Question 1

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

Accepted Answer

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays. Utility refers to the satisfaction or benefit a consumer receives from consuming a product. Consumer demand refers to the quantity of a product that consumers are willing and able to purchase at various prices. Market failure occurs when the market does not allocate resources efficiently.

Question 2

The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a result of the contract in ways that are costly to the other party.

Accepted Answer

The statement accurately describes the moral hazard problem.

Question 3

Which of the following situations is not an example of market failure?

Accepted Answer

Ben's inability to afford a luxury car is not a market failure. It is simply a matter of personal finances and preferences. The other options involve externalities or the abuse of power in the market, which are examples of market failure.

Question 4

A competitive market produces the economically efficient outcome if the following conditions are met, except

Accepted Answer

Option D is incorrect as it produces the socially inefficient outcome. The correct condition is that the market produces only units for which benefits are at least equal to costs. This condition ensures that there is no deadweight loss, and allocative efficiency is achieved. Options A, B, and C are all correct conditions that need to be met for allocative efficiency.

Question 5

When producers do not produce the efficient amount of a product because they are unable to charge consumers what they need to get in order to produce the efficient amount, then we have a

Accepted Answer

The answer of When producers do not produce the efficient...

Question 6

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Accepted Answer

The adverse selection problem actually refers to the tendency for high-risk individuals (such as those with a history of accidents or traffic violations) to seek out and purchase insurance coverage at a higher rate than lower-risk individuals. This creates an imbalance in the insurance pool and can lead to higher premiums for all policyholders. It is not directly related to how insured drivers behave on the road.

Question 7

The value that consumers get (from consuming a product) over and above what they actually paid for the product is called

Accepted Answer

Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a product and the actual price they paid. It represents the value or benefit that the consumer receives from the product over and above what they paid for it.

Question 8

When producers do not have to pay the full cost of producing a product, they tend to

Accepted Answer

When producers do not bear the full cost of production, they do not account for the external costs, leading to overproduction, which is a supply-side market failure.

Question 9

If many people in a community get flu shots, the whole community benefits, including those that did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of

Accepted Answer

This is an example of a demand-side market failure, where the private demand for flu shots does not account for the positive externalities that occur when many people get vaccinated, leading to under-consumption of the vaccine and a lower overall societal benefit.

Question 10

Consumer surplus arises in a market because

Accepted Answer

Consumer surplus arises when the market price is below what some consumers are willing to pay for the product. This means that consumers are able to purchase the product at a lower price than their maximum willingness to pay, resulting in a surplus benefit or value for them. Option A and B are incorrect as they describe situations of market disequilibrium, where the market is not at equilibrium and there may be shortages or surpluses. Option D describes a situation where there may be some consumers who are unwilling to buy the product at the current market price, but it does not necessarily lead to a consumer surplus.

Question 11

Which of the following is an example of a market failure?

Accepted Answer

This is an example of a positive externalities market failure. Successful public schools benefit the entire community, but the cost of funding and maintaining them falls solely on the government and taxpayers. There may not be enough incentive for private entities to invest in education due to the difficulty of capturing the external benefits. A market failure occurs when the free market does not allocate resources efficiently, leading to a loss of economic and social welfare. In this case, the market is failing to provide optimal education for all members of the society.

Question 12

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is the total amount of the two girls' combined consumer surplus?

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually have to pay.

For Jena: 
Consumer surplus = willingness to pay - actual price 
Consumer surplus = $75 - $65 
Consumer surplus = $10

For Jane: 
Consumer surplus = willingness to pay - actual price 
Consumer surplus = $85 - $65 
Consumer surplus = $20

Total combined consumer surplus = $10 + $20 = $30

Therefore, the best choice is B.

Question 13

If the unit price of a product is P, then the amount of money buyers would need to pay for a given quantity Q is equal to

Accepted Answer

The formula for calculating the total cost of purchasing a certain quantity of a product is the unit price (P) multiplied by the quantity (Q). Therefore, the correct answer is A) P × Q.

Question 14

When producers (say, of roads) are not able to make all consumers pay for enjoying their product (i.e., the roads), they tend to see a

Accepted Answer

When producers cannot charge all consumers, the marginal benefit perceived is lower than the actual benefit, leading to underproduction and a demand-side market failure.

Question 15

Professor Gullible agreed to cancel the final examination if students promised to study for it anyway. The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Accepted Answer

Moral hazard refers to the tendency of people to take more risks or engage in dangerous behavior when they are protected from the consequences of their actions. In this case, if Professor Gullible cancels the final exam, students may be less motivated to study knowing that they will not be graded on their performance. This is an example of moral hazard, and it would be reasonable to predict that many students would not study for the exam.

Question 16

Asymmetric information always results in adverse selection.

Accepted Answer

Asymmetric information can lead to adverse selection, but it can also result in other market inefficiencies like moral hazard. Adverse selection is just one possible outcome of asymmetric information.

Question 17

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral hazard.

Accepted Answer

Co-pays and deductibles require the patient to pay a portion of the cost of care, which can discourage overuse of health services and help prevent moral hazard.

Question 18

Charlie is willing to pay $10 for a T-shirt that is priced at $9. If Charlie buys the T-shirt, then his consumer surplus is

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. Charlie is willing to pay $10 but pays $9, so his consumer surplus is $1.

Question 19

TripAdvisor provides online reviews of hotels, restaurants, and attractions at tourist destinations around the world. When a traveler is planning a vacation, TripAdvisor helps the traveler avoid

Accepted Answer

TripAdvisor helps travelers avoid adverse selection by providing a platform for previous guests to share their experiences and opinions about hotels, restaurants, and attractions. Travelers can use this information to make informed decisions about where to stay and what to do, thereby avoiding the risk of selecting a subpar option.

Question 20

Which of the following statements about market failure is not true?

Accepted Answer

Market failure can result from a variety of factors, including externalities, public goods, imperfect competition, and incomplete or asymmetric information. It does not always result from government action or policy in a market. In fact, government intervention can sometimes correct market failures.

Quiz 4: Market Failures: Public Goods and Externalities