Question 1

Which of the following activities, if any, represents an external benefit?

Accepted Answer

A)  The benefit to a consumer from watching a film on DVD.
B)  The reduction in air quality resulting from industrial development in an urban area.
C)  The increase in the value of property belonging to your neighbors when you hire a landscaper to beautify your front yard.
D)  The reduction in property values when a new airport is built in a neighborhood.E) None of the above
F) B) and C)

Question 2

Consumer surplus increases whenever the price of a good increases due to a leftward shift of the supply curve.

Accepted Answer

A) True 
 B)False

Question 3

If the production of a particular good involves significant external costs, to force the externality to be internalized the government might:

Accepted Answer

A)  impose a tax on production of the good in order to increase production.
B)  impose a tax on production of the good in order to decrease production.
C)  offer a subsidy for production of the good in order to increase production.
D)  offer a subsidy for production of the good in order to decrease production.E) None of the above
F) B) and C)

Question 4

Figure 6-F 
-Someone who does not contribute toward covering the cost of a good he desires, and yet he cannot be excluded from receiving the good, is called a free rider.

Accepted Answer

A) True 
 B)False

Question 5

When a 9% increase in price leads to a 6% increase in quantity supplied, supply is relatively inelastic.

Accepted Answer

A) True 
 B)False

Question 6

The main purpose of government price controls is to keep prices from rising above their equilibrium levels.

Accepted Answer

A) True 
 B)False

Question 7

Producer surplus is always the total area below the price and above the supply curve.

Accepted Answer

A) True 
 B)False

Question 8

In a competitive economy with no government sector:

Accepted Answer

A)  goods with spillover benefits will not be produced at all.
B)  there will be too few public goods produced.
C)  goods with spillover costs will be underproduced.
D)  too few resources be allocated to each industry.E) B) and D)
F) All of the above

Question 9

Which of the following is false?

Accepted Answer

A)  Product liability laws can make it unprofitable to sell shoddy merchandise, providing a substantial incentive to provide safe products independent of government regulations.
B)  Asymmetric information exists when the available information is initially distributed in favor of one party to a transaction relative to another.
C)  In adverse selection situations, it is rational for a seller with more information about a product to provide a truthful and complete disclosure and make that fact known to a potential buyer.
D)  Moral hazard arises from the fact that it is costly for an insurer to monitor the behaviors of the insured party.
E)  Warranty agreements that limit the responsibility of the insurer in certain situations are one method of controlling moral hazard problems.F) A) and E)
G) C) and D)

Question 10

If the production of a good creates large spillover benefits on others, the government might correct for the:

Accepted Answer

A)  overallocation of resources to its production by subsidizing it.
B)  overallocation of resources to its production by imposing a tax on it.
C)  underallocation of resources to its production by subsidizing it.
D)  underallocation of resources to its production by imposing a tax on it.E) A) and D)
F) C) and D)

Question 11

A decrease in price will cause a firm's total revenue to decrease if demand is price inelastic.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is true?

Accepted Answer

A)  Consumption of a public good by one individual reduces the availability of the good for others.
B)  It is extremely difficult to limit the benefits of a public good to the people who pay for it.
C)  Public goods are free whenever the government produces them.
D)  From an efficiency standpoint, a market economy will generally supply too much of a public good.
E)  None of the above are correct.F) A) and D)
G) D) and E)

Question 13

Consumer surplus equals the quantity supplied minus the quantity demanded.

Accepted Answer

A) True 
 B)False

Question 14

Figure 6-F 
-Positive externalities include benefits received the seller but not benefits received by the buyer.

Accepted Answer

A) True 
 B)False

Question 15

Consumer surplus increases whenever the price of a good decreases due to a rightward shift of the supply curve.

Accepted Answer

A) True 
 B)False

Question 16

Voters will gather information on voting alternatives:

Accepted Answer

A)  when the cost of acquiring such information is exorbitantly high.
B)  as long as the marginal benefit to them of acquiring additional information exceeds the marginal cost to them.
C)  as long as the marginal benefit to them of the information is less than the marginal cost to them of gathering the information.
D)  because the welfare of the community is always perceived to be more important than the welfare of the individual.E) None of the above
F) A) and C)

Question 17

If there are important spillover benefits from consumption of a good,

Accepted Answer

A)  government should prohibit its production.
B)  taxes should be imposed on producers of the product.
C)  the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production.
D)  the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production.E) None of the above
F) A) and B)

Question 18

If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be:

Accepted Answer

A)  an increase in production.
B)  a decrease in production.
C)  a greater misallocation of resources.
D)  a decrease in the market price of the product.E) All of the above
F) C) and D)

Question 19

Public goods are:

Accepted Answer

A)  any goods or services several members of the public would like produced
B)  those goods for which natural monopolies exist.
C)  goods which cannot be successfully produced by private firms.
D)  goods which cannot be easily financed through the market system.
E)  goods which cannot be either successfully produced by private firms or easily financed through the market system.F) A) and B)
G) C) and D)

Question 20

A special interest issue is best described as:

Accepted Answer

A)  one in which both sides utilize paid lobbyists to represent them.
B)  one which one party strongly supports and the other party strongly opposes.
C)  one in which a large number will each suffer small costs and a small number will each receive large benefits.
D)  one decided in a special session of the legislature.E) None of the above
F) C) and D)

Exam 5: Market Failure and Public Choice

Voters will gather information on voting alternatives:

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When a 9% increase in price leads to a 6% increase in quantity supplied, supply is relatively inelastic.

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If the production of a good creates large spillover benefits on others, the government might correct for the:

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The main purpose of government price controls is to keep prices from rising above their equilibrium levels.

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

Consumer surplus increases whenever the price of a good increases due to a leftward shift of the supply curve.

Correct AnswerverifiedShow Answer

Producer surplus is always the total area below the price and above the supply curve.

Correct AnswerverifiedShow Answer

Which of the following activities, if any, represents an external benefit?

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Figure 6-F -Positive externalities include benefits received the seller but not benefits received by the buyer.

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If the production of a particular good involves significant external costs, to force the externality to be internalized the government might:

Correct AnswerverifiedShow Answer

Consumer surplus increases whenever the price of a good decreases due to a rightward shift of the supply curve.

Correct AnswerverifiedShow Answer

If there are important spillover benefits from consumption of a good,

Correct AnswerverifiedShow Answer

If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be:

Correct AnswerverifiedShow Answer

A decrease in price will cause a firm's total revenue to decrease if demand is price inelastic.

Correct AnswerverifiedShow Answer

Figure 6-F -Someone who does not contribute toward covering the cost of a good he desires, and yet he cannot be excluded from receiving the good, is called a free rider.

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In a competitive economy with no government sector:

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A special interest issue is best described as:

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Consumer surplus equals the quantity supplied minus the quantity demanded.

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Which of the following is false?

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Public goods are:

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