5133 Managerial Economics Chapter 16

The above figure shows the market for steel ingots. The socially optimal quantity of steel is A) 0 units. B) 50 units. C) 100 units. D) produced if the market were competitive.

50 units.

Which of the following statements is TRUE? A) A government policy that eliminates a market failure, but only some people gain while others are kept the same, is not a Pareto improvement. B) A government policy that generates a Pareto improvement eliminates all deadweight loss. C) A government policy that eliminates a market failure and some people gain and some lose only a little, is a Pareto improvement. D) A government policy that eliminates a market failure, but only some people gain while others are kept the same, is a Pareto improvement.

A government policy that eliminates a market failure, but only some people gain while others are kept the same, is a Pareto improvement.

Which of the following goods has the property of rivalry? A) A highway B) A digital music file C) National defense D) Air to breathe

A highway

Which of the following would be considered open-access common property? A) A library B) Broadcast television C) The world wide web D) A company gym

A library

Which of the following is NOT a common property? A) A public beach B) A main street C) A city park D) A movie screening

A movie screening

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if A) Al has the right to leave trash and Bert can pay him to limit his dumping. B) Al has the right to leave trash and Bert cannot do anything about it. C) Bert moves. D) Al is fined by the government.

Al has the right to leave trash and Bert can pay him to limit his dumping.

Antitrust laws seek to prevent actions that harm society such as A) price discrimination. B) refusal to deal. C) predatory pricing. D) All of these.

All of these.

Cartels persist despite laws against them because A) international cartels are legal. B) firms believe they can avoid detection and the penalties are small anyway. C) firms can coordinate without explicitly colluding. D) All of these.

All of these.

Environmental CSR that is undertaken to reduce negative externalities might be A) altruistic. B) strategic. C) undertaken because of Internet-based scrutiny. D) All of these.

All of these.

Governments can eliminate market failure due to an imperfectly competitive market by A) changing the market structure, for example by eliminating monopoly protection. B) having the government own the monopoly. C) imposing regulations that reduce prices. D) All of these.

All of these.

If Pareto efficiency has been achieved, A) there are no additional Pareto improvements that can be made. B) surplus is maximized. C) economic efficiency is also achieved. D) All of these.

All of these.

Mergers may result in A) anticompetitive behavior. B) more efficient production. C) fewer firms in a market. D) All of these.

All of these.

One way for the government to eliminate a negative externality is to A) charge an emissions fee. B) set an emissions standard. C) levy an effluent charge. D) All of these.

All of these.

One way to avoid the free rider problem is A) through mandates. B) for the government to provide the good or service. C) to use social pressure. D) All of these.

All of these.

Regulation might NOT increase total surplus because A) the costs of the regulation might outweigh the benefits. B) it may not be possible to gather the information necessary to set prices correctly. C) regulators might get captured by the industry. D) All of these.

All of these.

To alleviate the commons problem, the government can A) apply a tax. B) set a quota. C) assign property rights. D) All of these

All of these.

When attempting price regulation, a government faces what problem(s)? A) limited information B) bribes C) uncooperative firms D) All of these.

All of these.

Which of the following is an alternative to patents that still encourages research? A) The government funding research by firms. B) Offering a prize for discovery. C) Government grants to universities. D) All of these.

All of these.

Which of the following statements about private and social costs associated with a negative externality is TRUE? A) Social costs include externalities. B) Private cost do not include externalities. C) Social costs are never smaller than private costs. D) All of these.

All of these.

What is one reason drunk driving is held in such disrepute? A) Drunk drivers impose high potential costs on other drunk drivers. B) Only drunk drivers cause automobile fatalities. C) Drunk driving imposes high potential costs on non-drunk drivers. D) Drunk driving destroys cars and telephone poles, causing disruption in essential services.

Drunk driving imposes high potential costs on non-drunk drivers.

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, one way to alleviate the externality is that A) Al is fined by the government. B) Al has the right to leave trash and Bert cannot do anything about it. C) Bert has the right to a clean park and Al cannot leave trash. D) Either Al or Bert owns the park.

