Survey of ECON 2nd Edition by Robert L. Sexton - Test Bank

Survey of ECON 2nd Edition by Robert L. Sexton – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Market Failure and Public Choice

 

TRUE/FALSE

 

1. Positive externalities include benefits received the seller but not benefits received by the buyer.

 

ANS:  F                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

2. A cost that spills over onto individuals not directly involved in an activity is called a positive externality.

 

ANS:  F                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

3. When negative externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable.

 

ANS:  F                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

4. When positive externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable.

 

ANS:  T                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

5. If a negative externality results from the production of chemicals, an external cost is imposed on parties not directly involved in the market for the chemicals.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

6. If mining companies are able to shift some of their production costs onto outside parties, the actual output of mines is likely to fall short of society’s ideal.

 

ANS:  F                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

7. Inoculation against communicable diseases is an example of an activity that generates positive externalities.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

8. Information supplied to consumers by the government rarely ever helps in making better decisions.

 

ANS:  F                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | What Can the Government Do to Correct for Positive Externalities?

 

9. Positive externalities exist any time the social costs of producing a good or service exceed the private costs.

 

ANS:  F                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

10. public good is nonrivalrous and excludable.

 

ANS:  F                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

11. Since it is difficult to establish and enforce ownership rights over air, people have less incentive to preserve air quality than if its ownership was clearly defined.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Common Resources and the Tragedy of the Commons

 

12. Someone who does not contribute toward covering the cost of a good he desires, and yet he cannot be excluded from receiving the good, is called a free rider.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

13. A public good or service can be consumed by paying and nonpaying customers alike.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

14. An example of a public good is a flood control project that protects all the homes and properties near a river.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

15. Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

16. The over hunting of U.S. buffalo that nearly caused their extinction would be an example of the tragedy of the commons.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Common Resources and the Tragedy of the Commons

 

17. The failure of private incentives to provide adequate maintenance of public resources leads to the tragedy of the commons.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Common Resources and the Tragedy of the Commons

 

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

 

ANS:  F                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

19. One way to overcome an adverse selection problem when buying a used car is to hire an independent mechanic to inspect the car before making a purchase.

 

ANS:  T                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

20. Moral hazard occurs when an informed party benefits in an exchange by taking advantage of knowing more than the other party.

 

ANS:  F                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

21. The idea of rational ignorance implies that people are fully informed about their market purchases but uninformed about political issues.

 

ANS:  F                    PTS:   1                    DIF:    M

TOP:   5.4 Public Choice | Voters and Rational Ignorance

 

22. The motivation for an individual citizen to spend the necessary time and effort to resist an interest group is minimal, even if she had a guarantee that this resistance would be effective.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Special Interest Groups

 

23. The median voter model predicts a strong tendency for both candidates to choose a position away from the middle of distribution.

 

ANS:  F                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Majority Rule and the Median Voters

 

24. When decisions are made by majority rule, the individual consumption-payment link is broken.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | The Individual Consumption-Payment Link

 

25. The self-interest assumption is central to the analysis of behavior in both private and public sectors.

 

ANS:  T                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | What Is Public Choice Theory?

 

MULTIPLE CHOICE

 

1. Private costs are those borne by:

a.	the government.
b.	the producer of an item.
c.	both an item’s producer and outside parties affected by a negative externality.
d.	outside parties affected by a negative externality.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

2. The total social costs of production are:

a.	private costs plus private benefits.
b.	private benefits minus private costs.
c.	private costs plus external costs.
d.	private costs minus external costs.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

3. An example of a positive externality is:

a.	freeway congestion.
b.	pollution in a resort lake.
c.	airport noise.
d.	beautiful trees on property along a parkway.

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

4. An externality occurs when:

a.	people other than those making the demand and supply decisions share the benefits or the costs of an activity.
b.	only the people making the demand and supply decisions share the benefits or the costs of an activity.
c.	private costs of production equal the full social costs associated with production of a good.
d.	private costs of production are ignored.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   5.1 Externalities

 

5. Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes the decision are called ____ costs.

a.	negative; positive
b.	social; private
c.	private; social
d.	positive; negative

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

6. Negative externalities are costs incurred by:

i.	buyers
ii.	sellers
iii.	someone other than buyers or sellers

 

a.	(i) only
b.	(ii) only
c.	(iii) only
d.	both (i) and (ii)

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

7. Which of the following will most likely generate positive externalities?

a.	a hot dog vendor
b.	public education
c.	an automobile
d.	a steel mill

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

8. Golf course developers who buy the land around the golf course they build are attempting to:

a.	impose external costs on non-consenting third parties.
b.	internalize external benefits.
c.	turn a private good into a public good.
d.	internalize external costs.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

9. Which of the following is an example of an externality?

a.	cigarette smoke that permeates an entire restaurant
b.	a flu shot that prevents a student from transmitting the virus
c.	a beautiful flower garden outside the county courthouse
d.	All of the above are correct.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

10. The presence of negative externalities leads to a misallocation of societal resources because:

a.	whenever external costs are imposed on outside parties, the good should not be produced at all.
b.	less of the good than is ideal for society is produced.
c.	there are some costs associated with production that the producer fails to take into consideration.
d.	the government always intervenes in markets when negative externalities are present, and the government is inherently inefficient.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

