Question 1

Driving your automobile in Los Angeles during the rush hour causes externalities because

Accepted Answer

A) it adds congestion and pollution from auto exhaust, reducing the welfare of others. 
B) gasoline is scarce and you must pay for it. 
C) gasoline is a public good. 
D) your actions will benefit others even though you will be unable to charge them for the service.

Question 2

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

Accepted Answer

A) Human greed and selfishness. 
B) Capital markets. 
C) The absence of an enforceable property right. 
D) The lack of understanding of pollution and its effects.

Question 3

When a firm generates external benefits, a more efficient outcome would result if

Accepted Answer

A) the firm produced a larger output level. 
B) the firm reduced its output level. 
C) a tax were levied on the firm equal to the dollar amount of the externalities. 
D) price were fixed below the firm's per-unit cost.

Question 4

The idea that an action should be undertaken if and only if the benefits exceed the costs is known as the concept of

Accepted Answer

A) economic efficiency. 
B) public welfare maximization. 
C) marginal comparative advantage. 
D) monetary construction of values.

Question 5

Suppose external costs are present in a market which results in the actual market price of $50 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

A) The efficient outcome would be greater than 800 units. 
B) The efficient outcome would be less than 800 units. 
C) The efficient outcome would also be 800 units. 
D) The efficient price would be less than $50.

Question 6

Manny's Bar-n-Grill is next door to a franchised fast-food restaurant near a busy freeway exit. Essentially, the menus, food quality, atmosphere, and service are equal at the two restaurants. Nevertheless, the nationally franchised restaurant can attract more customers, even though its prices are higher. This situation

Accepted Answer

A) indicates that people are irrational because it never makes sense to pay a higher price when a product is cheaper elsewhere. 
B) is one in which the national franchise provides uninformed consumers with valuable information that reduces their risk of being unsatisfied with the purchase. 
C) reflects the greater elasticity of supply for food at Manny's Bar-n-Grill relative to the nationally franchised restaurant. 
D) is inconsistent with the basic postulates that underlie the economic way of thinking.

Question 7

If production of a good creates external benefits, a competitive market will likely produce

Accepted Answer

A) less output than would maximize profit. 
B) more output than would maximize profit. 
C) less output than is efficient. 
D) more output than is efficient.

Question 8

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

Accepted Answer

A) not enough of the product is being produced. 
B) the price charged for the good is too high. 
C) the good produces a positive externality. 
D) the good produces a negative externality. 
E) the government should produce the good.

Question 9

Externalities

Accepted Answer

A) are always detrimental. 
B) are always beneficial. 
C) arise when all costs, external and private, are included in production cost. 
D) cause the price system to misallocate resources.

Question 10

Many external costs occur because

Accepted Answer

A) people do not pay the true cost of using a resource. 
B) people do not pay the private cost of using a resource. 
C) companies do not pay the market price for natural resources. 
D) companies pay more than the true cost of using a resource.

Question 11

If the construction of a new elementary school would create $5 million worth of benefits for citizens and cost $7 million to construct, then using the criterion of economic efficiency, the school

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 12

Externalities are fundamentally the result of

Accepted Answer

A) the absence of competition in a market. 
B) the lack of well-defined or enforced property rights. 
C) poor information on the part of consumers. 
D) the presence of significant comparative advantages in production.

Question 13

When economists say that an activity meets the criterion for economic efficiency, they mean

Accepted Answer

A) a majority of citizens favor the activity. 
B) the benefits that result from the activity exceed the costs. 
C) the number of people who gain from the activity exceeds the number on whom costs are imposed. 
D) the costs that result from the activity exceed the benefits.

Question 14

Which of the following provides an example of an externality?

Accepted Answer

A) a paper pulp mill releasing pollution into the atmosphere 
B) persons driving during a busy rush hour 
C) a drunk driver operating a car on a public highway 
D) all of the above

Question 15

Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of paper in a competitive market compare with their values under conditions of ideal economic efficiency?

Accepted Answer

A) The price will be too high, and the output will be too large. 
B) The price will be too low, and the output will be too large. 
C) The price will be too low, and the output will be too small. 
D) The price will be too high, and the output will be too small.

Question 16

If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,

Accepted Answer

A) more education must be produced. 
B) the same amount of education must be produced, and the price should be lower. 
C) less education must be produced, and the price should be higher. 
D) less education must be produced, and the price should be lower. 
E) less education must be produced at the same price.

Question 17

Figure 5-4
 
-Refer to Figure 5-4. If the government uses a pollution tax, how much of a tax must be imposed on each unit of production?

Accepted Answer

A) $1.90 
B) $1.80 
C) $1.60 
D) $0.30

Question 18

A sound legal system that protects individuals and their property,

Accepted Answer

A) cannot be expected until markets are already working well. 
B) is vital to the smooth operation of markets. 
C) is normally found in most economies of the world. 
D) is helpful for the rich, but harmful to the economic well-being of others.

Question 19

A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should

Accepted Answer

A) always gather all available information about prices. 
B) gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it. 
C) gather information about prices only if it can be gathered without cost. 
D) ignore information about prices because it is irrelevant to making an "optimally imperfect" decision.

Question 20

In economics, a free rider is the term used for a person who

Accepted Answer

A) receives the benefit of a good without contributing to its costs of production. 
B) purchases an item during a "buy one, get one free" sale. 
C) lives in a town in which the city provides free bus service. 
D) pays for exactly what they receive.

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