Deck 14: Government Intervention in the Market

Question 1

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.Which of the following is true?

A)If the price of pecans is $3, the output will be economically efficient but there will be a deadweight loss.
B)If the price of pecans is $9, consumers will purchase more than the economically efficient output.
C)Both 4000 metrics and 12 000 metrics are economically inefficient rates of output.
D)If the price of pecans is $3, producers will sell 12 000 metrics of pecans but this output will be economically inefficient.

Answer 1

Both 4000 metrics and 12 000 metrics are economically inefficient rates of output.

Question 2

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9,

A)economic surplus is maximised.
B)too many consumers want to buy pecans.
C)the quantity supplied is greater than the economically efficient quantity.
D)the quantity demanded is economically efficient, but the quantity supplied is economically inefficient.

Answer 2

the quantity supplied is greater than the economically efficient quantity.

Question 3

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If 8000 metrics of pecans are sold,

A)the deadweight loss is equal to economic surplus.
B)producer surplus equals consumer surplus.
C)the marginal benefit of each of the 8000 metrics of pecans equals $9.
D)marginal benefit is equal to marginal cost.

Answer 3

marginal benefit is equal to marginal cost.

Question 4

If marginal benefit is greater than marginal cost, output is inefficiently high.

Question 5

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $9,

A)the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low.
B)producers should lower the price to $3 in order to sell the quantity demanded of 4000.
C)the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high.
D)the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.

Question 6

How can the market demand for a public good be determined?

A)By adding up the total private benefits and external benefits that each quantity provides the citizens of a country.
B)By adding up how much each citizen expects to consume at each possible price.
C)By adding up how much each consumer is willing to pay for each unit of the public good.
D)By estimating the value of the benefit that each unit provides and multiplying that by the number of consumers.

Question 7

Which of the following displays these two characteristics: non-rivalry and non-excludability in consumption?

A)Public goods
B)Private goods
C)Quasi-public goods
D)Common resources

Question 8

Which of the following displays these two characteristics: rivalry and non-excludability?

A)A public good
B)A private good
C)A quasi-public good
D)A common resource

Question 9

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $3, what changes in the market would result in an economically efficient output?

A)The price would increase, the quantity supplied would decrease, and the quantity demanded would increase.
B)The quantity supplied would increase, the quantity demanded would decrease and the equilibrium price would increase.
C)The price would increase, the demand would decrease and the supply would increase.
D)The price would increase, the quantity demanded would decrease and the quantity supplied would increase.

Question 10

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If 4000 metrics of pecans are sold,

A)the deadweight loss is equal to $12 000.
B)consumer surplus equals zero.
C)the marginal benefit of each of the 4000 metrics of pecans equals $3.
D)marginal benefit is equal to marginal cost.

Question 11

Economic efficiency is a market outcome in which the marginal benefit of consumers is equal to the marginal cost of production, and the sum of consumer surplus and producer surplus is maximised.

Question 12

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $3,

A)economic surplus is maximised.
B)not enough consumers want to buy pecans.
C)the quantity supplied is less than the economically efficient quantity.
D)the quantity supplied is economically efficient, but the quantity demanded is economically inefficient.

Question 13

When is economic efficiency achieved in a competitive market?

A)When economic surplus is equal to consumer surplus.
B)When consumers and producers are satisfied.
C)When the marginal benefit equals the marginal cost from the last unit sold.
D)When producer surplus equals the total amount firms receive from consumers minus the cost of production.

Question 14

If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and consumer surplus plus producer surplus is maximised, then

A)maximum deadweight loss occurs.
B)economic efficiency is achieved.
C)profits are maximised.
D)costs are minimised.

Question 15

In a competitive market equilibrium,

A)total consumer surplus equals total producer surplus.
B)marginal benefit and marginal cost are maximised.
C)consumers and producers benefit equally.
D)the marginal benefit equals the marginal cost of the last unit sold.