11. Which of the following activities, if any, represents an external cost?

a.	The reduction in the incidence of chicken pox when children are inoculated against the disease.
b.	The damage to a person’s health from secondhand smoke.
c.	The increase in local property values when the city creates a neighborhood park.
d.	The price you pay for the prime rib that you consume at a local restaurant.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

12. Which of the following activities, if any, represents an external cost?

a.	The benefits that accrue to society when an individual receives a college education.
b.	The increase in property values of vacant lots in an area near where a new amusement park is constructed.
c.	The pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard.
d.	None of the above

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

13. Which of the following activities, if any, represents an external benefit?

a.	The benefit to a consumer from consuming a Caesar salad.
b.	The damage to a person’s health from secondhand smoke.
c.	The reduction in tourist revenues at a beach resort caused by an oil spill.
d.	None of the above

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

14. Which of the following activities, if any, represents an external benefit?

a.	The benefit to a consumer from watching a film on DVD.
b.	The reduction in air quality resulting from industrial development in an urban area.
c.	The increase in the value of property belonging to your neighbors when you hire a landscaper to beautify your front yard.
d.	The reduction in property values when a new airport is built in a neighborhood.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

15. An negative externality is present whenever:

a.	the private marginal cost of an activity exceeds the private marginal benefit.
b.	the private marginal benefit of an activity exceeds the private marginal cost.
c.	the social marginal cost of an activity exceeds the private marginal cost.
d.	none of the above

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

16. An example of a negative externality is:

a.	the benefit you receive when your neighbor installs a smoke detector.
b.	the reduction in profits for your company that occurs when there is a decrease in consumer demand for the product you manufacture.
c.	the sleep you lose when your neighbor throws a loud party next door that keeps you awake.
d.	the change in the property values of your neighbors’ homes when you paint your house and landscape your front yard

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

17. If a positive externality results from the consumption of higher education, then the marginal benefit students receive from education:

a.	equals the marginal social benefit.
b.	is less than the marginal social benefit.
c.	includes the marginal external benefit.
d.	exceeds the marginal social benefit.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

18. A positive externality will cause a market to produce:

a.	more than the efficient equilibrium output level.
b.	less than the efficient equilibrium output level.
c.	the efficient equilibrium output level.
d.	None of the above.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

19. Suppose that flu shots create a positive externality equal to $20 per shot. What is the relationship between the market equilibrium output level and the efficient equilibrium output produced?

a.	They are equal.
b.	The market equilibrium output level is greater than the efficient equilibrium output level.
c.	The market equilibrium output level is less than the efficient equilibrium output level.
d.	None of the above.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

20. Which of the following is (are) true when one firm’s research and production can increase another firm’s access to technological advances?

a.	It is called a technology spillover.
b.	Other firms will imitate and improve on the new knowledge.
c.	If there is no subsidy, the market equilibrium output level is less than the efficient equilibrium output level.
d.	All of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

21. If education produces positive externalities and the government does not intervene in the market, we would expect

a.	the market equilibrium price to be higher than the efficient equilibrium price.
b.	the market equilibrium quantity to be lower than the efficient equilibrium output level.
c.	the market equilibrium quantity to be higher than the efficient equilibrium output level.
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

22. If a negative externality results from the refining of oil, the cost of production as seen by the oil refinery:

a.	does not include the external cost.
b.	includes the external cost.
c.	does not include the external benefit.
d.	includes the external benefit.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

23. If positive externalities are present in the production of a good, then society will:

a.	produce too much of the good since the marginal private benefit to consumers is less than the marginal social benefit.
b.	produce too little of the good since the marginal private benefit to consumers is greater than the marginal social benefit.
c.	produce too much of the good since the marginal private benefit to consumers is greater than the marginal social benefit.
d.	produce too little of the good since the marginal private benefit to consumers is less than the marginal social benefit.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

24. If negative externalities are created in the production of a good, then society will:

a.	produce too much of the good since the marginal private cost to firms is less than the marginal social cost.
b.	produce too little of the good since the marginal private cost to firms is less than the marginal social cost.
c.	produce too much of the good since the marginal private cost to firms is greater than the marginal social cost.
d.	produce too little of the good since the marginal private cost to firms is greater than the marginal social cost.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

25. In a market where firms are able to reduce their private costs by shifting costs onto others, which of the following will not happen?

a.	Inefficiencies will occur.
b.	Negative externalities will be observed.
c.	The market prices of products produced by firms will be too low relative to the social optimum.
d.	Output of the good being produced will be too low.

