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1. Suppose that for Jim the marginal benefit (MB) of producing is $60 and that the marginal cost (MC) of producing is
$10. Suppose also that his marginal benefit of stealing is $50 and the marginal cost of stealing is $10. Is Jim currently
maximizing utility in terms of producing and stealing? If not, should he produce more and steal less, or produce less and
steal more to move toward utility maximization?
a.
Yes, Jim is maximizing utility.
b.
No, Jim is not maximizing utility. Since the MB/MC ratio for producing is less than the MB/MC ratio for
stealing, Jim should produce more and steal less.
c.
No, Jim is not maximizing utility. Since the MB/MC ratio for producing is greater than the MB/MC ratio for
stealing, Jim should produce more and steal less.
d.
No, Jim is not maximizing utility. Since the MB/MC ratio for producing is greater than the MB/MC ratio for
stealing, Jim should steal more and produce less.
2. Suppose that for Alicia the marginal benefit (MB) of producing is $75 and that the marginal cost (MC) of producing is
$5. Suppose also that her marginal benefit of stealing is $85 and the marginal cost of stealing is $5. Is Alicia currently
maximizing utility in terms of producing and stealing? If not, should she produce more and steal less, or produce less and
steal more to move toward utility maximization?
a.
Yes, Alicia is maximizing utility.
b.
No, Alicia is not maximizing utility. Since the MB/MC ratio for producing is less than the MB/MC ratio for
stealing, Alicia should produce more and steal less.
c.
No, Alicia is not maximizing utility. Since the MB/MC ratio for producing is greater than the MB/MC ratio
for stealing, Alicia should produce more and steal less.
d.
No, Alicia is not maximizing utility. Since the MB/MC ratio for producing is less than the MB/MC ratio for
stealing, Alicia should steal more and produce less.
3. Which of the following statements is true?
a.
Government cannot remove individuals from a prisoner’s dilemma setting and make them better off.
b.
As long as government charges each individual a tax that is more than the gain received by being removed
from a prisoner’s dilemma setting, then government makes that individual better off.
c.
Government can remove individuals from a prisoner’s dilemma setting by changing the payoff matrix.
d.
a and c
e.
all of the above
4. Which of the following statements is false?
a.
In the case of a negative externality, the market equilibrium is inefficient.
b.
In the case of a negative externality, when a tax is set equal to the marginal external costs (MEC) efficiency
can be achieved.
c.
In the case of a negative externality, when a tax is set that is greater than the marginal external costs (MEC)
inefficiency will result.
d.
In the case of a positive externality, when a tax is set equal to the marginal external benefits (MEB) efficiency
can be achieved.
5. In the case of a negative externality, in order to achieve efficiency the government must set the _________________
equal to the marginal ____________________.
a.
tax; external costs
b.
tax; external benefits
c.
subsidy; external costs
d.
subsidy; external benefits
e.
tax; private costs
6. In the case of a positive externality, in order to achieve efficiency the government must set the _________________
equal to the marginal ____________________.
a.
tax; external costs
b.
tax; external benefits
c.
subsidy; external costs
d.
subsidy; external benefits
e.
subsidy; private costs
7. When a negative externality exists, _______________________ and thus _______________ intervention may be
needed to achieve efficiency.
a.
external costs are necessarily greater than private costs; government
b.
social costs equal private costs; no government
c.
social costs are less than private costs; government
d.
social costs are greater than private costs; government
e.
none of the above
8. When a positive externality exists, _______________________ and thus _______________ intervention may be
needed to achieve efficiency.
a.
external costs are necessarily greater than private costs; government
b.
social costs equal private costs; no government
c.
social costs are less than private costs; government
d.
social costs are greater than private costs; government
e.
none of the above
9. A consequence of a negative externality is that social costs __________ private costs, and the efficient level of output
__________.
a.
equal; does not require any type of government intervention
b.
are less than; requires the government to create a subsidy
c.
are greater than; requires the government to impose a tax
d.
are greater than; requires the government to create a subsidy
e.
are less than; requires the government to impose a tax
10. In the case of a negative externality, the government can use a ________________ to turn an inefficient outcome into
an efficient one. In the case of a positive externality, the government can use a ________________ to turn an inefficient
outcome into an efficient one.
a.
tax; subsidy
b.
subsidy; tax
c.
tax; tax
d.
subsidy; subsidy
11. In the case of nonexcludable goods, economists contend that the market ___________ produce these goods because of
the ________________________.
a.
will; free rider problem
b.
will not; law of diminishing marginal utility
c.
will not; law of diminishing marginal returns
d.
will not; free rider problem.
12. When a good is nonexcludable, then individuals
a.
will purchase the good for more than what it cost to produce the good.
b.
can obtain the benefits of the good without paying for it.
c.
have an incentive to become free riders.
d.
will purchase more than the optimum amount.
e.
b and c
13. Most economists believe that the market __________ produce nonexcludable public goods because of the
__________.
a.
will; monetary incentive they have to produce them
b.
will not; externality problem
c.
will not; free rider problem
d.
will; market shortage that often accompanies the production of public goods.
e.
none of the above
14. A negative externality exists and government wants to impose a tax in order to bring about an efficient outcome. To
accomplish its objective, government must set the tax equal to marginal
a.
private cost.
b.
social benefit.
c.
external cost.
d.
social cost.
e.
external benefit.
15. A positive externality exists and government wants to impose a subsidy in order to bring about an efficient outcome.
To accomplish its objective, government must set the subsidy equal to marginal
a.
private cost.
b.
social benefit.
c.
external cost.
d.
social cost.
e.
external benefit.
16. A positive externality exists and government wants to apply a per-unit subsidy in order to bring about an efficient
outcome. Under what condition will the solution (the subsidy) be worse than the problem (the market failure)?
a.
Under the condition that the subsidy is greater than the marginal external benefit (associated with the positive
externality).
b.
Under the condition that the post-subsidy output is not farther away from the efficient level of output than the
pre-subsidy output is from the efficient level of output.
c.
Under the condition that the post-subsidy output is farther away from the efficient level of output than the pre-
subsidy output is from the efficient level of output.
d.
Under the condition that the subsidy is less than the marginal external benefit (associated with the positive
externality).
e.
none of the above
17. An unintended effect of a new tax placed on the producers of good A may include
a.
a higher price paid by the consumers of good A.
b.
less consumers’ surplus for the buyers of good A.
c.
fewer workers employed in the production of good A.
d.
all of the above
18. A tax credit given to first-time home buyers would result in a _____________ shift in the ______________ curve for
housing, which would lead to the unintended result of a(n) _____________ in the price of housing.
a.
leftward; supply; increase
b.
leftward; demand; decrease
c.
rightward; supply; decrease
d.
rightward; demand; increase
e.
none of the above
19. Which of the following statements is false?
a.
Government can remove individuals from a prisoner’s dilemma setting and make them better off.
b.
In a prisoner’s dilemma setting, it is impossible for the government to define and enforce property rights that
the individuals involved in the setting want to have defined and enforced.
c.
As long as government charges each individual in a prisoner’s dilemma setting a tax that is less than the gain
received by being removed from the setting, then government has made the individuals better off.
d.
Depending upon the amount of the tax charged to each individual in a prisoner’s dilemma setting, the
government can make both persons better off, both persons worse off, or one person better off and the other
person worse off.
20. Which of the following statements is false?
a.
One of the intended effects of the health-care reform bills passed in March 2010 was for some people who had
health insurance before the reform to choose to become uninsured after health-care reform.
b.
One of the provisions of the health-care reform bills passed in March 2010 is that individuals will be fined for
not buying insurance.
c.