Question 16

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.At a price of $3,

A)the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low.
B)producers should raise the price to $9 in order to sell the quantity demanded of 12 000.
C)the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high.
D)the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.

Question 17

The construction of a market demand curve for a private good differs from that for a public good in that

A)there is no difference; in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity of the good.
B)there is no difference; in both cases the demand curve is determined by adding up the quantities demanded by each consumer at each price.
C)the market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price, but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good.
D)the market demand curve for a private good is determined by adding up the price each consumer is willing to pay for each quantity of the good, but the market demand curve for a public good is determined by adding up the quantities demanded by each consumer at each price.

Question 18

Will equilibrium in a market always result in an outcome that is economically efficient? Explain.

Question 19

Figure 14.1
Refer to Figure 14.1.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $9, what changes in the market would result in an economically efficient output?

A)The price would decrease, the quantity supplied would decrease, and the quantity demanded would increase.
B)The quantity supplied would increase, the quantity demanded would decrease and the equilibrium price would decrease.
C)The price would decrease, the demand would increase and the supply would decrease.
D)The price would increase, the quantity demanded would decrease and the quantity supplied would increase.

Question 20

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

A)the sum of consumer surplus and producer surplus is at a maximum.
B)economic surplus is minimised.
C)the sum of the benefits to firms is equal to the sum of the benefits to consumers.
D)the sum of consumer surplus and producer surplus is minimised.

Question 21

What is one difference between the demand for a private good and that for a public good?

A)With a private good, each consumer chooses the quantity she wants to consume but with a public good, each consumer chooses the price she is willing to pay for a fixed quantity.
B)With a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity.
C)With a private good, each consumer receives different amounts of benefit from consuming the product but with a public good, every consumer realises the same amount of benefit from consuming the product.
D)The marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from consuming the last unit of a private good because there are externalities in the consumption of the former.

Question 22

An example, from the list below, of a common resource is

A)elephants in the wild
B)lions in a zoo
C)a university education
D)public transportation

Question 23

Public goods are distinguished by two primary characteristics.What are they?

A)Non-rivalry and non-excludability
B)Government intervention and low prices
C)Market failure and high prices
D)Rivalry and exclusivity

Question 24

What does the supply curve of a public goods show?

A)The total quantities that all producers are willing and able to supply at each price.
B)The maximum amount suppliers require to produce each quantity of the good.
C)The total cost of producing each unit of the good.
D)The marginal cost of producing each unit of the good.

Question 25

State whether each of the following goods and services is non-rival, non-excludable or both:
a.A toll road
b.A public park
c.A lighthouse
d.An art museum
e.A radio broadcast of 'A Prairie Home Companion'

Question 26

Figure 14.2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14.2 shows their willingness to pay for different quantities of street lights, the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14.2.How much is Bree willing to pay to have 4 street lights installed?

A)$1500
B)$1800
C)$2700
D)$7200

Question 27

Why do private producers have no incentive to provide public goods?

A)Because the government subsidy granted is usually insufficient to enable private producers to make a profit.
B)Because production of huge quantities of public goods entails huge fixed costs.
C)Because they cannot avoid the tragedy of the commons.
D)Because once produced, it will not be possible to exclude those who do not pay for the good.

Question 28

Where does the efficient output level of a public good occur?

A)Where greatest number of free riders occurs.
B)Where marginal cost of producing the last unit is equal to the marginal benefit realised by consumers.
C)Where total cost of production is affordable.
D)Where marginal cost of production is at its lowest.

Question 29

Figure 14.2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14.2 shows their willingness to pay for different quantities of street lights, the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14.2.The optimal quantity of street lights to install is

A)3
B)4
C)6
D)9

Question 30

In England during the Middle Ages, each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge.Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat.The reason the grass was depleted was

A)the area of pasture was non-excludable and the consumption of the grass was rival.
B)self-interest motives led livestock owners to raise too many cows and sheep.
C)due to a policy of neglect on the part of the English government.
D)it did not get enough rainfall.

