Deck 11: Government Intervention in the Market

Question 1

Figure 11.1
Refer to Figure 11.1.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.

Answer 1

A

Question 2

Figure 11.1
Refer to Figure 11.1.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 2

C

Question 3

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

Answer 3

D

Question 4

Figure 11.1
Refer to Figure 11.1.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.

Question 5

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 6

Figure 11.1
Refer to Figure 11.1.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 7

Figure 11.1
Refer to Figure 11.1.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 8

Figure 11.1
Refer to Figure 11.1.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 9

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 10

Figure 11.1
Refer to Figure 11.1.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 11

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 12

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 13

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 14

Figure 11.1
Refer to Figure 11.1.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.

Question 15

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 16

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 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

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 19

Figure 11.1
Refer to Figure 11.1.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 20

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 21

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 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

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 24

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 25

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 26

Will equilibrium in a market always result in an outcome that is economically efficient? Explain.
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Question 27

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'
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Question 28

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

Question 29

Figure 11.2 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 11.2 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 11.2.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 30

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

Question 31

'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.
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Question 32

Figure 11.2 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 11.2 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 11.2.How much is Bree willing to pay to have four street lights installed?

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

Question 33

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 34

Figure 11.2 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 11.2 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 11.2.The optimal quantity of street lights to install is

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

Question 35

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 36

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

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.
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Question 38

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 39

Figure 11.2 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 11.2 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 11.2.How much is Amit willing to pay to have four street lights installed?

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

Question 40

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 41

When does a negative externality exist?

A) When there are quantity controls in a market.
B) When there are price controls in a market.
C) When the marginal social cost of producing a good or service exceeds the private cost.
D) When the marginal private cost of producing a good or service exceeds the social cost.

Question 42

Property rights are

A) the title to ownership of any physical asset.
B) a legal document verifying ownership of intangible assets.
C) the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
D) the right of the government to appropriate private assets for the good of society.

Question 43

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 44

A market failure

A) refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.
B) refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost.
C) refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event.
D) refers to a breakdown in a market economy because of widespread corruption in government.

Question 45

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 46

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 47

A 'social cost' of production is

A) the cost of the natural resources used up in production.
B) the total costs of producing a product, both implicit and explicit costs.
C) the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product.
D) the cost of the environmental damage created by production.

Question 48

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

Question 49

A negative externality is created by

A) cleaning up the sidewalk on your block.
B) graduating from university.
C) repainting the house you live in to improve its appearance.
D) keeping a junked car parked on your front lawn.

Question 50

What is an externality?

A) A benefit realised by the purchaser of a good or service
B) A cost paid for by the producer of a good or service
C) A benefit or cost experienced by someone who is not a producer or consumer of a good or service
D) Anything that is external or not relevant to the production of a good or service

Question 51

What is rent seeking and how is it related to regulatory capture?
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Question 52

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

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

Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

A) The private cost of production
B) The social cost of production
C) The external cost of production
D) The explicit cost of production

Question 55

Which of the following is a source of market failure?

A) Unforeseen circumstances which lead to the bankruptcy of many firms
B) A lack of government intervention in a market
C) Incomplete property rights or inability to enforce property rights
D) An inequitable income distribution

Question 56

What is the relationship between market failure and government failure?
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Question 57

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

Question 58

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 59

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 60

Which of the following is true of private costs?

A) Are borne by consumers of a good while social costs are borne by government
B) Are borne by producers of a good while social costs are borne by government
C) Are borne by producers of a good while social costs are borne by society at large
D) Are borne by producers of a good while social costs are borne by those who cannot afford to purchase the good

Question 61

What does a market demand curve reflect?

A) Private benefits of consuming a product
B) External benefits of consuming a product
C) Social benefits of consuming a product
D) The sum of private and social benefits of consuming a product

Question 62

Figure 11.4 Figure 11.4 shows a market with a negative externality.
Refer to Figure 11.4.The size of marginal external costs can be determined by

A) S₂ + S₁ at each output level.
B) S₂ - S₁ at each output level.
C) the supply curve S₂.
D) the supply curve S₁.

Question 63

Figure 11.5
Refer to Figure 11.5.What is the private profit maximising output level?

A) Q_m
B) Q_n
C) Q_o
D) Q_o - Q_m

Question 64

What does the private market produce when a negative externality exists?

