Question 1

(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 2

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Accepted Answer

A)   the adverse selection problem.
B)   the moral hazard problem.
C)   the special interest effect.
D)   logrolling.E) None of the above
F) A) and D)

Question 3

If a good that generates positive externalities was produced and priced to take into account these spillover beneﬁts, then its

Accepted Answer

A)   price and output would increase.
B)   output would increase, but price would remain constant.
C)   price would increase and output would decrease.
D)   price would increase, but output would remain constant.E) C) and D)
F) All of the above

Question 4

The MC curves in the diagram slope upward because of the law of

Accepted Answer

A)   demand.
B)   conservation of matter and energy.
C)   diminishing marginal utility.
D)   diminishing returns.E) None of the above
F) A) and B)

Question 5

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) B) and C)
F) A) and B)

Question 6

Refer to the provided graph. Suppose consumers do not fully appreciate the beneﬁts of the product whose market is shown in the graph. If an external agency is able to provide full information to
Consumers about the beneﬁts of the product, then

Accepted Answer

A)   the supply curve will shift to the left.
B)   the demand 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 lower.E) None of the above
F) C) and D)

Question 7

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) A) and B)
F) A) and C)

Question 8

A positive externality or spillover beneﬁt occurs when

Accepted Answer

A)   product differentiation increases the variety of products available to consumers.
B)   the beneﬁts associated with a product exceed those accruing to people who consume it.
C)   a ﬁrm does not bear all of the costs of producing a good or service.
D)   ﬁrms earn positive economic proﬁts.E) A) and D)
F) C) and D)

Question 9

Better Business Bureaus in various cities exist partly in order to try to deal with inadequate buyer
information about sellers.

Accepted Answer

A) True 
 B)False

Question 10

(Last Word)  A cap-and-trade program

Accepted Answer

A)   assigns a property right to the atmosphere.
B)   mandates that every ﬁrm individually cut its emissions to below a certain level.
C)   assigns a property right to polluting the atmosphere.
D)   is easy to establish and enforce.E) C) and D)
F) B) and D)

Question 11

An emission fee levied against polluting ﬁrms will tend to shift the

Accepted Answer

A)   supply curve of the ﬁrms to the left.
B)   supply curve of the ﬁrms to the right.
C)   demand curve for the product to the left.
D)   demand curve for the product to the right.E) B) and D)
F) All of the above

Question 12

What resource problem is created by negative externalities?

Accepted Answer

A negative externality occurs as an over...

Question 13

Refer to the 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

Accepted Answer

A)   eﬃcient resource allocation occurs at output G and price B because the market mechanism does not measure all beneﬁts.
B)   an output smaller than G would improve resource allocation.
C)   government should levy a per-unit excise tax on Z to shift the demand curve toward D1.
D)   an output greater than G would result in a more eﬃcient allocation of resources.E) A) and B)
F) A) and C)

Question 14

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

Accepted Answer

A)   Demand curves must reﬂect all costs of production, and supply curves must reﬂect consumers' full willingness to pay.
B)   Supply curves must reﬂect all costs of production, and demand curves must reﬂect consumers' full willingness to pay.
C)   Firms must minimize production costs, and consumers must minimize total expenditures.
D)   Firms must maximize proﬁts, and consumers must all pay prices equal to their maximum willingness to pay.E) A) and B)
F) A) and D)

Question 15

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 lot.E) A) and B)
F) B) and C)

Question 16

A competitive market produces the economically eﬃcient outcome if the following conditions are met, except

Accepted Answer

A)   the market produces only units for which beneﬁts are at least equal to cost.
B)   the market demand curve reﬂects the buyers' full willingness to pay.
C)   the market supply curve reﬂects all costs of production.
D)   the market produces only units for which costs are at least equal to beneﬁts.E) None of the above
F) A) and B)

Question 17

It has been proposed that a government agency be charged with the task of determining the amount of pollution that the atmosphere (or a body of water)  can safely absorb, establish "rights" to
This limited amount of pollution, and sell those limited amount of rights to ﬁrms. The ﬁrms can then
Buy and sell these rights among themselves later. This approach is known as the

Accepted Answer

A)   taxes and subsidies system.
B)   cap-and-trade system.
C)   property rights system.
D)   market and command system.E) B) and C)
F) B) and D)

Question 18

As it applies to insurance, the adverse selection problem is the tendency for

Accepted Answer

A)   those most likely to collect on insurance to buy it.
B)   those who buy insurance to take less precaution in avoiding the insured risk.
C)   sellers to price discriminate.
D)   sellers to restrict output and charge high prices.E) B) and C)
F) None of the above

Question 19

Deﬁne positive externality, and explain how getting a vaccination is an example.