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   5.1 Externalities | Negative Externalities in Production

 

26. Consider two goods-one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce:

a.	too much of both goods, relative to the social optimum.
b.	too little of both goods, relative to the social optimum.
c.	too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs.
d.	too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

27. Which of the following provides an example of an externality?

a.	The air pollution generated when you drive your car.
b.	The view that passersby and neighbors enjoy when observing your rose garden.
c.	The free concerts neighbors hear when an accomplished musician practices at home.
d.	All of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

28. Which of the following statements is true?

a.	Externalities can never refer to costs borne by the seller.
b.	Both external costs and external benefits can never exist for the same good.
c.	Externalities can never lead to under-production of a specific good.
d.	External benefits can never exceed external costs.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

29. Which of the following describes an external benefit resulting from an individual’s purchase of a winter flu shot?

a.	A flu shot is less expensive than the cost of treatment when you get the flu.
b.	The income of doctors increases when you get a flu shot.
c.	A flu shot reduces the likelihood that others will catch the flu from you.
d.	A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

30. Suppose that firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. If this is the case in a competitive market, how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?

a.	Price is too low; output is too large.
b.	Price is too high; output is too large.
c.	Price is too low; output is too small.
d.	Price is too high; output is too small.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

31. If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the efficient situation.

a.	overstates; increase
b.	understates; increase
c.	overstates; decrease
d.	understates; decrease

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

32. If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation.

a.	overstates; increase
b.	understates; increase
c.	overstates; decrease
d.	understates; decrease

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

33. Which of the following would be an example of a nongovernmental solution to a problem associated with externalities?

a.	society’s preference to drive large cars and SUVs
b.	new stricter anti-litter laws
c.	a general moral commitment against using sprinklers during a drought
d.	tax credits for the purchase of hybrid autos

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Nongovernmental Solutions to Externalities

 

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

a.	provide firms with the incentive to increase the level of activity creating the pollution.
b.	provide firms with the incentive to decrease the level of activity creating the pollution.
c.	provide firms with little incentive to search for less environmentally damaging production methods.
d.	not reduce pollution levels at all.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

35. Currently Q₀ of electrical power is being produced. The demand curve is represented by D, and the current market supply is represented by S₀. It is discovered that the Rocky Mountain Electrical Co-op and Power Company is discharging waste into the area water supply. As a result, S₁ represents ____ and a price of ____ would represent the true internalized cost of production at that level of output.

 

a.	the supply curve with external costs included; P2
b.	the supply curve with external costs included; P1
c.	the supply curve with external costs included; P0
d.	There is insufficient information available to provide an accurate answer.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

36. Because of the problem of second-hand smoke, if unregulated, the market for cigarettes would produce a quantity that is too ____ at a price that is too ____ when compared to the socially optimal results.

a.	low; low
b.	high; low
c.	low; high
d.	high; high

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

Exhibit 5-1

 

 

37. Refer to Exhibit 5-1. Suppose that education provides spillover benefits to the community as illustrated in the diagram. Based on this information, we can say that:

a.	the market would fall short of the desirable level of education, Q0.
b.	education is overproduced by Q1 minus Q0 units.
c.	the socially optimal quantity of education is Q1 units.
d.	the socially optimal quantity of education is Q0 units.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

38. To internalize a negative externality:

a.	a producer’s costs could be reduced by an amount equal to the external cost resulting from the production of a good.
b.	a producer’s costs could be increased by an amount equal to the external cost resulting from the production of a good.
c.	a producer could receive a subsidy equal to the external cost resulting from the production of a good.
d.	None of the above are correct.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

39. To internalize a positive externality:

a.	the consumers of a good could receive a subsidy equal to the external benefit resulting from the production or consumption of the good.
b.	a producer’s costs could be increased by an amount equal to the external benefit resulting from the production of the good.
c.	consumers of the good could pay a tax equal to the external benefit resulting from the production or consumption of the good.
d.	None of the above are correct.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

40. A corrective tax equal to the external cost imposed on third parties levied on polluters will:

a.	eliminate all pollution.
b.	increase the level of pollution.
c.	force polluters to internalize the external cost resulting from their actions.
d.	usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government.

 

 

ANS:  C                    PTS:   1                    DIF:    D

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

41. If the production of a particular good involves significant external benefits, to force the externality to be internalized the government might:

a.	impose a tax on production of the good in order to increase production.
b.	impose a tax on production of the good in order to decrease production.
c.	offer a subsidy for production of the good in order to increase production.
d.	offer a subsidy for production of the good in order to decrease production.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | What Can the Government Do to Correct for Positive Externalities?

 

42. If the production of a particular good involves significant external costs, to force the externality to be internalized the government might:

a.	impose a tax on production of the good in order to increase production.
b.	impose a tax on production of the good in order to decrease production.
c.	offer a subsidy for production of the good in order to increase production.
d.	offer a subsidy for production of the good in order to decrease production.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

43. If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be:

a.	an increase in production.
b.	a decrease in production.
c.	a greater misallocation of resources.
d.	a decrease in the market price of the product.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

44. If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, other things being equal, there would probably be:

a.	an increase in consumption.
b.	a decrease in consumption.
c.	a greater misallocation of resources.
d.	a decrease in the market price of the product.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

45. Which of the following are true?

a.	Negative externalities are real costs, but, unlike the other resources a firm uses in production, a firm does not have to pay for its use.
b.	In the case of external costs, firms tend to produce too much from society’s standpoint, causing an efficiency loss due to an overallocation of scarce resources to the production of the good.
c.	If government could impose a pollution tax equal to the exact size of the external costs imposed by a firm, then the firm would produce at the socially desired level of output.
d.	All of the above are true.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

46. If Don paints the outside of his house a horrendous color:

a.	he probably has lowered the value of his home, but not that of his neighbors’ homes.
b.	he probably has lowered the value of his home and the value of his neighbors’ homes.
c.	he probably has lowered the value of his neighbors’ homes but not the value of his own home.
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

47. Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

a.	too high; too high.
b.	too high; too low.
c.	too low; too high.
d.	too low, too low.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

48. Assume that production of a good generates external benefits for others. The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

a.	too high; too high.
b.	too high; too low.
c.	too low; too high.
d.	too low, too low.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

49. If the production of a good creates large spillover benefits on others, the government might correct for the:

a.	overallocation of resources to its production by subsidizing it.
b.	overallocation of resources to its production by imposing a tax on it.
c.	underallocation of resources to its production by subsidizing it.
d.	underallocation of resources to its production by imposing a tax on it.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

50. If there are important spillover benefits from consumption of a good,

a.	government should prohibit its production.
b.	taxes should be imposed on producers of the product.
c.	the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production.
d.	the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

51. In a competitive market,

a.	demand will always reflect all spillover costs.
b.	demand will always reflect all spillover benefits.
c.	supply will always reflect all spillover costs.
d.	none of the above are true.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Externalities

 

52. Suppose a product produces substantial spillover costs. If the government adopts a policy that forces producers to bear those costs:

a.	the equilibrium quantity of the product exchanged will fall.
b.	the initial misallocation of resources will be corrected.
c.	the equilibrium price of the product will rise.
d.	all of the above will be true.

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

53. When the production or consumption of a good involves an externality:

a.	resources are necessarily overallocated to the good.
b.	resources are necessarily underallocated to the good.
c.	someone not involved in buying or selling the good is affected.
d.	the market will efficiently allocate resources to its production.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

54. An individual firm has little incentive to voluntarily internalize any external costs it was creating because:

a.	it would shift its cost curves downward.
b.	it would put it at a competitive disadvantage compared to its rivals.
c.	it would have to increase output to make up for the added costs.
d.	they do not care at all about other people.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

55. Which of the following may involve external benefits?

a.	drunken driving.
b.	smoking.
c.	public education.
d.	highway congestion.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

56. If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will:

a.	not produce the product at all.
b.	overproduce the product.
c.	underproduce the product.
d.	produce the optimal amount of the product.

 

 

ANS:  B                    PTS:   1                    DIF:    D

TOP:   5.1 Externalities | Negative Externalities in Production

 

57. If the government required car makers to install more costly and effective emission control devices on cars, it will lead to:

a.	a higher price of cars and a larger quantity of cars sold.
b.	a higher price of cars and a smaller quantity of cars sold.
c.	a lower price of cars and a larger quantity of cars sold.
d.	a lower price of cars and a smaller quantity of cars sold.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

58. Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

a.	too high; too high.
b.	too high; too low.
c.	too low; too high.
d.	too low; too low.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

59. Assume that production of a good generates external benefits for others. The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

a.	too high; too high.
b.	too high; too low.
c.	too low; too high.
d.	too low; too low.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

60. Without government intervention, society is likely to get too little production of:

i.	private goods that generate external costs
ii.	private goods that generate external benefits
iii.	public goods

 

a.	(i) only
b.	(ii) only
c.	(iii) only
d.	both (ii) and (iii)

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   5.1 Externalities | Negative Externalities in Production

 

Exhibit 5-2

 

 

61. Refer to Exhibit 5-2. Market equilibrium and efficient equilibrium are denoted by points ____ respectively.

a.	a and b
b.	c and a
c.	a and c
d.	c and b

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

62. Refer to Exhibit 5-2. If the suppliers of steel are not aware of or not responsible for the external costs, they will tend to:

a.	apply new technology to reduce external costs.
b.	produce too much.
c.	produce too little.
d.	reduce production to Q2.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

63. Refer to Exhibit 5-2. The supply curve S social includes the following costs.

a.	Private costs only
b.	Private costs and external costs
c.	External costs and public costs
d.	all of the above

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

64. Global warming, which causes unfavorable climatic changes due to the burning of fossil fuels, would be an example of a(n):

a.	positive externality.
b.	negative externality.
c.	internalized externality.
d.	Coase externality.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

65. If the production of a product creates external costs, there is an ____ to production of that good which the government can correct for by ____.

a.	overallocation of resources; granting a subsidy
b.	overallocation of resources; imposing a per-unit tax
c.	underallocation of resources; granting a subsidy
d.	underallocation of resources; imposing a per-unit tax

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

66. The imposition of a per-unit tax on polluting firms will result in the socially efficient level of production only if the tax equals:

a.	the marginal social cost plus the marginal private cost.
b.	the marginal social cost plus the marginal external cost.
c.	the marginal social cost minus the marginal private cost.
d.	the average total cost minus the average variable cost.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.1 Externalities | What Can the Government Do to Correct for Negative Externalities?

