Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

The equilibrium point in the market is where S and D curve intersect.  Refer to the graph above. At equilibrium, the total revenues received by sellers would be represented by the area:

Accepted Answer

A)   b
B)   b + c
C)   a + b
D)   b + c + dE) A) and B)
F) None of the above

Question 4

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem.

Accepted Answer

A) True 
 B)False

Question 5

Answer the question on the basis of the following information is for public good. Pa and Pb represent the prices that citizens (a)  and (b) , the only two people in this nation, are willing to pay for additional units of a quantity (Qc)  of the public good. Qs represents the quantity of the public good supplied by government at each of the collective prices. a and Pb represent the prices that citizens (a)  and (b) , the only two people in this nation, are willing to pay for additional units of a quantity (Qc)  of the public good. Qs represents the quantity of the public good supplied by government at each of the collective prices.   Refer to the above information. The collective willingness of this nation to pay for the fourth unit of the public good is: A)  $7 B)  $6 C)  $5 D)  $3" class="answers-bank-image d-inline" rel="preload" > Refer to the above information. The collective willingness of this nation to pay for the fourth unit of the public good is:

Accepted Answer

A)   $7
B)   $6
C)   $5
D)   $3E) A) and B)
F) A) and C)

Question 6

The moral hazard problem arises primarily because of:

Accepted Answer

A)   Individual bargaining
B)   Negative externalities
C)   Asymmetric information
D)   Poorly defined property rightsE) A) and B)
F) A) and C)

Question 7

2 to Q3, then the: A)  Marginal cost of the product becomes closer to its marginal benefit B)  Marginal cost of the product increases while its marginal benefit decreases C)  Marginal cost of the product decreases while its marginal benefit increases D)  Marginal cost of the product stays constant while its marginal benefit increases" class="answers-bank-image d-inline" rel="preload" > Refer to the above graph. If the output level increases from Q2 to Q3, then the:

Accepted Answer

A)   Marginal cost of the product becomes closer to its marginal benefit
B)   Marginal cost of the product increases while its marginal benefit decreases
C)   Marginal cost of the product decreases while its marginal benefit increases
D)   Marginal cost of the product stays constant while its marginal benefit increasesE) A) and C)
F) A) and D)

Question 8

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings:

Accepted Answer

A)   Can be resolved by the owners themselves through individual bargaining
B)   Has to be resolved by city government officials
C)   Can only be resolved by a zoning ordinance restricting high-rise buildings
D)   Should be resolved by a government fine for the builder of the high-riseE) B) and D)
F) B) and C)

Question 9

1 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 good D)  Positive externalities from producing the good" class="answers-bank-image d-inline" rel="preload" > Refer to the above supply and demand graph. 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) :

Accepted Answer

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 good
D)   Positive externalities from producing the goodE) A) and B)
F) All of the above

Question 10

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)   Below the true-cost supply curve
B)   Above the true-cost supply curve
C)   Vertical
D)   HorizontalE) A) and D)
F) A) and C)

Question 12

When the marginal benefit of an output exceeds the marginal cost:

Accepted Answer

A)   Production of that output should be increased, in order to achieve efficiency
B)   Production of that output should be decreased, in order to achieve efficiency
C)   Increasing the production of that output would increase the deadweight loss
D)   Reducing the production of that output would reduce efficiency lossesE) B) and C)
F) C) and D)

Question 13

When producers (say, of roads)  are not able to make all consumers pay for enjoying their product (i.e., the roads) , they tend to see a:

Accepted Answer

A)   Marginal cost of production that is too low, and there is a supply-side market failure
B)   Marginal benefit of production that is too high, and there is a demand-side market failure
C)   Marginal cost of production that is too high, and there is a supply-side market failure
D)   Marginal benefit of production that is too low, and there is a demand-side market failureE) B) and C)
F) None of the above

Question 14

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table.  Refer to the above table and information. What project should the government select to achieve the maximum net benefit?

Accepted Answer

A)   A
B)   B
C)   C
D)   DE) B) and C)
F) None of the above

Question 15

Sometimes, public goods whose benefits are less than their costs still get produced because:

Accepted Answer

A)   The marginal benefit is still larger than the marginal cost
B)   Of externalities in production
C)   The benefits accrue to politically powerful government officials and their constituents
D)   Of market failuresE) A) and D)
F) B) and C)

Question 16

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. In the situation described above, we would expect an:

Accepted Answer

A)   Overproduction of paper in the mills
B)   Underproduction of paper in the mills
C)   External cost resulting from the production of hydroelectric power
D)   Attainment of allocative efficiency in the marketE) A) and D)
F) C) and D)

Question 17

When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting, there is no moral hazard problem.

Accepted Answer

A) True 
 B)False

Question 18

Oftentimes, the socially optimal quantity for a product that imposes external costs on the society is not zero, but something greater than zero. This is because completely eliminating the externality would involve:

Accepted Answer

A)   A much greater marginal benefit than marginal cost
B)   A much greater marginal cost than marginal benefit
C)   Having shortages in the market
D)   Having surpluses in the marketE) A) and B)
F) None of the above

Question 19

Consumer surplus is the reason why sometimes a shopper regrets having bought a particular item.

Accepted Answer

A) True 
 B)False

Question 20

The equilibrium point in the market is where S and D curve intersect.  Refer to the graph above. At equilibrium, the minimum acceptable revenue that sellers would have been willing to receive is represented by the area:

Accepted Answer

A)   b
B)   b + c
C)   a + b
D)   cE) A) and C)
F) A) and D)

Exam 4: Market Failures: Public Goods and Externalities

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem.

Correct Answer
verified

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

Correct Answer
verified

When the marginal benefit of an output exceeds the marginal cost:

Correct Answer
verified

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

Correct Answer
verified

The equilibrium point in the market is where S and D curve intersect. Refer to the graph above. At equilibrium, the total revenues received by sellers would be represented by the area:

Correct Answer
verified

The equilibrium point in the market is where S and D curve intersect. Refer to the graph above. At equilibrium, the minimum acceptable revenue that sellers would have been willing to receive is represented by the area:

Correct Answer
verified

Correct Answer
verified

When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting, there is no moral hazard problem.

Correct Answer
verified

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Correct Answer
verified

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings:

Correct Answer
verified

The moral hazard problem arises primarily because of:

Correct Answer
verified

Refer to the above supply and demand graph. 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) :

Correct Answer
verified

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.

Correct Answer
verified

Refer to the above graph. If the output level increases from Q₂ to Q₃, then the:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Consumer surplus is the reason why sometimes a shopper regrets having bought a particular item.

Correct Answer
verified

Oftentimes, the socially optimal quantity for a product that imposes external costs on the society is not zero, but something greater than zero. This is because completely eliminating the externality would involve:

Correct Answer
verified

When producers (say, of roads) are not able to make all consumers pay for enjoying their product (i.e., the roads) , they tend to see a:

Correct Answer
verified

Sometimes, public goods whose benefits are less than their costs still get produced because:

Correct Answer
verified

Exam 4: Market Failures: Public Goods and Externalities

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When the marginal benefit of an output exceeds the marginal cost:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The equilibrium point in the market is where S and D curve intersect. Refer to the graph above. At equilibrium, the total revenues received by sellers would be represented by the area:

Correct AnswerverifiedShow Answer

The equilibrium point in the market is where S and D curve intersect. Refer to the graph above. At equilibrium, the minimum acceptable revenue that sellers would have been willing to receive is represented by the area:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting, there is no moral hazard problem.

Correct AnswerverifiedShow Answer

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

Correct AnswerverifiedShow Answer

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings:

Correct AnswerverifiedShow Answer

The moral hazard problem arises primarily because of:

Correct AnswerverifiedShow Answer

Refer to the above supply and demand graph. 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) :

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Refer to the above graph. If the output level increases from Q2 to Q3, then the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Consumer surplus is the reason why sometimes a shopper regrets having bought a particular item.

Correct AnswerverifiedShow Answer

Oftentimes, the socially optimal quantity for a product that imposes external costs on the society is not zero, but something greater than zero. This is because completely eliminating the externality would involve:

Correct AnswerverifiedShow Answer

When producers (say, of roads) are not able to make all consumers pay for enjoying their product (i.e., the roads) , they tend to see a:

Correct AnswerverifiedShow Answer

Sometimes, public goods whose benefits are less than their costs still get produced because:

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

Refer to the above supply and demand graph. 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) :

Correct Answer
verified

Correct Answer
verified

Refer to the above graph. If the output level increases from Q₂ to Q₃, then the:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified