ARE 336 Exam 2 Part one, practice exams

10.What best describes the concept of a transaction cost? A. Cost of reaching and enforcing agreements. B. Cost of fees paid to credit card companies. C. Cost of lawyers. D. None of the above.

A. Cost of reaching and enforcing agreements.

4. Suppose that Parker Dam, on Lake Havasu in Arizona has a leak, and will break in five years. If it breaks, the damage caused to local agriculture and loss of tourism will be $500. To avoid this, the government can spend $100 a year for two years to avoid the loss. Suppose the discount rate is 25 percent. Calculate the net present value. Should the Bureau of Reclamation pursue this policy? Hint: We need to spend $100 now (t= 0) and 100 next year (t=1) to avoid the loss in time t=5. A. NPV = -16.16. Don't pursue the policy. B. NPV = 16.16. Pursue the policy. C. NPV = -46.67. Don't pursue the policy. D. NPV = 46.67. Pursue the policy. E. None of the above.

A. NPV = -16.16. Don't pursue the policy. B. NPV = 16.16. Pursue the policy.

20.Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution? A. Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). B. Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. C. Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section. D. Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.

A. Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15).

16.On the Fourth of July, there is no fireworks display in the small town of Yankeeville, even though it would be efficient for such a display to be produced. Which of the following statements is correct? A. The lack of a fireworks display in Yankeeville arises because of an externality. B. The lack of a fireworks display in Yankeeville arises because the free- rider problem does not apply to goods such as fireworks displays. C. In deciding not to produce a fireworks display in Yankeeville, private individuals and private firms made decisions that were privately irrational. D. All of the above are correct.

A. The lack of a fireworks display in Yankeeville arises because of an externality.

1. Suppose a local government has three roads that need to be repaved, but only have the resources to repave one of these roads. How would they make the decision of which road to repave? A. They would conduct a cost benefit analysis, and choose the project that maximizes net benefits. B. They would conduct a cost benefit analysis, and choose the project that maximizes net costs. C. They would conduct a cost benefit analysis, and choose the project that maximizes total benefits D. They would use dice to decide, since there is too much uncertainty to accurately estimate the costs and benefits of each proposal.

A. They would conduct a cost benefit analysis, and choose the project that maximizes net benefits.

7. Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears a $350 cost from the noise. Mary would like to offer Alexander some money to turn down the volume on his stereo. If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement? A. an amount less than $100 B. an amount between $100 and $250 C. an amount between $250 and $350 D. Any amount could result in both parties benefiting from the agreement.

A. an amount less than $100

7. Neither public goods nor open access resources are A. excludable, but only public goods are not rival in consumption. B. excludable, but only open access resources are not rival in consumption. C. rival in consumption, but only public goods are not excludable. D. rival in consumption, but only open access resources are not excludable.

A. excludable, but only public goods are not rival in consumption.

5. Which of the following pairs of goods includes a good that is excludable and rival in consumption as well as a good that is excludable and not rival in consumption? A. pizza, cable TV B. pair of pants, clean air C. clean air, mathematical theorem D. basic research, fireworks display

A. pizza, cable TV

1. The Tragedy of the Commons results when a good is A. rival in consumption and not excludable. B. excludable and not rival in consumption. C. both rival in consumption and excludable. D. neither rival in consumption nor excludable.

A. rival in consumption and not excludable.

13.The Coase theorem states that A. under certain circumstances government intervention is not needed to reach efficient outcomes when an externality is present. B. government intervention is always required to reach an efficient outcome when an externality is present. C. government intervention cannot lead to an efficient outcome when an externality is present. D. only negative externalities can be resolved using government intervention.

A. under certain circumstances government intervention is not needed to reach efficient outcomes when an externality is present.

19.Which of the following best describes the decision rule used in cost benefit analysis for a single project/policy proposal? A. Implement the project/policy if a single human life can be saved. B. Implement the policy if the net present value is greater than zero. C. Implement the policy if marginal revenue exceeds marginal damages. D. None of the above.

B. Implement the policy if the net present value is greater than zero.

19.Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? A. The railroad will continue to operate but will pay the farmer $1,500 in damages. B. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. C. The farmer will incur $1,500 in damages to his crops. D. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

B. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur

3. Sensitivity analysis is best described as which of the following? A. Unnecessary. B. Useful for determining how the calculation changes with different parameter values. C. Mandatory. D. None of the above.

B. Useful for determining how the calculation changes with different parameter values.

14.Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action A. is always needed because private solutions can never be attained. B. is needed when private solutions fail to arise. C. will be needed only to correct for positive externalities. D. will be needed only to correct for negative externalities.

B. is needed when private solutions fail to arise.

12.Which of the following is not a public good? A. national defense B. patented technological knowledge C. general knowledge D. the elimination of poverty

B. patented technological knowledge

9. The overuse of an open access resource relative to its economically efficient use is called A. the free rider problem. B. the Tragedy of the Commons. C. a public good. D. cost-benefit analysis.

B. the Tragedy of the Commons.

5. Miguel, Maria, and Marcos all would like a place to sit while waiting at their children's bus stop. The neighborhood association is considering installing several park benches at the bus stop. Miguel values the benches at $20, Maria at $30, and Marcos at $40. The park benches and labor for installation cost $100. If Miguel, Maria, and Marcos are the only residents who value the benches, what should the neighborhood association do? A. Install the park benches because people like places to sit. B. Install the park benches because the benefits outweigh the costs. C. Do not install the park benches because the costs outweigh the benefits. D. Do not install the park benches to prevent the Tragedy of the Commons problem of overuse.

