Question 1

Sellers may choose not to sell in certain markets if:

Accepted Answer

A)  it is possible to practice price discrimination against customers.
B)  buyers are unable to perceive the high quality of their goods.
C)  the social cost of production exceeds the private cost of production.
D)  the social cost of production is lower than the private cost of production.
E)  there are technological spillovers in the production of a good.F) A) and B)
G) B) and D)

Question 2

If a positive externality results from higher education, _____.

Accepted Answer

A)  the marginal benefit students receive from education equals the marginal social benefit
B)  the marginal benefit students receive from education is less than the marginal social benefit
C)  the private cost of education exceeds the social cost
D)  the marginal benefit students receive from education exceeds the marginal social benefit
E)  the private cost of education is less than the social costF) C) and E)
G) A) and E)

Question 3

Suppose the U.S. government announced a policy that it would bail out troubled financial institutions, and this resulted in an increase in the number of bank failures. This is an example of:

Accepted Answer

A)  the moral hazard problem.
B)  the free-rider problem.
C)  the adverse selection problem.
D)  the lemon problem.
E)  the tragedy of the commons.F) A) and C)
G) A) and E)

Question 4

Which of the following is rival and excludable?

Accepted Answer

A)  A public good
B)  An externality
C)  A private good
D)  A common resource
E)  A tariffF) A) and D)
G) A) and B)

Question 5

Adverse selection occurs when a fully insured person fails to take as many precautions against risk as he or she would take if uninsured.

Accepted Answer

A) True 
 B)False

Question 6

Education generates negative externalities.

Accepted Answer

A) True 
 B)False

Question 7

A tax on firms that emit pollutants equal to the external cost would:

Accepted Answer

A)  provide firms with an incentive to increase the level of the activity that creates pollution.
B)  provide firms with an incentive to decrease the level of the activity that creates pollution.
C)  provide firms with little incentive to search for production methods that are less environmentally damaging.
D)  not reduce pollution levels at all.
E)  reduce pollution levels to zero.F) A) and D)
G) B) and E)

Question 8

Which of the following is an example of moral hazard?

Accepted Answer

A)  A car salesman earns a commission of 10 percent on every car sold.
B)  An individual who eats well and exercises regularly chooses not to purchase health insurance.
C)  An individual drives less cautiously after obtaining automobile insurance.
D)  A car salesman offers a full warranty on a used car for 90 days.
E)  A person brings a mechanic to check a used car before buying it.F) A) and C)
G) A) and B)

Question 9

If negative externalities are generated in the production of a good, then society will:

Accepted Answer

A)  produce too much of the good because the private cost of production is greater than the social cost of production.
B)  produce too little of the good because the private cost of production is less than the social cost of production.
C)  produce too much of the good because the private cost of production is less than the social cost of production.
D)  produce too little of the good because the private cost of production is greater than the social cost of production.
E)  produce too little of the good because the private cost of production is less than the private benefit from the good.F) B) and D)
G) C) and E)

Question 10

Signaling is important because:

Accepted Answer

A)  it increases social benefits associated with public goods.
B)  it decreases external costs associated with externalities.
C)  it reduces information costs associated with asymmetric information.
D)  it helps to solve the free-rider problem associated with public goods.
E)  it helps to prevent the overuse of common resources.F) All of the above
G) B) and E)

Question 11

Public choice theory assumes that voters, politicians, and other political participants are largely motivated by:

Accepted Answer

A)  personal self-interest.
B)  altruism.
C)  a desire to promote the general welfare.
D)  a desire to promote economic efficiency.
E)  a desire to promote allocative efficiency.F) C) and D)
G) All of the above

Question 12

Which of the following would not be considered a special-interest group?

Accepted Answer

A)  The National Rifle Association
B)  Greenpeace
C)  The U.S. sugar industry
D)  The potato growers in the United States
E)  CongressF) B) and C)
G) C) and D)

Question 13

Why might voters tend to be relatively uninformed about political issues?

Accepted Answer

Answers will vary. Individuals act in th...