Either Al or Bert owns the park.

In the U.S., one example of a cartel that is legal is A) the railroads, including Union Pacific. B) the oil industry. C) Major League Baseball. D) None, all cartels are prohibited.

Major League Baseball.

Mergers harm society. A) True. Firms merge to avoid antitrust laws and increase their prices. B) True. Total surplus is reduced when firms merge. C) False. Firms gain economies of scale and pass the price savings on to their customers. D) Maybe. It depends on whether the effect on prices is larger from reducing competition or increasing efficiency.

Maybe. It depends on whether the effect on prices is larger from reducing competition or increasing efficiency.

Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality? A) Yes, the airport's noise should be curtailed for the well-being of the homeowners. B) No, airports are government entities and therefore don't impose costs on individuals. C) No, the airport was there first. D) No, if the original property values reflect the costs imposed by the airport.

No, if the original property values reflect the costs imposed by the airport.

Regulation A) always increases consumer surplus. B) passes the cost-benefit test. C) solves market failures of all size. D) None of these.

None of these.

Which of the following is a Pareto improvement? A) A monopolist loses its monopoly when a government policy allows another firm to enter the market, resulting in lower prices and higher quantity available for consumers. B) A government policy is implemented that results in the middle class being better off, and the very rich only have to pay a little bit more in taxes. C) A government policy removes a market failure. D) None of these.

None of these.

Who said "If it moves, tax it. If it still moves, regulate it. If it stops moving, subsidize it."? A) Ronald Reagan B) Adam Smith C) Vilfredo Pareto D) Barack Obama

Ronald Reagan

In the U.S., the ________ and the ________ prohibit firms from explicitly agreeing to take actions that reduce competition. A) Per Se Act; Sherman Antitrust Act B) Department of Justice Act; Federal Trade Commission Act C) Sherman Antitrust Act; Federal Trade Commission Act D) Pareto Act; Anti-Cartel Act

Sherman Antitrust Act; Federal Trade Commission Act

What is one problem with trying to regulate a monopoly's price? A) The government needs information on the monopoly's marginal cost. B) Anything that the government does is problematic. C) The government needs information on the maximum quantity the monopoly can supply. D) The government needs to identify which firm is a monopolist.

The government needs information on the monopoly's marginal cost.

Which of the following is likely protected by copyright? A) The color scheme for your house B) The names of your children C) Your recipe for chocolate cake D) Your autobiography

Your autobiography

If a government policy increases benefits to the unemployed without having a detrimental effect on any other constituent, the policy is A) regressive. B) a Pareto improvement. C) redistributive. D) a positive externality effect.

a Pareto improvement.

Which of the following is NOT a club good? A) a country club B) cable television C) a baseball bat D) a rock concert

a baseball bat

A public good in which exclusion is possible is called A) an exclusive good. B) a club good. C) a common good. D) an impure good.

a club good.

Negative externalities are created when A) an increase in the price of butterfat drives up the price of ice cream. B) a driver drives recklessly on a busy highway. C) a driver leaves his car in a parking space after the meter expires and receives a ticket. D) a driver pulls over to help a stranded motorist fix a flat tire.

a driver drives recklessly on a busy highway.

If children go to school and become productive members of society, A) an externality is created that may be positive or negative. B) no externality is created by the schools. C) a negative externality is created by the schools. D) a positive externality is created by the schools.

a positive externality is created by the schools.

If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then A) a shortage will exist. B) consumer surplus is maximized. C) a surplus will exist. D) producer surplus is maximized

a shortage will exist.

Laws that are used to prevent firms from colluding and setting high prices are called A) anti-trust laws. B) anti-cartel laws. C) anti-competition policies. D) price ceiling laws.

anti-trust laws.

Intellectual property A) prevents people who do not own the knowledge from using it. B) increases total surplus. C) eliminates the free rider problem. D) assigns property rights to knowledge.

assigns property rights to knowledge.

