a.
valuable socially.
b.
not depletable and not excludable.
c.
subject to the “free rider” problem.
d.
All of the above are correct.
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
Provision of Public Goods
138. National defense and coastal lighthouses are examples of
a.
public goods.
b.
private goods.
c.
high marginal cost goods.
d.
depletable goods.
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
139. Without government intervention, public goods would
a.
be much less expensive.
b.
not be provided.
c.
be produced in much larger quantity.
d.
be priced within the income ability of all individuals to purchase them.
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
140. The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer. Many
who attend make donations for symphony expenses, but the donation is not required. Some who attend make no
contributions. Economists would
a.
classify the noncontributors as detrimental externalities.
b.
call the concerts excludable events.
c.
call the noncontributors free riders.
d.
call the concerts depletable goods.
c
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Provision of Public Goods
141. Which of the following is not a public good?
a.
b.
c.
d.
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Provision of Public Goods
142. Which of the following is not true for a public good?
a.
Marginal cost of serving public good to one more person is zero.
b.
Free rider problem arises in case of public goods.
c.
Exclusion is not possible in most of the public goods.
d.
Public goods include only material commodities.
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Provision of Public Goods
143. A commodity is ____ if it is used up when someone consumes it.
a.
marginal
b.
scalable
c.
depletable
d.
replaceable
c
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
Provision of Public Goods
144. Private goods are characterized by two important attributes. What are they?
a.
marginality and depletability
b.
scalability and desirability
c.
repeatability and reliability
d.
depletability and excludability
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Provision of Public Goods
145. If interest rates fall, the opportunity cost of spending money today rather than tomorrow
a.
rises.
b.
falls.
c.
rises only if the prices of goods today rise.
d.
falls only if the prices of goods today fall.
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
Allocation of Resources Between Present and Future
146. If the interest rate rises, a profit-maximizing firm will tend to
a.
invest in more projects (such as new plants) with payoffs in the future.
b.
invest in fewer projects with payoffs in the future.
c.
increase both current output and future output.
d.
reduce both current output and future output.
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
Allocation of Resources Between Present and Future
147. If the interest rate on saving is 5 percent per period, then the true opportunity cost of being paid $100 next period
instead of this period is
a.
$5.
b.
$105.
c.
less than $5 if people suffer from a “defective telescopic faculty.”
d.
more than $5 if people suffer from a “defective telescopic faculty.”
a
Easy
DISC: Scarcity, tradeoffs, and o – DISC: Scarcity, tradeoffs, and opportunity cost
United States – BPROG: Analytic
Scarcity, tradeoffs, and opportu – Scarcity, tradeoffs, and opportunity cost
Allocation of Resources Between Present and Future
BLOOMS: Application
148. Critics argue that society is depleting its energy resources far too quickly. The most likely explanation for this
behavior is that
a.
firms try to avoid making irreversible decisions about resource depletion.
b.
investors expect interest rates to fall continuously in the future.
c.
individuals tend to value their own well-being more highly than the well-being of future generations.
d.
people do not have what Pigou called a “defective telescopic faculty.”
c
Moderate
DISC: Productivity and growth
United States – BPROG: Reflective Thinking – BPROG: Analysis
Productivity and growth
Allocation of Resources Between Present and Future
149. An increase in interest rates will generally lead to a(n) ____ in present investment and a(n) ____ in future income
and production.
a.
decrease, decrease
b.
decrease, increase
c.
increase, decrease
d.
increase, increase
a
Difficult
DISC: Productivity and growth
Productivity and growth
Allocation of Resources Between Present and Future
150. What is the meaning of “a defective telescopic faculty,” as described by A.C. Pigou?
a.
Persons are unable to plan rationally for consumption.
b.
Persons zero in on something and cannot consider alternatives.
c.
Persons seek long-term goals and ignore present problems.
d.
Persons are unable to give adequate weight to the future.
DISC: Productivity and growth
United States – BPROG: Analytic
Productivity and growth
Allocation of Resources Between Present and Future
151. Which of the following is not a problem for the price system allocating resources among different time periods?
a.
Interest rates are used for a variety of purposes other than influencing investment.
b.
The market devotes too much to immediate consumption.
c.
Our market system leads to lesser real incomes for later generations.
d.
Our market system despoils irreplaceable natural resources.
