Microeconomics Chapter 12

A condition in which no change is possible that will make some members of society better off without making some other members of society worse off is called A. Pareto optimality. B. market failure. C. general equilibrium. D. partial equilibrium.

A. Pareto optimality.

In order to have an efficient distribution of final products to households, A. free and open markets are essential. B. there can be no unemployment. C. households must maximize their income. D. the equity criterion must be satisfied.

A. free and open markets are essential.

Which of the following are examples of Parents-efficient changes? Explain your answers. The Hooterville Police Department implements cost-saving programs without having to sacrifice the quality of their services. A. Pareto efficient, because services are provided at a lower cost regardless of the quality of the service. B. Pareto efficient, because services are provided at a lower cost without making any members of society worse off. C. Not Pareto efficient, because service quality does not increase with the cost-saving programs. D. Not Pareto efficient, because services provided by a government agency are public goods. Competition is introduced into the satellite television industry, and monthly rates drop. A study shows that benefits to consumers are larger than the lost monopoly profits. A. Pareto efficient, because competition increases. B. Potentially efficient, because the gains exceed the losses. C. Not Pareto efficient, because only consumers who want to buy D. Pareto efficient, because consumers are better off. James trades his Harley-Davidson motorcycle to Lola for her John Deere tractor. A. Pareto efficient, because Lola will be better off more than James will be worse off. B. Not Pareto efficient, because a motorcycle is worth less than a tractor. C. Not Pareto efficient, because the tractor is worth less than the motorcycle. D. Pareto efficient, because James and Lola agree to exchange voluntarily. The government eliminates an international transportation tax on entire tickets when airlines complain that the tax was costing them business. A. Pareto efficient, because airlines sell more tickets at lower cost. B. Not Pareto efficient, because only consumers who purchase airline tickets are better off. C. Pareto efficient, because consumers are better off. D. Potentially efficient if we assume the gains for consumers and firms exceed the losses.

B. Pareto efficient, because services are provided at a lower cost without making any members of society worse off. Pareto efficiency is a condition in which no change is possible that will make some members of society better off without making other members of society worse off. In this instance, the monopoly is worse off; however, consumers are better off by more. Therefore, the change may be potentially efficient. B. Potentially efficient, because the gains exceed the losses. D. Pareto efficient, because James and Lola agree to exchange voluntarily. B. Not Pareto efficient, because only consumers who purchase airline tickets are better off. In this instance, the government is worse off because it loses tax revenue, although airlines might be better off by more.

Each instance that follows is an example of one of the four types of market failure discussed in this chapter. In each case, identify the type of market failure and defend your choice briefly. Everyone in town would benefit from the acquisition of two new fire engines, but the town does not have the money to pay for them, and no one is willing to purchase and donate them to the town. A. Imperfect information, because no one knows the entire neighborhood would benefit from two new fire engines. B. Public good, because new fire engines would bestow collective benefits to society. C. Private good, because the fire engines would be owned by the donor. D. Negative externality, because the collective benefits that the fire engines would bestow on society are not provided. The only three gas stations in a small town all agree to raise their prices. A. Negative externality, because drivers will be paying higher prices. B. Imperfect competition, because individuals outside the transaction are harmed by the agreement. C. Imperfect competition, because the gas stations are not acting like price-takers. D. Imperfect information, because the government does not know about the agreement. Your electrician convinces you that you need to replace your entire breaker box when all you really need is a new breaker switch. A. Imperfect competition, because the electrician is dishonest. B. Negative externality, because you are paying for something that you don't need. C. Public good, because the repair bestows collective benefits on members of society. D. Imperfect information, because you lack information about electrical repairs to know which repair is unnecessary. Your neighbor refuses to vaccinate his children for measles. A. Positive externality, because individuals outside the transaction are positively affected. B. Imperfect information, because you failed to communicate how important the measles vaccine is for children. C. Negative externality, because individuals outside the transaction are negatively affected. D. Imperfect information, because your neighbor lacks the information needed to obtain the measles vaccine.

B. Public good, because new fire engines would bestow collective benefits to society. An externality is a cost or benefit imposed or bestowed on an individual or group that is outside, or external, to the transaction. C. Imperfect competition, because the gas stations are not acting like price-takers. This is an example of imperfect competition because these firms are not acting like price-takers. Their decision to raise price above marginal cost will restrict output of gas sales below the efficient level. D. Imperfect information, because you lack information about electrical repairs to know which repair is unnecessary. C. Negative externality, because individuals outside the transaction are negatively affected. This is an example of a negative externality because there is a byproduct (harm) that affects parties outside the transaction of not vaccinating the child

Society will benefit from more of a good being produced when the price of a good is A. greater than the marginal cost to produce that good. B. less than the marginal cost to produce that good. C. less than the marginal benefit of producing that good. D. greater than the marginal benefit of producing that good.

B. less than the marginal cost to produce that good. Society will benefit from more a good being produced when the price of a good is greater than the marginal cost to produce that good.

The opportunity cost of using resources to produce more of one good instead of more of another good is its A. total cost. B. marginal cost. C. marginal revenue. D. price.

B. marginal cost.

If some gain and some lose as the result of a change, and it can be demonstrated that the value of the gains exceeds the value of the losses, then the exchange is said to be A. inefficient. B. potentially efficient. C. technically efficient. D. unequivocally Pareto optimal.

B. potentially efficient.

The point of scalping is to find someone who wants a ticket more than the person who presently has it. Whenever two different prices exist in market, arbitrage opportunities (buy and then sell at a higher price) are there. Professional scalpers buy up tickets when they are first offered to the public while some buy them on the street the night of the event. They can sell any ticket, even those in short supply, at some price. When lots of people want to go to an event that has a limited supply of tickets, the scalping price can be quite high. What determines whether it is worth it? It is worth it A. if all the tickets to the event are sold. B. to both parties if the transaction is completed. C. if the price is less than the original ticket price. D. if the price is more than the original ticket price. It is argued that scalping is efficient because it A. remove the middleman. B. is a voluntarily exchange not effecting third parties. C. creates revenue for the event. D. is unregulated.

B. to both parties if the transaction is completed. When a transaction is completed, it is revealed that both parties benefit. If they did not, the trade would not take place. B. is a voluntarily exchange not effecting third parties. Any trade in which two or more people voluntarily exchange goods or services, without having any effect on third parties, must be efficient.

Do you agree or disagree with each of the following statements? Explain your answer. Nutritional food is a public good and should be produced by the public sector because private markets will fail to produce tie efficiently. A. Agree: The private sector cannot produce efficient quantities of nutritional food. B. Disagree: Public goods should not be produced by the public sector. C. Disagree: Nutritional food is not a public good since it does not bestow collective benefits on members of society. D. Agree: Nutritional foods should not be produced by the private sector. Imperfect markets are inefficient because as price-makers, firms in these markets can guarantee that price will always be less than marginal cost. A. Disagree: Under imperfect competition, price will equal marginal cost. B. Agree: Under imperfect competition, an efficient mix of output is guaranteed C. Disagree: Under imperfect competition, an efficient mix of output is not guaranteed. D. Agree: Under imperfect competition, the price will always be less than marginal cost. Financial planning service is an example of a potentially inefficient market because consumers do not have perfect information about th A. Agree: Financial planners are not to be trusted. B. Disagree: Consumers have perfect information about financial planning services. C. Agree: It is difficult for consumers to evaluate the skills of a financial planner. D. Disagree: Imperfect information does not result in efficiencies.

C. Disagree: Nutritional food is not a public good since it does not bestow collective benefits on members of society. The private market typically will not provide an efficient quantity of public goods because the private market does not account for benefits bestowed on individuals or groups that are outside, or external to, the market. C. Disagree: Under imperfect competition, an efficient mix of output is not guaranteed. C. Agree: It is difficult for consumers to evaluate the skills of a financial planner. Financial planners typically have more information about financial services than consumers and don't always share it entirely.