Question 31

Why is it difficult for a private market to provide the economically efficient quantity of a public good?

A)By law, governments cannot use cost-benefit analysis to determine this quantity.
B)Public goods produce positive and negative externalities.
C)Individual preferences are not revealed in the market for the good.
D)It is too expensive to produce the necessary amount of the good.

Question 32

What is an important difference between the demand for a private good and the demand for a public good?

A)Individuals reveal their preferences for a public good, but they do not have to reveal their preferences a private good.
B)The resources used to provide public goods are common resources or government owned; the resources used to produce private goods are all privately owned.
C)Individuals reveal their preferences for a private good, but they do not have to reveal their preferences for a public good.
D)The demand for a private good produces consumption externalities; the demand for a public good produces production externalities.

Question 33

How is economic rent defined?

A)What you pay to rent your apartment or house.
B)The revenue received by a factor of production with an upward sloping supply curve.
C)The price of a factor of production that is fixed in supply.
D)The surplus received by employing a factor of production in its highest valued use.

Question 34

A public good that is a good that is both rival and excludable.

Question 35

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

Question 36

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

A)It conducts public surveys to determine if consumers want the product.
B)It hires economists to estimate the market demand for the product.
C)It takes a vote in Congress.
D)It evaluates the costs and benefits of producing the good.

Question 37

Goods differ on the basis of whether their consumption is rival and excludable.Explain the terms 'rivalry' and 'excludability' as they are used to define goods.List the four categories of goods, and define these categories in terms of rivalry and excludability.

Question 38

Figure 14.2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14.2 shows their willingness to pay for different quantities of street lights, the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14.2.How much is Amit willing to pay to have 4 street lights installed?

A)$3600
B)$2700
C)$1800
D)$900

Question 39

Figure 14.2 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 14.2 shows their willingness to pay for different quantities of street lights, the market demand for street lights and the marginal cost of installing the street lights.
Refer to Figure 14.2.Suppose Amit and Bree know each other's preferences so that it is not possible for one to deceive the other.Which of the following statements best describes the circumstances under which the optimal quantity of street lights could be achieved?

A)The optimal quantity will be installed only if the two parties agree to pay according to their willingness to pay as indicated by their respective demand curves.
B)Because there are only two consumers, it is likely that private bargaining will result in the optimal quantity being installed.
C)The optimal quantity will be installed only if the two parties split the cost of installation equally.
D)The optimal quantity will be installed only if Bree pays for the entire installation cost.

Question 40

'When it comes to public goods, individuals do not reveal their true preferences because it is not in their self-interest to do so.' Evaluate this statement.

Question 41

What do economists call the price of a factor of production that is in fixed supply?

A)Economic rent.
B)Economic profit.
C)A compensating differential.
D)Opportunity cost.

Question 42

When a firm has been granted a trademark, which grants legal protection against other firms using the name of the product that has been granted the trademark, the firm

A)still faces the possibility that the name will become widely used and no longer associated with a specific company.
B)does not have to worry about legally enforcing the trademark; this is the responsibility of the legal system.
C)still must apply for a copyright and a patent to ensure that no other firm will use the product's name.
D)must spend an annual amount on advertising the product each year; the amount it must spend is negotiated by the firm and the government agency that grants the trademark.

Question 43

Which of the following can a firm use to defend a successful product's brand name?

A)The firm can obtain a patent on the brand name.
B)The firm can apply for a trademark to ban other firms from using the product's name.
C)The firm can increase the amount it spends on advertising for the product.
D)The firm can attempt to copyright the brand name.

Question 44

Rent-seeking behaviour, unlike profit maximising behaviour in competitive markets, wastes society's scarce resources.

Question 45

What is one result of the public choice model that is believed by most economists?