C. Do not install the park benches because the costs outweigh the benefits.

20.Suppose that policymakers are doing cost-benefit analysis on a proposal to add traffic barriers to divide the flow of traffic in an effort to increase safety on a given highway. Which of the following statements is correct? A. The benefits are usually easier to measure than the costs. B. Because human life is priceless, any measure to increase traffic safety would generate benefits that outweigh the costs. C. Estimating the value of a human life is difficult but necessary to evaluate the proposal. D. Both A and B are correct.

C. Estimating the value of a human life is difficult but necessary to evaluate the proposal

15.Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that A. Jenny pays Abe $150 to give the dog to his parents who live on an isolated farm. B. Abe pays Jenny $350 for her inconvenience. C. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm. D. There is no private transaction that would improve this situation.

C. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

11.The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. Which of the following statements about the aquifer is correct? A. The aquifer is a public good which must be publicly owned to be used efficiently. B. The aquifer is a private good which must be privately owned to be used efficiently. C. The aquifer is an open access resource which will be overused if no one owns it. D. The aquifer is a club good which should be left as it is.

C. The aquifer is an open access resource which will be overused if no one owns it.

4. Without government intervention, public goods tend to be A. overproduced and open access resources tend to be overconsumed. B. overproduced and open access resources tend to be underconsumed. C. underproduced and open access resources tend to be overconsumed. D. underproduced and open access resources tend to be underconsumed.

C. underproduced and open access resources tend to be overconsumed.

2. On the Fourth of July, there is no fireworks display in the small town of Yankeeville, even though it would be efficient for such a display to be produced. Which of the following statements is correct? A. The lack of a fireworks display in Yankeeville arises because of an externality. B. The lack of a fireworks display in Yankeeville is a case of market failure. C. In deciding not to produce a fireworks display in Yankeeville, private individuals and private firms made decisions that were privately rational but socially inefficient. D. All of the above are correct.

D. All of the above are correct.

17.Which of the following is a type of transactions cost? A. Information cost. B. Contracting cost. C. Enforcement cost. D. All of the above. E. None of the above.

D. All of the above.

9. What are two necessary conditions for the free market to achieve an efficient level of pollution? A. Clearly defined property rights and low marginal abatement costs. B. Clearly defined human rights and low marginal abatement costs. C. Pigouvian taxation and emissions standards. D. Clearly defined property rights and low transactions costs.

D. Clearly defined property rights and low transactions costs.

8. Which of the following statements is not correct? A. Private markets tend to over-produce products with negative externalities. B. Private markets tend to under-produce products with positive externalities. C. Private parties can bargain to efficient outcomes even in the presence of externalities. D. Private parties are usually more successful in achieving efficient outcomes than government policies in the presence of externalities.

D. Private parties are usually more successful in achieving efficient outcomes than government policies in the presence of externalities.

18.A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome? A. The radio station puts up a shield, which it pays for. B. The radio station puts up a shield, which the dentist pays for. C. Neither the radio station nor the dentist purchase additional equipment. D. The dentist gets a new drill; it does not matter who pays for it.

D. The dentist gets a new drill; it does not matter who pays for it.

3. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes an efficient outcome? A. The railroad will continue to operate but will pay the farmer $1,500 in damages. B. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. C. The farmer will incur $1,500 in damages to his crops. D. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

D. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

10.Four friends decide to meet at a Chinese restaurant for dinner. They decide that each person will order an item off the menu, and they will share all dishes. They will split the cost of the final bill evenly among each of the people at the table. A Tragedy of the Commons problem is likely for each of the following reasons except A. each person has an incentive to eat as fast as possible since their individual rate of consumption will not affect their individual cost. B. there is an externality associated with eating the food on the table. C. when one person eats, he may not take into account how his choice affects his friends. D. each dish would be both excludable and rival in consumption.

D. each dish would be both excludable and rival in consumption.

6. A sidewalk runs across Jermichael's front yard near the street. By law, anyone has the right to use the sidewalk. When Jermichael shovels the sidewalk after a heavy snowstorm, A. he is providing a good that is excludable. B. he is a free rider. C. those who walk on the sidewalk are using a club good. D. he is providing a good that is not rival and not excludable.

D. he is providing a good that is not rival and not excludable.

8. If the use of an open access resource is not regulated, A. no one can enjoy it. B. it will tend to be underused. C. property rights will be clearly defined. D. it will be overused.

D. it will be overused.

6. The greatest difficulty with cost-benefit analysis of a public project is determining A. whether government revenue is sufficient to cover the cost of the project. B. which contractor should be awarded the project. C. the cost of the project. D. the value or benefit of the project.

D. the value or benefit of the project.

2. Suppose Wake County is contemplating building a network of bicycle trails throughout the county. Which of the following groups of people most likely have "standing" (that is to say, who's benefits and/or costs will be counted in the benefit cost analysis)? A. Wake county taxpayers. B. Wake county bicycle enthusiasts. C. Chatham county bicycle enthusiasts. D. All of the above. E. A and B.

E. A and B.

11.Which of the following is a limitation of Coasean bargaining? A. It results in an inefficient allocation of resources. B. It increases deadweight loss. C. It violates the equimarginal rule. D. All of the above. E. None of the above.

E. None of the above.