A) Products at a high opportunity cost
B) Less than the economically efficient output level
C) Products at a low opportunity cost
D) More than the economically efficient output level

Question 65

Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle involvement in traffic accidents.In this sense,these mandatory helmet laws are reducing ________ of risky behaviour.

A) positive externalities
B) negative externalities
C) the private benefit
D) the social benefit

Question 66

What does a market supply curve reflect?

A) External costs of producing a good or service
B) External benefits of producing a good or service
C) Social costs of producing a good or service
D) Private costs of producing a good or service

Question 67

What does a positive externality cause?

A) The marginal social benefit to be equal to the marginal private cost of the last unit produced.
B) The marginal social benefit to be less than the marginal private cost of the last unit produced.
C) The marginal social benefit to exceed the marginal private cost of the last unit produced.
D) The marginal private benefit to exceed the marginal social cost of the last unit produced.

Question 68

Figure 11.3 Figure 11.3 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
Refer to Figure 11.3.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₂ represent?

A) The market supply curve reflecting private cost
B) The market supply curve reflecting social cost
C) The market supply curve reflecting external cost
D) The market supply curve reflecting implicit cost

Question 69

Which of the following conditions holds in economically efficient competitive market equilibrium?

A) The deadweight loss is positive but at a minimum
B) Producer and consumer surplus are exactly equal in size
C) There are no positive and no negative external effects from consumption and production
D) The marginal benefit of the last unit produced and consumed is maximised

Question 70

Figure 11.3 Figure 11.3 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
Refer to Figure 11.3.Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality.The economically efficient output is Q₂.In that case,the diagram shows

A) the effect of a positive externality in the production of a good.
B) the effect of a negative externality in the production of a good.
C) the effect of an external cost imposed on a producer.
D) the effect of an external benefit such as a subsidy granted to consumers of a good.

Question 71

Figure 11.4 Figure 11.4 shows a market with a negative externality.
Refer to Figure 11.4.The deadweight loss due to the externality is represented by the area -.

A) abc
B) abf
C) abd
D) ade

Question 72

From the list below,the best example of a positive externality is

A) forbidding the use of cell phones in public.
B) planting trees along the pavement, which adds beauty and creates shade.
C) banning the sale of candy in elementary schools.
D) prohibiting street parking in all residential neighbourhoods.

Question 73

Figure 11.4 Figure 11.4 shows a market with a negative externality.
Refer to Figure 11.4.What is the efficient output level?

A) Q_d
B) Q_b
C) Q_a
D) Q_b - Q_d

Question 74

Figure 11.4 Figure 11.4 shows a market with a negative externality.
Refer to Figure 11.4.What price represents the true marginal cost of the last unit produced?

A) P_a
B) P_b
C) P_c
D) P_f.

Question 75

Figure 11.4 Figure 11.4 shows a market with a negative externality.
Refer to Figure 11.4.What is the private profit-maximising quantity for the firm?

A) Q_a
B) Q_b
C) Q_b - Q_d.
D) Q_d

Question 76

If you burn your trash in the back yard in spite of regulations against it,then you are

A) acting economically irrationally and creating a social cost.
B) avoiding the private costs associated with disposing your trash some other way and creating a social cost.
C) acting rationally and creating a positive externality.
D) saving landfill space and creating a social benefit.

Question 77

Figure 11.5
Refer to Figure 11.5.The size of marginal external benefits can be determined by

A) the demand curve D₂.
B) D₂ + D₁ at each output level.
C) D₂ - D₁ at each output level.
D) the demand curve D₁.

Question 78

Figure 11.5
Refer to Figure 11.5.What is the efficient output level?

A) Q_m
B) Q_n
C) Q_o
D) Q_o - Q_m

Question 79

Figure 11.3 Figure 11.3 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
Refer to Figure 11.3.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does S₁ represent?

A) The market supply curve reflecting external cost
B) The market supply curve reflecting implicit cost
C) The market supply curve reflecting social cost
D) The market supply curve reflecting private cost

Question 80

Figure 11.4 Figure 11.4 shows a market with a negative externality.
Refer to Figure 11.4.What price represents the marginal benefit of the last unit produced?

A) P_a
B) P_b
C) P_c
D) P_f