Question 1

Figure 15-1 
-Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils

Accepted Answer

The answer of Figure 15-1 
-Figure 15-1 portrays conditions in...

Question 2

A local flower grower grows products in a plot of land which is exceptionally colorful, and is admired by many passersby.There is no way to charge for this in the price of the flowers.We can safely conclude that

Accepted Answer

The beauty of the flowers that passersby enjoy for free is an example of a positive externality, where benefits extend beyond the buyer and seller. Since these external benefits are not compensated or charged for, the market may produce fewer flowers than is socially optimal, indicating the florist produces too few flowers.

Question 3

Which of the following statements is correct?

Accepted Answer

Marginal social cost is the sum of both marginal private cost (which is the share of marginal cost caused by an activity that is paid for by the persons who carry out the activity) and incidental cost (which is the share of marginal cost caused by an activity that is borne by persons other than those who carry out the activity). Therefore, option C is the correct statement. Option A and B are partially correct but do not provide the full picture, and option D is incorrect as it suggests that marginal private cost and incidental cost are the same, which is not true.

Question 4

Where a firm generates beneficial externalities, society would be better off if

Accepted Answer

When a firm generates beneficial externalities, society is better off when the firm produces a larger output level. This is because the benefits spill over to society, which increases overall welfare. Therefore, the firm's positive externalities should be encouraged and amplified, and a larger output level would achieve this goal.

Question 5

Figure 15-1 
-Figure 15-1 describes conditions in the monopolized weezil industry.In the absence of government intervention, the monopolist will produce an output equal to

Accepted Answer

The monopolist will produce where marginal revenue (MR) equals marginal cost (MC), which is at point X. At any output level greater than X, MC is greater than MR, leading to a decrease in profit. At any output level less than X, MR is greater than MC, leading to an increase in profit. Therefore, the monopolist will always choose to produce at point X, where it maximizes its profit.

Question 6

Marginal social cost is defined as marginal private cost

Accepted Answer

Marginal social cost includes the private cost incurred by a producer plus any costs that are incurred by society but not accounted for by the producer, which are known as incidental costs.

Question 7

If P = MC for all goods in a free-market economy, then

Accepted Answer

If P = MC for all goods in a free-market economy, then the price of each good reflects the marginal cost of producing it. Therefore, the desire for utility maximization will lead consumers to buy the amount of each good at which their marginal utility (MU) equals the marginal cost (MC) of producing it, since this is the point at which they will maximize their satisfaction (utility) given the price they are willing to pay. In other words, consumers will buy the quantity of each good at which they receive the most marginal benefit per dollar spent, which occurs when MU = MC.

Question 8

Figure 15-2 
-The firm illustrated in Figure 15-2 is producing

Accepted Answer

The firm is producing more than it would if the external costs were internalized, as it is producing at a level where the marginal private cost is equal to marginal revenue (MC=MR) but the marginal social cost (MSC) is higher than the MPC. This indicates that the firm is not taking into account the external costs of production, which would reduce the level of output if internalized.

Question 9

Which of the following would be classified as an externality?

Accepted Answer

The answer of Which of the following would be classified...

Question 10

The desirable level of output in a perfectly competitive market if there exists a detrimental externality is

Accepted Answer

In a perfectly competitive market with a detrimental externality, the socially optimal level of output is where the Marginal Social Cost (MSC) equals the Marginal Revenue (MR), which is the same as the price in perfect competition.

Question 11

One of the reasons why firms pollute air and water is that

Accepted Answer

One of the main reasons why firms pollute air and water is that most of the time, these resources are not priced. They are considered free and accessible to everyone, so there is no cost associated with using them. This lack of a price signal means that firms do not internalize the costs of their pollution, such as the negative health impacts on nearby communities, and therefore do not have an incentive to reduce their pollution levels.

Question 12

In a free market where a firm's activity causes detrimental externalities,

Accepted Answer

The answer of In a free market where a firm's...

Question 13

Figure 15-1 
-Figure 15-1 describes conditions in the monopolized weezil industry.If the government replaces the monopolist with perfectly competitive firms and forces these firms to take account of all the costs and benefits they impose on society, the industry will produce an output equal to

Accepted Answer

Under perfect competition, firms will produce where MC=AC=P, which is at point Y in the graph. This results in a higher level of output than under monopoly and a lower price for consumers.

Question 14

Free market economies

Accepted Answer

The answer of Free market economies
...

Question 15

The former communist countries of eastern Europe and the Soviet Union

Accepted Answer

The former communist countries of eastern Europe and the Soviet Union have a dismal environmental record due to their reliance on heavy industry and lack of environmental regulations during the communist era. The collapse of communism also led to economic chaos and further degradation of the environment.

Question 16

The Rand Corporation estimates that the external costs imposed by alcohol consumption (for example, deaths caused by drunk drivers) to be 48 cents per ounce consumed.Taxes on alcohol amount to 23 cents per ounce consumed.This information suggests: (i) alcohol is overconsumed; (ii) alcohol taxes should be raised.Which of these statements is correct?

Accepted Answer

The external costs of alcohol consumption being higher than the taxes suggest that alcohol is being underpriced and overconsumed. Therefore, raising alcohol taxes would help to reduce the negative externalities and curb overconsumption. Thus, both statements i and ii are correct.

Question 17

In the case of a beneficial externality

Accepted Answer

In the case of a beneficial externality, the marginal social benefit exceeds the marginal private benefit, which leads to the socially efficient quantity being greater than the market equilibrium quantity. This means that the free market price is below the socially efficient price, since the demand curve does not reflect the full value of the benefit to society. Therefore, choice D is the correct answer.

Question 18

Market economies have air and water pollution, but nonmarket economies

Accepted Answer

Nonmarket economies, such as those seen in developing countries, often lack regulations and incentives to mitigate pollution, leading to severe environmental degradation. Market economies, on the other hand, often have regulations and economic incentives to reduce pollution, though they still experience environmental issues.

Question 19

When beneficial externalities are present in a market, the actual output will be

Accepted Answer

Beneficial externalities lead to a situation where the marginal social benefit (MSB) is greater than the marginal private benefit (MPB). As a result, the market equilibrium output will be smaller than the socially optimal output. Therefore, option B is the best choice.

Question 20

If a detrimental externality is being produced in the course of producing a good, then

Accepted Answer

If a detrimental externality is being produced, then the social cost of producing the good (MSC) is higher than the private cost of production (MPC), resulting in an inefficiently large output. Thus, the correct choice is D, output is inefficiently large.

Quiz 15: The Shortcomings of Free Markets

Figure 15-1 -Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils