Question 1

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?

Accepted Answer

A)   The price would be too low, and the output would be too large.
B)   The price would be too high, and the output would be too large.
C)   The price would be too low, and the output would be too small.
D)   The price would be too high, and the output would be too small.E) A) and B)
F) C) and D)

Question 2

Which of the following provides the best example of a public good?

Accepted Answer

A)   elementary and secondary education
B)   residential trash pickups provided by a local government
C)   an unscrambled television signal
D)   the medical services provided by a local hospitalE) B) and C)
F) A) and D)

Question 3

The government sometimes provides public goods because

Accepted Answer

A)   private markets are incapable of producing public goods.
B)   free-riders make it difficult for private markets to supply the efficient quantity.
C)   markets are always better off with some government oversight.
D)   external benefits will accrue to private producers.E) A) and B)
F) All of the above

Question 4

Use the figure below to answer the following question(s) .
Figure 5-2
 
-Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

Accepted Answer

A)   Relative to economic efficiency, output of the good will be too large and the price too low.
B)   Relative to economic efficiency, output of the good will be too large and the price too high.
C)   Relative to economic efficiency, output of the good will be too small and the price too low.
D)   Relative to economic efficiency, output of the good will be too small and the price too high.E) A) and B)
F) None of the above

Question 5

Relative to a competitive situation, if a market lacks competition, economic theory suggests that

Accepted Answer

A)   output will be lower and price higher.
B)   output will be higher and price lower.
C)   both output and price will be higher.
D)   both output and price will be lower.E) B) and C)
F) B) and D)

Question 6

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

Accepted Answer

A)   pollution is not a serious problem in this industry.
B)   the consumers of steel are unwilling to bear the costs of pollution generated from steel production.
C)   pollution is an externality in this market, since producers and purchasers of steel do not bear the full costs of the pollution.
D)   pollution creates an external benefit rather than an external cost in this case.E) All of the above
F) C) and D)

Question 7

A good is considered nonrival-in-consumption if

Accepted Answer

A)   many individuals can share in the consumption of the same unit of the good.
B)   the consumption of the good by one individual lowers the amount available for others.
C)   even nonpaying customers can receive the full benefit from the good.
D)   its production is financed through tax revenue rather than market prices.E) A) and B)
F) A) and C)

Question 8

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the

Accepted Answer

A)   productive function of government.
B)   protective function of government.
C)   construction function of government.
D)   income redistribution function of government.E) C) and D)
F) None of the above

Question 9

Which of the following is most consistent with the idea that if it's worth doing, it's worth doing imperfectly?

Accepted Answer

A)   We should eliminate all pollution.
B)   Automobiles should be made completely safe.
C)   When cleaning house, people only generally clean the most visible areas.
D)   A price cannot be put on human life.E) B) and C)
F) B) and D)

Question 10

"Government failure" exists when political decision-makers choose actions that

Accepted Answer

A)   seek efficient outcomes rather than fair outcomes.
B)   seek fair outcomes rather than efficient outcomes.
C)   conflict with efficient allocation of resources.
D)   conflict with the outcome favored by the majority of voters.E) A) and C)
F) B) and C)

Question 11

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the

Accepted Answer

A)   productive function of government.
B)   protective function of government.
C)   transfer function of government.
D)   illegitimate function of government.E) B) and C)
F) All of the above

Question 12

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

Accepted Answer

A)   firm's cost of producing electricity will be higher than the community's true opportunity cost.
B)   firm will tend to produce too little electricity from the viewpoint of economic efficiency.
C)   community generally receives an external benefit from the production of electricity.
D)   firm's cost of producing electricity will be lower than the community's true opportunity cost.E) All of the above
F) B) and C)

Question 13

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 only the people who pay for it.
C)   Public goods are free to a society when they are produced by the government.
D)   From an efficiency standpoint, a market will generally supply too much of a public good.E) B) and D)
F) A) and D)

Question 14

From the standpoint of economic efficiency, markets tend to provide

Accepted Answer

A)   less of a public good than would be efficient.
B)   more of a public good than would be efficient.
C)   exactly the amount of a public good that is efficient.
D)   none of the above.E) A) and B)
F) A) and C)

Question 15

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

Accepted Answer

A)   Human greed and selfishness.
B)   Capital markets.
C)   The absence of an enforceable property right.
D)   The lack of understanding of pollution and its effects.E) A) and B)
F) A) and C)

Question 16

In a market that lacks sufficient competition,

Accepted Answer

A)   output will generally be less than the output that is ideal from the standpoint of economic efficiency.
B)   output will generally be greater than the output that is ideal from the standpoint of economic efficiency.
C)   price will generally be less than the price that would result if the market was competitive.
D)   profit rates will generally be so low that government subsidies will be necessary to ensure that the firms remain in business.E) None of the above
F) A) and C)

Question 17

Which of the following is the most fundamental function of government?

Accepted Answer

A)   protection of individuals and their property
B)   imposing progressive taxes to fund income-transfer programs
C)   regulating prices and wages
D)   provision of postal services and garbage collectionE) A) and B)
F) None of the above

Question 18

Markets fail to allocate resources efficiently when

Accepted Answer

A)   prices fluctuate.
B)   people who have property rights abuse their privileges.
C)   property rights are poorly enforced or not well established.
D)   the government refuses to intervene in private markets.E) A) and C)
F) A) and B)

Question 19

Markets may have difficulty providing the proper quantity of a public good because

Accepted Answer

A)   individuals will tend to become free riders, and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good.
B)   the good generally has a very large value to consumers relative to its cost of production.
C)   the good is one that tends to benefit a large number of people.
D)   the large profit involved in the production of a public good is generally too much for private firms to effectively pay out to shareholders.E) B) and D)
F) C) and D)

Question 20

If the construction of a new hospital would create $6 million worth of benefits for citizens and would cost $8 million to construct, then using the criterion of economic efficiency, the hospital

Accepted Answer

A)   should be built.
B)   should not be built.
C)   results in a substantial improvement to the welfare of society.
D)   should be built if it passes by a majority vote.E) B) and C)
F) A) and B)

Exam 5: Difficult Cases for the Market and the Role of Government

Markets fail to allocate resources efficiently when

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"Government failure" exists when political decision-makers choose actions that

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If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

Correct AnswerverifiedShow Answer

If the construction of a new hospital would create $6 million worth of benefits for citizens and would cost $8 million to construct, then using the criterion of economic efficiency, the hospital

Correct AnswerverifiedShow Answer

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

Correct AnswerverifiedShow Answer

A good is considered nonrival-in-consumption if

Correct AnswerverifiedShow Answer

The government sometimes provides public goods because

Correct AnswerverifiedShow Answer

Use the figure below to answer the following question(s) . Figure 5-2 -Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

Correct AnswerverifiedShow Answer

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

Correct AnswerverifiedShow Answer

Which of the following is the most fundamental function of government?

Correct AnswerverifiedShow Answer

In a market that lacks sufficient competition,

Correct AnswerverifiedShow Answer

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the

Correct AnswerverifiedShow Answer

Which of the following is most consistent with the idea that if it's worth doing, it's worth doing imperfectly?

Correct AnswerverifiedShow Answer

Which of the following provides the best example of a public good?

Correct AnswerverifiedShow Answer

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the

Correct AnswerverifiedShow Answer

Markets may have difficulty providing the proper quantity of a public good because

Correct AnswerverifiedShow Answer

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

From the standpoint of economic efficiency, markets tend to provide

Correct AnswerverifiedShow Answer

Relative to a competitive situation, if a market lacks competition, economic theory suggests that

Correct AnswerverifiedShow Answer

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