Question 1

The 2010 Health Care Reform Law, also known as "Obamacare," includes a part known as universal coverage which requires everyone to have health insurance. One reason for this is to address the
Problem of

Accepted Answer

A)   moral hazard.
B)   externalities.
C)   adverse selection.
D)   eﬃciency losses.E) B) and D)
F) A) and C)

Question 2

Deadweight losses occur when the quantity of an output produced is

Accepted Answer

A)   less than, but not when it is greater than, the competitive equilibrium quantity.
B)   greater than, but not when it is less than, the competitive equilibrium quantity.
C)   less than or greater than the competitive equilibrium quantity.
D)   such that the marginal beneﬁt of the output is just equal to the marginal cost.E) None of the above
F) A) and B)

Question 3

Society's marginal cost of pollution abatement curve slopes upward because of the law of
diminishing marginal utility.

Accepted Answer

A) True 
 B)False

Question 4

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is
The total amount of the two girls' combined consumer surplus?

Accepted Answer

A)   $10
B)   $30
C)   $195
D)   $160E) None of the above
F) B) and C)

Question 5

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

Accepted Answer

A)   a consumer surplus of $10, and Tony experiences a producer surplus of $190.
B)   a producer surplus of $200, and Tony experiences a consumer surplus of $10.
C)   a consumer surplus of $670, and Tony experiences a producer surplus of $200.
D)   a producer surplus of $10, and Tony experiences a consumer surplus of $190.E) B) and C)
F) All of the above

Question 6

Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars. This is an example of

Accepted Answer

A)   the moral hazard problem.
B)   a spillover cost.
C)   a positive externality.
D)   asymmetric information.E) B) and C)
F) All of the above

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Asymmetric information always results in adverse selection.

Accepted Answer

A) True 
 B)False

Question 10

Product reviews help to alleviate problems associated with

Accepted Answer

A)   asymmetric information.
B)   moral hazard.
C)   positive externalities.
D)   negative externalities.E) A) and B)
F) A) and C)

Question 11

How do economists determine the optimal amount of pollution control?

Accepted Answer

The optimal reduction of a negative exte...

Question 12

(Last Word) Describe how a cap-and-trade system works.

Accepted Answer

Tradeable emissions permits ("cap and tr...

Question 13

Refer to the provided supply and demand graph of Product X. What would happen if the government taxed the producers of this product because it has negative externalities in production?

Accepted Answer

A)   supply would increase
B)   demand would decrease
C)   supply would decrease
D)   price would decreaseE) B) and C)
F) A) and C)

Question 14

(Last Word)  In a cap-and-trade program,

Accepted Answer

A)   government ﬁxes the price of pollution rights and ﬁrms choose how many permits to purchase.
B)   government ﬁxes the maximum amount of a pollutant that ﬁrms can discharge and issues permits that ﬁrms can buy from and sell to each other.
C)   each ﬁrm is provided a ﬁxed number of permits for a particular pollutant and no individual ﬁrm is allowed to acquire additional permits.
D)   ﬁrms can emit whatever type of pollutant they want, so long as the total tonnage does not exceed a government-established quantity.E) B) and D)
F) B) and C)

Question 15

Where there is asymmetric information between buyers and sellers,

Accepted Answer

A)   product shortages will occur at the equilibrium price.
B)   product surpluses will occur at the equilibrium price.
C)   markets can produce ineﬃcient outcomes.
D)   markets will fail due to the over-allocation of resources.E) A) and D)
F) B) and C)

Question 16

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to take is called the producer

Accepted Answer

A)   revenues.
B)   surplus.
C)   costs.
D)   utility.E) A) and C)
F) A) and B)

Question 17

Explain how governments can use direct controls for dealing with negative externalities.

Accepted Answer

One way that governments can counter the...

Question 18

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, consumer surplus would be represented by the area

Accepted Answer

A)   a + b.
B)   a + b + c.
C)   a.
D)   b + c.E) C) and D)
F) All of the above

Question 19

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. This will lead to the equilibrium
Price of cars

Accepted Answer

A)   decreasing and the quantity increasing.
B)   decreasing and the quantity decreasing.
C)   increasing and the quantity increasing.
D)   increasing and the quantity decreasing.E) C) and D)
F) A) and D)

Question 20

Insurance policies typically stipulate a deductible amount which the insured must pay; this is to address the problem of

Accepted Answer

A)   adverse selection.
B)   externalities.
C)   moral hazard.
D)   public goods.E) B) and D)
F) A) and C)

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

(Last Word) Describe how a cap-and-trade system works.

Correct AnswerverifiedTradeable emissions permits ("cap and tr...View AnswerShow Answer

Explain how governments can use direct controls for dealing with negative externalities.

Correct AnswerverifiedOne way that governments can counter the...View AnswerShow Answer

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is The total amount of the two girls' combined consumer surplus?

Correct AnswerverifiedShow Answer

Asymmetric information always results in adverse selection.

Correct AnswerverifiedShow Answer

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

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Refer to the provided supply and demand graph of Product X. What would happen if the government taxed the producers of this product because it has negative externalities in production?

Correct AnswerverifiedShow Answer

Deadweight losses occur when the quantity of an output produced is

Correct AnswerverifiedShow Answer

Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars. This is an example of

Correct AnswerverifiedShow Answer

Insurance policies typically stipulate a deductible amount which the insured must pay; this is to address the problem of

Correct AnswerverifiedShow Answer

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. This will lead to the equilibrium Price of cars

Correct AnswerverifiedShow Answer

How do economists determine the optimal amount of pollution control?

Correct AnswerverifiedThe optimal reduction of a negative exte...View AnswerShow Answer

(Last Word) In a cap-and-trade program,

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The 2010 Health Care Reform Law, also known as "Obamacare," includes a part known as universal coverage which requires everyone to have health insurance. One reason for this is to address the Problem of

Correct AnswerverifiedShow Answer

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to take is called the producer

Correct AnswerverifiedShow Answer

Product reviews help to alleviate problems associated with

Correct AnswerverifiedShow Answer

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, consumer surplus would be represented by the area

Correct AnswerverifiedShow Answer

Where there is asymmetric information between buyers and sellers,

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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

Correct AnswerverifiedShow Answer

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Tradeable emissions permits ("cap and tr...
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One way that governments can counter the...
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The optimal reduction of a negative exte...
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