome.
B)government intervention will always result in a reduction in economic efficiency in regulated markets.
C)policymakers may have incentives to intervene in the economy in ways that do not promote economic efficiency.
D)the voting paradox will prevent voters from selecting the best person for public office.

Question 59

A public good that is a good that is both rival and excludable.

Question 60

State whether each of the following goods and services is non-rival,non-excludable or both:
a.A toll road
b.A public park
c.A lighthouse
d.An art museum
e.A radio broadcast of 'A Prairie Home Companion'

Question 61

When a firm has been granted a trademark,which grants legal protection against other firms using the name of the product that has been granted the trademark,the firm

A)still faces the possibility that the name will become widely used and no longer associated with a specific company.
B)does not have to worry about legally enforcing the trademark;this is the responsibility of the legal system.
C)still must apply for a copyright and a patent to ensure that no other firm will use the product's name.
D)must spend an annual amount on advertising the product each year;the amount it must spend is negotiated by the firm and the government agency that grants the trademark.

Question 62

Which of the following is true of trademarks?

A)A successful trademark is one that becomes a generic name for a product,for example,'Xerox' has become a generic term for making photocopies.
B)A successful trademark is one that allows consumers to immediately identify the source or producer of the product.
C)If a firm is granted a trademark,then no other firms can legally produce similar products for a given period of time.
D)If a firm is granted a trademark,then no other firms can legally sell in the same geographic area for a given period of time.

Question 63

Governments grant patents to encourage

A)research and development on new products.
B)competition.
C)low prices.
D)firms to form public enterprises.

Question 64

A patent

A)grants the creator of a book,film,or piece of music the exclusive right to use the creation for 20 years.
B)grants the creator of a book,film,or piece of music the exclusive right to use the creation during the creator's lifetime.
C)gives a firm the exclusive right to a new product for 20 years from the date the product is invented.
D)gives the firm the exclusive right to a new product during the product inventor's lifetime.

Question 65

The 10-year protection period from generic competition for drug manufacturers is a form of

A)copyright.
B)trademark.
C)hallmark.
D)patent.

Question 66

A patent or copyright is a barrier to entry based on

A)ownership of a key necessary raw material.
B)large economies of scale as output increases.
C)government action to protect a producer.
D)widespread network externalities.

Question 67

Which of the following can a firm use to defend a successful product's brand name?

A)The firm can obtain a patent on the brand name.
B)The firm can apply for a trademark to ban other firms from using the product's name.
C)The firm can increase the amount it spends on advertising for the product.
D)The firm can attempt to copyright the brand name.

Question 68

Many biologic drug manufacturers are pushing for patent protection to be extended to 12 years before generics are allowed to be introduced to the market.This reflects which of the following barriers to entry?

A)control of a key resource
B)network externalities
C)entry blocked by government action
D)economies of scale creating a natural monopoly

Question 69

Which of the following is a disadvantage of trademarking a firm's product?

A)A trademark differentiates a firm's product.
B)A trademark conveys information about the product to the public.
C)A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name.
D)A trademark does not affect demand for the firm's product.

Question 70

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is

A)after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat.
B)firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses.
C)the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls.
D)after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.

Question 71

For which of the following firms is patent protection of vital importance?

A)furniture producers
B)software firms
C)pharmaceutical firms
D)auto makers

Question 72

Governments grant patents to

A)compensate firms for research and development costs.
B)encourage competition.
C)encourage low prices.
D)encourage firms to reveal secret production techniques.

Question 73

Ordinarily,governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?

A)Patents encourage firms to spend money on research necessary to create new products.
B)Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons.
C)Patents are an important source of government revenue.
D)Patents are justified because they are an important means for creating network externalities.

Question 74

When the government wants to give an exclusive right to one firm to produce a product,it

A)imposes a tariff on imports of the product.
B)imposes a quota on imports of the product.
C)grants a patent or copyright to an individual or firm.
D)uses antitrust laws to keep other firms from entering the market.

Question 75

One reason patent protection is vitally important to pharmaceutical firms is

A)successful new drugs are not profitable.If firms are not granted patents,many would go out of business and health care would be severely diminished.
B)the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly.Patents enable firms to recover costs incurred during this process.
C)that taxes on profits from drugs are very high;profits from patent protection enable firms to pay these taxes.
D)the high salaries pharmaceutical firms pay to scientists and doctors make their labour costs higher than for any other business.Profits from patents are needed to pay these labour costs.

Question 76

________ describes the actions a firm takes to maintain the differentiation of its product over time.

A)Product differentiation
B)Brand management
C)Aggressive marketing
D)Advertising

Question 77

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

A)most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs.
B)prices remain high without patent protection because of a lack of competition.Firms that are not granted patents cannot compete with firms that are granted patents.
C)other firms are free to produce chemically identical drugs.Competition reduces the profits that had been earned by the firms that received patents.
D)firms will find ways to obtain additional patent protection-often by making cosmetic changes in drugs that were patented-so that they can continue charging high prices.

Question 78

A successful trademark is one that becomes a generic name for a product,for example,'Kleenex' has become a generic term for tissues.

Question 79

A trademark is

A)a legal instrument which grants a firm the right to differentiate its product.
B)a legal right to position a firm's product in high-traffic public areas such as airports and post offices.
C)a patent on a firm's product.
D)a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.

Question 80

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.