Question 1

If the Social Marginal Benefit is greater than the Social Marginal Cost:&#10;A) Society's welfare will fall if another unit is produced.&#10;B) Society's welfare will increase if another unit is produced.&#10;C) Society's welfare will stay the same if another unit is produced.&#10;D) Society's welfare is maximized.

Accepted Answer

When the Social Marginal Benefit exceeds the Social Marginal Cost, it indicates that the additional benefits to society from producing one more unit of a good or service are greater than the additional costs. This means that producing another unit will increase overall societal welfare.

Question 2

Community surplus equals:&#10;A) Producer surplus plus marginal utility&#10;B) Consumer surplus plus producer surplus&#10;C) Producer surplus minus consumer surplus&#10;D) Total utility minus marginal utility

Accepted Answer

Community surplus is the sum of consumer surplus and producer surplus. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, while producer surplus is the difference between what producers are willing to accept for a good or service and what they actually receive.

Question 3

If there is a positive consumption externality, in a free market the product will then:&#10;A) Be too expensive.&#10;B) Be over-provided compared to the socially optimal level.&#10;C) Be under-provided compared to the socially optimal level.&#10;D) Not be provided in the free market.

Accepted Answer

When there is a positive consumption externality, the social value of the product is higher than the private value. This means that the market, left to its own devices, will produce less of the product than is socially optimal because it does not account for the external benefits to non-consumers.

Question 4

The free rider problem occurs:&#10;A) With monopolies&#10;B) With competition&#10;C) With public goods&#10;D) With all goods

Accepted Answer

The free rider problem typically occurs with public goods, which are non-excludable and non-rivalrous, meaning people cannot be easily excluded from using them and one person's use does not reduce availability for others. This leads to individuals consuming the good without contributing to its cost.

Question 5

A merit good:&#10;A) Is one that is available to everyone.&#10;B) Cannot be provided at all in the free market.&#10;C) Is illegal.&#10;D) Is one that society believes has more benefits than individuals themselves think it has.

Accepted Answer

Merit goods are considered to have more benefits than individuals might realize on their own, leading society or governments to encourage their consumption or provision. This is because they generate positive externalities that benefit others beyond the individual consumer.

Question 6

A monopoly occurs when a firm dominates a market; this is likely to lead to a higher price and lower quantity than a perfectly competitive market.

Accepted Answer

In a monopoly, since there is only one firm dominating the market without any close substitutes, it has the power to set prices higher than in a competitive market where many firms would compete on price, leading to lower prices and higher quantities for consumers.

Question 7

With a negative production externality the amount produced in the free market is below the socially optimal level.

Accepted Answer

With a negative production externality, the amount produced in the free market is above the socially optimal level, because the external costs to society are not considered in the production decision.

Question 8

A demerit good:&#10;A) Is one that is available to everyone.&#10;B) Cannot be provided at all in the free market.&#10;C) Is illegal.&#10;D) Is one that society believes has more costs than individuals themselves think it has.

Accepted Answer

Demerit goods are considered to have more social costs than the individuals consuming them realize, leading to negative externalities. Society often believes these goods are over-consumed, hence they may be taxed or regulated.

Question 9

An example of a demerit good is:&#10;A) Education&#10;B) Cigarettes&#10;C) Vaccinations&#10;D) Art gallery

Accepted Answer

Cigarettes are considered a demerit good because they have negative externalities; they can harm the smoker's health and also affect others through second-hand smoke.

Question 10

The free market assumes that:&#10;A) Consumers are maximising utility and firms are maximising profitability.&#10;B) Consumers are maximising their profitability and firms are minimising utility.&#10;C) Consumers are minimising their utility and firms are minimising profitability.&#10;D) None of the above.

Accepted Answer

In a free market, the assumption is that consumers aim to maximize their utility, which means they seek to get the most satisfaction from the goods and services they purchase. Similarly, firms are assumed to be maximizing profitability, striving to increase their earnings and financial health. This dynamic drives the supply and demand mechanism that regulates prices and quantities in the market.

Question 11

The extra satisfaction consumers gain from consuming one more unit of a good or service is known as:&#10;A) Marginal cost&#10;B) Marginal benefit&#10;C) Beneficial margin&#10;D) Gain margin

Accepted Answer

The answer of The extra satisfaction consumers gain from consuming...

Question 12

At the socially optimal level of output:&#10;A) Private marginal benefit = social marginal cost&#10;B) Social marginal benefit = social marginal cost&#10;C) Social marginal benefit = private marginal cost&#10;D) None of the above

Accepted Answer

The answer of At the socially optimal level of output:&#10;A)...

Deck 8: The Free Market System