Question 1

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

Accepted Answer

This is an example of a positive externality, where the benefits of attending a successful public school spill over to the broader community. Market failures occur when markets do not allocate resources efficiently, such as in situations where there are externalities or public goods that are underprovided.

The other choices do not represent market failures. A) is an example of high demand for a limited supply, which is a normal function of markets. B) represents a price increase due to increased costs of production, which is also a normal function of markets. D) represents normal market competition and innovation, which can result in price decreases and some businesses closing.

Question 2

Consumer surplus arises in a market because:

Accepted Answer

Consumer surplus arises when the market price is lower than what some consumers are willing to pay for a product. This means that consumers are able to purchase the product at a price lower than their maximum willingness to pay, which leads to a surplus or benefit for them.

Question 3

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 shoes is $65. What is the combined amount of consumer surplus of Jena and Jane?

Accepted Answer

Given that Jena is willing to pay $75 for a pair of shoes and actually pays $65, her consumer surplus is $10.
Similarly, given that Jane is willing to pay $85 for a pair of shoes and actually pays $65, her consumer surplus is $20.
Therefore, the combined amount of consumer surplus of Jena and Jane is $10 + $20 = $30. 
Hence, the correct choice is B.

Question 4

The equilibrium point in the market is where S and D curve intersect.  Refer to the graph above. At equilibrium, consumer surplus would be represented by the area:

Accepted Answer

The answer of The equilibrium point in the market is...

Question 5

The equilibrium point in the market is where S and D curve intersect.  Refer to the graph above. At equilibrium, the total maximum amount that consumers would have been willing to pay for the product is represented by the area:

Accepted Answer

At equilibrium, the quantity demanded by consumers is equal to the quantity supplied by producers. The maximum amount that consumers are willing to pay for a product is represented by the area below the demand curve and above the price (a + b + c), which is the total consumer surplus. Therefore, choice B (a + b + c) is the correct answer. Choices A, C, and D do not accurately represent the total amount that consumers are willing to pay.

Question 6

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 7

The minimum acceptable price for a product that producer Sam is willing to receive is $15. The price he could get for the product in the market is $18. How much is Sam's producer surplus?

Accepted Answer

Producer surplus is the difference between the minimum price a producer is willing to accept for a product and the actual price they receive in the market. In this case, Sam's producer surplus is $3 ($18 - $15). Choice A is the only option that matches this calculation. The other choices are either too high or do not reflect Sam's actual producer surplus.

Question 8

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

Accepted Answer

Market failure can result from a variety of causes including externalities, public goods, information asymmetry, and imperfect competition. It does not always result from government action or policy, although government intervention may be necessary to correct the market failure.

Question 9

The value that consumers get (from consuming a product) over and above that they actually paid for the product 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 they pay. It represents the extra value or benefit that consumers receive from a product beyond what they paid for it. Consumer utility refers to the satisfaction or usefulness that consumers derive from a product. Consumption expenditures refer to the amount of money spent on purchasing a product. Consumer demand refers to the amount of a product that consumers are willing and able to buy at different prices.

Question 10

When producers do not produce the efficient amount of a product because they are unable to charge consumers what they are willing to pay for it, then we have a:

Accepted Answer

This situation describes a demand-side market failure, where the market does not allocate resources efficiently due to the inability to capture the full willingness to pay of consumers.

Question 11

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

Accepted Answer

Ben's inability to afford a high-end luxury car is not an example of market failure. It is simply a personal budget constraint. A, C, and D are all examples of market failure. A is an example of a negative externality (sidewalk is a public good and cannot be charged for), C is an example of monopoly power, and D is an example of a tragedy of the commons (unregulated use of a public resource).

Question 12

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 are not able to make all consumers pay for enjoying their product, it leads to a situation known as "free-rider problem," where some consumers benefit from the product without paying for it. This results in the marginal benefit of production being too low, as the producers' revenue doesn't capture the full value of the product. Therefore, there is a demand-side market failure.

Question 13

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

Accepted Answer

The formula for calculating the total spending by the buyers is the product of the unit price and the quantity purchased. Therefore, the correct choice is A) P x Q. Option B) is incorrect because it adds the unit price and the quantity, which would result in an incorrect answer. Options C) and D) subtract the quantity from the unit price or vice versa, which is also incorrect.

Question 14

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 individuals do not take into account the positive externalities they create for others by getting a flu shot. As a result, the optimal level of vaccination may not be achieved without intervention.

Question 15

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to accept is called the producer:

Accepted Answer

The difference between the actual price received and the minimum acceptable price is called producer surplus. It represents the benefit received by the producer from selling a good or service at a price that is higher than the cost of production.

Question 16

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 a consumer derives from a product, consumer demand refers to the quantity of a product that consumers are willing and able to purchase at various prices, and market failure is a situation where the market fails to efficiently allocate resources. Therefore, the correct answer is B.

Question 17

A competitive market can produce economically efficient outcomes if these conditions are met, except:

Accepted Answer

Option D contradicts the principle of economic efficiency, which requires that the market produces only units for which benefits are at least equal to costs. Therefore, option D is the only exception to the conditions that are required for a competitive market to produce economically efficient outcomes.

Question 18

The equilibrium point in the market is where S and D curve intersect.  Refer to the graph above. At equilibrium, the total amount of spending that consumers would be paying for the product is represented by the area:

Accepted Answer

The answer of The equilibrium point in the market is...

Question 19

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

Accepted Answer

When producers do not pay the full cost of production, it leads to a supply-side market failure, causing them to over-produce because they do not account for the external costs.

Question 20

If the price of a product increases:

Accepted Answer

Consumer surplus is the difference between the maximum price a customer is willing to pay for a product and the actual price they pay. If the price of a product increases, the amount of consumer surplus decreases because consumers are paying more for the product and are therefore less likely to purchase it.

Quiz 4: Market Failures: Public Goods and Externalities