Econ Chapter 4 Test

With a public good, to compute the collective demand you add together the (prices people are willing to pay / quantities demanded) ______ for the last unit of the public good at each possible ______.

price; QD

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences: A) a consumer surplus of $10 and Tony experiences a producer surplus of $190 B) a producer surplus of $200 and Tony experiences a consumer surplus of $10 C) a consumer surplus of $670 and Tony experiences a producer surplus of $200 D) a producer surplus of $10 and Tony experiences a consumer surplus of $190

A - a consumer surplus of $10 and Tony experiences a producer surplus of $190

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. We would expect an A) overproduction of paper in the mills. B) underproduction of paper in the mills. C) external cost resulting from the production of hydroelectric power. D) overproduction of power by the hydroelectric plants.

A - overprodcution of paper in the mills

Demand-side market failures occur when A) the demand and supply curves don't reflect consumers' full willingness to pay for a good or service. B) the demand and supply curves don't reflect the full cost of producing a good or service. C) government imposes a tax on a good or service D) a good or service is not produced because no one demands it

A - the demand and supply curves don't reflect consumers' full willingness to pay for a good or service.

What two conditions must hold for a competitive market to produce efficient outcomes? A) Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay B) Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay C) Firms must minimize production costs, and consumers must minimize total expenditures D) Firms must maximize production costs, and consumers must pay all prices equal to their maximum willingness to pay.

B - Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay

cost-benefit analysis

Used by government to decide if it should use resources for a project and to determine the total quantity of resources it should devote to a project. Cost: resources diverted from private good production. Benefit: Extra satisfaction from more public goods.

marginal-cost - marginal-benefit rule

Used by government to decide if it should use resources for a project and to determine the total quantity of resources it should devote to a project. Additional resources should only be devoted to a project so long as the MB > MC.

A negative externality or spillover cost occurs when A) firms fail to achieve allocative efficiency B) firms fail to achieve productive efficiency C) the price of a good exceeds the marginal cost of producing it D) the total cost of producing a good exceeds the costs borne by the producer

B - firms fail to achieve productive efficiency

An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which A) marginal cost exceeds marginal benefit. B) maximum willingness to pay exceeds minimum acceptable price. C) consumer surplus exceeds producer surplus. D) producer surplus exceeds consumer surplus.

B - maximum willingness to pay exceeds minimum acceptable price.

A positive externality or spillover benefit occurs when A) product differentiation increases the variety of of products available to consumers B) the benefits associated with a product exceed those accruing to people who consume it C) a firm does not bear all of the costs in producing a good or service D) firms earn positive economic profits

B - the benefits associated with a product exceed those accruing to people who consume it

Supply-side market failures occur when: A) the demand and supply curve don't reflect consumers' full willingness to pay for a good or service B) the demand and supply curves don't reflect the full cost of producing a good or service C) government regulates production of a good or service D) a good or service is not supplied because no one wants it

B - the demand and supply curves don't reflect the full cost of producing a good or service

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle: A) under the demand curve and below the actual price B) under the demand curve and above the actual price C) above the supply curve and above the actual price D) above the supply curve and below the actual price

B - under the demand curve and above the actual price

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences: A) a consumer surplus of $12 and Nathan experiences a producer surplus of $190 B) a producer surplus of $9 and Nathan experiences a consumer surplus of $3 C) a consumer surplus of $9 and Nathan experiences a producer surplus of $3 D) a producer surplus of $9 and Nathan experiences a producer surplus of $12

C - a consumer surplus of $9 and Nathan experiences a producer surplus of $3

People enjoy outdoor holiday lighting displays, and would be willing to pay to see these displays, but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a: A) negative externality B) supply-side market failure C) demand-side market failure D) government failure

C - demand-side market failure

The two main characteristics of a public good are: A) production at a constant marginal costs and rising demand B) nonexcludability and production at a rising marginal cost C) nonrivalry and nonexcludability D) nonrivalry and large negative externalities

C - nonrivalry and nonexcludability

quasi-public goods

Could be provided through the market system but are produced by the government due to the free-rider problem. (Education, highways). If left to the private market, these goods would be underproduced or underconsumed.

free-rider problem

Created by nonrivalry and nonexcludability, it is where once a producer provides a public good, everyone, including nonpayers, can receive the benefits.

Graphically, producer surplus is measured as the area: A) under the demand curve and below the actual price B) under the demand curve and above the actual price C) above the supply curve and above the actual price D) above the supply curve and below the actual price

D - above the supply curve and below the actual price

producer surplus

Difference between the actual price a producer receives and the minimum price they would accept.

consumer surplus

Difference between what a consumer is willing to pay for a good and what they actually pay.

private goods

Goods produced in the market by firms and are offered for sale. They must have rivalry and excludability.

public goods

Goods provided by the government and are offered for free. They must have nonrivalry and nonexcludability. They can create the free-rider problem.

efficiency losses (deadweight losses)

If quantity is less than or greater than the equilibrium quantity or most efficient level, there are efficiency losses to buyers and sellers. They reduce the maximum possible size of the combined consumer and surplus surplus.

market failures

Markets fail to produce the right amount of the product. Resources may be over-allocated or under-allocated. Scarce resources are not allocated to the most valued products.

demand-side market failures

Occur when it is not possible to charge consumers for the products. Some can enjoy the benefits without paying. Consumers' full willingness to pay is not fully captured in the demand for the good or service. (Fireworks)

supply-side market failures

Occurs when a firm does not pay the full cost of producing its output. (pollution)

Coase theorem

Some negative or positive externality situations can be addressed through individual or private bargaining and without government intervention

Where there is overproduction of a product there are efficiency losses and where there is underproduction there are efficiency losses. In both cases, the combined consumer and producer surplus is _____ (greater / less than) the maximum that would occur at the efficient quantity of output.

less than

Allocative efficiency occurs at quantity levels where MB is equal to MC, maximum willingness to pay by consumers is equal to the minimum acceptable price for producers, and the combined consumer and producer surplus is at a ________ (min / max).

max

optimal reduction of an externality

occurs when MC and MB of reducing an externality are equal

externality

occurs when some of the costs or benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller. Negative: supply-side Positive: demand-side

nonrivalry

once a public good is consumed by one person, it is still available for consumption by others.

rivalry

one's consumption is only for themselves

excudability

only those who can afford it will consume

nonexcludability

those individuals who do not pay for a public good can still obtain its benefits