Question 1

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

Accepted Answer

A)  $19.
B)  $0.90.
C)  $90.
D)  $1.E) A) and D)
F) C) and D)

Question 2

Which of the following does not illustrate the asymmetric information problem?

Accepted Answer

A)  Ordinary financial investors do not know the motivations of financial advisers.
B)  Ordinary customers do not know how sanitarily the food is prepared in a restaurant.
C)  Ordinary stock buyers do not know what will happen to the stock's price next week.
D)  Ordinary car buyers do not know the actual quality of the various cars in the dealer's lot.E) A) and B)
F) A) and C)

Question 3

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $2.50, $2.25, $2.00, and $1.75. If the actual price of lemonade is $1.50 per glass, then consumer surplus in this market will be

Accepted Answer

A)  $3.25.
B)  $1.50.
C)  $4.50.
D)  $1.00.
E)  $2.50.F) All of the above
G) B) and C)

Question 4

Where there is asymmetric information between buyers and sellers,

Accepted Answer

A)  product shortages will occur at the equilibrium price.
B)  product surpluses will occur at the equilibrium price.
C)  markets can produce inefficient outcomes.
D)  markets will fail due to the over-allocation of resources.E) A) and D)
F) B) and C)

Question 5

Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes

Accepted Answer

A)  the Coase theorem.
B)  the optimal allocation of a social good.
C)  a positive externality.
D)  a market for externality rights.E) All of the above
F) A) and C)

Question 6

Which of the following would be an example of a moral hazard problem?

Accepted Answer

A)  a person in poor health who purchases life insurance
B)  a person who is taxed on the purchase of a carton of cigarettes
C)  a person who purchases auto insurance and then drives more recklessly
D)  a person who receives a subsidy from the Federal government to insulate a homeE) A) and C)
F) None of the above

Question 7

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.If the government intervenes and corrects the externality in the situation described above, we would expect

Accepted Answer

A)  the output of the paper mills to increase.
B)  the price of paper from the mills to decrease.
C)  production of the hydroelectric power plants to decrease.
D)  production in the paper mills to decrease.E) A) and D)
F) None of the above

Question 8

If a good that generates positive externalities was produced and priced to take into account these spillover benefits, then its

Accepted Answer

A)  price and output would increase.
B)  output would increase, but price would remain constant.
C)  price would increase and output would decrease.
D)  price would increase, but output would remain constant.E) A) and D)
F) A) and B)

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

Upon buying a car with airbags, Indy begins to drive recklessly. This is an example of the

Accepted Answer

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

Question 11

Refer to the diagram. From society's perspective, if MB₁ and MC₂ are relevant,

Accepted Answer

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 D)
F) B) and C)

Question 12

External benefits in consumption refer to benefits accruing to

Accepted Answer

A)  those who are selling the product to the consumers.
B)  those who bought and consumed the product.
C)  those other than the ones who consumed the product.
D)  those who are consuming the product abroad.E) A) and D)
F) A) and B)

Question 13

If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be

Accepted Answer

A)  taxed.
B)  prohibited.
C)  subsidized.
D)  left alone.E) A) and D)
F) A) and C)

Question 14

When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero.

Accepted Answer

A) True 
 B)False

Question 15

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.Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem?

Accepted Answer

A)  levy a Pigovian tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources
B)  levy a Pigovian tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products
C)  levy a Pigovian tax on the producers of electricity and use the tax revenues to clean up the river
D)  levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the riverE) C) and D)
F) None of the above

Question 16

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 losses.E) C) and D)
F) B) and C)

Question 17

Consumer surplus

Accepted Answer

A)  is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
B)  is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.
C)  is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
D)  rises as equilibrium price rises.E) All of the above
F) A) and D)

Question 18

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle

Accepted Answer

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

Question 19

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₂ and S₂. If there are substantial external costs associated with the production of Z, then

Accepted Answer

A)  a price lower than B and an output greater than G would improve resource allocation.
B)  government should levy a per-unit excise tax on Z to shift the demand curve to the right.
C)  government should levy a per-unit excise tax on Z to shift the supply curve toward S₁.
D)  government should subsidize the production of Z to lower equilibrium price and increase equilibrium output.E) B) and C)
F) None of the above

Question 20

Refer to the provided table. The producer surplus is $4 for producer

Accepted Answer

A)  A.
B)  B.
C)  C.
D)  D.E) A) and C)
F) B) and C)

Exam 4: Market Failures Caused by Externalities Asymmetric Information

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

Correct Answer
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Where there is asymmetric information between buyers and sellers,

Correct Answer
verified

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $2.50, $2.25, $2.00, and $1.75. If the actual price of lemonade is $1.50 per glass, then consumer surplus in this market will be

Correct Answer
verified

Upon buying a car with airbags, Indy begins to drive recklessly. This is an example of the

Correct Answer
verified

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₂ and S₂. If there are substantial external costs associated with the production of Z, then

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle

Correct Answer
verified

External benefits in consumption refer to benefits accruing to

Correct Answer
verified

When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero.

Correct Answer
verified

Consumer surplus

Correct Answer
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Which of the following would be an example of a moral hazard problem?

Correct Answer
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Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes

Correct Answer
verified

If a good that generates positive externalities was produced and priced to take into account these spillover benefits, then its

Correct Answer
verified

Which of the following does not illustrate the asymmetric information problem?

Correct Answer
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If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Refer to the diagram. From society's perspective, if MB₁ and MC₂ are relevant,

Correct Answer
verified

Refer to the provided table. The producer surplus is $4 for producer

Correct Answer
verified

Exam 4: Market Failures Caused by Externalities Asymmetric Information

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

Correct AnswerverifiedShow Answer

Where there is asymmetric information between buyers and sellers,

Correct AnswerverifiedShow Answer

Assume that there are four consumers A, B, C, and D, and the prices that each of them is willing to pay for a glass of lemonade is, respectively, $2.50, $2.25, $2.00, and $1.75. If the actual price of lemonade is $1.50 per glass, then consumer surplus in this market will be

Correct AnswerverifiedShow Answer

Upon buying a car with airbags, Indy begins to drive recklessly. This is an example of the

Correct AnswerverifiedShow Answer

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₂ and S₂. If there are substantial external costs associated with the production of Z, then

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle

Correct AnswerverifiedShow Answer

External benefits in consumption refer to benefits accruing to

Correct AnswerverifiedShow Answer

When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero.

Correct AnswerverifiedShow Answer

Consumer surplus

Correct AnswerverifiedShow Answer

Which of the following would be an example of a moral hazard problem?

Correct AnswerverifiedShow Answer

Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes

Correct AnswerverifiedShow Answer

If a good that generates positive externalities was produced and priced to take into account these spillover benefits, then its

Correct AnswerverifiedShow Answer

Which of the following does not illustrate the asymmetric information problem?

Correct AnswerverifiedShow Answer

If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Refer to the diagram. From society's perspective, if MB₁ and MC₂ are relevant,

Correct AnswerverifiedShow Answer

Refer to the provided table. The producer surplus is $4 for producer

Correct AnswerverifiedShow Answer

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