Chapter 5 Econ

Chapter 5

1. Market failure is said to occur whenever:

government intervenes in the functioning of private markets.

some consumers who want a good do not obtain it because the price is higher than they are willing to pay.

private markets do not allocate resources in the most economically desirable way.

prices rise.

MC Qu. 2 Which of the following is an example of mark...

Which of the following is an example of market failure?

negative externalities

positive externalities

public goods

all of these

MC Qu. 4 People enjoy outdoor holiday lighting displa...People enjoy outdoor holiday lighting displays, and would be willing to pay to see these displays, but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a:

demand-side market failure

supply-side market failure

government failure

negative externality

MC Qu. 6 From society's perspective...From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically:

produces a benefit exactly equal to the cost of producing the last unit.

generates more of a benefit than it costs to produce.

maximizes the net benefit to society.

costs more to produce than it provides in benefits.

8.What two conditions must hold for a competitive market to produce efficient outcomes?

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Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay.

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

Firms must minimize production costs, and consumers must minimize total expenditures.

Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay.

9. If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then

which of the following is true?

The benefit surpluses shared between consumers and producers will be maximized.

The benefit surpluses received by consumers and producers will be equal.

There will be no consumer or producer surplus.

Consumer surplus will be maximized, and producer surplus will be minimized.

MC 11. Producer surplus:

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

rises as equilibrium price falls.

is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.

is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

12. Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the

seller, Nathan, was $30. Jennifer experiences:

a consumer surplus of $12 and Nathan experiences a producer surplus of $3.

a producer surplus of $9 and Nathan experiences a consumer surplus of $3.

a consumer surplus of $9 and Nathan experiences a producer surplus of $3.

a producer surplus of $9 and Nathan experiences a producer surplus of $12.

13. Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was

$140. Amanda experiences:

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a consumer surplus of $10 and Tony experiences a producer surplus of $190.

a producer surplus of $200 and Tony experiences a consumer surplus of $10.

a consumer surplus of $670 and Tony experiences a producer surplus of $200.

a producer surplus of $10 and Tony experiences a consumer surplus of $190.

14. Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:

under the demand curve and below the actual price.

under the demand curve and above the actual price.

above the supply curve and above the actual price.

above the supply curve and below the actual price.

15. Graphically, producer surplus is measured as the area:

under the demand curve and below the actual price.

under the demand curve and above the actual price.

above the supply curve and above the actual price.

→above the supply curve and below the actual price.

17. Refer to the above diagram. Assuming equilibrium price P1, consumer surplus is represented by areas:

→a + b.

a + b + c + d.

c + d.

a + c.

19. Refer to the above diagram. The area that identifies the maximum sum of consumer surplus and producer surplus is:

a + b + c + d + e + f.

c + d + f.

a + b + e.

a + b + c + d.

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20. Refer to the above diagram. If actual production and consumption occur at Q1:

efficiency is achieved.

consumer surplus is maximized.

an efficiency loss (or deadweight loss) of b + d occurs.

an efficiency loss (or deadweight loss) of e + d occurs.

21. Refer to the above diagram. If actual production and consumption occur at Q2:

efficiency is achieved.

an efficiency loss (or deadweight loss) of a + b + c + d occurs.

an efficiency loss (or deadweight loss) of a + c occurs.

an efficiency loss (or deadweight loss) of e + f occurs.

23. Allocative efficiency occurs only at that output where:

marginal benefit exceeds marginal cost by the greatest amount.

consumer surplus exceeds producer surplus by the greatest amount.

the combined amounts of consumer surplus and producer surplus are maximized.

the areas of consumer and producer surplus are equal.

24. At the output level defining allocative efficiency:

the areas of consumer and producer surplus necessarily are equal.

marginal benefit exceeds marginal cost by the greatest amount.

consumer surplus exceeds producer surplus by the greatest amount.

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

25. Which of the following conditions does not need to occur for a market to achieve allocative efficiency?

Consumers' maximum willingness to pay equals producers' minimum acceptable price.

The sum of producer and consumer surplus is maximized.

The total revenue received by producers equals the total cost of production.

The marginal benefit of the last unit produced equals the marginal cost of producing that unit.

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27. An efficiency loss (or deadweight loss):

is measured as the combined loss of consumer surplus and producer surplus.

results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price.

can result from underproduction, but not from overproduction.

can result from overproduction, but not from underproduction.

28. An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which:

marginal cost exceeds marginal benefit.

maximum willingness to pay exceeds minimum acceptable price.

consumer surplus exceeds producer surplus.

producer surplus exceeds consumer surplus

MC Qu. 29 The two main characteristics of a public goo...The two main characteristics of a public good are:

nonrivalry and nonexcludability.

production at constant marginal cost and rising demand.

nonrivalry and large negative externalities.

nonexcludability and production at rising marginal cost.

30. Nonrivalry and nonexcludability are the main characteristics of:

consumption goods.

capital goods.

private goods.

public goods.

31. Unlike a private good, a public good:

has no opportunity costs.

