d.
deadweight loss problem.
79. Which of the following about public goods 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 only the people who pay
for it.
c.
Public goods are free to a society when they are produced by the government.
d.
From an efficiency standpoint, a market will generally supply too much of a public good.
80. From the standpoint of economic efficiency, markets tend to provide
a.
less of a public good than would be efficient.
b.
more of a public good than would be efficient.
c.
exactly the amount of a public good that is efficient.
d.
none of the above.
81. A market is unlikely to provide an efficient quantity of public goods because
a.
only the government has the vast resources necessary to produce public goods.
b.
the nature of public goods makes it difficult for producers to withhold them from
nonpaying consumers.
c.
the technology involved in the production of public goods makes it difficult for private
firms to produce them even though they could be produced efficiently.
d.
private production of public goods generally results in a large amount of profit, which is
difficult for a firm to effectively pay out to shareholders.
82. Which of the following is a valid reason for government provision rather than market provision of
certain economic goods and services?
a.
When the government provides economic goods, they are free; costs are only incurred
when such goods are provided by private firms.
b.
Voters tend to be better informed than market consumers.
c.
Decision makers in the market are motivated by self-interest, whereas, political decision
makers are primarily motivated by 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, while the government can
use taxes to overcome this problem.
83. A car sells at different prices at different dealerships in a local market. If a consumer has imperfect
information about the price of a car at each dealership, he should
a.
always gather all available information about prices.
b.
gather information about prices until the expected marginal benefit of more information
equals the marginal cost of gathering it.
c.
gather information about prices only if it can be gathered without cost.
d.
ignore information about prices because it is irrelevant to making an “optimally imperfect”
decision.
84. Sellers will tend to be most concerned with customer satisfaction when
a.
it is difficult for the customer to evaluate product quality.
b.
they depend on repeat customers for most of their business.
c.
they sell primarily to tourists.
d.
they are a monopoly protected from competition by government licensing.
85. Which of the following statements is true regarding potential information problems faced by
consumers?
a.
Sellers have little incentive to inform customers about their products.
b.
The market provides consumers with a strong incentive to acquire information.
c.
Information problems tend to be most problematic for items consumers purchase
regularly.
d.
In markets, people make all decisions with full information.
86. Which of the following most clearly indicates why the franchiser of a product has a strong incentive to
monitor the quality of the product among all of the franchised sellers?
a.
The franchiser has a monopoly on the sale of products in his industry.
b.
If quality is not maintained, the franchiser will be limited in his ability to sell other
franchises and collect franchise fees.
c.
If quality is not maintained, the government will prohibit future sales of the franchises.
d.
Franchisers do not gain financially by maintaining quality, but they generally maintain
quality anyway because they are consumers as well as producers.
87. When consumers cannot tell the difference at the time of sale between high-quality products and those
with defects, strong sales of the low-quality products will tend to depress price and drive the
high-quality products from the market. Economists call this
a.
the curse of advertising.
b.
the imperfect information problem.
c.
the brand name problem.
d.
an open-access resource.
88. Manny’s Bar-n-Grill is next door to a franchised fast-food restaurant near a busy freeway exit.
Essentially, the menus, food quality, atmosphere, and service are equal at the two restaurants.
Nevertheless, the nationally franchised restaurant can attract more customers, even though its prices
are higher. This situation
a.
indicates that people are irrational because it never makes sense to pay a higher price when
a product is cheaper elsewhere.
b.
is one in which the national franchise provides uninformed consumers with valuable
information that reduces their risk of being unsatisfied with the purchase.
c.
reflects the greater elasticity of supply for food at Manny’s Bar-n-Grill relative to the
nationally franchised restaurant.
d.
is inconsistent with the basic postulates that underlie the economic way of thinking.
89. Market failure will most likely arise from poor information when the product is
a.
a repeat-purchase item.
b.
easily evaluated on inspection.
c.
often purchased from the same seller.
d.
unlikely to be purchased from the same seller in the future.
90. An item purchased often by the same buyer is known as a
a.
frequent transaction good.
b.
repeat-purchase item.
c.
free rider good.
d.
public good.
91. Brand names such as “Coca Cola” or “Nike”
a.
raise the cost of goods because they require advertising to make consumers aware of the
brand name and, therefore, generally increase the price of products to consumers without
producing any benefit to them.
b.
generally convey little information about a product to consumers.
c.
benefit consumers by assuring them of a known quality level when they buy a product that
they have little previous first-hand knowledge about.
d.
provide the most value to consumers for goods that are repeat-purchase items.
92. When market failure is present,
a.
democratic political decision-making can be counted on to improve the efficiency of
resource allocation.
b.
market allocation will achieve idealized economic efficiency.
c.
the conditions implied by idealized efficient allocation of resources will be absent, but it
does not follow that political action will improve the situation.
d.
democratic political decision-making will never be able to improve the efficiency of
resource allocation.
93. A sound legal system that protects individuals and their property,
a.
cannot be expected until markets are already working well.
b.
is vital to the smooth operation of markets.
c.
is normally found in most economies of the world.
d.
is helpful for the rich, but harmful to the economic well-being of others.
94. When there is reason to think that the existing structure of incentives will cause individuals in the
market to act in ways that are inconsistent with ideal economic efficiency, economists say that
a.
market failure is present.
b.
democratic political decision-making will lead to the ideal efficient outcome.
c.
government action, however well intended, cannot improve the situation.
d.
government failure is present.
95. The economic way of thinking indicates that government action will
a.
never improve on the allocation of resources through markets.
b.
always improve on the results of markets if the political process is democratic.
c.
reflect the actions of political decision-makers seeking to advance the public interest,
rather than their own personal interests.
d.
can either improve the well-being of the general public, or harm it, depending on the
circumstances.
96. “Government failure” exists when political decision-makers choose actions that
a.
seek efficient outcomes rather than fair outcomes.
b.
seek fair outcomes rather than efficient outcomes.
c.
conflict with efficient allocation of resources.
d.
conflict with the outcome favored by the majority of voters.
97. “Government failure” is present when
a.
constitutional restrictions block government action that is favored by the majority of
voters.
b.
political decision-makers try to serve the general public rather than their personal interest.
c.
the structure of incentives encourages political decision-makers to undertake actions that
conflict with the efficient allocation of resources.
d.
the political decision-makers are motivated by something other than good intentions; if
they have good intentions, political action will allocate resources efficiently.
Figure 5-1
98. In Figure 5-1, S1 and D illustrate the demand and supply for a product if it were produced in a normal
competitive market. Which of the following would be true if the firms in the industry were instead able
to get government licensing restrictions to limit competition in the market?
a.
The restricted market supply would be S3, resulting in a lower price and a higher than
efficient level of output.
b.
The restricted market supply would be S3, resulting in a higher price and a less than
efficient level of output.
c.
The restricted market supply would be S2, resulting in a lower price and a higher than
efficient level of output.
d.
The restricted market supply would be S2, resulting in a higher price and a less than
efficient level of output.
Use the figure below to answer the following question(s).
Figure 5-2
99. Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market
supply curve, while S2 is the supply curve including the external cost. Which of the following is true?
a.
Relative to economic efficiency, output of the good will be too large and the price too low.
b.
Relative to economic efficiency, output of the good will be too large and the price too
high.
c.
Relative to economic efficiency, output of the good will be too small and the price too
low.
d.
Relative to economic efficiency, output of the good will be too small and the price too
high.
100. Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market
supply curve, while S2 is the supply curve including the external cost. Which of the following is true?
a.
Point a illustrates the competitive private market outcome, while point b illustrates the
outcome consistent with economic efficiency.
b.
Point b illustrates the competitive private market outcome, while point a illustrates the
outcome consistent with economic efficiency.
c.
