Macroeconomics Chapter 4

Market failures refer to those situations where the sellers are not producing as much as the buyers are wanting to buy. (T/F)

False

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

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

An example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies. True False

T

When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to find jobs because of the unemployment benefits, they are referring to the moral hazard problem. (T/F)

True

A cap-and-trade program assigns a property right to the atmosphere. mandates that every firm individually cut its emissions to below a certain level. assigns a property right to polluting the atmosphere. is easy to establish and enforce.

assigns a property right to polluting the atmosphere.

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve? frozen yogurt bubble gum microwave popcorn courts of law

courts of law

The MB curves in the diagram slope downward because of the law of conservation of matter and energy. diminishing returns. diminishing marginal utility. increasing cost.

diminishing marginal utility.

The MC curves in the diagram slope upward because of the law of demand. conservation of matter and energy. diminishing marginal utility. diminishing returns.

diminishing returns.

A significant amount of positive consumer surplus is the reason why sometimes a shopper regrets having bought a particular item. True False

f

Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the greatest amount. True False

f

The optimal quantity of a public good is where the total benefits from it are equal to the total costs of producing it. (T/F)

false

When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting on their mortgages, there is no moral hazard problem. (T/F)

false

From an economist's perspective, an important consideration for policies to address global warming is the market for recyclable inputs. the supply and demand for recycled products. the marginal cost and marginal benefit of the policies. a lawsuit that can arise from the enactment of the policies.

the marginal cost and marginal benefit of the policies.

At the output where the combined amounts of consumer and producer surplus are largest, the areas of consumer and producer surplus necessarily are equal. the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output. consumer surplus exceeds producer surplus by the greatest amount. marginal benefit exceeds marginal cost by the greatest amount.

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

Refer to the provided supply and demand graph of Product X. If there are positive externalities from the consumption of Product X, then the socially optimal demand curve would be to the left of line D on the graph. to the right of line D on the graph. at the position of line D on the graph. an upward-sloping line.

to the right of line D on the graph.

Along a demand curve, product price and consumer surplus are inversely related. (T/F)

true

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 $19. $0.90. $90. $1.

$1.

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. Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem? levy a Pigovian tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources levy a Pigovian tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products levy a Pigovian tax on the producers of electricity and use the tax revenues to clean up the river levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river

levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river

At the optimal quantity of a public good, marginal benefit exceeds marginal cost by the greatest amount. total benefit equals total cost. marginal benefit equals marginal cost. marginal benefit is zero.

marginal benefit equals marginal cost.

Upon buying a car with airbags, Indy begins to drive recklessly. This is an example of the principal-agent problem. adverse selection problem. moral hazard problem. free-rider problem.

moral hazard problem.

In the insurance business, the moral hazard problem arises when not-so-healthy people are the ones more eager to buy insurance. people with unhealthy lifestyles buy more insurance coverage. people who have car-insurance coverage drive less carefully. people do not get sufficient car-insurance coverage.

people who have car-insurance coverage drive less carefully.

The market system does not produce public goods because there is no need or demand for such goods. private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them. public enterprises can produce such goods at lower cost than can private enterprises. their production seriously distorts the distribution of income.

private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.

The amount of revenue that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called production costs. producers' supply. producer surplus. surplus production.

producer surplus

When the marginal benefit of an output exceeds the marginal cost, production of that output should be increased, in order to achieve efficiency. production of that output should be decreased, in order to achieve efficiency. increasing the production of that output would increase the deadweight loss. reducing the production of that output would reduce efficiency losses.

production of that output should be increased, in order to achieve efficiency.

Nonrivalry and nonexcludability are the main characteristics of consumption goods. capital goods. private goods. public goods.

public goods.

The market demand curve for a public good is derived in the same manner as demand curves for private goods. is derived by horizontally summing all individual demand curves. shows the total value that all individuals place on each additional unit of the good. shows the total number of units that would be produced by the public sector at each possible price.

shows the total value that all individuals place on each additional unit of the good.

(Consider This) Suppose that a new band, "Balin and the Wolf Riders," tries to sell its music on the Internet. Economists would expect all of those enjoying the music to pay for downloads and compensate the band for its costs. some of those enjoying the music to "free ride" through illegal file sharing and digital piracy. government to tax those attempting to download the band's music. there to be no consumer surplus for those who download the band's music.

some of those enjoying the music to "free ride" through illegal file sharing and digital piracy.

A demand curve for a public good is determined by summing vertically the individual demand curves for the public good. summing horizontally the individual demand curves for the public good. combining the amounts of the public good that the individual members of society demand at each price. multiplying the per-unit cost of the public good by the quantity made available.

summing vertically the individual demand curves for the public good

Supply-side market failures occur when supply curves don't reflect consumers' full willingness to pay for a good or service. supply curves don't reflect the full cost of producing a good or service. government regulates production of a good or service. a good or service is not supplied because no one wants it.

supply curves don't reflect the full cost of producing a good or service.

Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. One solution to this externality problem is to give consumers a subsidy of the amount FG per unit. give producers a subsidy of the amount AB per unit. tax producers by the amount DE per unit. tax consumers by the amount EF per unit.

tax producers by the amount DE per unit.

Allocative efficiency occurs only at that output where marginal benefit exceeds marginal cost by the greatest amount. consumer surplus exceeds producer surplus by the greatest amount. the combined amounts of consumer surplus and producer surplus are maximized. the areas of consumer and producer surplus are equal.

the combined amounts of consumer surplus and producer surplus are maximized.