Deck 10: Monopolistic Competition and Oligopoly

Question 1

When patients or farmers choose whether to use moreantibiotics, they compare:

A)their private benefits with the social cost.
B)their private benefits with the market price.(True Answer )Correct
C)the social benefits with the social cost.
D)the social benefits with the market price.

Answer 1

B

Question 2

When the government intervenes in markets with externalcosts, it does so in order to:

A)protect the interests of bystanders.
B)ensure all the costs are born by producers.
C)ensure all the costs are born by consumers.
D)increase the welfare losses of producers.

Answer 2

A

Question 3

An external cost is a cost paid by:

A)the consumers trading in the market.
B)the producers trading in the market.
C)the government regulating the market.
D)people other than the consumer and the producer trading in the market.

Answer 3

D

Question 4

If a steel manufacturer does NOT bear the entire cost of thesulfur dioxide it emits, it will:

A)emit a lower level of sulfur dioxide than is socially efficient.
B)emit a higher level of sulfur dioxide than is socially efficient.
C)emit an acceptable level of sulfur dioxide
D)not emit any sulfur dioxide in an attempt to avoid paying the entire cost.

Question 5

Ideally, a market should maximize:

A)consumer surplus.
B)producer surplus.
C)consumer surplus plus producer surplus.
D)social surplus.

Question 6

Markets are often inefficient when external costs are presentbecause:

A)externalities cannot be corrected without government regulation.
B)social costs exceed private costs at the private market solution.
C)private costs exceed social costs at the private market solution.
D)production externalities lead to consumption externalities.

Question 7

(Table: Costs of Antibiotics) Refer to the table. The marginal social cost of thefifth unit is:

A)$15.
B)$5.
C)$35.
D)$30.

Question 8

A chemical bathroom cleaner has an ingredient X that allowsthe cleaner to lather well and remove stains. The cost ofproducing a bottle of this bathroom cleaner is $3.60, but thebottle retails for $5.50. When consumers use the bathroomcleaner, the lather that gets washed down the drain escapesinto the environment and releases allergens that causerespiratory problems for people. What is the social cost of abottle of this cleaner?

A)$5.50 less the external cost of such a bottle of bathroom cleaner
B)the cost paid by other people as a result of the use of such a bottle of bathroom cleaner
C)$5.50 plus the external cost of such a bottle of bathroom cleaner
D)$3.60

Question 9

(Figure: Market with External Cost) Suppose that the figuredisplays the demand and supply curves for dry cleaning, aservice that creates pollution. The external cost of dry cleaningis:

A)P₂.
B)P₁ - P0.
C)P0.
D)P₂ - P0.

Question 10

Figure: Market with External Cost (Figure: Market with External Cost) The figure displays amarket with external costs. The efficient level of output of________ units would eliminate the deadweight loss area of________.

A)Q₁; ce
B)Q0; ce
C)Q0; gh
D)Q₁; de

Question 11

If an external cost is present in a market, economic efficiencymay be enhanced by:

A)increased competition.
B)weakening property rights.
C)better informed market participants.
D)government intervention.

Question 12

Which of the following is TRUE?

A)private cost + average cost = social cost
B)social cost = private cost + external cost (True Answer )Correct
C)external cost = private cost
D)private cost + social cost = external cost

Question 13

Which of the following illustrates the concept of external cost?

A)Margaret purchases all her food and clothing in the big city outside her residence.
B)A small business owner frequently buys raw materials by using her bank's line of credit.
C)Raymond cannot open his windows at times because he lives downwind from a mushroom farm.
D)Felicia, an economics major, asks the most insightful questions in class.

Question 14

Suppose that the private cost of using antibiotics is less than itssocial cost-we would then expect people to ________antibiotics, leading to an ________ market outcome.

A)overuse; inefficient
B)underuse; inefficient
C)overuse; efficient
D)make efficient use of; equilibrium

Question 15

Antibiotics may be ________, since people consider only the________.

A)underused; private and not the social costs of consumption
B)overused; private and not the social costs of consumption
C)underused; external and not the private costs of consumption
D)overused; external and not the private costs of consumption

Question 16

(Table: Costs of Antibiotics) Refer to the table. The deadweight loss in themarket could be eliminated if the government:

A)outlawed the production of the good.
B)added a $10 tax per unit.
C)equated marginal benefit with external cost.
D)subsidized consumption by $5 per unit.

Question 17

Since the price of antibiotics does not include all the costs ofusing antibiotics, the price is too:

A)high, and so antibiotics are overused.
B)high, and so antibiotics are underused.
C)low, and so antibiotics are overused.
D)low, and so antibiotics are underused.