Among the provisions in the health-care reform bills passed in March 2010 is that insurance companies are
prohibited from turning down a person with a preexisting disease.
d.
One of the objectives of the health-care reform bills passed in March 2010 was to bring more people into the
pool of insured persons so that insurance policies would become cheaper.
21. One of the objectives of the health-care reform bills passed in March 2010 was to bring _____________ people into
the pool of insured persons so that insurance policies would become ________________. However, provisions in the bill
are likely to make the average cost of an insurance policy _____________ than it would have been without reform.
a.
fewer; cheaper; lower
b.
fewer; more expensive; lower
c.
more; cheaper; lower
d.
more; cheaper; higher
e.
none of the above
22. When the government imposes a tariff on imported goods, it _____________ prices for domestic consumers,
________________ consumers’ surplus and _________________ the producers’ surplus for domestic producers.
a.
raises; lowers; raises
b.
lowers; raises; raises
c.
lowers; raises; lowers
d.
raises; lowers; lowers
e.
none of the above
23. Special interest group X receives a 1/150th slice of the economic pie. Its net benefits from an economic growth policy
are $7,000, which are the same as its net benefits from a transfer policy. What is the change in the size of the economic
pie (Real GDP) that is required to bring about this result?
a.
$1,050,000
b.
$46.67
c.
$150,000
d.
$2,500,000
e.
none of the above
24. Which of the following statements is true?
a.
Special interest groups are more likely to push for policies that increase the size of the economic pie than to
increase their slice of the pie.
b.
Special interest groups are likely to push for policies that increase the size of their slice of the economic pie
even if it means that the overall size of the economic pie will shrink.
c.
Special interest groups are more likely to favor policies that increase the size of their slice of the economic pie
than policies that favor economic growth.
d.
a and c
e.
b and c
25. Special interest group Z receives a 1/200th slice of the economic pie. Its net benefit from both an economic growth
policy and a transfer policy is $30,000. How much does the size of the economic pie (Real GDP) need to grow before
group Z is indifferent between the two policies?
a.
$150
b.
$600,000
c.
$600,000,000
d.
$6,000,000
e.
none of the above
26. In the prisoner's dilemma setting for stealing and producing, both participants end up __________, which turns out to
be ________________________ stolen. The government _________ make both participants better off by changing the
payoff matrix.
a.
stealing; better for them than if they had both not; can
b.
stealing; worse for them than if they had both not; can
c.
not stealing; better for them than if they had both; cannot
d.
not stealing; worse for them than if they had both; cannot
27. Which of the following situations is used as a justification for government?
a.
negative externalities
b.
removal from the prisoner’s dilemma
c.
nonexcludable goods
d.
positive externalities
e.
all of the above
28. Which of the following is usually discussed in the case against government?
a.
special interest groups and transfers
b.
the unintended effects of governments actions
c.
removal from the prisoner’s dilemma
d.
a and b
e.
none of the above
29. In the case of a negative externality,
a.
marginal external costs are greater than marginal private costs.
b.
marginal external costs are less than marginal private costs.
c.
marginal external benefits are greater than marginal private benefits.
d.
marginal external benefits are equal to marginal private costs.
e.
none of the above
30. In the prisoner’s dilemma setting for producing and stealing, a tax imposed on participants could end up changing the
payoff matrix so that
a.
one participant is better off, and one participant is worse off.
b.
both participants are worse off.
c.
both participants are better off.
d.
all of the above are possible
31. Special interest group Q receives a 1/10,000th slice of the economic pie. Its net benefit from either an economic
growth policy or a transfer policy is $50,000. In order for group Q to be indifferent between the two policies, the
economic growth policy would have to make the size of the economic pie (Real GDP) grow
by _________________. This type of analysis is used to show that special interest groups tend press government for
______________ instead of ________________.
a.
$50,000,000; economic growth; transfers
b.
$500,000; transfers; economic growth
c.
