45) Obstacles in achieving efficiency in a market include
A) public goods.
B) the presence of an external cost or benefit.
C) competition.
D) Both answers A and C are correct.
E) Both answers A and B are correct.
46) If the government imposes a tax on a competitive market with no externalities, then
i. resource use is not efficient.
ii. there is a deadweight loss.
iii. consumer surplus is at its maximum.
A) ii only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
47) What is the impact of a government subsidy to producers?
A) Less is produced relative to the efficient level, creating a deadweight loss.
B) More is produced relative to the efficient level, creating a deadweight loss.
C) Producer surplus is increased, which creates a larger consumer surplus.
D) Producers are able to sell the product at a higher price.
E) Consumers must pay a higher price for the good.
48) Subsidies ________ the price paid by the buyer and ________ the price received by the
seller.
A) increase, increase
B) increase, decrease
C) decrease, increase
D) decrease, decrease
E) do not change; increase
49) When there is a cost or benefit that affects someone other than the seller and buyer, then
there is
A) a tax.
B) a subsidy.
C) a quantity regulation.
D) a price regulation.
E) an externality.
50) When the cost of producing a product is paid, at least in part, by someone other than the
producer, the cost is referred to as
A) an external cost.
B) an external profit.
C) an external benefit.
D) an external/internal cost.
E) a public cost.
51) A cost not borne by the producer but borne by other people is known as ________ cost.
A) a marginal
B) an internal
C) an external
D) a nonessential
E) a subsidized
52) Air pollution is an external cost because it
A) is a pollution of the external environment.
B) is a cost not borne by the producer of the good.
C) benefits no one.
D) is not associated with resource use.
E) is created only when production occurs.
53) When a product benefits people other than the buyer of the product, the product is said to
have
A) an external cost.
B) an excludable cost.
C) an external benefit.
D) an excludable benefit.
E) a subsidized benefit.
54) A benefit that accrues to people other than the buyer of a good is known as ________
benefit.
A) an internal
B) an external
C) a marginal
D) a total
E) a subsidized
55) A public good
A) is a good that is usually consumed in public, such as a restaurant meal.
B) is a good people can consume even if they do not pay for it.
C) is a good produced by government.
D) results in an efficient allocation of resources.
E) is a good for which people are willing to pay a very high price.
56) A good or service can be consumed by a person even if he or she didn’t pay for it is called
________ good.
A) a private
B) a public
C) a normal
D) an inferior
E) an external
57) When people cannot be excluded from consuming a good, even if they have not paid for the
good, competitive markets would
A) produce more of the good than society needs.
B) allocate more resources than the efficient amount to the production of the good.
C) produce the good so that people could enjoy a “free ride.”
D) produce less than the efficient quantity.
E) eliminate the deadweight loss.
58) A monopoly is
A) the single buyer of some good or service.
B) a firm that has control of a market because it is the only seller.
C) a firm that creates enormous external costs.
D) a firm that faces intense competition.
E) a cost of producing a good or service.
59) If one producer has control over an entire market and underproduces, the producer will
A) increase producer surplus by lowering pollution costs.
B) increase consumer surplus by lowering producer surplus.
C) increase both consumer and producer surplus.
D) create a deadweight loss.
E) decrease the deadweight loss that would exist if the market were efficient.
60) Deadweight loss is created when a market produces
A) either more or less than the efficient quantity.
B) more than the efficient quantity but not when less than the efficient quantity is produced.
C) less than the efficient quantity but not when more than the efficient quantity is produced.
D) the efficient quantity.
E) None of the above answers is correct because deadweight loss has nothing to do with the
efficient quantity.
61) The figure above shows the market for pants. If the efficient quantity is produced
A) there will be no consumer surplus.
B) the sum of consumer and producer surplus will be maximized.
C) a small deadweight loss will result.
D) the sum of consumer and producer surplus will be minimized.
E) the consumer surplus on all the pants must equal the producer surplus on all the pants.
62) The figure above shows the market for pants. If 6 million pairs of pants are produced the
deadweight loss is
A) zero.
B) the triangle ABE.
C) the triangle BCE.
D) the triangle ACE.
E) the triangle BCE minus the triangle ABE.
63) The figure above shows the market for pants. If the production of the pants causes an
external cost from pollution that is the result of the dye used, then
A) 6 million pairs is the efficient quantity.
B) fewer than 6 million pairs is the efficient quantity.
C) more than 6 million pairs is the efficient quantity.
D) None of the above answers are necessarily correct because more information is needed about
the size of the external cost.
E) None of the above answers are correct because it is impossible to tell whether the external
cost results in underproduction or overproduction.
64) The figure above shows the market for pants. If the government subsidizes the production of
pants so that production expands from 6 million pairs to 7 million pairs,
A) there would be no deadweight loss.
B) the government’s policy would have no effect on the sum of consumer surplus and producer
surplus.
C) a deadweight loss would result.
D) the government’s policy would increase the sum of consumer surplus and producer surplus.
E) production would be even more efficient than if 6 million pairs of pants are produced because
more is always better than less.
65) When a market is efficient the
A) sum of consumer surplus and producer surplus is maximized.
B) deadweight gain is maximized.
C) quantity produced is maximized.
D) marginal benefit of the last unit produced exceeds the marginal cost by as much as possible.
E) total benefit equals the total cost.
66) Which of the following occurs when a market is efficient?
A) Producers earn the highest income possible.
B) Production costs equal total benefit.
C) Consumer surplus equals producer surplus.
D) Scarce resources are used to produce the goods and services that people value most highly.
E) Every consumer has all of the good or service he or she wants.
67) The concept of “the invisible hand” suggests that markets
A) do not produce the efficient quantity.
B) are always fair.
C) produce the efficient quantity.
D) are unfair.
E) allocate resources unfairly and inefficiently.
68) When underproduction occurs,
A) producers gain more surplus at the expense of consumers.
B) marginal cost is greater than marginal benefit.
C) consumer surplus increases to a harmful amount.
D) there is a deadweight loss that is borne by the entire society.
E) the deadweight loss harms only consumers.
69) When production moves from the efficient quantity to a point of overproduction,
A) consumer surplus definitely increases.
B) the sum of producer surplus and consumer surplus increases.
C) there is a deadweight loss.
D) consumers definitely lose and producers definitely gain.
E) consumers definitely gain and producers definitely lose.
70) Which of the following can result in a market producing an inefficient quantity of a good?
i. competition
ii. an external cost or an external benefit
iii. a tax
A) i only
B) iii only
C) ii only
D) ii and iii
E) i and iii
6.5 Are Markets Fair?
1) The “equality of opportunity” idea of fairness claims
A) a society should make the poorest as well off as possible.
B) the results and the rules should both be fair.
C) it’s not fair if the rules aren’t fair.
D) private property can be transferred under government order.
E) only a first-come, first-served system of allocating resources is fair.
2) Assume the Nozick rules are being followed in the economy so that the distribution of income
is fair. What must be true for this to create an efficient allocation of resources?
A) All people are earning equal incomes.
B) There are no public goods, monopolies, high transactions costs, or external costs and benefits.
C) The costs of administering redistribution equals the benefits the poor receive.
D) The government must redistribute income in a fashion that minimizes the “big tradeoff.”
E) The government must allocate resources using a command mechanism.
3) An unequal distribution of income is considered fair according to Robert Nozick if
A) marginal cost equals marginal benefit.
B) the cost of administering a welfare system is minimized.
C) property rights are enforced and voluntary exchange occurs.
D) the economy is producing its maximum total output.
E) resources are allocated using the command method.
4) Which of the following is most closely related to the “fair results” approach to fairness?
A) efficient resource use
B) having an equal income distribution
C) voluntary exchange
D) the command system of allocating resources
E) price hikes in a natural disaster
5) The “big tradeoff” refers to
A) producing capital goods instead of consumable goods.
B) marginal benefit versus marginal cost.
C) efficiency and fairness.
D) taking an economics course instead of some other course.
E) using market prices rather than a command system to allocate resources.
6) The “big tradeoff” considers
A) the benefit of achieving “the greatest happiness for the greatest number.”
B) whether the rules or the results are fair.
C) the cost of using market prices to allocate resources.
D) the cost of making income transfers when comparing efficiency to fairness.
E) the cost of using majority rule to allocate resources.
7) The idea of the “big tradeoff” points out the costs of
A) using a results approach to fairness when the rules approach is correct.
B) transferring income using taxes.
C) price hikes during natural disasters.
D) using a rules approach to fairness when the results approach is correct.
E) None of the above answers is correct.
8) When economists use the term “big tradeoff” when discussing efficiency they are referring to
the tradeoff between
A) external costs and external benefits.
B) marginal cost and marginal benefits.
C) producer surplus and consumer surplus.
D) efficiency and fairness.
E) deadweight loss and producer/consumer surplus.
9) Which of the following is part of the cost of income transfers?
A) Tax-collecting agencies cost money to administer.
B) Taxing incomes encourages people to work harder.
C) Income transfers make the results more unfair.
D) Income transfers increase the size of the economic pie.
E) Income transfers are a similar to allocating resources using a lottery.
10) As pointed out by the “big tradeoff,” government action that redistributes incomes so that
everyone has the same income leads to
A) fairness according to the “fair rules” approach.
B) efficient markets.
C) resources being allocated according to a command system.
D) a smaller total output
E) lower taxes on the rich than on the poor so that the rich do not lose their incentive to work.
11) Redistributing income from the rich to the poor creates inefficiency because of
A) wasteful expenditures by people receiving welfare grants.
B) administrative costs to operate the government redistribution agencies.
C) the incentive to produce more output is decreased.
D) Both answers B and C are correct.