In perfect competition, the condition that ensures that the right things are produced is A. P=ATC B. MRPL=ATC C. P=MC D. MUx=Px

C. P=MC

In perfect competition, when firms are maximizing profits and households are maximizing utility, A. voluntary exchange can be used to make both firms and households better off. B. individual welfare is maximized, but social welfare is not. C. Pareto optimality has been obtained. D. the outcome is inefficient.

C. Pareto optimality has been obtained.

A positive externality is A. a cost imposed on an individual or a group that is outside the transaction. B. an occurrence in an other country. C. a benefit bestowed on an individual or a group that is outside of, or external to, the transaction. D. a program devised by the private sector. What type of externalities misallocate resources and result in market failure, waste, or lost value? A. negative externalities only B. technological externalities C. positive externalities only D. positive externalities and negative externalities

C. a benefit bestowed on an individual or a group that is outside of, or external to, the transaction. D. positive externalities and negative externalities Both positive and negative externalities can result in market failure because they can misallocate resources, causing waste or lost value.

Output is distributed efficiently among households in perfectly competitive markets because A. households will buy goods as their income is greater than or equal to their prices. B. households will buy goods as their income is greater than or equal to the firm profit. C. households will buy goods as their willingness to pay for goods is greater than or equal to their prices. D. of the assumption of profit maximization.

C. households will buy goods as their willingness to pay for goods is greater than or equal to their prices. Resources are allocated efficiently among firms in a perfectly competitive market because of the assumption of profit maximization. For firms to maximize profits, they must minimize the cost of producing their chosen levels of output, so firms must choose production technology that produces the desired output at the lowest cost. Maximizing profit also means hiring an input up until the marginal revenue product of the input is equal to its price. If all firms pay the same input prices, the marginal revenue product of the last unit of an input hired will be the same in all firms, so they are also allocated efficiently. Output is distributed efficiently among households in perfectly competitive markets because households will buy goods as their willingness to pay for goods is greater than or equal to their prices. As long as households are free to choose how to spend their incomes, they cannot end up with the wrong combinations of goods. Competitive markets ensure that households don't end up with the wrong goods and services.

An economist ha estimated that the maintenance of a public park costs $25,000 a year and that the public park generates $30,000 a year in revenue for merchants near the park. From society's point of view, the maintenance of this park is A. inefficient, because everyone in the community pays taxes to support the park, but only the merchants near the park benefit. B. potentially efficient because no one would be made worse off as a result of maintaining the park. C. potentially efficient because the value of the gains exceed the value of the costs. D. inefficient because the additional revenues generated by the park are so low.

C. potentially efficient because the value of the gains exceed the value of the costs.

Under perfect competition, the efficient level of output is produced because A. government regulates the output level that must be produced. B. firms can earn an economic profit in the long run. C. price equals marginal cost. D. firms earn only a normal profit in the long run.

C. price equals marginal cost.

Efficiency occurs when A. unemployment is low and prices are stable. B. all markets are in equilibrium. C. the economy is producing hat people want at least possible cost. D. the economy has a fair and just distribution of income.

C. the economy is producing hat people want at least possible cost.

Marginal cost is a good measure of A. what society gains by using resources to produce more of a good or service. B. the social value of a marginal unit of good. C. what society gives up by using resources to produce more of a good or service. D. the least costly way to produce all units of a good.

C. what society gives up by using resources to produce more of a good or service.

When all the conditions for perfect competition are met, A. resources are allocated among firms efficiently. B. final products are distributed among households efficiently. C. the system produces the goods and services consumers want. D. All of the above are correct.

D. All of the above are correct.

Which assumption(s) are necessary for an efficient allocation of resources among firms? A. All firms pay the same price for inputs. B. Firms behave so as to maximize their profits. C. Factor markets are open and competitive. D. All of the above are correct.