DISC: Measuring the Economy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Measuring the Economy
Allocation of Resources Between Present and Future
152. A free market may produce a misallocation of resources over time because
a.
the Fed manipulates interest rates.
b.
people have a “defective telescopic faculty.”
c.
private risk usually exceeds social risk.
d.
All of the above are correct.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Allocation of Resources Between Present and Future
153. The lure of ____ directs resources to optimally efficient activities and time periods.
a.
future consumption
b.
present consumption
c.
market share growth
d.
profits
Difficult
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Allocation of Resources Between Present and Future
154. If long-term investments are increasing,
a.
current consumption must be increasing.
b.
interest rates must be relatively low.
c.
interest rates must be relatively high.
d.
the people must be experiencing a “defective telescopic faculty.”
Moderate
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Allocation of Resources Between Present and Future
155. In the allocation of resources between present and future
a.
the market works imperfectly.
b.
the market works perfectly.
c.
centrally planned economies are more efficient than market economies.
d.
the invisible hand guarantees efficiency in market economies.
a
Moderate
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Allocation of Resources Between Present and Future
156. High interest rates make a firm’s long-term investment in new capital
a.
riskless.
b.
less attractive.
c.
more attractive.
d.
no more attractive than short-term investment.
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Allocation of Resources Between Present and Future
157. Part of the reason why barely used cars sell for much less than new cars is that
a.
buyers and sellers have symmetric information about cars and both have less information about used cars than
about new cars.
b.
buyers and sellers have symmetric information about cars and both have more information about used cars
than about new cars.
c.
buyers have more information about used cars than sellers do.
d.
sellers have more information about used cars than buyers do.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
158. Asymmetric information will lead to
a.
higher prices for some used cars, lower prices for others.
b.
“lemon” prices for good used cars.
c.
new cars selling for prices lower than good used cars.
d.
old cars selling for more than new cars.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
159. A car sells at different prices at different dealerships in an oligopolistic 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 utility 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.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Utility and consumer choice
Some Other Sources of Market Failure
160. How does imperfect information affect market decisions?
a.
It doesn’t, because information is generally excellent.
b.
It leads to inefficient outcomes in which expected benefits and actual benefits diverge.
c.
It leads to wasteful attempts to improve information.
d.
It leads to exploitation of sellers by buyers.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
161. Anthony Downs, in The Economic Theory of Democracy, argues that voters choose to remain “rationally ignorant”
when they vote in elections, knowing relatively little about the candidates or the issues. What economic principle would
you invoke to explain this behavior?
a.
public good theory
b.
moral hazard
c.
the cost of information
d.
risk aversion
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Some Other Sources of Market Failure
162. When consumers or businessmen stop collecting information to make decisions at the point where marginal cost of
data collection equals the marginal utility of the data, economists would call the decisions based on existing data
a.
perfect decisions.
b.
optimally imperfect decisions.
c.
joint decisions.
d.
rent seeking.
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Some Other Sources of Market Failure
163. An “optimally imperfect” decision is one that
a.
is vaguely right instead of precisely wrong.
b.
recognizes that the decision could always be better if given more time.
c.
recognizes that the cost of additional information probably exceeds the potential gain from making a better
decision.
d.
recognizes that any decision is imperfect because humans have limited intellectual capacities.
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
Some Other Sources of Market Failure
164. Often when consumers enter the used car market to make a purchase,
a.
they know little about what they are purchasing.
b.
the motto “let the buyer beware” applies.
c.
the information they gain may not be perfect, but may be what economists call “optimally imperfect.”
d.
All of the above are correct.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
165. Rent-seeking behavior refers to
a.
the offering of goods on a for-rent rather than for-sale basis.
b.
profit maximization by producers.
c.
unproductive activity in the pursuit of economic profit.
d.
illegal manipulation of prices.
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
Some Other Sources of Market Failure
166. The owner of a garage makes large contributions to a politician who is seeking the office of state governor. If his
candidate wins, he will get the contract, which now resides with a competitor, to repair State Police vehicles. This is an
example of
a.
moral hazard.
b.
externality.
c.
rent seeking.
d.
investment.
c
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
167. Rent seeking is the term given
a.
to an attempt by firms to create a profitable monopoly even though resources may be wasted in the process.
b.
to filing a lawsuit, which wastes resources, in the hope of obtaining monetary gain or a strategic market
position.
c.
to attempts by firms to obtain earnings without contributing to production.
d.