$500,000,000; transfers; economic growth
d.
$5,000,000; transfers; economic growth
e.
none of the above
32. Which economist said, “This focus on distribution makes the significance of distributional issues (transfer issues) in
political life relatively greater and the significance of widespread common interest in political life relatively smaller.”?
a.
John Maynard Keynes
b.
Milton Friedman
c.
David Friedman
d.
Mancur Olson
e.
David Ricardo
33. A divisive society is a nonexcludable public _____________ because it comes with ____________.
a.
good; utility
b.
bad; disutility
c.
bad; utility
d.
good; disutility
34. In a divisive society the members of groups within the society see themselves as
a.
working in harmony with other groups in the society.
b.
equal to other groups within the society.
c.
pitted against other groups in the society.
d.
a and b
35. Special interest group K receives a 1/100th slice of the economic pie. Its net benefit from either an economic growth
policy or a transfer policy is $200,000. In order for group K to be indifferent between the two policies, the economic
growth policy would have to make the size of the economic pie (Real GDP) grow by _________________. This type of
analysis is used to show that special interest groups tend to press government for ______________ instead of
________________.
a.
$20,000,000; economic growth; transfers
b.
$2,000,000; transfers; economic growth
c.
$20,000,000; transfers; economic growth
d.
$20,000,000; transfers; economic growth
e.
none of the above
Situation 37-2
Dan and Ann live in the same community and both can participate in two activities, producing and stealing.
36. Refer to Situation 37-2. If Dan’s MB/MC ratio for producing is currently greater than his MB/MC ratio for stealing,
then he will
a.
steal more and produce less.
b.
steal less and produce less.
c.
produce more and steal more.
d.
produce more and steal less.
37. Refer to Situation 37-2. Ann spends 8 hours of each day producing and 1 hour of each day stealing. It is probably the
case for her that
a.
at some point the MB/MC ratio for producing fell below the MB/MC ratio for stealing.
b.
her MB/MC ratio for producing was always greater than her MB/MC ratio for stealing.
c.
her MB/MC ratio for producing never changed, no matter how much or how little she produced.
d.
her MB/MC ratio for stealing never changed, no matter how much or how little she stole.
e.
There is not enough information to answer the question.
38. Refer to Situation 37-2. Both Dan and Ann realize that they are better off producing and not stealing from each other
than producing and stealing from each other. They agree not to steal from each other. There is no enforcer of their
agreement to not steal. It is likely that
a.
Dan and Ann are in a prisoner’s dilemma setting.
b.
Dan is in a prisoner’s dilemma setting but Ann is not.
c.
Ann is in a prisoner’s dilemma setting but Dan is not.
d.
neither Dan nor Ann is in a prisoner’s dilemma setting.
Exhibit 37-1
39. Refer to Exhibit 37-1, where the higher the number, the better the position for the person to whom the number is
connected. Jaden and Karen have entered into an agreement and are currently in box 1. There is no enforcer to their
agreement. Jaden and Karen are likely to
a.
remain in box 1.
b.
move to box 2, because this box is better for Jaden.
c.
move to box 3, because this box is better for Karen.
d.
move to box 4.
e.
There is not enough information to answer the question.
40. Refer to Exhibit 37-1, where the higher the number, the better the position for the person to whom the number is
connected. Jaden and Karen are currently in box 4, each receiving 10. they would like to move to box 1, where each
receives 12. Without someone to ________________ their agreement, moving from box 4 is ______________________.
a.
enforce; likely
b.
enforce; unlikely
c.
break; unlikely
d.
break; likely
e.
There is not enough information to answer the question.
41. The essence of a prisoner’s dilemma setting is that if both person A and person B do what is best for each of them,
a.
they end up in a position that is “the best” for each of them.
b.
they end up in a position that is “the worst” for each of them.
c.
one ends up in a position that is “the best” for him and the other ends in a position that is “the worst” for him.