D. All of the above are correct.

To conduct a general equilibrium analysis of a change in consumer preferences away from beef and toward chicken, you must consider A. changes in the price of resources allocated to the production of beef and chicken. B. changes in the equilibrium prices and quantities of beef and chicken. C. changes in the amount of resources allocated to the production of beef and chicken. D. All of the above.

D. All of the above.

Which of the following are actual Pareto-efficient changes? Explain briefly. You blast your MP3 player at full volume through your car speakers while driving your convertible through Chicago. A. Pareto efficient, because you you are better off more than the other drivers are worse off. B. Pareto efficient, because this event makes you better off. C. Not Pareto efficient, because not all member of society are better off. D. Not Pareto efficient, because you are better off but some other drivers are worse off. Your neighbor never returns the lawnmower he borrowed from you. A. Pareto efficient, because at least one individual, your neighbor, is better off. B. Not Pareto efficient, because you are worse off more than your neighbor is better off C. Pareto efficient, because your neighbor is better off more than you are worse off. D. Not Pareto efficient, because you are worse off. You use a store coupon to save $1.50 on a jar of peanut butter. A. Not Pareto efficient, because the coupon value is too low. B. Pareto efficient, because you are better off more than the store is worse off. C. Pareto efficient, because both you and the store agree to the transaction. D. Not Pareto efficient, because the coupon value is too high. You pay a ticket scalper $250 for a ticket to a Green Bay Packer's game at Lambeau Field. The ticket has a face value of $125. A. Pareto efficient, because both you and the scalper agree to the transaction. B. Not Pareto efficient, because the price of the ticket is too high. C. Not Pareto efficient, because the transaction does not benefit you and the scalper by the same amount. D. Pareto efficient, because the scalper is better off more than you are worse off.

D. Not Pareto efficient, because you are better off but some other drivers are worse off. D. Not Pareto efficient, because you are worse off. C. Pareto efficient, because both you and the store agree to the transaction. A. Pareto efficient, because both you and the scalper agree to the transaction.

A condition is Pareto optimal when A. no change is possible that will make most members of society better off without making some members of society worse off. B. some change is possible that will make most members of society better off without making some members of society worse off. C. some change is possible that will make some members of society better off without making some members of society worse off. D. no change is possible that will make some members of society better off without making some members of society worse off. E. None of the above.

D. no change is possible that will make some members of society better off without making some members of society worse off.

Under ideal conditions, a perfectly competitive market economy allocated resources efficiently without the help of government. But efficiency may not be achieved without the help of government in a world where A. there is noncompetitive behavior. B. there are externalities. C. there are public goods. D. there is imperfect information. E. there is any of the above.

E. there is any of the above.

There are several types of market failure which may prevent an economy from allocating resources efficiently. Indicate which type of market failure describes each of the situations below. Everyone in a neighborhood would benefit from spraying a nearby pond for mosquitos, but some people are not willing to pay ___. Charlie parks rusty old cars on his front lawn, thus reducing the neighbors' property values. ___ Both of the pizza restaurants in a small town agree on a common price. ___ Consumers use too little legal services since they are unsure of the quality. ___

Everyone in a neighborhood would benefit from spraying a nearby pond for mosquitos, but some people are not willing to pay public good. Freedom from mosquitos is something we consume collectively and no one can be excluded. Charlie parks rusty old cars on his front lawn, thus reducing the neighbors' property values. externality Charlie's behavior imposes an external cost on his neighbors. Both of the pizza restaurants in a small town agree on a common price. noncompetitive behavior When the two restaurants collude, price is not driven down to the bottom of the average cost curve. Consumers use too little legal services since they are unsure of the quality. imperfect information

An example of a positive externality is A. the exhaust from an automobile. B. cigarette smoke C. the beauty of a home's well-kept lawn. D. the effluent from a chemical factory.

The beauty of home's well-kept lawn is an example of a positive externality. Neighbors get to enjoy seeing a beautiful lawn without paying for it.