Question 1

If a good has the characteristic of nonrivalness, it means that
A) the good is publicly provided
B) it is impossible to prevent others from sharing the benefits of consumption
C) the benefits linked to consumption are indivisible
D) none of the above

Accepted Answer

Nonrivalness means that one person's consumption of a good does not reduce the amount available for others to consume, indicating that the benefits linked to consumption are indivisible.

Question 2

At Q_C, the maximum payment recreational users of the river would be willing to pay the producer for a unit change in output is A) DG B) DEH C) EH D) none of the above

Accepted Answer

At the point where the demand curve intersects the marginal social cost curve (Q_C), the maximum payment recreational users would be willing to pay is the vertical distance between this point and the demand curve (EH).

Question 3

The Coase Theorem assumes
A) transactions are costless
B) damages are accessible and measureable
C) both (a) and (b)
D) none of the above

Accepted Answer

The Coase Theorem assumes that transactions are costless and damages are accessible and measurable. This means that parties can negotiate and reach an efficient outcome without any transaction costs, and the damage caused by production can be quantified and compensated for. Both conditions are present in the graph as it represents the costs and benefits of producing the chemical solvents and the damage caused to the waterbody used for recreation, hence, C is the correct answer.

Question 4

If it is not possible to prevent others from sharing in the benefits of a good's consumption, we say that the good
A) is an economic bad
B) is nonrival in consumption
C) has the characteristic of nonexcludability
D) is a private good

Accepted Answer

Nonexcludability means it is not possible to exclude others from consuming the good. If others can enjoy the benefits of a good's consumption without paying for it, it means the good has the characteristic of nonexcludability. This is a characteristic of public goods.

Question 5

In the presence of a negative externality
A) there is an overallocation of resources to production
B) the competitive equilibrium will not achieve an allocatively efficient solution
C) MSC exceeds MSB at the competitive output level
D) all of the above
E) (a) and (b) only

Accepted Answer

In the presence of a negative externality, there is an overallocation of resources to production because the social cost exceeds the private cost, leading to a competitive equilibrium that does not achieve allocative efficiency. Additionally, the Marginal Social Cost (MSC) exceeds the Marginal Social Benefit (MSB) at the competitive output level, making all of the statements correct.

Question 6

The reduction in damages to the environment from changing output from Q_C to Q_E is A) EH B) DG C) DEHG D) DGH

Accepted Answer

To determine the reduction in environmental damage, we need to look at the vertical distance between the initial quantity supplied (Q_C) and the final quantity supplied (Q_E) at the social cost curve (SC). From the graph, we can see that the vertical distance between Q_C and Q_E at SC is represented by the four segments DE, EH, HG, and GD. Therefore, the reduction in environmental damage is equal to the sum of these segments: DE + EH + HG + GD. Hence, the best choice(s) are C) DEHG as they represent the total reduction in environmental damage.

Question 7

An external effect that generates costs to a third party is called
A) free-ridership
B) a positive externality
C) a negative externality
D) a marginal private cost

Accepted Answer

A negative externality is an external cost imposed on a third party due to the actions of an economic agent. This effect generates costs that are not borne by the agent responsible for the externality, but by others who are not directly involved in the original transaction. Examples of negative externalities include pollution, traffic congestion, and noise pollution.

Question 8

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the firm's M$\pi$ function must be A) M$\pi$ = 20 - 0.8Q B) P_E = $22.50 C) M$\pi$ = 0.3Q D) M$\pi$ = 20 - 0.1Q

Accepted Answer

The answer of Consider the following model for the production...

Question 9

The net gain to society from changing output from Q_C to Q_E is A) DG B) DEH C) DGH D) DEHG

Accepted Answer

The net gain to society from changing output is represented by the area under the demand curve and above the supply curve between the two quantities. DEH represents this area, indicating the additional consumer and producer surplus gained from increasing output.

Question 10

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.
-Based on the model, the MPC function is:
A) MPC = 20 - 0.8Q
B) MPC = 30 - 0.6Q
C) MPC = 10 + 0.8Q
D) MPC = 10 + 0.2Q

Accepted Answer

MPC (Marginal Private Cost) is calculated by adding MSC (Marginal Social Cost) and MEC (Marginal External Cost). In this case, MSC = 10 + 0.5Q and MEC = 0.3Q. Adding these together gives MPC = 10 + 0.5Q + 0.3Q = 10 + 0.8Q. However, none of the options match this calculation directly, indicating a possible misunderstanding in the question's interpretation. The correct approach to find MPC should only involve MSC, as MPC typically does not include MEC directly. Therefore, the closest option based on the provided formulas is D) MPC = 10 + 0.2Q, which seems to be a misinterpretation of the given data.

Question 11

The original 'long box' packaging of CD's is an example of
A) a positive production externality
B) a negative production externality
C) an envirotech industry
D) a negative consumption externality

Accepted Answer

The answer of The original 'long box' packaging of CD's...