 

67. Nancy loves to landscape her yard, but her neighbor Tom places a low value on his landscaping. When Tom’s grass is neglected and gets long, Nancy will mow for Tom. This is an example of:

a.	the fallacy of composition.
b.	a pollution tax.
c.	a private solution to a negative externality problem.
d.	how lazy Tom is.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Nongovernmental Solutions to Externalities

 

68. Which of the following is a valid reason for the government rather than the market to finance the provision of certain economic goods and services?

a.	When the government provides economic goods, they are free; costs are incurred when such goods are provided by private firms.
b.	Voters tend to be better informed than market consumers are.
c.	Decision makers in the market sector are motivated by self-interest, whereas political decision makers are primarily motivated by altruism (the desire to help others).
d.	Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers; the government can use taxes to overcome this problem of nonpayment.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | The Government and Benefit-Cost Analysis

 

69. Which of the following is an example of a public good?

a.	telephone service
b.	national defense
c.	a city-owned bus
d.	electricity generated by a city-owned public utility

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

70. As an additional consumer obtains the benefits of a public good such as national defense, the benefits to existing consumers:

a.	decline.
b.	increase.
c.	increase in the short run, but decrease in the long run.
d.	do not change.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

71. Nonrivalry in consumption and the inability to exclude nonpaying consumers from using the goods are characteristics of what kinds of goods?

a.	durable
b.	nondurable
c.	public
d.	private

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

72. The reason why national defense is commonly provided by the government, while food is not, is that food:

a.	is too essential to survival to be provided by a bureaucratic organization.
b.	manufacturers have successfully lobbied the government to stay out of the food industry.
c.	can easily be withheld from those who refuse to pay for it.
d.	provision is subject to a free-rider problem.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

73. A public good is:

a.	a good or service for which it is relatively easy to exclude nonpaying customers from consumption.
b.	a good or service that can be consumed by both the paying and nonpaying customers.
c.	any good or service that is produced by the government.
d.	a good or service that is consumed by private individuals and financed by private contributions.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

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

a.	a national system of healthcare
b.	an amusement park
c.	city street lights
d.	telephone service

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

75. Which of the following is true?

a.	Consumption of a public good by one individual reduces the availability of the good for others.
b.	It is extremely difficult to limit the benefits of a public good to the people who pay for it.
c.	Public goods are free whenever the government produces them.
d.	From an efficiency standpoint, a market economy will generally supply too much of a public good.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

76. Where a free-rider problem exists, goods tend to be:

a.	underproduced.
b.	overproduced.
c.	high-priced and available only to the rich.
d.	low priced and available only to the poor.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

77. A free-rider problem arises whenever:

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.	goods cease to be scarce.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

78. In the absence of government action, the private market would probably not provide as much police protection as is socially desirable because:

a.	individuals are too poorly informed about the value of police protection.
b.	the private benefits are greater than the private costs of providing police protection.
c.	it is difficult to prevent free riders from benefiting from some police protection services.
d.	the use of police services by one person will significantly reduce the police protection available to others.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

79. Which of the following best illustrates the free-rider problem?

a.	A tollbooth is constructed at the entrance of a privately funded highway.
b.	Individuals contribute toward a national defense program by paying taxes to the government.
c.	Some homeowners in a mountain resort area refuse to contribute toward paving the area’s only access road.
d.	You erect a locked gate around your swimming pool to keep out unsupervised children.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

80. Public goods are those that are consumed:

a.	only by those who have paid for them.
b.	only by the government that provides them.
c.	by the private group that funds them.
d.	by the paying and nonpaying public alike.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

81. Medical research helps to develop better treatments for neuromuscular disease. Medical researchers are constantly in search of funds. Many in the public, however, are unwilling to contribute money toward neuromuscular disease research until a member of their own family suffers from a neuromuscular ailment. If left strictly to the private market, it is likely that there will be:

a.	an overallocation of resources to neuromuscular disease research, relative to the efficient level.
b.	an underallocation of resources to neuromuscular disease research, relative to the efficient level.
c.	an efficient quantity of resources devoted to neuromuscular disease research.
d.	zero dollars devoted to neuromuscular disease research.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

82. Public goods are characterized by:

a.	rivalry in consumption.
b.	nonrivalry in consumption.
c.	excludability of nonpayers.
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

83. An example of a public good is:

a.	a pizza.
b.	milk.
c.	a delivery truck.
d.	national defense.

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

84. An example of a public good is:

a.	a tornado siren.
b.	a cake.
c.	a personal computer.
d.	a DVD player.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

85. The free-rider problem arises when:

a.	goods cease to be scarce.
b.	goods are produced by the government.
c.	goods can’t be provided exclusively to paying customers.
d.	the marginal benefit to a private individual outweighs the marginal cost of producing a good.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

86. When a good is nonrivalrous in consumption, then:

a.	consumption by an additional individual will significantly reduce the benefits derived by others from a public good.
b.	individuals who refuse to pay for a public good cannot be excluded from benefiting from it.
c.	consumption by an additional individual does not prevent others from benefiting from a public good.
d.	individuals who refuse to pay for a public good can be excluded from benefiting from it.

 

 

ANS:  C                    PTS:   1                    DIF:    D

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

87. When city beautification programs are funded privately:

a.	only contributing citizens are likely to benefit from a more beautiful city.
b.	only free riders are likely to benefit from a more beautiful city.
c.	an underallocation of resources toward the beautification project is likely to occur relative to what is socially efficient.
d.	none of the above

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

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

a.	U.S. citizens are not very patriotic.
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 to a national defense fund cannot be excluded from benefiting from national defense.