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has benefits available to all, including nonpayers.

produces no positive or negative externalities.

is characterized by rivalry and excludability.

MC Qu. 32 Which of the following is an example of a pu...

Which of the following is an example of a public good?

a weather warning system

a sofa

a bottle of soda

a television set

33. A public good:

can be profitably produced by private firms.

is characterized by rivalry and excludability.

produces no positive or negative externalities.

is available to all and cannot be denied to anyone.

MC Qu. 34 The market system does not produce public go...The market system does not produce public goods because:

public enterprises can produce such goods at lower cost than can private enterprises.

their production seriously distorts the distribution of income.

private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.

there is no need or demand for such goods.

35. Public goods are those for which there:

is no free-rider problem.

are no externalities.

is nonrivalry and nonexcludability.

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is rivalry and excludability.

36. If one person's consumption of a good does not preclude another's consumption, the good is said to be:

nonrival in consumption.

rival in consumption.

nonexcludable.

excludable.

37. Nonexcludability describes a condition where:

one person's consumption of a good does not prevent consumption of the good by others.

there is no effective way to keep people from using a good once it comes into being.

sellers can withhold the benefits of a good from those unwilling to pay for it.

there is no potential for free-riding behavior.

39. Because of the free-rider problem:

the market demand for a public good is overstated.

the market demand for a public good is nonexistent or understated.

government has increasingly yielded to the private sector in producing public goods.

public goods often create serious negative externalities.

42. Answer the below question on the basis of the following information for a public good. Pa and Pb are the prices that

individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society.

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If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be:

1 unit.

2 units.

3 units.

4 units.

MC Qu. 43 Answer the below question on the basis of the ...Answer the below question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society.

Suppose government has already produced 4 units of this public good. The amount individual B is willing voluntarily to pay for the 4th unit is:

$2.

$5.

$14.

$0.

44. If this good were a private good instead of a public one, the total quantity demanded at a $3 market price would be:

2 units.

3 units.

6 units.

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4 units.

45. A demand curve for a public good is determined by:

summing vertically the individual demand curves for the public good.

summing horizontally the individual demand curves for the public good.

combining the amounts of the public good that the individual members of society demand at each price.

multiplying the per-unit cost of the public good by the quantity made available.

46. Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the 3rd

unit of a public good. Also, assume that the marginal cost of the 3rd unit is $17. We can conclude that:

the 3rd unit should not be produced.

the 3rd unit should be produced.

zero units should be produced.

4 units should be produced.

MC Qu. 47 Alex, Kara, and Susie are the only three peo...Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the 5th unit of a public good; Kara, $15, and Susie, $25. Government should produce the 5th unit of the public good if the marginal cost is less than or equal to:

$25.

$15.

$60.

$300.

48. For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand

curve?

frozen yogurt

bubble gum

microwave popcorn

courts of law

MC Qu. 49 Refer to the above diagrams in which figures...

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Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the 1st unit of this public good is:

$6.

$14.

$18.

$10.

51. Cost-benefit analysis attempts to:

compare the real worth, rather than the market values, of various goods and services.

compare the relative desirability of alternative distributions of income.

determine whether it is better to cut government expenditures or reduce taxes.

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compare the benefits and costs associated with any economic project or activity.

53. The following data are for a series of increasingly extensive flood control projects:

Refer to the above data. On the basis of cost-benefit analysis government should undertake:

Plan D.

Plan C.

Plan B.

Plan A.

MC Qu. 55 Answer the below question on the basis of the...Answer the below question on the basis of the following information for four highway programs of increasing scope. All figures are in millions of dollars.

The above data indicate that:

the marginal cost and marginal benefit of Program A cannot be determined.

the marginal cost and marginal benefit of Program A are $2 and $9 respectively.

there is no highway program that is economically justifiable on the basis of cost-benefit analysis.

the marginal cost and marginal benefit of Program C are $12 and $21 respectively.

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56. The following data are for four highway programs of increasing scope. All figures are in millions of dollars.

On the basis of the above data we can say that:

Program D is the most efficient on economic grounds.

Program C is the most efficient on economic grounds.

Program B is the most efficient on economic grounds.

Program A is the most efficient on economic grounds.

57. According to the marginal-cost-marginal-benefit rule:

only government projects (as opposed to private projects) should be assessed by comparing marginal costs and marginal benefits.

the optimal project size is the one for which MB = MC.

the optimal project size is the one for which MB exceeds MC by the greatest amount.

project managers should attempt to minimize both MB and MC.

60. A negative externality or spillover cost occurs when:

firms fail to achieve allocative efficiency.

firms fail to achieve productive efficiency.

the price of the good exceeds the marginal cost of producing it.

the total cost of producing a good exceeds the costs borne by the producer.

MC Qu. 61 Refer to the above diagram in which S is the...

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Refer to the above diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. Without government interference, this market will reach:

a higher price than is consistent with an optimal allocation of resources.

an optimal allocation of society's resources.

an underallocation of resources to this product.

an overallocation of resources to this product.

