Question 1

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean for the residents of a low-rise building. The Coase theorem suggests that this type of dispute
Between the owners of high-rise and low-rise buildings

Accepted Answer

A)  can be resolved by the owners themselves through private bargaining. 
B)  has to be resolved by city government oﬃcials. 
C)  can only be resolved by a zoning ordinance restricting high-rise buildings. 
D)  should be resolved by a government ﬁne for the builder of the high-rise.

Question 2

Which of the following would be considered an example of adverse selection?

Accepted Answer

A)  Malpractice insurance may increase the amount of malpractice. 
B)  Drivers may be less cautious because they have airbags installed in a car. 
C)  Those individuals who most need insurance are the ones most likely to buy it. 
D)  Work contracts that give a set number of sick-days may encourage more workers to call in sick.

Question 3

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following conditions does not need to occur for a market to achieve allocative eﬃciency?

Accepted Answer

A)  Consumers' maximum willingness to pay equals producers' minimum acceptable price for the last unit of output. 
B)  The sum of producer and consumer surplus is maximized. 
C)  The total revenue received by producers equals the total cost of production. 
D)  The marginal beneﬁt of the last unit produced equals the marginal cost of producing that unit.

Question 5

Refer to the provided graph of a competitive market. If the output level is Q1, then the sum of the consumer and producer surplus is

Accepted Answer

A)  bce. 
B)  ac0. 
C)  0abe. 
D)  0eQ1.

Question 6

What is the moral hazard problem?

Accepted Answer

The answer of What is the moral hazard problem?...

Question 7

From an economist's perspective, an important consideration for policies to address global warming is

Accepted Answer

A)  the market for recyclable inputs. 
B)  the supply and demand for recycled products. 
C)  the marginal cost and marginal beneﬁt of the policies. 
D)  a lawsuit that can arise from the enactment of the policies.

Question 8

A market for pollution rights can be expected to

Accepted Answer

A)  eliminate all pollution. 
B)  produce a shortage of pollution. 
C)  encourage potential polluters to increase emissions. 
D)  provide potential polluters with a monetary incentive to reduce emissions.

Question 9

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the total amount of spending that consumers would be paying for the product is
Represented by the area

Accepted Answer

A)  a + b. 
B)  a + b + c. 
C)  a. 
D)  b + c.

Question 10

Consumer surplus

Accepted Answer

A)  is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. 
B)  is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. 
C)  is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. 
D)  rises as equilibrium price rises.

Question 11

If some activity creates external beneﬁts as well as private beneﬁts, then economic theory suggests that the activity ought to be

Accepted Answer

A)  taxed. 
B)  prohibited. 
C)  subsidized. 
D)  left alone.

Question 12

Refer to the diagram. With MB1 and MC1, society's optimal amount of pollution abatement is

Accepted Answer

A)  Q1. 
B)  Q2. 
C)  Q3. 
D)  Q4.

Question 13

Refer to the diagram. If actual production and consumption occur at Q2,

Accepted Answer

A)  eﬃciency is achieved. 
B)  an eﬃciency loss (or deadweight loss) of a + b + c + d occurs. 
C)  an eﬃciency loss (or deadweight loss) of a + c occurs. 
D)  an eﬃciency loss (or deadweight loss) of e + f occurs.

Question 14

An improvement in the technology of pollution control is likely to increase society's optimal amount
of pollution abatement.

Accepted Answer

A) True 
 B)False

Question 15

The minimum acceptable price for a product that producer Sam is willing to receive is $15. The price he could get for the product in the market is $18. How much is Sam's producer surplus?

Accepted Answer

A)  $3 
B)  $33 
C)  $45 
D)  $270

Question 16

If Congress decreases the amount of government insurance on bank deposits, then this action would

Accepted Answer

A)  create a moral hazard problem in banking. 
B)  reduce a moral hazard problem in banking. 
C)  create an adverse selection problem in banking. 
D)  reduce an adverse selection problem in banking.

Question 17

Depositors do not check their banks carefully for stability anymore, because of the federal deposit insurance program. This illustrates the problem of

Accepted Answer

A)  adverse selection. 
B)  externalities. 
C)  moral hazard. 
D)  public goods.

Question 18

In a market where negative externalities are associated with consumption and production, the equilibrium will not be eﬃcient because

Accepted Answer

A)  too few resources will be allocated toward producing the good. 
B)  ﬁrms will shut down until costs are reduced. 
C)  costs of production will, on average, be too high. 
D)  too many resources will be allocated toward producing the good.

Question 19

The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in danger of failing because they are too big and could bring the system down, leads to which of the following
Problems?

Accepted Answer

A)  adverse selection 
B)  externalities 
C)  moral hazard 
D)  public goods

Question 20

When critics of unemployment insurance claim that some of the unemployed are not exerting much
effort to ﬁnd jobs because of the unemployment beneﬁts, they are referring to the moral hazard
problem.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean for the residents of a low-rise building. The Coase theorem suggests that this type of dispute Between the owners of high-rise and low-rise buildings

Which of the following would be considered an example of adverse selection?

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Which of the following conditions does not need to occur for a market to achieve allocative eﬃciency?

Refer to the provided graph of a competitive market. If the output level is Q1, then the sum of the consumer and producer surplus is

What is the moral hazard problem?

From an economist's perspective, an important consideration for policies to address global warming is

A market for pollution rights can be expected to

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the total amount of spending that consumers would be paying for the product is Represented by the area

Consumer surplus

If some activity creates external beneﬁts as well as private beneﬁts, then economic theory suggests that the activity ought to be

Refer to the diagram. With MB1 and MC1, society's optimal amount of pollution abatement is

Refer to the diagram. If actual production and consumption occur at Q2,

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement.

The minimum acceptable price for a product that producer Sam is willing to receive is $15. The price he could get for the product in the market is $18. How much is Sam's producer surplus?

If Congress decreases the amount of government insurance on bank deposits, then this action would

Depositors do not check their banks carefully for stability anymore, because of the federal deposit insurance program. This illustrates the problem of

In a market where negative externalities are associated with consumption and production, the equilibrium will not be eﬃcient because

The "too big to fail" policy of the Fed, whereby some banks are bailed out if they are in danger of failing because they are too big and could bring the system down, leads to which of the following Problems?

When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to ﬁnd jobs because of the unemployment beneﬁts, they are referring to the moral hazard problem.