Question 18

Which of the following statements is TRUE?
I) If an activity creates an external cost of $15, the governmentshould subsidize the activity by $15
II)Social surplus is maximized when the private marginalbenefit equals the social cost
III) External costs result in markets producing too muchoutput.IV. Someone pays external costs other than the producer orconsumer.

A)I and III only
B)II, III, and IV only
C)III only
D)II and IV only

Question 19

An external cost:

A)causes markets to allocate resources efficiently.
B)affects producers but not consumers.
C)is a cost paid by people other than the producer or consumer trading in the market.
D)leads to economic efficiency only when private costs are greater than external costs.

Question 20

Which of the following answers correctly identifies social cost?

A)market price + external cost = social cost (True Answer )Correct
B)external cost - market price = social cost
C)market price + cost of production = social cost
D)negative externality + positive externality = social cost

Question 21

Because there are external benefits from higher education:

A)private markets will over-supply college classes.
B)government intervention cannot improve the market for college classes.
C)the government should impose a tax on college students.
D)private markets will under-supply college classes.(True Answer )Correct

Question 22

Which of the following is an example involving an externalbenefit?

A)the pollution of a stream
B)a person littering a public highway
C)air pollution
D)a nice garden in front of someone's house (True Answer )Correct

Question 23

Which of these statements is TRUE in the case ofexternalities?
I) In the case of externalities, prices do not reflect the true costor benefit of the product
II)In the case of externalities, prices sometimes send thewrong signals about a market
III) Externalities discourage new producers from entering theindustry since the price always remains about the efficientprice.

A)I and II only
B)I and III only
C)II and III only
D)I, II, and III

Question 24

Figure: Market for Vaccines (Figure: Market for Vaccines) The figure represents themarket for vaccines with external benefits. The market'soutcome generates a(n):

A)deadweight loss of approximately $750.(True Answer )Correct
B)shortage of 1,800 vaccines.
C)equilibrium price of $20.
D)All of the answers are correct.

Question 25

If antibiotic users get all the benefits of antibiotics but do notbear all of the costs, the social marginal cost of antibiotic useat the market equilibrium will be:

A)higher than the marginal cost to antibiotic sellers.(True Answer )Correct
B)less than the marginal cost to antibiotic sellers.
C)higher than the marginal benefit to the antibiotic buyers.
D)less than the marginal benefit to the antibiotic buyers.

Question 26

Which of the following statements is correct under a marketwith externalities?

A)Social surplus is maximized as long as consumer surplus is maximized.
B)Social surplus is maximized as long as producer surplus is maximized.
C)Social surplus is maximized as long as both consumer surplus and producer surplus are maximized.
D)None of these statements is correct.

Question 27

(Figure: Efficient Market Outcome) Refer to the figure.Which point represents the efficient equilibrium?

A)A
B)B
C)C
D)None of the answers is correct.

Question 28

Edgar's expected private benefit from the flu shot is $15, andit would cost him $20 to get vaccinated. Therefore, which ofthe following is correct?

A)It is socially optimal for Edgar to get the flu shot if the social benefits of the shot exceed $20.
B)The external benefits of the flu shot equal $5 ($20 - $15).
C)Even without a government subsidy, Edgar is certain to be vaccinated.
D)The deadweight loss is eliminated if Edgar is vaccinated and the external benefits are $4.

Question 29

An external benefit in a market will cause the market toproduce:

A)more than the same market would produce in the presence of a negative externality.
B)more than is socially desirable.
C)less than is socially desirable.
D)the socially optimal equilibrium amount.

Question 30

(Figure: Market for Bathroom Cleaner) The figure shows amarket for cans of bathroom cleaner that causesenvironmental damage, imposing costs on people other thanthe consumers and producers of the cleaner. What is theexternal cost of the bathroom cleaner?

A)$6
B)$9
C)$12
D)$3

Question 31

Private markets fail to reach a socially optimal equilibriumwhen external benefits are present because the:

A)social value exceeds the private value at the private market solution.
B)private cost exceeds the social benefit at the private market solution.
C)private benefit equals the social benefit at the private market solution.
D)None of the answers is correct.Private markets DO achieve a socially optimal equilibrium when external benefits are
Present.

Question 32

The Centers for Disease Control and Prevention (CDC) wantsat least 90 percent of the population vaccinated againstpreventable diseases, since the chance of a disease outbreakdecreases as vaccine coverage increases. We can concludethat:

A)the external benefits of vaccination likely decrease as more and more people are vaccinated.
B)the private benefits of vaccination increase with vaccine coverage.
C)vaccines create a negative externality once the vaccine covers 90 percent of the population.
D)vaccines create a positive externality once the vaccine covers 90 percent of the population.