If the government wants to regulate a natural monopoly while ensuring the firm does not earn profits or require subsidies, the government will force the firm to set price equal to A) average cost. B) marginal cost. C) marginal revenue. D) None of these.

average cost.

Reparations for slavery in the United States would A) be inconsistent with the Pareto principle. B) be unconstitutional. C) have nothing to do with the Pareto principle. D) be consistent with the Pareto principle.

be inconsistent with the Pareto principle.

A free rider A) benefits from a positive externality without paying for it. B) has a horizontal demand curve. C) places no value on the good provided. D) All of these.

benefits from a positive externality without paying for it.

The above figure shows the market for steel ingots. If the market is competitive, then the deadweight loss to society is A) a. B) b. C) c. D) zero.

c.

An externality A) is always either a negative or positive externality. B) can be a negative externality for one group of people and a positive externality for another. C) could be either a negative or positive externality. D) creates market failures only when they are negative.

can be a negative externality for one group of people and a positive externality for another.

Students who talk loudly with each other in class A) only create an externality if they talk about something unrelated to class. B) create an externality because other students cannot follow the lecture as well. C) benefit the other students in class because they engage in conversation. D) disturb nobody.

create an externality because other students cannot follow the lecture as well.

Patents A) reduce deadweight loss. B) are a form of trade secret. C) create monopoly power. D) always increase total welfare.

create monopoly power.

The government forcing a monopoly telecommunications company to allow other firms to use its cables is an attempt to A) regulate prices. B) decrease the monopoly market power by eliminating a natural monopoly. C) decrease the monopoly market power by increasing competition. D) None of these.

decrease the monopoly market power by increasing competition.

If a production process creates positive externalities, a competitive market produces too few positive externalities because the producer A) does not pay all the costs of the externalities. B) does not receive compensation for the externalities. C) Both does not pay all the costs of the externalities and does not receive compensation for the externalities. D) None of these.

does not receive compensation for the externalities.

If a production process generates pollution, then a competitive market will produce more of the good than is socially optimal because A) firms ignore the costs of production that they do not incur. B) firms take all costs into consideration. C) firms set price equal to social marginal cost. D) firms incur all costs of production but ignore some of them.

firms ignore the costs of production that they do not incur.

If a monopolist's production process has economies of scale and average cost exceeds marginal cost, then A) if the government sets price equal to marginal cost, the monopoly will go out of business. B) if the government sets price equal to average cost, the monopoly will go out of business. C) the government should set price equal to marginal cost. D) the government cannot regulate price.

if the government sets price equal to marginal cost, the monopoly will go out of business.

A firm's private costs A) include only its direct costs. B) are the private profit minus the producer surplus. C) include both direct and indirect costs. D) exclude the taxes on any externalities generated.

include only its direct costs.

When the government charges an output tax to eliminate an externality, it forces the manufacturer to ________ the negative externality. A) internalize B) charge customers for C) increase the production of D) stop producing

internalize

Cartels persist despite laws against them because A) international cartels are legal. B) it is impossible to convict firms. C) of the Prisoners' Dilemma issue. D) All of these.

international cartels are legal.

According to the U.S. Robinson-Patman Act of 1936, price discrimination A) is legal unless it harms competition. B) may be used to drive rivals out of business. C) can only be justified if the price discrimination is due to actual cost differences. D) is always illegal.

is legal unless it harms competition.

In the U.S., charging monopoly-level prices A) is evidence of a conspiracy. B) is illegal. C) constitutes a per se violation. D) is not necessarily illegal.

is not necessarily illegal.

A rival good A) is exclusive. B) is one that rival firms are trying to obtain. C) cannot be shared. D) is one that is used up as it is consumed.

is one that is used up as it is consumed.

A main rationale for government intervention in markets ________ and ________. A) is to reduce producer surplus; redistribute wealth B) concerns the creation of public goods; reduces free-riding C) is to correct market failures; increase surplus D) There is never an economic rationale for government intervention.

is to correct market failures; increase surplus

One way a government can eliminate a market failure A) is to regulate the price so that it equals marginal cost. B) is to implement a price floor equal to marginal cost. C) is to regulate the price so that it is below average cost. D) None of these solutions will eliminate a market failure.

is to regulate the price so that it equals marginal cost.

If a change is a Pareto improvement, then A) it also passes the cost-benefit test. B) the distributional effect is likely to be regressive. C) we also achieve Pareto efficiency. D) consumer surplus is maximized.

it also passes the cost-benefit test.

According to the cost-benefit principle, if a change generates $50,000 in gains and $45,000 in losses, A) the gain is not large enough to justify the change. B) it is desirable. C) the desirability depends on who gains and who loses. D) it is a Pareto improvement.

it is desirable.

If a dominant firm is charged with refusal to deal under antitrust law, it is being charged because A) it will sell its products only to people who agree to buy only from it and not from rival firms. B) it is refusing to sell a key input to downstream rivals, thereby reducing or destroying competition. C) the firm will not set its price at the regulated rate. D) it is refusing to cooperate with antitrust authorities, such as the Department of Justice.

it is refusing to sell a key input to downstream rivals, thereby reducing or destroying competition.

If a change passes the cost-benefit test, then A) it may be a Pareto improvement. B) it is not a Pareto improvement. C) total surplus is maximized. D) it is a Pareto improvement.

it may be a Pareto improvement.

Optimal price regulation sets price equal to A) marginal cost. B) minimum average cost. C) average variable cost. D) average cost.

marginal cost.

Suppose twenty neighbors share a park. One of the neighbors, Al, leaves trash in the park. This bothers the other neighbors. According to Coase's Theorem, assigning the property rights to the park to Al A) might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly. B) will result in zero trash being dumped in the park. C) is unfair. D) will achieve the socially optimal quantity of trash.

might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly.

The above figure shows the market for steel ingots. If the market is competitive, then A) more than the socially optimal quantity of 50 units of steel is produced. B) the socially optimal quantity of steel of 100 units is produced. C) the socially optimal quantity of steel of 50 units is produced. D) the socially optimal quantity of steel is zero.

more than the socially optimal quantity of 50 units of steel is produced.

A cable company can add a subscriber for ________ and a market failure occurs because the price charged ________. A) less than average cost; reduces consumer surplus B) nearly zero marginal cost; is extortionist C) average variable cost; increases producer surplus D) nearly zero marginal cost; exceeds marginal cost

nearly zero marginal cost; exceeds marginal cost

In order to regulate a monopoly's price, the government A) should rely on industry experts for information. B) needs to hire former executives from the monopoly. C) needs to know the monopoly's supply curve. D) needs accurate information on the monopoly's demand and cost curves.

needs accurate information on the monopoly's demand and cost curves.

When discussing rules that governments use to intervene in a market, we can take a(n) ________ approach where we discuss what governments should do, or a ________ approach where we discuss what governments actually do. A) optimistic; cynical B) bipartisan; normative C) normative; positive D) positive; normative

normative; positive

The price of pie increases. Some people who purchased pie before the price increase no longer purchase pie. This is A) a positive externality. B) a positive externality for some consumers and a negative externality for others. C) a negative externality. D) not an externality.

not an externality.

In the case of a good that has no exclusion and no rivalry, private markets fail because A) the quantity produced will exceed the social optimum. B) profit is driven down to zero. C) of free-ridership. D) this is a natural monopoly

of free-ridership.

Markets tend to produce too little of an excludable public good because A) transaction costs are high. B) of the lack of rivalry. C) these goods are depletable. D) All of these.

of the lack of rivalry.

An exclusive deal is A) always illegal. B) welfare reducing. C) one where a firm will only sell to a customer if the customer agrees not to buy anything from the firm's rivals. D) All of these.

one where a firm will only sell to a customer if the customer agrees not to buy anything from the firm's rivals.