Question 14

The market system fails to provide the efficient output of public goods because:

Accepted Answer

A)  people do not value public goods.
B)  private firms cannot restrict the benefits from those goods to consumers who pay for them.
C)  public enterprises can produce those goods at a lower cost than private firms.
D)  public goods create widespread spillover costs.
E)  public goods generate positive externalities and markets tend to underproduce such goods.F) All of the above
G) A) and B)

Question 15

An externality occurs when:

Accepted Answer

A)  people other than those making the demand and the supply decisions share the benefits or the costs of an activity.
B)  people enjoy the benefits of a good or a service without paying for it.
C)  the private cost of production equals the social cost associated with the production of a good.
D)  a firm is unable to lower its average cost of production by expanding its output level.
E)  the government intervenes in the production and the distribution of a good and does not allow the market forces to perform efficiently.F) All of the above
G) B) and D)

Question 16

Which of the following good is least likely to be provided by the private sector?

Accepted Answer

A)  A good that is nonrival but excludable
B)  A good that is nonrival and nonexcludable
C)  A good that is rival and excludable
D)  A good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good
E)  A good for which the marginal private benefit to an individual is less than the marginal cost of producing the goodF) A) and B)
G) None of the above

Question 17

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

Accepted Answer

A)  Health care
B)  Amusement parks
C)  Street lights
D)  Telephone service
E)  Social Security paymentsF) A) and E)
G) A) and D)

Question 18

An economist would be most likely to argue that the U.S. national defense should be funded through tax revenues because:

Accepted Answer

A)  U.S. citizens are not likely to voluntarily pay for it.
B)  the government is always a more efficient provider of goods than the private market.
C)  the government always seeks to act benevolently on behalf of its citizens.
D)  individuals who refuse to contribute cannot be excluded from benefiting from national defense.
E)  defense equipment and machinery is very costly and huge amounts of tax revenues are required for it.F) A) and B)
G) D) and E)

Question 19

The free-rider problem arises whenever:

Accepted Answer

A)  goods cannot be provided exclusively to those who pay for them.
B)  the price of a good is very low.
C)  the government provides goods or services.
D)  there is an excess demand for a good.
E)  the price of a good is very high.F) B) and D)
G) A) and C)

Question 20

People can consume some private goods without paying for them.

Accepted Answer

A) True 
 B)False

Exam 5: Market Failure and Public Choice

Suppose the U.S. government announced a policy that it would bail out troubled financial institutions, and this resulted in an increase in the number of bank failures. This is an example of:

Correct AnswerverifiedShow Answer

Signaling is important because:

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Why might voters tend to be relatively uninformed about political issues?

Correct AnswerverifiedAnswers will vary. Individuals act in th...View AnswerShow Answer

The free-rider problem arises whenever:

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Which of the following is rival and excludable?

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If a positive externality results from higher education, _____.

Correct AnswerverifiedShow Answer

If negative externalities are generated in the production of a good, then society will:

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Which of the following would not be considered a special-interest group?

Correct AnswerverifiedShow Answer

Education generates negative externalities.

Correct AnswerverifiedShow Answer

An externality occurs when:

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Which of the following good is least likely to be provided by the private sector?

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

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The market system fails to provide the efficient output of public goods because:

Correct AnswerverifiedShow Answer

A tax on firms that emit pollutants equal to the external cost would:

Correct AnswerverifiedShow Answer

Public choice theory assumes that voters, politicians, and other political participants are largely motivated by:

Correct AnswerverifiedShow Answer

Sellers may choose not to sell in certain markets if:

Correct AnswerverifiedShow Answer

Adverse selection occurs when a fully insured person fails to take as many precautions against risk as he or she would take if uninsured.

Correct AnswerverifiedShow Answer

People can consume some private goods without paying for them.

Correct AnswerverifiedShow Answer

An economist would be most likely to argue that the U.S. national defense should be funded through tax revenues because:

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Which of the following is an example of moral hazard?

Correct AnswerverifiedShow Answer

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