Question 33

If antibiotic users are required to bear all the costs ofantibiotic use, the supply curve would:

A)shift left and would be above the social cost curve.
B)shift left and would be the same as the social cost curve.
C)shift left but would still be under the social cost curve.
D)remain unchanged.

Question 34

The market price for Good X is $10.75, and every time GoodX is consumed it creates an external benefit of $3.00.Therefore, which of the following is correct?

A)The social benefit of Good X is $13.75, a justification for the government to give buyers a $3.00 subsidy.(True Answer
)Correct
B)The social benefit of Good X is $7.75, a justification for the government to give buyers a $3.00 subsidy.
C)The social benefit of Good X is $7.75, a justification for the government to tax sellers $13.75 per unit.
D)The social benefit of Good X is $13.75, a justification for the government to tax sellers $3.00 per unit.

Question 35

(Figure: Market for Bathroom Cleaner) The figure shows amarket for cans of bathroom cleaner that causesenvironmental damage, imposing costs on people other thanthe consumers and producers of the cleaner. What is theefficient quantity in this market?

A)100
B)85
C)15
D)9

Question 36

(Figure: Market for Vaccines) The figure represents themarket for vaccines with external benefits. The efficient levelof output is ________ vaccines, which is ________ than themarket's output.

A)1,200; greater
B)1,800; less
C)2,400; greater
D)1,800; greater

Question 37

Figure: Market for Vaccines (Figure: Market for Vaccines) The figure represents themarket for vaccines with external benefits. The external________ of vaccination is ________.

A)cost; $15
B)cost; $10
C)benefit; $20
D)benefit; $5

Question 38

External costs caused by the use of antibiotics are the costs topeople who are:

A)buying antibiotics.
B)selling antibiotics.
C)either buying or selling antibiotics.
D)neither buying nor selling antibiotics.(True Answer )Correct

Question 39

Social surplus is consumer surplus:

A)minus producer surplus.
B)plus producer surplus.
C)plus producer surplus minus everyone else's surplus.
D)plus producer surplus plus everyone else's surplus.(True Answer )Correct

Question 40

Figure: Efficient Market Outcome (Figure: Efficient Market Outcome) Refer to the figure. Theefficient price and quantity are, respectively:

A)P₁ and Q₁.
B)P₁ and Q₂.
C)P₂ and Q₁.
D)P₃ and Q₂.

Question 41

(Figure: Softella) The figure shows a market for medicatedtissues. Assume that the only use for these tissues is to wipeand clean one's hands thus preventing germs from spreadingto other people. If the government were to subsidize the usersof these tissues, what would the efficient quantity in thismarket be?

A)700
B)500
C)1,200
D)200

Question 42

Which of the following correctly describes what a Pigouviansubsidy is?

A)Subsidies received by the producers are called Pigouvian subsidies.
B)Pigouvian subsidies are awarded to producers whose goods have external benefits.
C)Taxes on producers creating negative externalities are called Pigouvian subsidies.
D)Lower corporate tax rates are also known as Pigouvian subsidies.

Question 43

(Figure: Softella) The figure shows a market for medicatedtissues. Assume that the only use for these tissues is to wipeand clean one's hands thus preventing germs from spreadingto other people. What is the dollar amount of the externalbenefit (per box) that is created by the use of this product?

A)$24
B)$12
C)$8
D)$16

Question 44

Figure: ABC Company (Figure: ABC Company) The figure depicts the market for awater cleaner for home aquariums. After use it gets washeddown drains and enters into streams where it improves themineral content of the water and thus leads to better waterquality and better fish growth. What is the dollar amount ofthe external benefit created per can of the cleaner?

A)$12
B)$6
C)$3
D)$15

Question 45

Externalities are:

A)benefits received by people other than the producers and consumers exchanging in the market.
B)costs paid by people other than the producers and consumers exchanging in the market.
C)found either in the form of external benefits or external costs.
D)All of these statements are correct.

Question 46

(Figure: ABC Company) The figure depicts the market for awater cleaner for home aquariums. After use it gets washeddown drains and enters into streams where it improves themineral content of the water and thus leads to better waterquality and better fish growth. What is the efficient quantityin this market?

A)1,600
B)400
C)2,000
D)3,600

Question 47

Two parties fail to solve an externality problem becausereaching an agreement requires high-priced lawyers tonegotiate and write up contracts. This illustrates the problemof:

A)Pigouvian legal fees.
B)transaction costs.
C)legal inefficiency.
D)punitive-cost agreements.

