2ECON 201 Chapter 5

20) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. (MC represents the marginal private costs.) If the market for transportation services is competitive and unregulated, the equilibrium quantity is ________ and the equilibrium price is ________. A)MSC equilibrium B) MC equilibrium C) MSC above equilibrium D) MC bellow equilibrium

B

8) A market supply curve reflects the A) external costs of producing a good or service. B) private costs of producing a good or service. C) external benefits of producing a good or service. D) social costs of producing a good or service.

B

15) When a company engages in research and development (R&D), it often discovers things that are useful to other companies. Thus, we can say that there are ________ externalities associated with R&D, and that the free market will provide _________ R&D (relative to the economically efficient level). A) positive ; too little B) negative ; too much C) negative ; too little D) positive ; too much E) negative ; the right amount of

A

17) Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, equilibrium price A) is too low to be optimal, and equilibrium quantity is too high. B) is optimal, but there is an excess supply. C) and output are too low to be optimal. D) and output are too high to be optimal. E) is too high to be optimal, and equilibrium quantity is too low.

A

19) If there is a positive consumption externality, then: A) marginal social benefit = marginal private benefit B) marginal social benefit > marginal private benefit C) marginal social benefit < marginal private benefit D) marginal social cost > marginal private cost E) marginal social cost < marginal private cost

B

1) What is a market failure? A) It refers to a breakdown in a market economy because of widespread corruption in government. B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. C) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event. D) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost.

B

16) Which of the following best summarizes the method of addressing externalities as described in the Coase Theorem? A) Liability laws B) Negotiation between private parties C) Placing a ʺcapʺ on total pollution by the government D) Taxing the parties responsible for the externality

B

18) The Coase theorem states that A) government intervention is always needed if externalities are present. B) a free market equilibrium is the best solution to address externalities. C) if transactions costs are low, assignment of private property rights, and subsequent private bargaining will result in an efficient solution to the problem of externalities. D) it the face of negative externalities, placing a tax on the good in question is the best option.

C

2) A negative externality exists if A) there are quantity controls in a market. B) there are price controls in a market. C) the marginal social cost of producing a good or service exceeds the private cost. D) the marginal private cost of producing a good or service exceeds the social cost.

C

Figure 5-2: Marginal social cost (S2) is above Marginal private cost (S1) sliding on the demand curve 6) Refer to Figure 5-2. At the market outcome, the true marginal cost of the last unit produced is represented by __________ A) Pa. B) Pb. C) Pc. D) Pf.

D

Figure 5-3: Marginal social benefits (D2) is above Marginal private benefits (D1) sliding on the Supply curve 11) Refer to Figure 5-3. At the competitive market equilibrium, for the last unit produced, A) the size of the external cost is Pn - Po. B) the size of the external benefit is Pn - Po. C) the size of the external cost is Pm - Po. D) the size of the external benefit is Pm - Po.

D

22) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. (MC represents the marginal private costs.) The efficient quantity of transportation services is ________ and the corresponding price is ________. A)MSC equilibrium B) MC equilibrium C) MSC above equilibrium D) MC bellow equilibrium

A

9) A market demand curve reflects the A) private benefits of consuming a product. B) social benefits of consuming a product. C) external benefits of consuming a product. D) the sum of private and social benefits of consuming a product.

A

Figure 5-3: Marginal social benefits (D2) is above Marginal private benefits (D1) sliding on the Supply curve 12) Refer to Figure 5-3. The size of marginal external benefits can be determined by A) D2 - D1 at each output level. B) the demand curve D2. C) D2 + D1 at each output level D) the demand curve D1.

A

Figure 5-2: Marginal social cost (S2) is above Marginal private cost (S1) sliding on the demand curve 4) Refer to Figure 5-2. The efficient output level is A) Qb. B) Qa. C) Qb - Qd. D) Qd.

B

Figure 5-2: Marginal social cost (S2) is above Marginal private cost (S1) sliding on the demand curve 5) Refer to Figure 5-2. At the market outcome, the marginal benefit of the last unit produced is represented by _________ A) Pa. B) Pb. C) Pc. D) Pf .

B

21) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. (MC represents the marginal private costs.) If the market for transportation services is competitive and unregulated, then for the last vehicle-mile driven, the marginal benefits to society are _________________ the marginal costs to society. A) Slides on MC bar B) Change between equilibriums C) Change between equilibrium MSC and same quantity on MC D) equal to

C

Article Summary In a blog posting in the New York Times, Daniel Hamermesh cited a recent study conducted by researchers at Michigan State University which claims that states that repeal mandatory motorcycle helmet laws see an increase in organ donations from fatal motor vehicle accidents. According to the study, when states repeal mandatory motorcycle helmet laws, organ donations due to fatal accidents increase by 10 percent. The study estimates that for each death of a motorcyclist who was not wearing a helmet, 0.33 deaths are delayed or prevented among those on organ transplant waiting lists. In a conversation with colleagues prior to the state implementing a mandatory helmet law, a California surgeon stated ʺmotorcycle fatalities are ...our number one source of organsʺ. Source: Richard S. Chang, ʺMotorcycle Helmets and Donor Organs,ʺ New York Times, June 22, 2009. 3) Refer to the Article Summary. Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle involvement in traffic accidents, but they also have been shown to reduce the number of organs available for transplant. By decreasing the number of transplantable organs, these mandatory helmet laws produce A) social benefits. B) a positive externality. C) a negative externality. D) public goods.

C

Figure 5-2: Marginal social cost (S2) is above Marginal private cost (S1) sliding on the demand curve 7) Refer to Figure 5-2. At the market outcome, the deadweight loss is represented by _________ A) area abe B) Pf - Pb C) area abf D) area abc E) Pa - Pc

C

Figure 5-3: Marginal social benefits (D2) is above Marginal private benefits (D1) sliding on the Supply curve 10) Refer to Figure 5-3. In the absence of any government intervention, the private market A) under produces by Qo - Qm units. B) over produces by Qo - Qm units. C) under produces by Qn - Qm units. D) over produces by Qn - Qm units

C

Figure 5-3: Marginal social benefits (D2) is above Marginal private benefits (D1) sliding on the Supply curve 13) Refer to Figure 5-3. The deadweight loss due to the externality is represented by the area A) mso. B) nso. C) msn. D) mtn.

C

MSC above MC sliding on D bar 23) The figure above shows the market for transportation services, which produces an external cost due to the air pollution that is created. (MC represents the marginal private costs.) This graph shows _____________________________ and ______________________________, A) no production externality ; a negative consumption externality B) a negative production externality ; a negative consumption externality C) a positive production externality ; no consumption externality D) a negative production externality ; no consumption externality E) no production externality ; a positive consumption externality

D

14) Externalities A) do become reflected in market prices, so they can be a source of economic inefficiency. B) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event. C) do become reflected in market prices, so they do not adversely affect economic efficiency. D) are not reflected in market prices, so they do not adversely affect economic efficiency. E) are not reflected in market prices, so they can be a source of economic inefficiency.

E