Chapter 10 economics

If the production of a good results in negative externalities, then Select one: a. production will occur at socially optimal levels. b. production will be greater than the socially optimal output. c. production will be less than the socially optimal output. d. there will be a shortage of the good.

b

In a market experiencing a negative externality, quantity should __________ and price should __________. Select one: a. fall, fall. b. fall, rise. c. rise, fall. d. rise, rise. Feedback

b

In some coastal areas of the country, oceans are being over-fished resulting in rapid depletion of the fish population and a scarcity of certain varieties of fish. The reason for over-fishing is that Select one: a. there is more demand for fish than beef these days. b. the fishing areas are unowned and unregulated. c. government policy subsidizes fishing. d. European demand for fish encourages fish producers to over-fish.

b

Internalizing a negative externality refers to Select one: a. the government absorbing the cost of correcting a problem. b. the producer bearing the cost of correcting a problem. c. the affected party correcting the problem. d. ignoring the problem.

b

Market failures are caused by all of the following except Select one: a. imperfect information b. inferior products c. natural monopolies d. externalities

b

Methods used by life insurance companies to avoid the problem of moral hazard include all but Select one: a. premium discounts for non-smokers. b. premium discounts for certain age groups. c. premium increases for motorcycle owners. d. premium discounts for regular physical examinations.

b

Negative externalities (external costs)that arise from the production of a good Select one: a. equalize private and social costs. b. impose unfair costs on parties outside the production. c. cause a decrease in demand for the good. d. cause an increase in demand for the good. Feedback

b

Negative externalities lead to Select one: a. maximum efficiency. b. inefficiency. c. minimum efficiency. d. compensation.

b

Public choice theory is concerned with Select one: a. relative prices of goods and services. b. government policy decisions. c. marketing techniques. d. measuring consumer confidence in the economy.

b

The Coase Theorem suggests that Select one: a. people want to cooperate. b. people working in their own best interest can privately negotiate to solve an externality. c. people will not respond to incentives. d. government intervention is necessary to deal with externalities.

b

The auto insurance industry relies on people to Select one: a. pay for more coverage than they actually need. b. be risk averse. c. be risk neutral. d. be socially conscientious.

b

The main feature of a progressive tax system is that the higher one's income, the _______________ one pays. Select one: a. more taxes b. higher the tax rate one pays. c. less taxes d. lower the tax rate

b

Three voters will use a simple majority vote to determine whether a public service will be funded. Each persons share of the tax is $25. Person 1 receives $30 worth of benefits, person 2 receives $26 worth of benefits, and person 3 receives $5 worth of benefits. Therefore ______ person (s)will vote in favor, _____ person(s) will vote against, and the outcome will be ____________. Select one: a. one; two; inefficient b. two; one; inefficient c. two; one; efficient d. one; two; efficient

b

Which of the following is least likely to generate an external cost? Select one: a. Smoking a cigar. b. Reading a book. c. Wearing cologne. d. Talking on a cell phone in a store.

b

Which of the following statements is not true? Select one: a. Establishing property rights may be a way to internalize an externality. b. Internalizing an externality is not the same as inducing the producer of an externality to consider both private and social costs in production decisions. c. If the producer produces the socially optimal output level, the externality is internalized. d. The producer calculates all costs and benefits into production decisions.

b

Which of the following examples describe both risk-averse and risk-loving behavior? Select one: a. insuring your house and having an alarm system b. starting your own business and entering a sweepstakes c. insuring your car and betting on horses d. buying travel insurance and taking kick-boxing lessons

c

Years after the invention of Tang, the space program began using the drink in its heavily advertised space flights. This is an example of a Select one: a. moral hazard b. social cost c. positive externality d. negative externality

c

You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If raffle tickets cost $5, which individuals would buy the tickets? Select one: a. risk lovers and risk averse individuals. b. risk neutral and risk averse individuals c. risk neutral individuals and risk lovers d. risk lovers only

c

You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If you are risk inclined, how much would you be willing to pay for a ticket? Select one: a. $4 b. $5 c. $6 d. None of the above.

c

You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If you are risk neutral, which of the following prices would you be willing to pay? Select one: a. $50 b. $15 c. $5 d. You would not be willing to purchase one at all.

c

Assume your neighbor throws trash in his yard. He gets $50 worth of benefit from littering, which imposes a $90 cost to you. According to Coase, you should Select one: a. pay your neighbor $40 to clean up his yard. b. offer to clean his yard for $40. c. deal with it. d. offer him between $51 and $90 if he will keep his yard clean. Feedback

D

Usually the cost of preventing an external cost is less than the cost of correcting it after it has occurred. Select one: True False

TRUE

A method of correcting air pollution that most closely corrects the original problem is Select one: a. to tax each firm a per-unit tax for the right to pollute. b. to force each polluting firm to install emission-cleaning equipment. c. to subsidize the individuals who have to breathe the polluted air. d. to pass emissions standards and then allow local communities to enforce them.

a

An example of a positive externality (external benefit) is Select one: a. vaccinating your dog for rabies. b. driving a car with a hole in the muffler. c. speeding. d. going to work when you are grumpy. Feedback

a

An externality refers to Select one: a. the actions of one person affecting another person. b. the negative side-effects of some production process. c. government intervention in the market. d. firms differentiating their product by providing added services.

a

If an economic outcome results in a social cost, Select one: a. negative externalites are probably involved in the production of the good. b. the socially optimal level of production is being provided. c. producers would probably be willing to cut production. d. none of the above.

a

If you are willing to pay more than the expected value of an opportunity, you are considered Select one: a. a risk lover. b. risk averse. c. risk neutral. d. a risk manager. Feedback

a

If your neighbor's barking dog annoys you, a possible Coase solution would be to Select one: a. offer to train the dog not to bark. b. move. c. sue the neighbor to force him to build a fence. d. sound-proof your house.

a

One of the main potential problems caused by moral hazards in insurance markets is that Select one: a. insurance markets may break down. b. insurance companies may lose money. c. dishonest people may get away with a crime. d. deductibles will be raised.

a

Suppose a person has income of $100,000. If this person has a marginal tax rate of 20% on income over $20,000 and a zero tax rate on the first $20,000 of income, what is the person's average tax rate? Select one: a. 16% b. 20% c. 30% d. 4%

a

The Coase theorem is important because Select one: a. it indicates that market externalities can be corrected without resorting to government solutions. b. it claims that there are no transaction costs associated with correcting externalities. c. it shows that government solutions often work better than market solutions. d. it shows that governments always end up solving an externality. Feedback

a

The effects of an action that increases the well-being of third parties is called a Select one: a. positive externality (external benefit). b. negative externality (external cost). c. enhancement. d. inverse relationship.

a

Which of the following could not cause market failure? Select one: a. An uneducated person who does not value an education. b. A person who is so poor that he / she cannot bid for an item at its actual value. c. The unintended consequences of someone's actions. d. The existence of a natural monopoly.

a

A taxpayer pays _____________tax rate on additional income if the tax system is progressive, ___________ tax rate on additional income if the tax system is proportional, and ______________ tax rate on additional income if the tax structure is regressive. Select one: a. a higher; a lower; the same b. a lower; a higher; the same c. the same; a higher; a lower d. a higher; the same; a lower

d

All of the following could be reasons that pollution exists except Select one: a. preventing pollution can cost more than paying the fine. b. fines are relied upon to generate tax revenues. c. consumers continue to buy products from companies which pollute. d. all of the above could be reasons that pollution exists.

d

If the producer of a negative externality considers the cost to third parties when the producer makes cost-benefit analyses involving the production, the externality is said to be Select one: a. institutionalized. b. magnified. c. subsidized. d. internalized.

d

In a majority voting system, a public project Select one: a. will always be approved if the total benefits exceed the total costs. b. always accounts for intensity of preferences. c. will always be approved if the total costs exceed the total benefits. d. may be approved even if the total benefits are less than the total costs.

d

Public choice theory assumes that those involved in the public sector are generally motivated by Select one: a. a desire to serve the public. b. generosity. c. the desire to achieve efficient production of public goods. d. the same factors that motivate them in the private sector. Feedback

d

The Coase theorem suggests that finding an efficient solution to a negative externality Select one: a. is contingent upon who owns the property rights to the resource in question. b. is helped by government involvement in the process. c. is helped by application of a tax. d. is not dependent upon the ownership of property rights to the resource.

