Question 1

A government is considering undertaking a construction project of an increasing scale (ranging from 1, 2, 3, to 4) . The estimated marginal costs and marginal benefits of each successive scale of the project are given in the table below.  What is the total cost and total benefit of the scale-3 project?

Accepted Answer

A)   Total cost is $18 million, and total benefit is $19 million.
B)   Total cost is $24 million, and total benefit is $27 million.
C)   Total cost is $37 million, and total benefit is $41 million.
D)   Total cost is $65 million, and total benefit is $66 million.E) C) and D)
F) A) and B)

Question 2

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 3

If the market price of a product increases, then the total

Accepted Answer

A)   consumer surplus will decrease.
B)   consumer surplus will increase.
C)   revenues of sellers will definitely increase.
D)   revenues of sellers will definitely decrease.E) All of the above
F) A) and D)

Question 4

(Consider This)  According to the Coase theorem,

Accepted Answer

A)   government should levy excise taxes on firms that generate spillover or external costs.
B)   taxes should be levied such that they change private behavior as little as possible.
C)   private individuals can often negotiate their own resolution of externality problems, without the need for government intervention.
D)   private firms should not provide public goods.E) A) and B)
F) A) and C)

Question 5

Non excludability describes a condition where

Accepted Answer

A)   one person's consumption of a good does not prevent consumption of the good by others.
B)   there is no effective way to keep people from using a good once it comes into being.
C)   sellers can withhold the benefits of a good from those unwilling to pay for it.
D)   there is no potential for free-riding behavior.E) B) and D)
F) A) and B)

Question 6

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is called

Accepted Answer

A)   nonrivalry.
B)   nonexcludability.
C)   nontaxability.
D)   nondiscrimination.E) A) and B)
F) C) and D)

Question 7

The market system does not produce public goods because

Accepted Answer

A)   there is no need or demand for such goods.
B)   private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
C)   public enterprises can produce such goods at lower cost than can private enterprises.
D)   their production seriously distorts the distribution of income.E) A) and B)
F) A) and C)

Question 8

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

Accepted Answer

A) True 
 B)False

Question 9

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Accepted Answer

A) True 
 B)False

Question 10

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Accepted Answer

A) True 
 B)False

Question 11

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, we would expect

Accepted Answer

A)   the supply of the output from the hydroelectric power plants to decrease.
B)   the supply of the output from the hydroelectric power plants to increase.
C)   the demand for the output from the hydroelectric power plants to decrease.
D)   the demand for the output from the hydroelectric power plants to increase.E) A) and B)
F) A) and C)

Question 12

Asymmetric information always results in adverse selection.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following would be considered an example of adverse selection?

Accepted Answer

A)   Malpractice insurance may increase the amount of malpractice.
B)   Drivers may be less cautious because they have airbags installed in a car.
C)   Those individuals who most need insurance are the ones most likely to buy it.
D)   Work contracts that give a set number of sick-days may encourage more workers to call in sick.E) A) and B)
F) None of the above

Question 14

New Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected total annual costs and benefits of these alternatives.  If New Normal University undertakes program Level Three,

Accepted Answer

A)   total benefits will be less than total costs.
B)   marginal costs will exceed marginal benefits.
C)   there would be an underallocation of resources to crime control.
D)   there would be an overallocation of resources to crime control.E) A) and C)
F) B) and C)

Question 15

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

Accepted Answer

A) True 
 B)False

Question 16

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 loses.E) B) and D)
F) B) and C)

Question 17

When the marginal benefit of an output exceeds the marginal cost,

Accepted Answer

A)   production of that output should be increased, in order to achieve efficiency.
B)   production of that output should be decreased, in order to achieve efficiency.
C)   increasing the production of that output would increase the deadweight loss.
D)   reducing the production of that output would reduce efficiency losses.E) All of the above
F) A) and B)

Question 18

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Accepted Answer

A) True 
 B)False

Question 19

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to

Accepted Answer

A)   P × Q.
B)   P + Q.
C)   P - Q.
D)   Q - P.E) C) and D)
F) B) and D)

Question 20

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral hazard.

Accepted Answer

A) True 
 B)False

Exam 4: Market Failures: Public Goods and Externalities

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Correct Answer
verified

When the marginal benefit of an output exceeds the marginal cost,

Correct Answer
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If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Correct Answer
verified

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral hazard.

Correct Answer
verified

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

Correct Answer
verified

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to

Correct Answer
verified

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is called

Correct Answer
verified

Which of the following would be considered an example of adverse selection?

Correct Answer
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According to the Coase Theorem, externality problems

Correct Answer
verified

(Consider This) According to the Coase theorem,

Correct Answer
verified

Correct Answer
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If the market price of a product increases, then the total

Correct Answer
verified

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

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

The market system does not produce public goods because

Correct Answer
verified

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Non excludability describes a condition where

Correct Answer
verified

Asymmetric information always results in adverse selection.

Correct Answer
verified

Exam 4: Market Failures: Public Goods and Externalities

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Correct AnswerverifiedShow Answer

When the marginal benefit of an output exceeds the marginal cost,

Correct AnswerverifiedShow Answer

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Correct AnswerverifiedShow Answer

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral hazard.

Correct AnswerverifiedShow Answer

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

Correct AnswerverifiedShow Answer

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to

Correct AnswerverifiedShow Answer

Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is called

Correct AnswerverifiedShow Answer

Which of the following would be considered an example of adverse selection?

Correct AnswerverifiedShow Answer

According to the Coase Theorem, externality problems

Correct AnswerverifiedShow Answer

(Consider This) According to the Coase theorem,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the market price of a product increases, then the total

Correct AnswerverifiedShow Answer

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

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

The market system does not produce public goods because

Correct AnswerverifiedShow Answer

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Non excludability describes a condition where

Correct AnswerverifiedShow Answer

Asymmetric information always results in adverse selection.

Correct AnswerverifiedShow Answer

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