Accepted Answer

A positive externality is a beneﬁt obtai...

Question 20

Refer to the provided graph of a competitive market. If the output level is Q1, then there are eﬃciency losses indicated by the area

Accepted Answer

A)   0abe.
B)   bce.
C)   0eQ1.
D)   ecf.E) All of the above
F) A) and B)

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Better Business Bureaus in various cities exist partly in order to try to deal with inadequate buyer information about sellers.

Correct Answer
verified

(Consider This) According to the Coase theorem,

Correct Answer
verified

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

Correct Answer
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The MC curves in the diagram slope upward because of the law of

Correct Answer
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Which of the following does not illustrate the asymmetric information problem?

Correct Answer
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What two conditions must hold for a competitive market to produce eﬃcient outcomes?

Correct Answer
verified

As it applies to insurance, the adverse selection problem is the tendency for

Correct Answer
verified

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

Correct Answer
verified

A competitive market produces the economically eﬃcient outcome if the following conditions are met, except

Correct Answer
verified

An emission fee levied against polluting ﬁrms will tend to shift the

Correct Answer
verified

Refer to the 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

Correct Answer
verified

A positive externality or spillover beneﬁt occurs when

Correct Answer
verified

If a good that generates positive externalities was produced and priced to take into account these spillover beneﬁts, then its

Correct Answer
verified

Refer to the provided graph of a competitive market. If the output level is Q1, then there are eﬃciency losses indicated by the area

Correct Answer
verified

Correct Answer
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What resource problem is created by negative externalities?

Correct Answer
verified
A negative externality occurs as an over...
View Answer

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Correct Answer
verified

Deﬁne positive externality, and explain how getting a vaccination is an example.

Correct Answer
verified
A positive externality is a beneﬁt obtai...
View Answer

(Last Word) A cap-and-trade program

Correct Answer
verified

Refer to the provided graph. Suppose consumers do not fully appreciate the beneﬁts of the product whose market is shown in the graph. If an external agency is able to provide full information to Consumers about the beneﬁts of the product, then

Correct Answer
verified

Exam 4: Market Failures Caused by Externalities Asymmetric Information

Better Business Bureaus in various cities exist partly in order to try to deal with inadequate buyer information about sellers.

Correct AnswerverifiedShow Answer

(Consider This) According to the Coase theorem,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The MC curves in the diagram slope upward because of the law of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

As it applies to insurance, the adverse selection problem is the tendency for

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A competitive market produces the economically eﬃcient outcome if the following conditions are met, except

Correct AnswerverifiedShow Answer

An emission fee levied against polluting ﬁrms will tend to shift the

Correct AnswerverifiedShow Answer

Refer to the 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

Correct AnswerverifiedShow Answer

A positive externality or spillover beneﬁt occurs when

Correct AnswerverifiedShow Answer

If a good that generates positive externalities was produced and priced to take into account these spillover beneﬁts, then its

Correct AnswerverifiedShow Answer

Refer to the provided graph of a competitive market. If the output level is Q1, then there are eﬃciency losses indicated by the area

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What resource problem is created by negative externalities?

Correct AnswerverifiedA negative externality occurs as an over...View AnswerShow Answer

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

Correct AnswerverifiedShow Answer

Deﬁne positive externality, and explain how getting a vaccination is an example.

Correct AnswerverifiedA positive externality is a beneﬁt obtai...View AnswerShow Answer

(Last Word) A cap-and-trade program

Correct AnswerverifiedShow Answer

Refer to the provided graph. Suppose consumers do not fully appreciate the beneﬁts of the product whose market is shown in the graph. If an external agency is able to provide full information to Consumers about the beneﬁts of the product, then

Correct AnswerverifiedShow Answer

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A negative externality occurs as an over...
View Answer

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A positive externality is a beneﬁt obtai...
View Answer

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