In general, an externality is created when A) firms have to pay for pollution the environment. B) the government subsidizes education. C) people are affected (other than by price) by a transaction which they were not part of. D) firms produce a product of low quality and consumers don't like it.

people are affected (other than by price) by a transaction which they were not part of.

A firm charging prices below marginal cost is said to be engaged in A) price fixing. B) predatory pricing. C) a cartel. D) irrational behavior.

predatory pricing.

In a competitive market, a negative externality creates a deadweight loss because A) the cost of the externality is double counted. B) price equals social marginal cost. C) a harm is generated. D) price equals private marginal cost.

price equals private marginal cost.

If a production process generates pollution, then a competitive market will A) produce more of the good than is socially optimal. B) produce the socially optimal quantity of that good. C) produce zero output. D) produce less of the good than is socially optimal.

produce more of the good than is socially optimal.

The exclusive privilege to use an asset is called a(n) A) property privilege. B) property right. C) exclusive use agreement. D) right to work privilege.

property right.

A commodity or service whose consumption by one person does not preclude others from also consuming it is called a A) Coase good. B) public good. C) Giffen good. D) private good.

public good.

Market failures ________ and generate ________. A) create monopolies or oligopolies; deadweight loss B) create deadweight loss; externalities C) compel the government to act; regulations D) reduce economic efficiency; deadweight loss

reduce economic efficiency; deadweight loss

Regulatory capture is where A) firms impose barriers to entry on regulators. B) regulators of an industry look out for the industry instead of society. C) governments take over monopolies through use of regulation. D) the government taxes the profits of monopolies such that all producer surplus goes to the government.

regulators of an industry look out for the industry instead of society.

Resale price maintenance A) is per se illegal. B) has a net negative impact on competition. C) is the price of a maintenance contract on a good, such as an extended service contract on a car. D) requires a retailer to sell a good no lower than the specified price.

requires a retailer to sell a good no lower than the specified price.

The Commons Problem arises because A) firms don't maximize profits. B) social and private incentives are not aligned, and property rights are missing. C) social cost equals private cost and property rights are missing. D) social benefit equals private benefit and property rights are missing.

social and private incentives are not aligned, and property rights are missing.

In the presence of no externalities, A) social marginal cost and private marginal cost cannot be compared. B) social marginal cost exceeds private marginal cost. C) social marginal cost equals private marginal cost. D) social marginal cost is less than private marginal cost.

social marginal cost equals private marginal cost.

If a production process creates pollution, a competitive market produces excessive pollution because A) private marginal cost of pollution exceeds its social marginal cost. B) social marginal cost of pollution exceeds its private marginal cost. C) the marginal benefit of pollution to the firm is zero. D) zero pollution is optimal.

social marginal cost of pollution exceeds its private marginal cost.

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if A) Bert moves. B) someone is assigned property rights to the park. C) government limits the use of the park. D) nobody catches Al leaving the trash.

someone is assigned property rights to the park.

The efficient quantity of a pure public good occurs when the marginal cost of producing that good equals the A) sum of all individual marginal benefits divided by the number of voters. B) sum of all individual marginal benefits. C) marginal benefit to the median voter. D) marginal benefit to each individual

sum of all individual marginal benefits.

If a government policy change harms a monopolist, the government could A) tax those who get additional gains and compensate the monopolist, thereby making the change a Pareto improvement. B) increase the general tax rate and compensate the monopolist, thereby making the change a Pareto improvement. C) do nothing, because the change is a Pareto improvement. D) It is not possible to mitigate the harm to a monopolist.

tax those who get additional gains and compensate the monopolist, thereby making the change a Pareto improvement.

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called A) English Bargaining. B) the Bargaining Theorem. C) the Coase Theorem. D) a Nash Equilibrium.

the Coase Theorem.

The argument that society should be in favor of changes that benefit some people without making others worse off is known as A) the Coase Theorem. B) a positive externality. C) the cost-benefit principle. D) the Pareto principle.

the Pareto principle.

