True / False
1. A market economy provides solutions to almost all social ills such as poverty and environmental damage.
a.
True
b.
False
False
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
What Does the Market Do Poorly?
2. Market economies produce only a few relatively minor defects.
a.
True
b.
False
False
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
What Does the Market Do Poorly?
3. A production possibilities frontier indicates the most efficient combinations of goods.
a.
True
b.
False
True
Moderate
DISC: Scarcity, tradeoffs, and o – DISC: Scarcity, tradeoffs, and opportunity cost
United States – BPROG: Analytic
Scarcity, tradeoffs, and opportu – Scarcity, tradeoffs, and opportunity cost
Efficient Resource Allocation: A Review
4. If the market mechanism is efficient, the marginal cost accurately measures the opportunity cost of a good or service.
a.
True
b.
False
True
DISC: Marginal costs & benefits
United States – BPROG: Analytic
5. Efficient resource allocation is defined as MC = AC.
a.
True
b.
False
False
Moderate
6. An efficient allocation of resources requires that a product’s price equal its average cost.
a.
True
b.
False
False
Easy
7. An efficient allocation of resources requires each product’s price to equal its marginal cost.
a.
True
b.
False
True
Easy
8. As long as the market sets prices above marginal costs, production will be efficient.
a.
True
b.
False
False
Moderate
9. If a commodity’s price is above its marginal cost, the market will tend to produce too much of the good.
a.
True
b.
False
False
Moderate
Efficient Resource Allocation: A Review
10. A monopoly price reflects a good’s marginal utility.
a.
True
b.
False
False
Moderate
Monopoly
11. Externalities can be either detrimental or beneficial to others.
a.
True
b.
False
True
Easy
12. Activities that indiscriminately impose costs on others are externalities.
a.
True
b.
False
True
Easy
13. Beneficial externalities would be removed if the recipients of the benefit paid the producer of the externality.
a.
True
b.
False
True
Moderate
14. The pollution emitted by a power plant is an example of a detrimental externality.
a.
True
b.
False
True
Easy
15. An unregulated market economy provides material wealth, but does not generate effective control of environmental
damage.
a.
True
b.
False
True
Easy
16. If polluters are forced to pay for their pollution, they will reduce pollution toward a socially optimal amount.
a.
True
b.
False
True
Moderate
17. Marginal social costs are the sum of marginal private costs and incidental costs.
a.
True
b.
False
18. Society would be better off with more products that create beneficial externalities.
a.
True
b.
False
True
Easy
19. When MSC > MPC there are detrimental externalities.
a.
True
b.
False
True
Moderate
20. Marginal social cost is made up of marginal private cost and incidental cost.
a.
True
b.
False
21. If a firm’s activities generate detrimental externalities, the marginal social cost will be less than the marginal private
cost.
a.
True
b.
False
22. An industry that generates detrimental externalities will have a marginal social cost higher than the marginal private
cost to the industry.
a.
True
b.
False
True
Moderate
23. Private ownership of rivers and lakes will halt all water pollution.
a.
True
b.
False
False
Moderate
24. All externalities are detrimental.
a.
True
b.
False
False
Easy
25. There is no way that externalities can be corrected.
a.
True
b.
False
False
Easy
26. Government can deal with externalities through the use of taxes and subsidies.
a.
True
b.
False
27. Government gives subsidies to encourage production of products with beneficial externalities.
a.
True
b.
False
28. Imposing fines on companies that contribute heavily to air and water pollution is an attempt to bring marginal private
costs in line with marginal social costs.
a.
True
b.
False
29. Education is subsidized because it generates beneficial externalities.
a.
True
b.
False
True
Easy
30. Public goods could effectively be provided by private markets, but we choose to provide them through government.
a.
True
b.
False
False
Easy
31. Private goods are not excludable.
a.
True
b.
False
False
Moderate
32. A private good is characterized by excludability and depletability.
a.
True
b.
False
True
Easy
33. A free rider is one who enjoys the benefits of a public good without paying for it.
a.
True
b.
False
True
Easy
34. The marginal cost of serving an additional user of a public good is zero.
a.
True
b.
False
True
Easy
35. It is possible to charge a price for a pure public good.
a.
True
b.
False
False
Moderate
36. Examples of public goods include national defense, police, and the U.S. Postal Service.
a.
True
b.
False
False
Moderate
37. A public good has the quality of excludability but not the quality of depletability.
a.
True
b.
False
False
Moderate
38. Most Americans would voluntarily support defense without required taxation.
a.
True
b.
False
False
Moderate
39. The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources
among different industries.
a.
True
b.
False
False
Moderate
40. Low interest rates will persuade corporations to invest more right now.
a.
True
b.
False
True
Moderate
41. Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time
periods.
a.
True
b.
False
True
Moderate
42. The opportunity cost of postponing income to some future time depends on the interest rate.
a.
True
b.