All of the above are correct.
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
Some Other Sources of Market Failure
168. A process through which a firm seeks to obtain earnings without contributing to production, thus wasting valuable
resources, is known as
a.
moral hazard.
b.
rent seeking.
c.
detrimental externality.
d.
a defective telescopic faculty.
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
Some Other Sources of Market Failure
169. Which of the following best describes a situation of moral hazard?
a.
Sicker people are more likely to buy health insurance.
b.
Prospective used-car buyers have less information about a particular car than its seller does.
c.
Drivers with collision insurance drive more recklessly.
d.
Drivers with collision insurance wear seatbelts less often.
c
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
170. When a motorist speeds down the road at well above the posted limit, economists believe that the principle of ____
may be directing his actions.
a.
rent seeking
b.
defective telescopic faculty
c.
moral hazard
d.
resource misallocation
c
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
171. Suppose that deposit insurance were reduced to a maximum of $50,000 per account (instead of $250,000). This
would address the specific market imperfection of
a.
externalities.
b.
imperfect information.
c.
rent seeking.
d.
moral hazard.
Difficult
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
172. Which of the following could be written into an insurance contract in order to reduce the problem of moral hazard?
a.
co-payments for repair services
b.
deductibles for repair services
c.
limitations on insurance coverage
d.
All of the above are correct.
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
Some Other Sources of Market Failure
173. Individuals cannot buy unemployment insurance for themselves. The most likely reason for this is
a.
moral hazard.
b.
imperfect information.
c.
a culture of poverty.
d.
the free-rider problem.
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
Some Other Sources of Market Failure
174. Moral hazard is best described as
a.
an action by an individual that endangers others.
b.
an action that puts one’s salvation at risk.
c.
the presence of insurance increasing risk taking behavior.
d.
vigilance by individuals to keep total insurance claims at a minimum to keep rates low.
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
Some Other Sources of Market Failure
175. Unemployment insurance is often criticized because workers can extend the amount of time they are unemployed
and thus increase the cost of the program. This phenomenon is best described as
a.
rent-seeking behavior.
b.
moral hazard.
c.
free riding.
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Reflective Thinking – BPROG: Analysis
Markets, market failure, and ext – Markets, market failure, and externalities
Some Other Sources of Market Failure
176. Moral hazard
a.
makes a free market in insurance hard to operate.
b.
is the tendency of insurance to encourage the source of risk.
c.
tends to make the cost of insurance higher and the market for insurance less efficient.
d.
All of the above are correct.
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
Some Other Sources of Market Failure
177. Market economies produce outcomes that
a.
are virtually ideal in all respects.
b.
are inferior to most other systems.
c.
are, in some respects, far from ideal.
d.
are virtually indistinguishable from command economies.
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
Market Failure and Government Failure
178. The cost disease of personal services stems primarily from the fact that
a.
prices rise too slowly to provide public receipts.
b.
inflation has been with us since the early 1970s.
c.
personal service requires direct contact between producer and consumer.
d.
sellers of personal services have strong unions.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
The Cost Disease of Some Vital Services: Invitation to Government Failure
179. The prices of most services have risen much faster than inflation in recent years because
a.
wages and salaries of service providers have risen much faster than inflation.
b.
wages and salaries of service providers have risen but their productivity has not.
c.
the productivity of service providers has risen dramatically.
d.
the demand for services has risen.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
The Cost Disease of Some Vital Services: Invitation to Government Failure
180. The cost disease of the service sector in recent years is the result of
a.
market failure.
b.
government intervention.
c.
collective bargaining by unions.
d.
uneven productivity growth.
DISC: The role of government
United States – BPROG: Analytic
Productivity and growth
The Cost Disease of Some Vital Services: Invitation to Government Failure
181. The cost disease of personal services causes
a.
the cost of health care to rise faster than the economy’s rate of inflation.
b.
legislators to blame declining standards of quality at public hospitals on greedy doctors or administrators.
c.
legislators to propose price controls on insurance.
d.
All of the above are correct.
DISC: Productivity and growth
United States – BPROG: Reflective Thinking – BPROG: Analysis