E) Both answers A and C are correct.
12) Why does redistribution, so that the distribution of income is equal, bring about less total
output?
A) Incentives to work are reduced.
B) No one can determine marginal benefit or marginal cost as a result.
C) Those in political power will likely receive a larger income.
D) Because the marginal benefit and marginal cost of work have been equally increased.
E) The premise of the question is incorrect because an equal distribution of income would
increase rather than decrease the total amount produced.
13) In December 2007, Kansas had a severe ice storm that caused electrical blackouts. The
Fictitious Portable Generator firm of Lawrence had several portable generators that could be
used by homeowners to provide electricity. Which of the following would be the fair-rules way
to provide them?
A) The government confiscates the generators owned by Fictitious and distributes them.
B) Fictitious is forced by the state to rent the generators at half the normal rate.
C) The state sets up a lottery to determine who rents the available generators at the normal rate.
D) Fictitious rents generators at the equilibrium market price.
E) Fictitious follows government commands about who gets to use the generators.
14) Which of the following is true for taxes? They are
A) always administered fairly.
B) a necessary part of living in an economy with a fair distribution of income.
C) always administered without creating unfairness or inefficiency.
D) an involuntary transfer of private property.
E) do not create a big tradeoff problem.
15) If the government takes over the distribution of some scarce good in a time of a natural
disaster and provides the good at no charge to users, what must also be done?
A) The government must produce the good itself.
B) Some rationing mechanism must be set up to determine who gets the good.
C) Everyone hurt in the natural disaster must get one of the goods.
D) nothing
E) Because we live in a democracy, the government must use majority rule as the rationing
mechanism.
16) The “fair rules” view of fairness is based on
A) income transfers from the rich to the poor.
B) property rights and voluntary exchange.
C) utilitarianism.
D) the big tradeoff.
E) allocating resources using majority rule.
17) The idea that unequal incomes is unfair generally uses the ________ principle of fairness.
A) big tradeoff
B) involuntary exchange
C) voluntary exchange
D) it’s not fair if the result isn’t fair
E) it’s not fair if the rules aren’t fair
18) Which of the following is an example in which “the big tradeoff” can occur?
A) the government redistributes income from the rich to the poor
B) Ford increases the price of a pickup truck
C) a basketball player signs a $5 million contract
D) a college lowers tuition
E) the price of personal computers falls year after year
96
6.6 Chapter Figures
The figure above shows the PPF, marginal cost curve, and marginal benefit curve for pizza.
1) In the figure above, production efficiency occurs at ________, and allocative efficiency
occurs at ________.
A) all points on the PPF; only one point on the PPF
B) only one point on the PPF; all points on the PPF
C) only one point on the PPF; only one point on the PPF
D) all points on the PPF; all points on the PPF
E) all points on the PPF; all points above the PPF
2) In the figure above, when 2,000 pizzas are produced, the marginal benefit of a pizza ________
its marginal cost, which means ________ pizza is being produced.
A) exceeds its marginal cost; too little
B) exceeds its marginal cost; too much
C) is below its marginal cost; too much
D) is below its marginal cost; too little
E) equals its marginal cost; the efficient quantity of
3) In the figure above, when 6,000 pizzas are produced, the marginal benefit of a pizza ________
its marginal cost, which means ________ pizza is being produced.
A) exceeds its marginal cost; too little
B) exceeds its marginal cost; too much
C) is below its marginal cost; too much
D) is below its marginal cost; too little
E) equals its marginal cost; the efficient quantity of
4) In the figure above, when 4,000 pizzas are produced, the marginal benefit of a pizza ________
its marginal cost, which means ________ pizza is being produced.
A) exceeds its marginal cost; too little
B) exceeds its marginal cost; too much
C) is below its marginal cost; too much
D) is below its marginal cost; too little
E) equals its marginal cost; the efficient quantity of
5) In the figure above, how much is the consumer who buys the 5,000th pizza willing to pay for
that pizza?
A) $15
B) $10
C) $12
D) $22.50
E) $5
6) In the figure above, how much do the consumers pay in total for the quantity of pizza they buy
per day?
A) $100,000
B) $150,000
C) $125,000
D) $50,000
E) None of the above answers is correct.
7) In the figure above, what is the consumer surplus per day?
A) $100,000
B) $50,000
C) $125,000
D) $150,000
E) zero
8) In the figure above, the total benefit from pizza is ________ per day.
A) $100,000
B) $50,000
C) $125,000
D) $150,000
E) None of the above answers is correct.
The figure above shows the supply curve for pizza and the market price of pizza.
9) In the figure above, the minimum price that must be offered for the 5,000th pizza a day to be
produced is
A) $6.
B) $10.
C) $8.
D) $2.
E) $4.
10) In the figure above, the cost of producing 10,000 pizzas a day is
A) $60,000.
B) $100,000.
C) $40,000.
D) $80,000.
E) $50,000.