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

89. Which of the following goods is least likely to be provided by the private sector?

a.	a good characterized by nonrivalry in consumption from which nonpaying customers can be excluded
b.	a good characterized by nonrivalry in consumption from which paying customers cannot be excluded
c.	a good characterized by rivalry in consumption from which nonpaying customers can be excluded
d.	a good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

90. Which of the following is true?

a.	The private market provides too much of goods that generate external benefits.
b.	In the case of external benefits, if we could add the benefits that are derived by non-paying consumers, the supply curve would shift to the right, increasing output.
c.	In the case of external benefits, a tax equal to external benefits would result in an efficient level of output.
d.	In the case of public goods, when people act as free-riders, some goods having benefits greater than costs will not be produced.

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

91. In a competitive economy with no government sector:

a.	goods with spillover benefits will not be produced at all.
b.	there will be too few public goods produced.
c.	goods with spillover costs will be underproduced.
d.	too few resources be allocated to each industry.

 

 

ANS:  B                    PTS:   1                    DIF:    D

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

92. Which of the following is true?

a.	The nature of public goods is such that the government cannot accurately assess the benefits and costs of those affected.
b.	National defense is an illustration of a public good.
c.	Just as in the case of external benefits, public goods tend to be underprovided by the private sector.
d.	All of the above are true.

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

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

a.	people place no value on public goods.
b.	private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them.
c.	public enterprises can produce those goods at lower cost than private firms.
d.	public goods create widespread spillover costs.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Public Goods and the Free-Rider Problem

 

94. Public goods are:

a.	any goods or services several members of the public would like produced
b.	those goods for which natural monopolies exist.
c.	goods which cannot be successfully produced by private firms.
d.	goods which cannot be easily financed through the market system.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

95. Public goods, like national defense, are usually funded through government because:

a.	no one cares about them, because they are public.
b.	it is prohibitively difficult to withhold national defense from someone unwilling to pay for it.
c.	they cost too much for private firms to produce them.
d.	they provide benefits only to individuals, and not firms.

 

 

ANS:  B                    PTS:   1                    REF:   p. 224-225

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

96. The determination of which goods are public goods depends on:

a.	public laws.
b.	normative considerations.
c.	whether it is produced directly by the government or produced by a private sector firm.
d.	whether it is possible to exclude additional users from consuming the good if they do not pay for it.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

97. The consumption of public goods is

a.	excludable and rivalrous
b.	excludable and non-rivalrous
c.	non-excludable and rivalrous
d.	non-excludable and non-rivalrous

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

98. Which of the following is a rival good that is nonexcludable?

a.	public good
b.	private good
c.	common resource
d.	none of the above

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Common Resources and the Tragedy of the Commons

 

99. If the rivers, lakes and air in the United States could all be privately owned, then:

a.	there would be less pollution.
b.	costs of production for many firms would rise.
c.	externalities would be internalized.
d.	all of the above are correct.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Common Resources and the Tragedy of the Commons

 

100. The practice of potential buyers offering lower prices for a product of uncertain quality than they would for a product of certain quality is known as:

a.	the lemon problem.
b.	moral hazard.
c.	the winner’s curse.
d.	external costs.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

101. Consumers are generally willing to spend more time researching cars before making a purchase than they do researching paper towels because:

a.	the cost of gathering information about paper towels is very small.
b.	the cost of gathering information about cars is less than the cost of gathering information about paper towels.
c.	the cost of making a mistake when buying a car is significantly greater than the cost of making a mistake buying paper towels, so that the cost of gathering information about cars is smaller than the benefit that can be gained.
d.	the net benefit from gathering additional information about paper towels is likely much greater than the net benefit derived from gathering additional information about cars.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

102. Consumers will willingly make less-informed decisions:

a.	if information costs are less than the perceived benefits of gathering information.
b.	if information costs are greater than the perceived benefits of gathering information.
c.	since ignorance always leads to bliss.
d.	whenever acquiring more information requires sacrifice.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

103. Sellers may choose not to sell in certain markets because:

a.	it is possible to practice price discrimination against customers.
b.	buyers are unable to perceive the high quality of their goods and are, therefore, less willing to pay for them.
c.	they are able to impose negative externalities on third parties.
d.	an above-average profit potential is projected.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

104. A warranty offered by a seller is one way to overcome:

a.	a positive externality problem.
b.	a negative externality problem.
c.	an adverse selection problem.
d.	a free-rider problem.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

105. The tendency of those who are insured to take more risks is a problem of:

a.	free riding.
b.	moral hazard.
c.	adverse selection.
d.	positive externalities.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

106. After trading in her Volkswagen Beetle for a much safer Mercedes sedan, Rene began driving less carefully. This is an example of:

a.	an adverse selection problem.
b.	a free-rider problem.
c.	a moral hazard problem.
d.	a positive externality problem.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

107. Which of the following is an example of moral hazard?

a.	There are likely more cars of low quality than of high quality offered for sale without warranties in the used car market.
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.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

108. Signaling is important because:

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.	all of the above

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

109. If quality-detection costs are very low,

a.	low quality products will tend to be withdrawn from the market, and the average quality will rise.
b.	low quality products will tend to be withdrawn from the market, but the average quality will fall.
c.	high quality products will tend to be withdrawn from the market, and the average quality will rise.
d.	high quality products will tend to be withdrawn from the market, and the average quality will fall.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

110. An individual insured against a particular cost,

a.	has reduced incentives to take precautions against those costs.
b.	may take on additional risk because he/she is insured.
c.	faces incentives that can result in higher insurance rates.
d.	All of the above are true.