False
True
Difficult
43. The interest rate is determined purely by market forces, and not by government involvement.
a.
True
b.
False
False
Moderate
44. Due to Pigou’s “defective telescopic faculty,” a market economy is inefficient in allocating resources between the
present and the future.
a.
True
b.
False
True
Easy
45. Markets can efficiently handle irreversible decisions without involvement of government.
a.
True
b.
False
False
Moderate
46. Many economists argue that there is imperfect information in the market and that this is a failure of the market
mechanism.
a.
True
b.
False
True
Easy
47. If both a buyer and a seller have the same information, they are said to have symmetric information.
a.
True
b.
False
True
Easy
48. Symmetric information generally leads to efficient allocations of resources.
a.
True
b.
False
True
Moderate
49. Asymmetric information generally leads to efficient resource allocation.
a.
True
b.
False
False
Easy
50. Rent seeking is a way of earning profit without adding to the product’s value.
a.
True
b.
False
True
Moderate
51. Rent seeking refers to unproductive activity in the pursuit of profit.
a.
True
b.
False
True
Moderate
52. Monopolists usually earn economic rent.
a.
True
b.
False
True
Easy
Monopoly
53. Moral hazard encourages people to take risks.
a.
True
b.
False
True
Easy
54. Government action can usually perfectly correct the market’s shortcomings.
a.
True
b.
False
False
Easy
55. The cost disease of services explains the problems surrounding the health care crisis.
a.
True
b.
False
True
Difficult
56. An increase in wages in the public sector is always accompanied by an increase in labor productivity.
a.
True
b.
False
False
Moderate
57. As manufacturing becomes more efficient, services can be expected to become more costly.
a.
True
b.
False
True
Moderate
58. An increase in wages in the public sector is caused solely by increased labor productivity in that sector.
a.
True
b.
False
False
Moderate
59. As productivity in the manufacturing sector increases, the service sector must keep pace or it will become more
expensive in the long run.
a.
True
b.
False
True
Moderate
60. The cost of trash removal goes up, in part at least, because labor productivity in auto manufacturing goes up.
a.
True
b.
False
True
Moderate
61. For most industrial nations, health-care costs have increased faster than the rate of inflation.
a.
True
b.
False
True
Easy
62. As wages for manufacturing workers rise, wages for service workers will stay the same.
a.
True
b.
False
False
Easy
63. Productivity growth tends to affect all industries to the same degree.
a.
True
b.
False
False
Easy
64. Productivity in manufacturing sectors has risen faster than in service sectors.
a.
True
b.
False
True
Easy
65. On balance, markets do some things very well, and some things poorly.
a.
True
b.
False
True
Easy
66. Markets will always create more efficient outcomes without government intervention.
a.
True
b.
False
False
Moderate
67. Markets are primarily responsible for the rapid rise in productivity during the twentieth century.
a.
True
b.
False
True
Easy
68. The factor that most often leads to under pricing and overuse of an economic resource is human greed.
a.
True
b.
False
False
Easy
69. In the event of a detrimental externality which affects the public interest, government action is the only solution.
a.
True
b.
False
False
Moderate
DISC: The role of government
United States – BPROG: Analytic
The role of government
Market Failure and Government Failure
70. Because technology has automated so many functions, personal services have become cheaper in order to compete.
a.
True
b.
False
False
Moderate
DISC: Labor markets
United States – BPROG: Analytic
Labor markets
The Cost Disease of Some Vital Services: Invitation to Government Failure
Multiple Choice
71. Which of the following is an imperfection of market economies?
a.
They produce inexpensive services but expensive manufactured goods.
b.
They place undue importance on the needs of future generations.
c.
They cannot provide certain goods such as national defense.
d.
They distribute income too unequally.
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
What Does the Market Do Poorly?
72. Which of the following observations is true?
a.
A market produced with allocative efficiency if a monopoly exists.
b.
A market can provide “public goods.”
c.
A market makes public and personal services inexpensive.
d.
A market distributes income equally.
c
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
What Does the Market Do Poorly?
73. Is increased production of a good beneficial to society?
a.
Yes, because scarcity is such an overriding concern.
b.
Yes, because more is always better.
c.
Maybe, it depends on what is foregone.
d.
No, because increased production does not increase utility.
DISC: Productivity and growth
United States – BPROG: Analytic
Productivity and growth
Efficient Resource Allocation: A Review
74. What rule must be followed to obtain an efficient allocation of resources?
a.
P = AC.
b.
P = MC.
c.
P = AR.
d.
MR = AC.
DISC: Productivity and growth
United States – BPROG: Analytic
Productivity and growth
Efficient Resource Allocation: A Review
75. If the price of a commodity is above marginal cost, then the economy will tend to
a.
overproduce the item.
b.
underproduce the item.
c.
produce the optimal amount of the item.
d.
overproduce and underproduce the item cyclically.
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits