Question 1

When producers do not have to pay the full cost of producing a product, they tend to:

Accepted Answer

A)   Over-produce the product because of a demand-side market failure
B)   Under-produce the product because of a demand-side market failure
C)   Under-produce the product because of a supply-side market failure
D)   Over-produce the product because of a supply-side market failureE) A) and B)
F) A) and C)

Question 2

Refer to the above supply and demand graph for a public good. Which line segment would indicate the amount by which the marginal benefit of this public good exceeds the marginal cost at a certain quantity?

Accepted Answer

A)   de
B)   da
C)   ef
D)   abE) A) and D)
F) A) and C)

Question 3

The optimal quantity of a public good is where the total benefits from it are equal to the total costs of producing it.

Accepted Answer

A) True 
 B)False

Question 4

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 goodsE) A) and B)
F) B) and D)

Question 5

E-bay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.

Accepted Answer

A) True 
 B)False

Question 6

When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero.

Accepted Answer

A) True 
 B)False

Question 7

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called:

Accepted Answer

A)   Utility
B)   Consumer Surplus
C)   Consumer Demand
D)   Market failureE) None of the above
F) All of the above

Question 8

When producers do not produce the efficient amount of a product because they are unable to charge consumers what they are willing to pay for it, then we have a:

Accepted Answer

A)   Demand-side market failure
B)   Supply-side market failure
C)   Competitive market
D)   Monopolistic marketE) C) and D)
F) A) and B)

Question 9

According to the Coase Theorem, externality problems:

Accepted Answer

A)   Do not exist in reality, because all costs and benefits are internal to firms
B)   Can be solved through private negotiations without the need for government intervention
C)   Must only be resolved by government action, through either taxes or subsidies
D)   Can never be resolved adequately because one party always gains while the other losesE) B) and D)
F) A) and B)

Question 10

In a situation where an externality occurs, the "third party" refers to those who:

Accepted Answer

A)   Buy the product from others
B)   Produce the product for others
C)   Trade the product with others outside the nation or community
D)   Are not directly involved in the transaction or activityE) B) and C)
F) A) and D)

Question 11

If there are external benefits associated with the consumption of a good or service:

Accepted Answer

A)   The private demand curve will overestimate the true demand curve
B)   The private demand curve will underestimate the true demand curve
C)   Consumers will be willing to pay for all these benefits in private markets
D)   The market demand curve will be the vertical summation of the individual demand costsE) B) and C)
F) A) and D)

Question 12

1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. The positions of the graphs indicate that there is (are) : A)  External benefits from production and external costs from consumption of the product B)  External costs from production and external benefits from consumption of the product C)  External benefits from production and consumption of the product D)  External costs from production and consumption of the product" class="answers-bank-image d-inline" rel="preload" > Refer to the above supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. The positions of the graphs indicate that there is (are) :

Accepted Answer

A)   External benefits from production and external costs from consumption of the product
B)   External costs from production and external benefits from consumption of the product
C)   External benefits from production and consumption of the product
D)   External costs from production and consumption of the productE) A) and B)
F) C) and D)

Question 13

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. If the government intervenes and corrects the externality in the situation described above, we would expect:

Accepted Answer

A)   The output of the paper mills to increase
B)   The price of paper from the mills to decrease
C)   Production of the hydroelectric power plants to decrease
D)   Production in the paper mills to decreaseE) All of the above
F) A) and B)

Question 14

Which of the following does not illustrate the asymmetric information problem:

Accepted Answer

A)   Ordinary financial investors do not know the motivations of financial advisers
B)   Ordinary customers do not know how sanitarily the food is prepared in a restaurant
C)   Ordinary stock-buyers do not know what will happen to the stock's price next week
D)   Ordinary car buyers do not know the actual quality of the various cars in the dealer's lotE) A) and D)
F) B) and C)

Question 15

Refer to the graph above. Suppose consumers do not know the safety risks associated with a particular good, and that the free-market equilibrium is at E as shown in the diagram above. If an independent agency now provides accurate information about the harmful characteristics of the product, then:

Accepted Answer

A)   The supply curve will shift to the left
B)   The supply curve will shift to the right
C)   Both the new equilibrium price and quantity will be lower
D)   The new equilibrium price will be higher but the equilibrium quantity will be either higher or lowerE) None of the above
F) A) and B)

Question 16

In a well-functioning "cap-and-trade system" for pollution rights, society benefits because pollution will be brought down to insignificant levels.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following would be an example of a moral hazard problem?