In a market with positive externalities, A) the efficient level of production is equal to what competition will obtain. B) the efficient level of production is less than what competition will obtain. C) there cannot be an efficient level of production. D) the efficient level of production is more than what competition will obtain.

the efficient level of production is more than what competition will obtain.

If a production process creates pollution, a competitive market produces excessive pollution because A) the firms do not include the social cost of the pollution in their profit-maximizing decisions. B) people are not injured by the pollution. C) the firms place too high a price on society's cost of inflation. D) zero pollution is optimal.

the firms do not include the social cost of the pollution in their profit-maximizing decisions.

If a monopolist's production process has economies of scale and average cost exceeds marginal cost, then A) the government should not offer a subsidy, since the monopoly can make a profit setting price equal to marginal costs. B) if the government sets price equal to average cost, the monopoly will go out of business. C) the government could set price equal to marginal cost and subsidize the monopoly. D) the government cannot regulate price.

the government could set price equal to marginal cost and subsidize the monopoly.

If all Pareto improvements have been made, A) consumer surplus is maximized. B) monopolists are unhappy. C) the outcome is Pareto efficient. D) the result is increased government regulations.

the outcome is Pareto efficient.

A patent is a property right, which gives the owner A) the right to sell and/or license the invention. B) the ability to make the knowledge of how to make the invention rival. C) a guaranteed profit. D) All of these.

the right to sell and/or license the invention.

The above figure shows the market for steel ingots. An externality can be seen because A) the social marginal cost exceeds the private marginal cost. B) the private marginal cost exceeds the social marginal cost. C) the optimal quantity of steel is zero. D) not enough steel gets produced by the competitive market.

the social marginal cost exceeds the private marginal cost.

An example of an essential facility is A) the Golden Gate Bridge. B) U.S. Route 66. C) the telephone line into your house. D) your local pizza parlor.

the telephone line into your house.

A common resource is best described as a resource where A) there is a negative externality in production. B) there is a positive externality in production. C) there is a positive externality in consumption. D) there is a negative externality in consumption.

there is a negative externality in consumption.

If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then A) producer surplus is maximized. B) there will be excess supply. C) there will be excess demand. D) consumer surplus is maximized.

there will be excess demand.

Mergers are closely scrutinized by the government because A) they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly). B) they always result in a more efficient market. C) they always result in lower joint profits of the firms involved. D) all mergers are undesirable.

they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly).

If the government has enough knowledge about a market and the damage it causes through pollution, it can force the socially optimal output A) through an emission fee. B) using a ban on pollution. C) by deregulating to eliminate the monopoly. D) All of these.

through an emission fee.

The song "Stairway to Heaven" is likely protected A) under copyright law. B) with a patent. C) as a trade secret. D) in a trust.

under copyright law.

The total demand for a public good is found by A) finding the demand from the median voter. B) horizontally summing all individual demands. C) dividing the marginal cost of the good by the number of voters. D) vertically summing all individual demands.

vertically summing all individual demands.

If a policy helps some but harms others, A) then the cost-benefit analysis will show a net increase in surplus and is therefore desirable. B) the result is a Pareto improvement for the people who are helped. C) it is too hard to determine whether or not the outcome is desirable. D) we cannot use the Pareto principle to evaluate whether or not the policy is desirable.

we cannot use the Pareto principle to evaluate whether or not the policy is desirable.

Rent seeking is A) illegal in the U.S. B) where firms expend effort and money to profit from government actions. C) when consumers search for the lowest possible rent on housing. D) what regulators do to improve their chances of getting jobs in the regulated industry after they leave government service.

where firms expend effort and money to profit from government actions.

Positive externalities are created when A) you purchase the "Mona Lisa" and lock it in a vault. B) other consumers reduce their demand for coffee and price thereby declines. C) farmers spray pesticide in their fields and it washes into the local river after the first rainstorm. D) your neighbor plants beautiful trees and flowers in her yard.

your neighbor plants beautiful trees and flowers in her yard.