A)When market failure occurs, government intervention will always lead to a more efficient outcome.
B)Government intervention will always result in a reduction in economic efficiency in regulated markets.
C)Policymakers may have incentives to intervene in the economy in ways that do not promote economic efficiency.
D)The voting paradox will prevent voters from selecting the best person for public office.

Question 46

Economic rent refers to the price of a factor of production which is fixed in supply.

Question 47

Which of the following is not an example of rent-seeking behaviour?

A)Competition for subsidies
B)Lobbying the government to impose tariffs on certain imported products
C)Competition for the exclusive right to import a product
D)Engaging in aggressive advertising that slams a competitor's product

Question 48

A patent or copyright is a barrier to entry based on

A)ownership of a key necessary raw material.
B)large economies of scale as output increases.
C)government action to protect a producer.
D)widespread network externalities.

Question 49

Logrolling refers to attempts by individuals to use government action to make themselves better off at the expense of others.

Question 50

What is a trademark?

A)A legal instrument which grants a firm the right to differentiate its product.
B)A legal right to position a firm's product in high-traffic public areas such as airports and post offices.
C)A patent on a firm's product.
D)A distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.

Question 51

Governments grant patents to encourage

A)research and development on new products.
B)competition.
C)low prices.
D)firms to form public enterprises.

Question 52

Why do governments grant patents?

A)To compensate firms for research and development costs.
B)To encourage competition.
C)To encourage low prices.
D)To encourage firms to reveal secret production techniques.

Question 53

Some individuals seek to use government action to make themselves better off at the expense of others.The actions of these individuals

A)are examples of fraud; but these individuals usually avoid prosecution because of logrolling and rational ignorance.
B)are examples of rent seeking.
C)offer proof that Adam Smith's 'invisible hand' is not valid.
D)are evidence of the voting paradox.

Question 54

Economists often analyse the interaction of individuals and firms in markets.Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others, a process that is referred to as

A)rent seeking.
B)logrolling.
C)government failure.
D)the public choice initiative.

Question 55

________ describes the actions a firm takes to maintain the differentiation of its product over time.

A)Product differentiation
B)Brand management
C)Aggressive marketing
D)Advertising

Question 56

A disadvantage of trademarking a firm's product is

A)a trademark differentiates a firm's product.
B)a trademark conveys information about the product to the public.
C)a trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name.
D)a trademark does not affect demand for the firm's product.

Question 57

What is the relationship between market failure and government failure?

Question 58

Which of the following is true of trademarks?

A)A successful trademark is one that becomes a generic name for a product, for example, 'Xerox' has become a generic term for making photocopies.
B)A successful trademark is one that allows consumers to immediately identify the source or producer of the product.
C)If a firm is granted a trademark, then no other firms can legally produce similar products for a given period of time.
D)If a firm is granted a trademark, then no other firms can legally sell in the same geographic area for a given period of time.

Question 59

What is rent seeking and how is it related to regulatory capture?

Question 60

Which of the following statements about rent seeking is false?

A)Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for.
B)A person is engaging in rent-seeking behaviour when he uses the political process to acquire ownership of a resource that belongs to the public.
C)Because rent seeking redistributes society's resources, anyone engaging in such behaviour is violating the law.
D)If a firm can benefit from government intervention in the economy, it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market.

Question 61

Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?

A)The company that issues the health insurance policy
B)The individual who is applying for the health insurance policy
C)The employer of the individual who is trying to purchase the health insurance policy
D)All parties in the health insurance market have access to the same level of information.

Question 62

Consider a used car market in which half the cars are good and half are bad (lemons).Suppose the average price of a good car is $9000 and the average price of a lemon is $3000.If rational buyers are willing to pay $6000 for a used car, then sellers will agree to sell mostly the lemons at this price.What is the term used to describe this situation?