The competitive private market outcome is consistent with the conditions for economic
efficiency.
d.
The good will tend to be undersupplied relative to the conditions for economic efficiency.
Use the figure below to answer the following question(s).
Figure 5-3
101. Figure 5-3 illustrates the market for a product that generates an external benefit. D1 is the private
market demand curve, while D2 is the demand curve including the external benefit. Which of the
following is true?
a.
Relative to economic efficiency, output of the good will be too large and the price too low.
b.
Relative to economic efficiency, output of the good will be too large and the price too
high.
c.
Relative to economic efficiency, output of the good will be too small and the price too
low.
d.
Relative to economic efficiency, output of the good will be too small and the price too
high.
102. Figure 5-3 illustrates the market for a product that generates an external benefit. D1 is the private
market demand curve, while D2 is the demand curve including the external benefit. Which of the
following is true?
a.
Point a illustrates the competitive private market outcome, while point b illustrates the
outcome consistent with economic efficiency.
b.
Point b illustrates the competitive private market outcome, while point a illustrates the
outcome consistent with economic efficiency.
c.
The competitive private market outcome is consistent with the conditions for economic
efficiency.
d.
The good will tend to be oversupplied relative to the conditions for economic efficiency.
Figure 5-4
103. Refer to Figure 5-4. The figure illustrates an industry that generates
a.
external benefits.
b.
external costs.
c.
no externalities.
d.
economies of scale.
104. Refer to Figure 5-4. The inefficient equilibrium price and quantity are
a.
$1.90 and 38 units, respectively.
b.
$1.80 and 35 units, respectively.
c.
$1.60 and 42 units, respectively.
d.
$1.35 and 58 units, respectively.
105. Refer to Figure 5-4. The efficient price and quantity are
a.
$1.90 and 38 units, respectively.
b.
$1.80 and 35 units, respectively.
c.
$1.60 and 42 units, respectively.
d.
$1.35 and 58 units, respectively.
106. Refer to Figure 5-4. If the government uses a pollution tax, how much of a tax must be imposed on
each unit of production?
a.
$1.90
b.
$1.80
c.
$1.60
d.
$0.30
107. Which of the following best explains why making air travel completely safe is not efficient?
a.
After some level of safety is reached, making airplanes even safer is not worth the
opportunity cost that would be incurred.
b.
Because one can’t put a price on human life, airplane safety generally doesn’t matter
economically.
c.
The benefit from additional airplane safety will generally rise as airplanes are made safer,
more than offsetting the opportunity cost involved.
d.
The question is misleading—making airplanes safer is always efficient.
108. Which of the following is most consistent with the idea that if it’s worth doing, it’s worth doing
imperfectly?
a.
When Mia cleaned her apartment, she didn’t clean under the refrigerator.
b.
Mason is so disorganized that he spends 15 minutes every day trying to find his glasses.
c.
The senator stated, “No price is too high to save a life!”
d.
Ford’s new policy is to make every car completely safe.
109. Which of the following would be a protective function of government?
a.
legal enforcement of contracts and rules against fraud
b.
undertaking income redistribution
c.
providing national parks
d.
providing a stable monetary system
110. As more and more resources are dedicated to an activity
a.
the benefits will increase proportionately.
b.
the benefits will become smaller and smaller while the costs will rise.
c.
the demand for that activity will increase.
d.
the costs will be offset by the benefits received from the activity.
111. The standard economists use to assess whether an activity should be undertaken is
a.
majority vote
b.
the marginal benefit assessment.
c.
the gold standard
d.
economic efficiency.
112. Because the benefits derived from an activity decline as it is expanded, it is generally wise to
a.
undertake all actions that generate benefits.
b.
expend the smallest possible amount of resources on this type of activity.
c.
avoid any activity with this characteristic.
d.
stop the activity before perfection is reached..
113. Which of the following is a true statement regarding why the government produces public goods?
a.
Public goods are valued highly by some but not by the majority.
b.
Because of the electoral system, the public sector tends towards producing those goods
that help politicians get elected.
c.
Some goods should be produced whether they are economically efficient or not.
d.
Because it is difficult to exclude those who do not pay for public goods.
114. Suppose that the producers of copper are permitted to emit harmful pollutants, free of charge, into the
air. How will the price and output of copper products in a competitive market compare with their
values under conditions of ideal economic efficiency?
a.
The price will be too high, and the output will be too large.
b.
The price will be too low, and the output will be too large.
c.
The price will be too low, and the output will be too small.
d.
The price will be too high, and the output will be too small.
115. Which of the following provides an example of an externality?
a.
a paper pulp mill releasing pollution into the atmosphere
b.
persons driving during a busy rush hour
c.
a drunk driver operating a car on a public highway
d.
all of the above
116. Which of the following provides the best example of a public good?
a.
elementary and secondary education
b.
residential trash pickups provided by a local government
c.
an unscrambled television signal
d.
the medical services provided by a local hospital
117. Which of the following is true of public goods?
a.
They can only be supplied by the government.
b.
They will tend to be supplied efficiently by the private sector when markets are
competitive.
c.
It is difficult to establish a one-to–one link between payment and receipt of such goods.
d.
From an efficiency standpoint, private markets will tend to supply an excessively large
amount of public goods.
118. Markets provide the efficient amount of a good or service when
a.
externalities are present.
b.
monopoly exists.
c.
public goods are present.
d.
competition is present and externalities and public goods are absent.
119. The “free rider problem” occurs in connection with
a.
private goods.
b.
both public and private goods.
c.
goods that are not scarce.
d.
public goods.
120. If the construction of a new elementary school would create $5 million worth of benefits for citizens
and cost $7 million to construct, then using the criterion of economic efficiency, the school
a.
should be built.
b.
should not be built.
c.
results in a substantial improvement to the welfare of society.
d.
should be built if it passes by a majority vote.
ESSAY
121. National defense is considered a public good because there appears to be no limits to the
nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any
other goods that so perfectly meet both public goods criteria?
122. After spending $400,000 to build your dream home, you recently discovered that after less than one
year the foundation is cracking. Further investigation reveals that the contractor used substandard
concrete. Is there a role for the public sector in this situation?
123. How does the text define economic efficiency? Is this an absolute or a relative definition? Would
another type of definition be preferable? Why or why not?
124. Sam lives next to The Party Pub and its outdoor “beer garden” that features live music. An economics
major, Sam considers this a positive externality. Dave, another economics student, lives next to The
Party Pub too, but he considers the music a negative externality. Which student, if either, is correct?
Why?
125. Is your economics textbook a public or private good? If you conclude that it is a private good, why do
126. Is education a public good? Focus on whether it meets the two criteria for being a public good.
127. Why is a stable monetary system essential for the smooth operation of a market system? What would
an unstable monetary system be like? Why isn’t a barter economy just as efficient as an economy with
money?
128. A hilly, public golf course is often used by sledders in the winter. One of the sledders was quoted as
saying, “This is public property, so we have just as much a right to be on these hills as anyone else.
Besides, when it snows, golfers can’t use the course anyway. Sledding doesn’t harm anything.” Is he
correct? Why or why not?
129. Anne has just purchased a new house in a lovely neighborhood. Her neighbors are friendly and even
brought her house-warming gifts. Anne, however, has a problem. Her neighbors have cats, and Anne
hates cats. Even though the city has a law requiring all outdoor pets to be on a leash, her neighbors
ignore it, and the cats roam all over Anne’s property. How would an economist describe this situation?
Is there anything Anne can do?
130. Sparkle-Bright toothpaste is a new product that advertises it will give you fresh breath and shiny, white
teeth. You buy a tube for $1.99, and after brushing, you have both bad breath and dull teeth. Is there a
role for the public sector in this situation?