Question 48

The market for honey is:

A)inefficient since beekeepers do not receive compensation for their bees pollinating fruits and vegetables.
B)efficient since farmers pay beekeepers to pollinate their crops, which internalizes the externality.(True Answer
)Correct
C)a public goods market.
D)in disequilibrium since the market quantity of honey is less than the socially optimal quantity of honey.

Question 49

(Figure: ABC Company) The figure depicts the market for awater cleaner for home aquariums. After use it gets washeddown drains and enters into streams where it improves themineral content of the water and thus leads to better waterquality and better fish growth. If the users of the cleaner weregiven a subsidy to compensate them for the benefit they arecreating for the ecological system, how much deadweight lossis removed from this market?

A)$2,400
B)$3,000
C)$3,600
D)$1,200

Question 50

When significant externalities exist:
I) the market equilibrium is no longer efficient
II)the market equilibrium is only efficient if the externality isan external benefit
III) social surplus is not maximized.IV. the government may increase efficiency by imposing a taxon the market.

A)I only
B)II and IV only
C)I and III only
D)II, III, and IV only

Question 51

If the government wanted to maximize the number of peoplereceiving a flu vaccination, it should:

A)impose a mandatory vaccination program.
B)provide research grants to those firms engaging in increasing the supply of vaccine.
C)give a subsidy to people who are vaccinated.(True Answer )Correct
D)impose a tax on people who are unwilling to be vaccinated.

Question 52

Fewer people get flu shots than is efficient because:

A)people usually perceive that the private cost of getting flu shots is higher than their private benefit.(True Answer
)Correct
B)people usually perceive that the private benefit of getting flu shots is higher than their private cost.
C)the cost of producing flu shots is too high in relation to profits.
D)there are always more people taking take flu shots than the amount of flu shots available.

Question 53

Which of the following statements about vaccines is correct?

A)Vaccines benefit only people who are vaccinated.
B)Everyone should be vaccinated in order to prevent the spreading of disease-causing viruses.
C)Vaccines benefit people who are vaccinated but cannot prevent disease on those people who are not
Vaccinated.
D)Vaccines not only benefit people who are vaccinated but also inhibit spreading disease-causing viruses.(True Answer
)Correct

Question 54

If only people who get a flu shot receive all the benefits of thevaccination, then the:

A)demand curve would shift downward.
B)supply curve would shift upward.
C)market outcome will be efficient.
D)deadweight loss will be higher than if the vaccinations benefited others as well.

Question 55

A)P₁ and Q₁
B)P₂ and Q₁
C)P₃ and Q₁
D)P₂ and Q₂

Question 56

Private solutions to externalities are most likely to occur whenthere are:

A)well-defined property rights and low transaction costs.
B)communal property rights and large numbers of sellers.
C)private property rights and high transaction costs.
D)communal property rights and large numbers of buyers and sellers with equal bargaining power.

Question 57

In Market X, the external benefit of consumption is $5. InMarket Y, the external cost of consumption is $10. Efficiencyin both markets could be achieved by:

A)a tax of $5 in Market X and a subsidy of $10 in Market Y.
B)subsidizing both markets.
C)taxing Market Y and subsidizing Market X.(True Answer )Correct
D)taxing both markets.

Question 58

When external benefits are present in a market:

A)the market is more efficient than if the externalities were not present.
B)the market outcome is inefficient.
C)overall social surplus is maximized because others are gaining in addition to the market consumers.
D)the external benefit must be offset by an external cost.

Question 59

Which of the following statements is INCORRECT?

A)When external benefits exist in a market, Qmarket < Qefficient.
B)When external benefits exist in a market, social surplus is maximized when social benefits equal the marginal costs of
Production.
C)When external costs exist in a market, Qmarket > Qefficient.
D)Through taxation, government action can result in Qmarket = Qefficient.

Question 60

A beekeeper's hives are located in an orchard where the beesgather nectar to produce honey and simultaneously pollinatethe orchard, which increases the yield of fruit. This benefits:

A)only the owner of the orchard.
B)only the beekeeper.
C)the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner.
D)both the beekeeper and the orchard owner.(True Answer )Correct

Question 61

The Coase theorem posits that externality problems can besolved without government intervention

A)when transaction costs are low and property rights are clearly defined.
B)when trading in tradeable allowances occurs.
C)if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the
Market.
D)only rarely, that in general markets cannot maximize social surplus.

Question 62

Government solutions to externality problems include:

A)taxing the consumption of goods that cause externalities.
B)subsidies.
C)allowing firms to trade the rights to create pollutants.
D)All of the answers are correct.