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

111. Which of the following is true?

a.	Economic reasoning implies that individuals will acquire all possible information about a choice before making it.
b.	It is not rational for people to make decisions that could turn out to be mistaken.
c.	Reducing information costs to consumers and suppliers could permit more intelligent market decisions and lead to greater satisfaction.
d.	Occupational licensing laws generally act to protect misinformed consumers from getting shoddy services and enhances competition, leading to lower prices.

 

 

ANS:  C                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

112. Which of the following is false?

a.	Product liability laws can make it unprofitable to sell shoddy merchandise, providing a substantial incentive to provide safe products independent of government regulations.
b.	Asymmetric information exists when the available information is initially distributed in favor of one party to a transaction relative to another.
c.	In adverse selection situations, it is rational for a seller with more information about a product to provide a truthful and complete disclosure and make that fact known to a potential buyer.
d.	Moral hazard arises from the fact that it is costly for an insurer to monitor the behaviors of the insured party.

 

 

ANS:  C                    PTS:   1                    DIF:    D

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

113. Which of the following is not true of adverse selection?

a.	It can result when one of the parties to a transaction has little information about the quality of the goods involved.
b.	It can cause the quality of goods traded to fall, if quality detection costs are high.
c.	It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure.
d.	All of the above are true.

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

114. Which of the following is most likely to be an example of asymmetric information?

a.	a soft drink purchased in a vending machine
b.	a car wash to benefit the local high school band
c.	a collectible baseball card purchased on eBay
d.	wireless service that includes unlimited minutes and texting

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Asymmetric Information?

 

115. In the market for insurance, the moral hazard problem leads:

a.	those most likely to collect on insurance to buy it.
b.	those who buy insurance to take fewer precautions to avoid the insured risk.
c.	those with less insurance to take on more risk.
d.	to none of the above.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

116. The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of:

a.	the moral hazard problem.
b.	the free rider problem.
c.	the adverse selection problem.
d.	the “lemon” problem.

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

117. If, after she buys a car with air bags, Maria Andretti starts to drive recklessly, that would be an illustration of:

a.	the moral hazard problem.
b.	the free rider problem.
c.	the adverse selection problem.
d.	the “lemon” problem.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

118. A situation in which the winner of an auction is worse off than the loser because of inaccurate valuation is known as:

a.	adverse selection.
b.	winner’s curse.
c.	free rider problem.
d.	negative externality.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

119. Which of the following is most likely to be an example of the winner’s curse?

a.	a college student purchasing a text book at the campus book store
b.	a new parent subscribing to a parenting magazine
c.	roommates joining an online fantasy football league
d.	a baseball team offering the highest contract to a free agent player

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What Is Moral Hazard?

 

120. The median voter model implies that:

a.	most voters will have about the same preferences for goods and services provided through government.
b.	a candidate may adopt more extreme views when seeking her party’s nomination than during the general election.
c.	political voting will be as economically efficient as voting with dollars in competitive markets.
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.4 Public Choice | Majority Rule and the Median Voters

 

121. Public choice theory assumes that each voter will tend to favor the political candidate who offers:

a.	programs with the largest social benefits.
b.	equality of government-provided benefits across all citizens.
c.	programs that will yield the greatest personal benefits net of personal cost.
d.	a plan requiring the least amount of tax dollars, regardless of the level of benefits provided.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | What Is Public Choice Theory?

 

122. Which of the following statements best summarizes the essence of public choice analysis?

a.	Public choice analysis applies economic principles to political science issues.
b.	Public choice analysis applies political science principles to traditionally economic issues.
c.	Public choice analysis assumes that government leaders are primarily motivated by what is best for the community, unlike private interest groups.
d.	none of the above

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | What Is Public Choice Theory?

 

123. Public choice theory applies ____ principles to politics.

a.	altruistic
b.	ceteris paribus
c.	economic
d.	the fallacy of composition

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | What Is Public Choice Theory?

 

124. Voters will gather information on voting alternatives:

a.	when the cost of acquiring such information is exorbitantly high.
b.	as long as the marginal benefit to them of acquiring additional information exceeds the marginal cost to them.
c.	as long as the marginal benefit to them of the information is less than the marginal cost to them of gathering the information.
d.	because the welfare of the community is always perceived to be more important than the welfare of the individual.

 

 

ANS:  B                    PTS:   1                    DIF:    M

TOP:   5.4 Public Choice | Voters and Rational Ignorance

 

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

a.	personal self-interest.
b.	altruism.
c.	a desire to promote the general welfare.
d.	a desire to promote allocative economic efficiency.

 

 

ANS:  A                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | What Is Public Choice Theory?

 

126. Rational voter ignorance can lead politicians to:

a.	favor programs with immediate and clear benefits and unclear and deferred costs.
b.	fail to take all the benefits and costs of a program fully into account in deciding on which policies to favor.
c.	do a poor job of overseeing the actions of public sector bureaus.
d.	all of the above

 

 

ANS:  D                    PTS:   1                    DIF:    M

TOP:   5.4 Public Choice | Voters and Rational Ignorance

 

127. A special interest issue is one that:

a.	provides large private benefits and large social benefits.
b.	provides small private benefits and large social benefits.
c.	provides large benefits to each of a small number of people and small costs to each of a large number of people.
d.	provides small benefits to each of a small number of people and large costs to each of a large number of people.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Special Interest Groups

 

128. The view that those whose preferences represent the middle position on an issue will tend to determine the outcome of an election is called:

a.	rent seeking.
b.	the median voter model.
c.	the special interest effect.
d.	the cyclical majority problem.