A)Moral hazard
B)Adverse selection
C)An efficient market
D)Economic irrationality

Question 63

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

Question 64

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

A)most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs.
B)prices remain high without patent protection because of a lack of competition.Firms that are not granted patents cannot compete with firms that are granted patents.
C)other firms are free to produce chemically identical drugs.Competition reduces the profits that had been earned by the firms that received patents.
D)firms will find ways to obtain additional patent protection-often by making cosmetic changes in drugs that were patented-so that they can continue charging high prices.

Question 65

For which of the following firms is patent protection of vital importance?

A)Furniture producers
B)Software firms
C)Pharmaceutical firms
D)Auto makers

Question 66

A successful trademark is one that becomes a generic name for a product, for example, 'Kleenex' has become a generic term for tissues.

Question 67

One reason patent protection is vitally important to pharmaceutical firms is

A)successful new drugs are not profitable.If firms are not granted patents, many would go out of business and health care would be severely diminished.
B)the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly.Patents enable firms to recover costs incurred during this process.
C)that taxes on profits from drugs are very high; profits from patent protection enable firms to pay these taxes.
D)the high salaries pharmaceutical firms pay to scientists and doctors make their labour costs higher than for any other business.Profits from patents are needed to pay these labour costs.

Question 68

Many biologic drug manufacturers are pushing for patent protection to be extended to 12 years before generics are allowed to be introduced to the market.This reflects which of the following barriers to entry?

A)Control of a key resource
B)Network externalities
C)Entry blocked by government action
D)Economies of scale creating a natural monopoly

Question 69

Why are many companies concerned about brand management?

Question 70

What does a government do when it wants to give an exclusive right to one firm to produce a product?

A)It imposes a tariff on imports of the product.
B)It imposes a quota on imports of the product.
C)It grants a patent or copyright to an individual or firm.
D)It uses antitrust laws to keep other firms from entering the market.

Question 71

In the highly competitive fast-food restaurant market, brand name restaurants have a strong profit incentive to maintain high sanitary conditions and avoid any negative consequences.

Question 72

Ordinarily, governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?

A)Patents encourage firms to spend money on research necessary to create new products.
B)Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons.
C)Patents are an important source of government revenue.
D)Patents are justified because they are an important means for creating network externalities.

Question 73

Advertising is the action of a firm that is intended to maintain the differentiation of its product over time.

Question 74

What does a patent do?

A)It grants the creator of a book, film, or piece of music the exclusive right to use the creation for 20 years.
B)It grants the creator of a book, film, or piece of music the exclusive right to use the creation during the creator's lifetime.
C)It gives a firm the exclusive right to a new product for 20 years from the date the product is invented.
D)It gives the firm the exclusive right to a new product during the product inventor's lifetime.

Question 75

What is the term that is used to refer to a situation in which one party to an economic transaction has less information than the other party?

A)Inefficient market hypothesis.
B)Moral hazard.
C)Information disparity.
D)Asymmetric information.

Question 76

A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance.What is this phenomenon called?

A)Moral hazard
B)Economic irrationality
C)Asymmetric information
D)Adverse selection

Question 77

The 10-year protection period from generic competition for drug manufacturers is a form of

A)copyright.
B)trademark.
C)hallmark.
D)patent.

Question 78

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is

A)after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat.
B)firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses.
C)the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls.
D)after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.

Question 79

Consider a used car market in which half the cars are good and half are bad (lemons).A rational buyer in this market should

A)offer to pay a price equal to the most she would pay for a good car.
B)offer to pay a price equal to the most she would pay for a lemon.
C)offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
D)save up and buy a new car.

Question 80

Consider a used car market in which half the cars are good and half are bad (lemons).If buyers are rational, the prices being offered for used cars will result in

A)an equal proportion of a good cars and lemons being sold in an efficient market.
B)a larger proportion of good cars being sold and consequently, consumer surplus is increased.
C)a larger proportion of lemons being sold and consequently, producer surplus is increased.
D)an equal proportion of good cars and lemons being sold in an inefficient market.