Question 63

All of the following would be government solutions toexternality problems EXCEPT:

A)public sector charities.
B)taxes and subsidies.
C)command and control.
D)tradeable allowances

Question 64

If the government were to limit the release of air-pollutionproduced by a steel mill to 50 parts per million, the policywould be considered a:

A)corrective tax.
B)subsidy.
C)regulation.
D)market-based policy.

Question 65

Which method achieves the lowest per-gallon cost of reducingwater consumption?

A)low-flow toilets as mandated by the government
B)lawn watering restrictions for odd or even days only
C)shower heads with restricted water flow
D)a tax on water consumption

Question 66

Command and control policies are best suited for:

A)reducing electricity consumption.
B)addressing the problem of acid rain.
C)the suppression of deadly infectious diseases.(True Answer )Correct
D)All of the answers are correct.

Question 67

The text discusses private solutions for resolving externalitiesusing the honey market. Among the reasons why the marketsolution works well in the honey market is the fact that:

A)bees don't fly far and thus it is easy to identify which farmers are getting the benefits of their pollination
Activities.
B)the owners of the bee-hives can clearly be identified.
C)the market limits the beneficial activities of the bees to those farmers who have very small farms.
D)All of the answers are correct.

Question 68

The external benefit of honey production is internalized when:

A)farmers receive tax breaks from the government.
B)beekeepers receive tax breaks from the government.
C)farmers pay beekeepers to pollinate their crops.
D)beekeepers pay farmers to pollinate farmers' crops.

Question 69

Government solutions to externality problems include:
I) Pigouvian taxes
II)tradeable allowances
III) command and control.

A)I only
B)I and III only
C)II and III only
D)I, II, and III

Question 70

Transaction costs:

A)are incurred in the production process due to externalities.
B)are eliminated when the government intervenes in a market with externalities.
C)can keep private parties from solving externality problems.
D)increase when taxes are imposed to correct negative externalities.

Question 71

Which of the following statements about taxes is incorrect?

A)Taxes in markets always cause deadweight losses.(True Answer )Correct
B)If the good causes an external cost, taxes actually reduce deadweight loss.
C)Both taxes and tradeable allowances in a market that has external costs can lead to the efficient quantity.
D)Taxes on producers cause the supply curve for the product to shift to the left.

Question 72

Nobel Prize-winning economist James Meade argued that themarket for honey was inefficient because pollination is a(n):

A)external benefit of honey production.(True Answer )Correct
B)external cost of honey production.
C)private benefit of honey production.
D)private cost of honey production.

Question 73

Which of the following suggests that private markets can beeffective in dealing with external costs and benefits?

A)external technology policy
B)the Coase theorem
C)the law of diminishing returns
D)the ―invisible hand‖

Question 74

The command-and-control method to solving an external costproblem usually involves:

A)the imposition of taxes on the consumption of the item that is causing the external cost.
B)the institution of a subsidy on the consumption of the item that is causing the external cost.
C)the issuance of a regulation on the production, operation, or use of the item that is causing an external cost.(True Answer
)Correct
D)a price ceiling on the item that is causing an external cost.

Question 75

The proposition that, private parties with clearly definedproperty rights and low transaction costs can resolveexternalities problems on their own is called the:

A)voluntary tax theorem.
B)Bee theorem.
C)Coase theorem.
D)transaction cost theorem.

Question 76

______ make(s) it is illegal for a manufacturer to release itswaste into a nearby stream.

A)Legislative transaction costs
B)Tradable pollution permits
C)A command-and-control policy
D)A market-based policy

Question 77

If you are a government official, under which of the followingsituations would you opt for a command-and-control solutionto an externality problem?
I) Lack of running water in part of the country is exacerbatingthe spread of cholera in the population
II)Foreign ships are dumping toxic wastes in the waters offyour country's shores
III) A large number of banks fail due to excessive risk taking.

A)I only
B)I and II only
C)II and III only
D)I, II, and III

Question 78

When the government uses a command-and-control policy tosolve an externality, it:

A)usually involves taxing the consumption of a commodity.
B)relies on the Coase theorem to structure the policy.
C)creates policies that directly regulate behavior.(True Answer )Correct
D)is usually the most effective policy option available.

Question 79

The Coase theorem says that private bargains can ensure anefficient market equilibrium even when externalities exist if:

A)the government does not involve itself in the process.
B)the market is sufficiently competitive.
C)the number of market participants is large.
D)transaction costs are low and property rights are clearly defined.

Question 80

Market solutions to externality problems work when:
I) property rights are easily identifiable
II)transaction costs are relatively low
III) the market quantity is above the efficient quantity.

A)I only
B)I and II only
C)II and III only
D)I, II, and III