Question 1

In response to the financial crisis that began in 2007, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future. This illustrates

Accepted Answer

A)   the adverse selection problem.
B)   the moral hazard problem.
C)   the principal-agent problem.
D)   logrolling.E) A) and C)
F) A) and D)

Question 2

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.

Accepted Answer

A) True 
 B)False

Question 3

At the output where the combined amounts of consumer and producer surplus are largest,

Accepted Answer

A)   the areas of consumer and producer surplus necessarily are equal.
B)   the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
C)   consumer surplus exceeds producer surplus by the greatest amount.
D)   marginal benefit exceeds marginal cost by the greatest amount.E) None of the above
F) All of the above

Question 4

Nonrivalry and nonexcludability are the main characteristics of

Accepted Answer

A)   consumption goods.
B)   capital goods.
C)   private goods.
D)   public goods.E) None of the above
F) All of the above

Question 5

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) All of the above

Question 6

Consumer surplus

Accepted Answer

A)   is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
B)   is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.
C)   is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
D)   rises as equilibrium price rises.E) None of the above
F) B) and C)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

There is an adverse selection problem in the market for used cars because

Accepted Answer

A)   owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars.
B)   owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
C)   most people prefer new cars, but the high prices for new cars force most of them to buy used cars.
D)   government actions to pass "lemon" laws have reduced information on used cars.E) C) and D)
F) B) and D)

Question 9

Which of the following is an example of a market failure?

Accepted Answer

A)   There are not enough tickets available to concerts of extremely popular performers and artists.
B)   The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and procedures.
C)   Successful public schools provide benefits to the students who attend them, as well as to the community as a whole, including those who don't go to those public schools.
D)   Sharply declining prices of electronic equipment result in large numbers of bankruptcies in the computer industry.E) None of the above
F) All of the above

Question 10

Pigovian taxes

Accepted Answer

A)   are used to correct negative externalities.
B)   are used to correct positive externalities.
C)   are primarily designed to fund public goods.
D)   are a form of income tax.E) A) and D)
F) B) and C)

Question 11

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

Accepted Answer

A)   negative externality.
B)   supply-side market failure.
C)   demand-side market failure.
D)   government failure.E) B) and C)
F) B) and D)

Question 12

When the production of a good generates external costs, the producing firm's supply curve will be

Accepted Answer

A)   below (to the right of)  the true-cost supply curve.
B)   above (to the left of)  the true-cost supply curve.
C)   vertical.
D)   horizontal.E) All of the above
F) B) and C)

Question 13

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 14

Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product.

Accepted Answer

A) True 
 B)False

Question 15

At the output level defining allocative efficiency,

Accepted Answer

A)   the areas of consumer and producer surplus necessarily are equal.
B)   marginal benefit exceeds marginal cost by the greatest amount.
C)   consumer surplus exceeds producer surplus by the greatest amount.
D)   the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.E) B) and D)
F) A) and B)

Question 16

Which of the following is an example of a negative externality?

Accepted Answer

A)   an increase in the value of land you own when a nearby development is completed
B)   the costs paid by a company to build an automated factory
C)   falling property values in a neighborhood where a disreputable nightclub is operating
D)   the higher price you pay when you buy a heavily advertised productE) A) and B)
F) All of the above

Question 17

If there are external benefits associated with the consumption of a good or service,

Accepted Answer

A)   the private demand curve will overestimate the true demand curve.
B)   the private demand curve will underestimate the true demand curve.
C)   consumers are paying for all these benefits in private markets.
D)   the market demand curve will be the vertical summation of the individual demand curves.E) None of the above
F) C) and D)

Question 18

The following data are for a series of increasingly extensive flood-control projects.  Plan C entails

Accepted Answer

A)   marginal benefits in excess of marginal costs.
B)   fewer spillovers than either Plan A or Plan B.
C)   an overallocation of resources to flood control.
D)   an underallocation of resources to flood control.E) C) and D)
F) A) and B)

Question 19

Graphically, producer surplus is measured as the area

Accepted Answer

A)   under the demand curve and below the actual price.
B)   under the demand curve and above the actual price.
C)   above the supply curve and above the actual price.
D)   above the supply curve and below the actual price.E) A) and B)
F) B) and C)

Question 20

From an economist's perspective, an important consideration for policies to address global warming is

Accepted Answer

A)   the market for recyclable inputs.
B)   the supply and demand for recycled products.
C)   the marginal cost and marginal benefit of the policies.
D)   a lawsuit that can arise from the enactment of the policies.E) A) and B)
F) All of the above

Exam 4: Market Failures: Public Goods and Externalities

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Deadweight losses occur when the quantity of an output produced is

Correct AnswerverifiedShow Answer

Nonrivalry and nonexcludability are the main characteristics of

Correct AnswerverifiedShow Answer

Which of the following is an example of a negative externality?

Correct AnswerverifiedShow Answer

If there are external benefits associated with the consumption of a good or service,

Correct AnswerverifiedShow Answer

There is an adverse selection problem in the market for used cars because

Correct AnswerverifiedShow Answer

In response to the financial crisis that began in 2007, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future. This illustrates

Correct AnswerverifiedShow Answer

Graphically, producer surplus is measured as the area

Correct AnswerverifiedShow Answer

Which of the following is an example of a market failure?

Correct AnswerverifiedShow Answer

Consumer surplus

Correct AnswerverifiedShow Answer

When the production of a good generates external costs, the producing firm's supply curve will be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

At the output where the combined amounts of consumer and producer surplus are largest,

Correct AnswerverifiedShow Answer

At the output level defining allocative efficiency,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

From an economist's perspective, an important consideration for policies to address global warming is

Correct AnswerverifiedShow Answer

The following data are for a series of increasingly extensive flood-control projects. Plan C entails

Correct AnswerverifiedShow Answer

Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product.

Correct AnswerverifiedShow Answer

Pigovian taxes

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified