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Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) on the left and from S to S2 in diagram (b) on the right. The shift of the supply curve From S to S2 in diagram (b) might be caused by a per-unit A) subsidy paid to the producers of this product. B) tax on the producers of this product. C) subsidy paid to the buyers of this product. D) tax on the buyers of this product. Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) on the left and from S to S2 in diagram (b) on the right. The shift of the supply curve From S to S2 in diagram (b) might be caused by a per-unit


A) subsidy paid to the producers of this product.
B) tax on the producers of this product.
C) subsidy paid to the buyers of this product.
D) tax on the buyers of this product.

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

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If car makers are required to install gadgets to improve the cleanliness of car-exhaust, we would expect the equilibrium quantity in the car market to decrease.

A) True
B) False

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When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of


A) moral hazard.
B) adverse selection.
C) externalities.
D) diminishing utility.

E) None of the above
F) A) and C)

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The value that consumers get (from consuming a product) over and above what they actually paid for the product is called


A) consumer utility.
B) consumption expenditures.
C) consumer surplus.
D) consumer demand.

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

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Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. This figure Suggests that there is (are) A) external benefits from the production of this product. B) external costs in the production of this product. C) currently an underallocation of resources toward producing this product. D) positive externalities from producing the product. Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. This figure Suggests that there is (are)


A) external benefits from the production of this product.
B) external costs in the production of this product.
C) currently an underallocation of resources toward producing this product.
D) positive externalities from producing the product.

E) None of the above
F) A) and B)

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Asymmetric information occurs when the two parties in a market transaction do not have the same amount of information regarding the product or process involved in the transaction.

A) True
B) False

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Refer to the diagram. From society's perspective, if MB1 and MC2 are relevant, A) Q2 represents too little pollution abatement. B) Q1 represents too much pollution abatement. C) Q2 represents an optimal amount of pollution abatement. D) Q4 represents too little pollution abatement. Refer to the diagram. From society's perspective, if MB1 and MC2 are relevant,


A) Q2 represents too little pollution abatement.
B) Q1 represents too much pollution abatement.
C) Q2 represents an optimal amount of pollution abatement.
D) Q4 represents too little pollution abatement.

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

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Describe what is meant by the adverse selection problem.

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The adverse selection problem arises whe...

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What is a Pigouvian tax? The U.S. government has placed a Pigouvian tax on CFCs; explain how this tax works.

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A Pigouvian tax is a charge levied on th...

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Refer to the provided supply and demand graph of Product X. If there are positive externalities from the consumption of Product X, then the socially optimal demand curve would be A) to the left of the D curve on the graph. B) to the right of the D curve on the graph. C) at the position of the D curve on the graph. D) an upward-sloping line. Refer to the provided supply and demand graph of Product X. If there are positive externalities from the consumption of Product X, then the socially optimal demand curve would be


A) to the left of the D curve on the graph.
B) to the right of the D curve on the graph.
C) at the position of the D curve on the graph.
D) an upward-sloping line.

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

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Market failures


A) are only a concern when they result in prices that are too high.
B) apply exclusively to situations where markets do not produce any of an economically desirable good.
C) result in overproduction or underproduction of a good.
D) result from government interference in markets.

E) A) and B)
F) All of the above

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TripAdvisor provides online reviews of hotels, restaurants, and attractions at tourist destinations around the world. When a traveler is planning a vacation, TripAdvisor helps the traveler avoid


A) adverse selection.
B) moral hazard.
C) positive externalities.
D) negative externalities.

E) B) and D)
F) A) and D)

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What are the two conditions that must exist for markets to produce efficient outcomes?

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The market demand curve must reflect the ...

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In a situation where an externality occurs, the "third party" refers to those who


A) buy the product from others.
B) produce the product for others.
C) trade the product with others outside the nation or community.
D) are not directly involved in the transaction or activity.

E) C) and D)
F) All of the above

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Asymmetric information in a market transaction occurs when there is unequal knowledge possessed by the


A) buyer and the government.
B) seller and the government.
C) taxpayer and the government.
D) buyer and the seller.

E) A) and D)
F) A) and C)

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If pollution coming from factories is bad, then why would the socially optimal level of pollution not be zero?


A) because there are significant social costs of achieving zero pollution
B) because there are significant social benefits from attaining zero pollution
C) because the factories are privately owned in a market system
D) because there are zero benefits from zero pollution

E) A) and C)
F) A) and D)

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Buyers will opt out of markets in which


A) there are significant negative externalities.
B) standardized products are being produced.
C) there is inadequate information about sellers and their products.
D) there are only foreign sellers.

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

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A significant amount of positive consumer surplus is the reason why sometimes a shopper regrets having bought a particular item.

A) True
B) False

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Charlie is willing to pay $10 for a T-shirt that is priced at $9. If Charlie buys the T-shirt, then his consumer surplus is


A) $19.
B) $0.90.
C) $90.
D) $1.

E) None of the above
F) All of the above

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eBay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.

A) True
B) False

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