d

Which of the following economic systems could prevent market failure? Select one: a. A pure capitalist economy. b. A socialist economy. c. A barter economy d. none of the above.

d

Which of the following kinds of monopoly represent a market failure? Select one: a. A monopoly due to a patent or copyright. b. A monopoly due to economies of scale. c. A monopoly due to a governmental license for only one firm to operate. d. All the above are market failures.

d

Which of the following would be considered a solution to automobile air pollution by applying the principle of the second best? Select one: a. The government imposes an excise tax on each automobile. b. The government fines the automobile manufacturers for the cost of cleaning up the pollution. c. The government requires automobile manufacturers to put anti-pollution devices on automobiles. d. The government sells tradable pollution permits. Feedback

d

Which of the following would not be an example of a problem associated with moral hazard? Select one: a. A senior citizen more willing to take prescription drugs because they are subsidized by Medicaid. b. A traveler leaving his valuables in sight in a hotel room because she has travel insurance. c. A salesman ordering an expensive meal on a business trip because his company pays his expenses. d. All of the above are examples of moral hazard.

d

If property rights for the right to pollute the air were established, there would probably be Select one: a. more air polution. b. less air pollution. c. no change in air pollution. d. worse weather.

b

A good is non-exclusive if Select one: a. it is not possible to prevent people from obtaining the benefits of the good once it has been provided. b. its consumption by one person does not reduce the consumption by another. c. the good is free: everyone can get all they want at zero price. d. none of the above.

a

A sales tax on all retail sales is a progressive tax system because higher income taxpayers spend more money. Select one: True False

False

In the automobile insurance industry, deductibles are meant to increase the moral hazard associated with a claim. Select one: True False

False

The "principle of second best" is the idea that the best way to internalize a negative externality is to force the producer to correct the effects of the externality after it has occurred. Select one: True False

False

The impossibility theorem states that we can always achieve consistent results in societal preference ordering if we properly aggregate individual preferences. Select one: True False

False

The true social cost of any transaction is the private cost and the external cost, minus the true social benefits. Select one: True False

False

To obtain a market demand curve for a public good, one has to horizontally sum the demand of individual consumers. Select one: True False

False

When a per-unit tax is imposed on a polluter, the marginal social cost curve shifts to the right. Select one: True False

False

When externalities are present, the market will not maximize economic value. Select one: True False

True

All the following are possible methods of correcting a negative externality except Select one: a. taxing the producer. b. taxing the recipients of the externality and using the revenue to correct the problem. c. forcing the producer to correct the results of the externality. d. forcing the producer to pay the recipients the cost of the externality.

b

A free rider is a a consumer who consumes Select one: a. a private good and pays only what she is willing to pay. b. a public good and pays only what she is willing to pay. c. a public good and may be unwilling to pay anything for it. d. a public good but pays more than he would be willing to pay if the good were private.

c

A market failure exists Select one: a. if average total cost is not minimized in the long run. b. if economic profit is zero in the long run. c. if an economic outcome fails to maximize economic value. d. if the situation for one person could be improved without hurting anyone else.

c

A market failure is any economic outcome in which Select one: a. prices are too high for most consumers. b. there is a shortage or surplus of a good or service. c. the market does not provide the optimal outcome for a particular good. d. the market provides a poor quality good or service.

c

A risk averse person would not be expected to Select one: a. buy health insurance. b. put money in treasury bills. c. buy a lottery ticket. d. get a flu shot.

c

An unintended effect of a action that adversely affects others is called a Select one: a. complementary good. b. a substitute good. c. a negative externality (external cost). d. a positive externality (external benefit).

c

If the consumption of a good by one person reduces the amount of the good that can be consumed by others, economists say that the good is Select one: a. exclusive. b. non-exclusive. c. a rival good. d. a non-rival good.

c

The internalization of a negative externality from a particular production process will cause Select one: a. the market demand curve to shift to the right. b. the market demand curve to shift to the left. c. the market demand curve to stay the same. d. There is not enough information to answer the question.

c

The main problem about negative externalities is that Select one: a. they overstate the cost of production. b. they maximize the cost of production. c. they understate the cost of production. d. they minimize the cost of production.

c

What type of economy would we expect to have the highest incidence of moral hazard? Select one: a. A market economy b. A socialist economy c. A planned economy d. A transitional economy Feedback

c