Question 1

If marginal social cost is greater than marginal social benefit, allocative efficiency can be improved by increasing production.

Accepted Answer

Allocative efficiency requires that marginal social cost equals marginal social benefit. If marginal social cost is greater than marginal social benefit, it means that the cost of producing an additional unit of a good or service exceeds the benefits of that unit to society. Increasing production in this scenario would result in a greater divergence between marginal social cost and marginal social benefit, worsening allocative inefficiency. To improve allocative efficiency, production should be decreased until marginal social cost equals marginal social benefit.

Question 2

No external benefits are provided by the public goods.

Accepted Answer

Public goods have external benefits, which means that they benefit people who do not directly consume or pay for them. For example, a public park provides recreational opportunities for everyone, not just those who pay for its maintenance.

Question 3

Output is being produced efficiently if marginal social benefit is equal to marginal social cost.

Accepted Answer

In economics, the optimal level of output is achieved when marginal social benefit (MSB) equals marginal social cost (MSC). This is because at this level of output, the additional benefit to society from producing one more unit is exactly equal to the additional cost to society of producing that unit. Therefore, there is no more net gain to society from producing any additional units beyond this point, and production is being carried out in the most efficient manner possible.

Question 4

The monopolist will set the price at the level where its profits are maximized.

Accepted Answer

A monopolist has the power to set the price of its product as there is no competition. To maximize its profits, the monopolist will set the price where its marginal revenue (the revenue earned by selling an additional unit of the good) equals its marginal cost (the cost of producing an additional unit of the good). This intersection point will be at a higher price than in a competitive market where price is equal to marginal cost. Therefore, the monopolist will charge a higher price and earn higher profits.

Question 5

Government rent controls promote efficiency and equity.

Accepted Answer

Rent controls can actually have negative effects on the efficiency and equity of the housing market. Rent controls may discourage new construction and reduce maintenance and investment in existing units, leading to a shortage of housing in the long run. They may also benefit current tenants but create barriers to entry for new renters, leading to reduced equity for those seeking affordable housing.

Question 6

The total cost of production is measured as the:

Accepted Answer

The total cost of production is represented by the area under the supply curve, as the supply curve reflects the cost of producing each additional unit of a good or service.

Question 7

The cost to producers when they produce an additional unit of a good is measured by:

Accepted Answer

The cost to producers when they produce an additional unit of a good is measured by the height of the supply curve at that quantity, which represents the marginal cost of production.

Question 8

The benefit consumers receive when they consume an additional unit of a good is measured by:

Accepted Answer

The benefit consumers receive when they consume an additional unit of a good is measured by the consumer surplus, which is the difference between the maximum price a consumer is willing to pay and the actual price paid for the good. Consumer surplus is represented by the area above the market price and below the demand curve, hence the height of the demand curve.

Question 9

Pollution is an example of external costs.

Accepted Answer

Pollution is a classic example of an external cost, as the cost of the pollution is not fully borne by the person or company causing it, but rather by society as a whole in the form of health impacts, environmental damage, and other negative consequences.

Question 10

Government subsidized medical care results in inefficiently high levels of demand for medical care.

Accepted Answer

When medical care is subsidized by the government, patients are facing lower costs or co-payments, which can lead to an increase in demand for medical services. If the price of medical care is lower than the market equilibrium, there will be an inefficiently high level of demand for medical care, resulting in longer waiting times, higher costs, and lower quality medical services.

Question 11

The area under the demand curve represents the benefits producers receive when they sell some quantity of a product.

Accepted Answer

The area under the demand curve represents the total revenue received by producers, not the benefits they receive. Benefits would refer to profits, which are calculated by subtracting costs from revenue.

Question 12

Allocative efficiency exists when net benefit is as large as possible.

Accepted Answer

Allocative efficiency occurs when resources are allocated in a way that maximizes overall net benefit. This means that the value of the goods or services produced is equal to the cost of producing them, resulting in the greatest possible satisfaction for consumers and producers.

Question 13

A lighthouse is an example of a public good.

Accepted Answer

A lighthouse is a classic example of a public good because it provides a non-excludable and non-rivalrous benefit to a large number of people. It is non-excludable because it is impossible to prevent ships from seeing the light, and it is non-rivalrous because one ship's use of the light does not reduce the availability of the light for other ships. Therefore, it is difficult for private businesses to provide and charge for the use of a lighthouse, making it a public good that is typically funded and maintained by the government.

Question 14

Minimum wage laws give rise to unemployment.

Accepted Answer

When minimum wage laws are put into place, employers are required to pay their workers a certain amount, regardless of their skill level or the economic conditions of the market. This can lead to higher costs for businesses, which may then respond by reducing their workforce, cutting hours, or outsourcing work to other countries where labor is cheaper. As a result, some workers may lose their jobs or find it harder to find employment, especially if they are low-skilled or have limited work experience. Therefore, minimum wage laws can contribute to unemployment.

Question 15

Marginal social cost

Accepted Answer

Marginal social cost refers to the additional cost imposed on society as a whole, including both private and external costs, from the production or consumption of an additional unit of a good or service.

Question 16

The supply curve represents the marginal cost of producing various quantities of a good or service.

Accepted Answer

The supply curve depicts the relationship between the quantity of a good or service that producers are willing and able to sell and the price of that good or service. Generally, as the price of the good or service increases, producers are willing to supply more of it. This is because they can earn higher profits and cover the higher costs of producing more units. Therefore, the supply curve is typically upward sloping, indicating that the marginal cost of producing each additional unit of output increases as more units are produced.

Question 17

Income taxes result in allocative inefficiency because most people would work the same number of hours per year regardless of their hourly wage.

Accepted Answer

Income taxes may create disincentives to work for some individuals, especially those with lower incomes who would face a higher tax burden as they earn more income. This can lead to a reduction in labor supply and a loss of allocative efficiency as some workers who would have been willing to work at a lower wage are discouraged from doing so. However, it is not true that most people would work the same number of hours per year regardless of their hourly wage. In fact, people often respond to changes in their effective wage (after taxes) by adjusting their labor supply.

Question 18

A competitive industry usually produces the efficient level of output.

Accepted Answer

In a competitive industry, firms are forced to produce at the lowest possible cost in order to remain profitable. This typically results in producing the efficient level of output, where marginal cost equals marginal revenue.

Question 19

In determining the efficient amount of a good or service, it is only required that the benefits provided by a good or service be equal to or greater than the costs of providing it.

Accepted Answer

The efficient amount of a good or service is determined when the marginal benefit of the last unit produced is equal to its marginal cost, not just when total benefits exceed total costs.

Question 20

A monopoly is a market in which only one seller exists.

Accepted Answer

A monopoly is a market structure characterized by a single seller who dominates the entire market and has complete control over the supply and pricing of a particular product or service. Therefore, there is only one seller in a monopoly market.

Quiz 4: Efficiency in Resource Allocation: How Much Do We Have How Much Do We Want