Question 1

From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market allocation will often lead to

Accepted Answer

A) an output of the product that exceeds the amount consistent with ideal economic efficiency. 
B) an output of the product that is less than the amount consistent with ideal economic efficiency. 
C) an output of the product that equals the amount consistent with ideal economic efficiency. 
D) product prices that are below the cost of production.

Question 2

What are the two distinguishing characteristics of a public good?

Accepted Answer

A) nonrivalry in consumption and nonexcludability 
B) indivisibility in production and excludability of nonpaying customers 
C) provision by government and funding through taxation 
D) mass production and comparative advantage

Question 3

A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a

Accepted Answer

A) public good. 
B) joint good. 
C) excludable good. 
D) national good.

Question 4

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

Accepted Answer

A) durable. 
B) nonrival-in-consumption. 
C) a common good. 
D) a natural resource.

Question 5

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) Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency. 
B) Point b illustrates the competitive private market outcome, while point a illustrates the outcome consistent with economic efficiency. 
C) The competitive private market outcome is consistent with the conditions for economic efficiency. 
D) The good will tend to be undersupplied relative to the conditions for economic efficiency.

Question 6

The major distinction between private and public goods is that

Accepted Answer

A) private goods are goods produced by private firms whereas public goods are goods produced by government--the public sector. 
B) unlike private goods, public goods are nonexcludable--it is difficult or impossible to prevent nonpaying customers from receiving the good. 
C) unlike private goods, public goods are nonrival in consumption--the consumption of a unit by one person does not detract from the amount available to others. 
D) both b and c are correct.

Question 7

If the construction of a new hospital would create $6 million worth of benefits for citizens and would cost $8 million to construct, then using the criterion of economic efficiency, the hospital

Accepted Answer

A) should be built. 
B) should not be built. 
C) results in a substantial improvement to the welfare of society. 
D) should be built if it passes by a majority vote.

Question 8

Economic efficiency indicates that

Accepted Answer

A) if something is worth doing, you should do it as well as humanly possible. 
B) all pollution should be eliminated. 
C) automobiles should be made as safe as possible 
D) it nearly always makes sense to stop an activity well before perfection is achieved.

Question 9

Which of the following would be a protective function of government?

Accepted Answer

A) providing national defense 
B) undertaking income redistribution 
C) providing national parks 
D) monopolizing mail delivery

Question 10

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.

Question 11

Externalities cause the market mechanism to allocate goods and resources inefficiently because

Accepted Answer

A) nonconsenting third parties are generally not hurt by externalities. 
B) producers and consumers ignore signals given by the competitive market. 
C) prices are always higher than they should be. 
D) competitive markets fail to give producers and consumers correct price signals.

Question 12

In a competitive market, if the production process involves an external benefit, 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) result in a market price that is lower than the efficient one. 
D) result in too much of the good being produced compared to the ideal efficient outcome.

Question 13

If education creates external benefits,

Accepted Answer

A) actual market outcomes provide less than the efficient quantity of education. 
B) actual market outcomes provide more than the efficient quantity of education. 
C) actual market outcomes provide a higher price than the efficient price of education. 
D) the government should impose a depletion tax.

Question 14

If the construction of a new roadway would create $10 billion worth of benefits for citizens and would cost $8 billion to construct, then using the criterion of economic efficiency, the roadway

Accepted Answer

A) should be built. 
B) should not be built. 
C) results in no net improvement to the welfare of society. 
D) should be built only if it passes by a majority vote.

Question 15

Which of the following correctly describes the external benefit resulting from an individual's purchase of a winter flu shot?

Accepted Answer

A) The flu shot is cheaper than the cost of treatment when you get the flu. 
B) The income of doctors increases when you get the flu shot. 
C) The flu shot reduces the likelihood others will catch the flu. 
D) The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income.

Question 16

From the standpoint of economic efficiency, markets tend to provide

Accepted Answer

A) less of a public good than would be efficient. 
B) more of a public good than would be efficient. 
C) exactly the amount of a public good that is efficient. 
D) none of the above.

Question 17

In which of the following markets are information problems likely to be most serious?

Accepted Answer

A) automotive repair service 
B) magazines 
C) toothpaste 
D) pencils

Question 18

When production of a good provides external benefits, there will be

Accepted Answer

A) too few resources devoted to its production. 
B) too many resources devoted to its production. 
C) the optimal amount of resources devoted to its production. 
D) abnormally high profits earned by producers of the good.

Question 19

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.

Question 20

Markets provide the efficient amount of a good or service when

Accepted Answer

A) externalities are present. 
B) monopoly exists. 
C) public goods are present. 
D) competition is present and externalities and public goods are absent.

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