Accepted Answer

A)   A person in poor health who purchases life insurance
B)   A person who is taxed on the purchase of a carton of cigarettes
C)   A person who purchases auto insurance and then drives more recklessly
D)   A person who receives a subsidy from the Federal government to insulate a homeE) A) and D)
F) B) and C)

Question 18

1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that the government could shift supply to its socially optimal level is to: A)  Tax the sellers B)  Subsidize the buyers C)  Produce the product D)  Regulate the production of the good" class="answers-bank-image d-inline" rel="preload" > Refer to the above supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that the government could shift supply to its socially optimal level is to:

Accepted Answer

A)   Tax the sellers
B)   Subsidize the buyers
C)   Produce the product
D)   Regulate the production of the goodE) B) and C)
F) A) and B)

Question 19

If the price of a product increases:

Accepted Answer

A)   Consumer surplus will decrease
B)   Consumer surplus will increase
C)   Total revenue will definitely increase
D)   Total revenue will definitely decreaseE) A) and B)
F) A) and C)

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: Public Goods and Externalities

Refer to the graph above. Suppose consumers do not know the safety risks associated with a particular good, and that the free-market equilibrium is at E as shown in the diagram above. If an independent agency now provides accurate information about the harmful characteristics of the product, then:

Correct Answer
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The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called:

Correct Answer
verified

When producers do not have to pay the full cost of producing a product, they tend to:

Correct Answer
verified

In a well-functioning "cap-and-trade system" for pollution rights, society benefits because pollution will be brought down to insignificant levels.

Correct Answer
verified

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.

Correct Answer
verified

The optimal quantity of a public good is where the total benefits from it are equal to the total costs of producing it.

Correct Answer
verified

According to the Coase Theorem, externality problems:

Correct Answer
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Refer to the above supply and demand graph. S₁ and D₁ represent the current market supply and demand, respectively. S₂ and D₂ represent the socially optimal supply and demand. The positions of the graphs indicate that there is (are) :

Correct Answer
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When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero.

Correct Answer
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Correct Answer
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If the price of a product increases:

Correct Answer
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Which of the following would be an example of a moral hazard problem?

Correct Answer
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Refer to the above supply and demand graph. S₁ and D₁ represent the current market supply and demand, respectively. S₂ and D₂ represent the socially optimal supply and demand. One way that the government could shift supply to its socially optimal level is to:

Correct Answer
verified

E-bay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.

Correct Answer
verified

Which of the following does not illustrate the asymmetric information problem:

Correct Answer
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If there are external benefits associated with the consumption of a good or service:

Correct Answer
verified

Refer to the above supply and demand graph for a public good. Which line segment would indicate the amount by which the marginal benefit of this public good exceeds the marginal cost at a certain quantity?

Correct Answer
verified

In a situation where an externality occurs, the "third party" refers to those who:

Correct Answer
verified

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

Correct Answer
verified

When producers do not produce the efficient amount of a product because they are unable to charge consumers what they are willing to pay for it, then we have a:

Correct Answer
verified

Exam 4: Market Failures: Public Goods and Externalities

Refer to the graph above. Suppose consumers do not know the safety risks associated with a particular good, and that the free-market equilibrium is at E as shown in the diagram above. If an independent agency now provides accurate information about the harmful characteristics of the product, then:

Correct AnswerverifiedShow Answer

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called:

Correct AnswerverifiedShow Answer

When producers do not have to pay the full cost of producing a product, they tend to:

Correct AnswerverifiedShow Answer

In a well-functioning "cap-and-trade system" for pollution rights, society benefits because pollution will be brought down to insignificant levels.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

The optimal quantity of a public good is where the total benefits from it are equal to the total costs of producing it.

Correct AnswerverifiedShow Answer

According to the Coase Theorem, externality problems:

Correct AnswerverifiedShow Answer

Refer to the above supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. The positions of the graphs indicate that there is (are) :

Correct AnswerverifiedShow Answer

When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the price of a product increases:

Correct AnswerverifiedShow Answer

Which of the following would be an example of a moral hazard problem?

Correct AnswerverifiedShow Answer

Refer to the above supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that the government could shift supply to its socially optimal level is to:

Correct AnswerverifiedShow Answer

E-bay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.

Correct AnswerverifiedShow Answer

Which of the following does not illustrate the asymmetric information problem:

Correct AnswerverifiedShow Answer

If there are external benefits associated with the consumption of a good or service:

Correct AnswerverifiedShow Answer

Refer to the above supply and demand graph for a public good. Which line segment would indicate the amount by which the marginal benefit of this public good exceeds the marginal cost at a certain quantity?

Correct AnswerverifiedShow Answer

In a situation where an externality occurs, the "third party" refers to those who:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When producers do not produce the efficient amount of a product because they are unable to charge consumers what they are willing to pay for it, then we have a:

Correct AnswerverifiedShow Answer

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Refer to the above supply and demand graph. S₁ and D₁ represent the current market supply and demand, respectively. S₂ and D₂ represent the socially optimal supply and demand. The positions of the graphs indicate that there is (are) :

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Refer to the above supply and demand graph. S₁ and D₁ represent the current market supply and demand, respectively. S₂ and D₂ represent the socially optimal supply and demand. One way that the government could shift supply to its socially optimal level is to:

Correct Answer
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Correct Answer
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