Question 12

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -According to these relationships, the efficient output level arises where A) Q_E = 25 B) Q_E = 40 C) Q_E = 20 D) none of the above

Accepted Answer

The efficient output level arises where MSC = MSB. Setting the two equations equal to each other and solving for Q, we get:10 + 0.5Q = 30 - 0.3Q0.8Q = 20Q_E = 25

Question 13

Theoretically, the market demand for a public good is found by
A) vertically adding the MEC and MPC functions
B) overcoming free-ridership and vertically summing the price responses for each quantity
C) adding horizontally the marginal benefits received by each consumer at every price level
D) summing the quantities each person is willing and able to buy at each and every price

Accepted Answer

The market demand for a public good is found by vertically summing the price responses for each quantity, after overcoming free-ridership. This is because in the case of public goods, the consumption by one individual does not reduce its availability for others, and hence, there is a problem of free-ridership. Therefore, the demand for a public good is obtained by aggregating the willingness to pay of all individuals at different price levels to determine the overall demand for the good.

Question 14

According to the Coase Theorem
A) efficiency can result only if producers hold the property rights
B) an efficient outcome is possible as long as property rights are assigned
C) efficiency is not possible in the presence of an environmental externality
D) none of the above

Accepted Answer

The Coase Theorem suggests that an efficient outcome can be reached as long as property rights are assigned and transaction costs are low. In this case, the graph shows that as the cost of pollution increases, the market quantity of solvents decreases. This suggests that the market can reach an efficient outcome as long as property rights are assigned and the cost of pollution is accurately reflected in the market price of the solvents.

Question 15

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -According to these relationships, the competitive output level arises where A) Q_C = 25 B) Q_C = 20 C) Q_C = 40 D) none of the above

Accepted Answer

The competitive output level occurs where MSC = MEC, and since MSC = 10 + 0.5Q and MEC = 0.3Q, we have: 10 + 0.5Q = 0.3Q 0.2Q = 10 Q = 50 Substituting Q = 50 into MSB = MEB gives: 30 - 0.3(50) = 15 Thus, the competitive output level is Q = 50, which is achieved when Q_C = 40 (20 + 15 + 5). Therefore, the answer is C.

Question 16

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the price at the efficient equilibrium is A) P_E = $18 B) P_E = $22.50 C) P_E = $20 D) P_E = $40

Accepted Answer

The efficient equilibrium is found where MSC (Marginal Social Cost) equals MSB (Marginal Social Benefit). MSC = 10 + 0.5Q and MSB = 30 - 0.3Q. Setting MSC equal to MSB gives 10 + 0.5Q = 30 - 0.3Q, solving for Q gives Q = 25. Substituting Q = 25 into MSC or MSB to find the price gives P = 10 + 0.5(25) = $22.50.

Question 17

The loss of profit to the chemical solvent manufacturer from changing its output from Q_C to Q_E is A) DGH B) DEH C) DEHG D) EH

Accepted Answer

The loss of profit is represented by the area of the triangle DEH.

Question 18

A public good
A) possesses the characteristic of nonrivalry in consumption
B) is one whose benefits cannot be shared
C) is provided by the public sector
D) has nonexcludable benefits
E) both (a) and (d)

Accepted Answer

A public good is both nonrivalrous in consumption (meaning that one person's consumption of it does not prevent another person from consuming it) and nonexcludable (meaning that it is impossible or extremely difficult to prevent people from enjoying its benefits). It isn't necessarily provided by the public sector, and its benefits can be shared.

Question 19

The firm's marginal profit (M?) at the efficient equilibrium is
A) EH
B) HL
C) GK
D) DG

Accepted Answer

The answer of The firm's marginal profit (M?) at the...

Question 20

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the competitive price level is A) P_C = $18 B) P_C = $20 C) P_C = $25 D) P_C = $40

Accepted Answer

The competitive price level is determined where MSC = MSB. Setting 10 + 0.5Q = 30 - 0.3Q and solving for Q gives Q = 25. Substituting Q = 25 into either MSC or MSB gives P_C = $18.

Quiz 3: Modeling Market Failure

If a good has the characteristic of nonrivalness, it means that

At Q_C, the maximum payment recreational users of the river would be willing to pay the producer for a unit change in output is

The Coase Theorem assumes

If it is not possible to prevent others from sharing in the benefits of a good's consumption, we say that the good

In the presence of a negative externality

The reduction in damages to the environment from changing output from Q_C to Q_E is

An external effect that generates costs to a third party is called

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the firm's M $\pi$ function must be

The net gain to society from changing output from Q_C to Q_E is

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the MPC function is:

The original 'long box' packaging of CD's is an example of

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -According to these relationships, the efficient output level arises where

Theoretically, the market demand for a public good is found by

According to the Coase Theorem

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -According to these relationships, the competitive output level arises where

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the price at the efficient equilibrium is

The loss of profit to the chemical solvent manufacturer from changing its output from Q_C to Q_E is

A public good

The firm's marginal profit (M?) at the efficient equilibrium is

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions. -Based on the model, the competitive price level is