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Majority Rule and the Median Voters

 

129. A special interest issue is best described as:

a.	one in which both sides utilize paid lobbyists to represent them.
b.	one which one party strongly supports and the other party strongly opposes.
c.	one in which a large number will each suffer small costs and a small number will each receive large benefits.
d.	one decided in a special session of the legislature.

 

 

ANS:  C                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Special Interest Groups

 

130. Which of the following would be considered special interest group?

a.	National Rifle Association
b.	Greenpeace
c.	the U.S. sugar industry
d.	all of the above

 

 

ANS:  D                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Special Interest Groups

 

131. The process by which a legislator votes in favor of the legislation of other lawmakers in order to gain support for her own legislation is known as:

a.	pork barrel legislation.
b.	logrolling.
c.	the median vote model.
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    E

TOP:   5.4 Public Choice | Special Interest Groups

 

132. Which of the following explains why it is difficult to reduce government spending by reducing one program at a time?

a.	There is limited support from millions of taxpayers who will save only a few dollars each if a program is eliminated.
b.	The views of the masses generally outweigh those of the special interest groups.
c.	Most people are willing to cut spending on programs that affect them but are not willing to do so for programs that affect others.
d.	none of the above

 

 

ANS:  A                    PTS:   1                    DIF:    M

TOP:   5.4 Public Choice | Special Interest Groups

 

SHORT ANSWER

 

1. Various new cars are sold with sensors that automatically turn on the headlights at night or any low light conditions. Would these sensors create a positive externality or a negative externality? How?

 

ANS:

Cars with these new sensors would likely create positive externalities. Other drivers would be safer because those driving with these sensors would always have their headlights on when driving at night, in the rain, etc.

 

PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Positive Externalities in Consumption

 

2. What is the difference between private and social costs?

 

ANS:

Social costs are those that accrue to the total population; private costs refer to those costs incurred only by the producer or consumer of the good or service.

 

PTS:   1                    DIF:    E

TOP:   5.1 Externalities | Negative Externalities in Production

 

3. Why do decision makers tend to ignore external costs? How can internalizing external costs move us closer to efficient levels of output?

 

ANS:

The decision makers ignore it because it is never a resource that they have to “purchase” for the production process. If an industry or a firm were somehow forced to compensate persons who incur the costs of pollution, we would say that the industry had internalized the externality. There would be greater social efficiency if all of the costs of production were internalized. The firms would produce less and charge a higher price, but it would then include all the costs.

 

PTS:   1                    DIF:    M

TOP:   5.1 Externalities | Negative Externalities in Production

 

4. What are the external costs and external benefits associated with cellular phone usage in automobiles?

 

ANS:

The external costs associated with cellular phone usage may include a higher incidence of traffic accidents. Not only are the individuals involved in the accident bearing additional costs, but so also are other insured drivers who now have to pay higher insurance rates. External benefits could include the ability to report an accident so that help can reach victims more quickly, and so that traffic reporters can advise motorists to avoid a particular area.

 

PTS:   1                    DIF:    D

TOP:   5.1 Externalities | Negative Externalities in Production

 

5. What distinguishes public goods from private goods?

 

ANS:

Public goods are both nonrival in consumption (one person’s consumption does not diminish another’s) and nonexclusive (you cannot prevent nonpaying individuals from benefiting from the good). Private goods are both rivalrous and exclusive. One’s consumption of such a good does diminish another’s, and you can keep nonpaying individuals from consuming the good or service.

 

PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

6. Explain why broadcasting television over the air is considered a public good.

 

ANS:

Broadcast television is a good that is nonrivalrous and nonexclusive in nature.

 

PTS:   1                    DIF:    E

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

7. Differentiate between a public good and common resources.

 

ANS:

A public good is neither rival nor excludable. It is not rival because everyone can consume the good simultaneously. It is not excludable because once the good is produced, it is prohibitively costly to exclude anyone from consuming the good. On the other hand, a common resource is a rival good that is nonexcludable; that is, nonpayers cannot be easily excluded from consuming the good, and when one unit is consumed by one person, it means that it cannot be consumed by another.

 

PTS:   1                    DIF:    M

TOP:   5.2 Public Goods | Private Goods Versus Public Goods

 

8. Explain moral hazard and adverse selection. How do they differ in the timing of their effects?

 

ANS:

Moral hazard involves action taken after an exchange, in which someone changes their behavior as a result of a change in the cost to the party (e.g., car insurance reducing the care one takes while driving). Adverse selection occurs when one party to a transaction has more information than the other party, and has its effects at that time.

 

PTS:   1                    DIF:    M

TOP:   5.3 Asymmetric Information | What is Asymmetric Information?

 

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

 

ANS:

Individuals act in their own self-interest. Voters will gather information as long as the costs of gathering that information do not exceed the benefits to them. Voters may be relatively uninformed about political issues because of high costs and low personal benefits of being politically informed.

 

PTS:   1                    DIF:    M                   TOP:   5.4 Public Choice | What Is Public Choice Theory?