MC Qu. 62 Refer to the above diagram in which S is the...

Refer to the above diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should:

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not intervene because the market outcome is optimal.

subsidize consumers so that the market demand curve shifts leftward.

tax producers so that the market supply curve shifts leftward (upward).

subsidize producers so that the market supply curve shifts leftward (upward).

66. MC Qu. 66 Refer to the above competitive market diagra...

Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z

are D1 and S1. If there are substantial external benefits associated with the production of Z, then:

government can improve the allocation of resources by subsidizing consumers of Z.

government can improve the allocation of resources by imposing a per unit tax on Z.

a government subsidy for producers of Z would ensure that consumers are paying directly for all of the benefits they receive from Z.

consumers are paying too much for the good.

MC Qu. 63 Refer to the above diagrams for two separate...

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Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We can conclude that the government is correcting for:

negative externalities in diagram (a) and positive externalities in diagram (b).

positive externalities in both diagrams.

positive externalities in diagram (a) and negative externalities in diagram (b).

negative externalities in both diagrams.

MC Qu. 64 Refer to the above diagrams for two separate...

Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The shift of the supply curve from S to S1 in diagram (a) might be caused by a per unit:

subsidy paid to the buyers of this product.

tax on the producers of this product.

tax on the buyers of this product.

subsidy paid to the producers of this product.

MC Qu. 65 Refer to the above diagrams for two separate...

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Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The shift of the supply curve from S to S2 in diagram (b) might be caused by a per unit:

tax on the producers of this product.

subsidy paid to the producers of this product.

tax on the buyers of this product.

subsidy paid to the buyers of this product.

67. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for

Z are D2 and S2. If there are substantial external benefits associated with the production of Z, then:

efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits.

an output smaller than G would improve resource allocation.

government should levy a per unit excise tax on Z to shift the demand curve toward D1.

an output greater than G would result in a more efficient allocation of resources.

68. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for

Z are D2 and S2. If there are substantial external costs associated with the production of Z, then:

a price lower than B and an output greater than G would improve resource allocation.

government should levy a per unit excise tax on Z to shift the demand curve to the right.

government should levy a per unit excise tax on Z to shift the supply curve toward S1.

government should subsidize the production of Z to lower equilibrium price and increase equilibrium output.

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MC Qu. 69 Refer to the above diagram of the market for...

Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the market equilibrium output

is Q1, we can conclude that the existence of external:

costs has resulted in an overallocation of resources to X.

benefits has resulted in an overallocation of resources to X.

costs has resulted in an underallocation of resources to X.

benefits has resulted in an underallocation of resources to X.

MC Qu. 70 Refer to the above diagram of the market for...

Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the equilibrium output is Q2, we can conclude that the existence of external:

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costs has resulted in an underallocation of resources to X.

benefits has resulted in an underallocation of resources to X.

costs has resulted in an overallocation of resources to X.

benefits has resulted in an overallocation of resources to X.

72. Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday

lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that:

the display creates negative externalities.

government should tax the producers of holiday lighting.

resources are currently overallocated to the provision of holiday lighting in Anytown.

resources are currently underallocated to the provision of holiday lighting in Anytown.

84. (Consider This) Brinley puts on an art show in a public space, asking for donations based on how much people enjoy his

work. Economists would expect that:

people will understate their enjoyment of the art in order to "free ride."

people will overstate their enjoyment of the art, attempting to substitute praise for money.

people will accurately state their level of enjoyment and pay accordingly.

Brinley will reap significant economic profits from the event.

85. (Consider This) According to the Coase theorem:

government should levy excise taxes on firms that generate spillover or external costs.

taxes should be levied such that they change private behavior as little as possible.

private individuals can often negotiate their own resolution of externality problems, without the need for government intervention.

private firms should not provide public goods.

86. (Consider This) Darcy and Rachel live down the hall from each other in the same dorm. Darcy likes to play her music loudly

down the hall, and Rachel finds the music annoying. A Coase theorem solution for this problem would be for:

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Darcy and Rachel to negotiate a mutually agreeable level of volume and/or selection of music.

the Director of Housing to impose a fine on Darcy whenever she plays her music too loud.

the dorm government to set a payment schedule by which Rachel would compensate Darcy for making her play her music at a lower volume.

the college to ban the playing of music in dorms.

87. (Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts

Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes:

the Coase theorem.

the optimal allocation of a public good.

nonrivalry and nonexcludability.

a market for externality rights.

93. Along a demand curve, product price and consumer surplus are inversely related.

True

False

94. Along a supply curve, product price and producer surplus are inversely related.

True

False

95. Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the

greatest amount.

True

False

97. That government that has the smallest budget is the most efficient in the economic sense.

True

False

TF Qu. 98 A demand curve for a public good is determin...A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good.

True

False

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99. The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the

good just equals the good's marginal cost.

True

False

100. Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or

service.

True

False

104. (Consider This) The principle that private negotiation can resolve potential externalities without resort to government

intervention is known as the Coase theorem.

True

False

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