Question 1

Economic efficiency requires that

Accepted Answer

Economic efficiency is achieved when the benefits of an economic activity exceed the costs incurred. Therefore, in order to achieve economic efficiency, only those economic activities that generate more benefits than costs should be undertaken. This ensures that resources are allocated in the most productive manner possible.

Question 2

Markets may have difficulty providing the proper quantity of a public good because

Accepted Answer

Public goods are characterized by non-excludability and non-rivalry, which means that individuals cannot be excluded from consuming the good and one person's consumption does not reduce the amount available to others. This can lead to free riding, where individuals consume the good without paying for it, and private firms may find it difficult to generate revenue to produce an efficient quantity of the good. As a result, markets may not produce the proper quantity of a public good.

Question 3

Because the benefits derived from an activity decline as it is expanded, it is generally

Accepted Answer

B

Question 4

Which of the following correctly describes the external benefit resulting from an individual's purchase of a winter flu shot?

Accepted Answer

The external benefit of an individual purchasing a winter flu shot is that it reduces the likelihood that others will catch the flu. This is because the individual who gets the shot is less likely to spread the virus to others, which can help reduce the overall incidence of the flu in the community.

Question 5

The idea that an action should be undertaken if and only if the benefits exceed the costs is known as the concept of

Accepted Answer

The concept of economic efficiency is based on the idea that an action should only be undertaken if its benefits are greater than its costs. This means that resources are allocated in a way that maximizes their value and usefulness, leading to overall economic growth and prosperity. Public welfare maximization and marginal comparative advantage are related concepts, but they do not capture the fundamental notion of balancing costs and benefits in economic decision-making. Monetary construction of values, on the other hand, is not a well-established concept in economics and is not directly relevant to the idea of weighing costs and benefits.

Question 6

If the construction of a new hospital would create $6 million worth of benefits for citizens and would cost $8 million to construct, then using the criterion of economic efficiency, the hospital

Accepted Answer

The hospital should not be built because the costs outweigh the benefits.

Question 7

Which of the following is most consistent with the idea that if it's worth doing, it's worth doing imperfectly?

Accepted Answer

The idea that if it's worth doing, it's worth doing imperfectly suggests that it's better to do something partially or imperfectly rather than not doing it at all. Cleaning only the most visible areas of a house is an example of doing something partially, but still accomplishing the task to some degree. Choices A and B represent goals that are ideal, but often difficult to achieve completely. Choice D is a value statement that is not directly related to the idea of doing something imperfectly.

Question 8

Which of the following is the best example of a public good?

Accepted Answer

A public good is a good that is non-excludable and non-rivalrous, meaning that once it is provided, everyone can benefit from it and its consumption by one person does not reduce its availability to others. National defense fits this definition as it is provided to everyone in a nation and its provision does not reduce its availability to others. Health care (A) and Walt Disney World (B) are both excludable as individuals must pay to use them. Long-distance telephone service (D) is also excludable and may not benefit everyone equally.

Question 9

Competitive markets generally give consumers and producers correct incentives when

Accepted Answer

Competitive markets operate efficiently when property rights are clearly defined and enforced. This ensures that both consumers and producers have the correct incentives to maximize their welfare within the bounds of the law. Externalities, pure public goods, and information asymmetries can distort market outcomes and result in suboptimal allocations of resources.

Question 10

Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of paper in a competitive market compare with their values under conditions of ideal economic efficiency?

Accepted Answer

When paper pulp mills are allowed to emit harmful pollutants for free, they do not take into account the negative externalities they are causing. As a result, their production costs are lower than they should be, which leads them to produce more than what is economically efficient. This excess production leads to a surplus in the market, which depresses the price of paper. Therefore, the price of paper will be too low, and the output will be too large relative to what is economically efficient.

Question 11

Which of the following is the most fundamental function of government?

Accepted Answer

The most fundamental function of government is to ensure the protection of individuals and their property. This includes providing for national defense, enforcing laws, and maintaining a justice system. Without protection, other functions of government such as regulation and provision of services become irrelevant.

Question 12

Economic efficiency indicates that

Accepted Answer

Economic efficiency suggests that there is a point of diminishing returns in any activity, beyond which the cost of achieving perfection outweighs its benefits. Therefore, it is not always necessary to strive for perfection, and it is often more economically efficient to stop an activity before achieving it.

Question 13

From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market allocation will often lead to

Accepted Answer

When competitive forces in an industry are weak, market allocation will often lead to an output of the product that is less than the amount consistent with ideal economic efficiency. This is because when there is little competition, firms may be able to maintain higher prices and restrict output, resulting in reduced efficiency and welfare losses for consumers.

Question 14

Does economic efficiency indicate that all pollution should be eliminated?

Accepted Answer

Economic efficiency takes account of both the benefits and costs of reducing pollution. At some point, the cost of eliminating additional units of pollution exceeds the benefit gained from reduced pollution, and thus it is not economically efficient to eliminate all pollution. However, this does not mean that pollution should not be regulated or addressed in some way.

Question 15

Which of the following is a source of information that helps consumers acquire information about the quality of a good or service?

Accepted Answer

The answer of Which of the following is a source...

Question 16

When economists say that an activity meets the criterion for economic efficiency, they mean

Accepted Answer

Economic efficiency is achieved when the benefits of an activity or policy exceed the costs. This means that the activity generates a net gain for society and is therefore considered efficient from an economic standpoint.

Question 17

If the construction of a new roadway would create $10 billion worth of benefits for citizens and would cost $8 billion to construct, then using the criterion of economic efficiency, the roadway

Accepted Answer

According to the criterion of economic efficiency, if the benefits of a project outweigh the costs, then it is considered efficient and should be undertaken. In this case, the benefits of the roadway are $10 billion, which is greater than the cost of construction, $8 billion, so it is economically efficient to build the roadway. Therefore, the roadway should be built.

Question 18

When production of a good generates external costs, the

Accepted Answer

The answer of When production of a good generates external...

Question 19

If an economic action generates more costs than benefits, the action

Accepted Answer

Economically speaking, actions that generate more costs than benefits result in what is known as a "negative externality." Such actions should not be undertaken from an efficiency standpoint because the costs outweigh the benefits. This can lead to market failure, where the free market does not allocate resources efficiently. Therefore, the best course of action is to avoid such actions altogether.

Question 20

Which of the following best explains why making automobiles completely safe is not efficient?

Accepted Answer

As the level of safety in cars increase, the cost of making them even safer increases drastically, making it inefficient to strive towards complete safety.

Quiz 5: Difficult Cases for the Market, and the Role of Government