Multiple Choice Exam 2

a) individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account.

An externality is said to exist when: a) individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account. b) individuals impose costs or benefits on others, and the market provides incentives to take these costs and benefits into account. c) individual actions are affected by external forces; for example, the loss of U.S. jobs due to competition from abroad is an externality. d) individual actions are affected by government policies (such as taxes) that are externally imposed on the market.

b) nonexcludable.

An individual is more likely to free ride when a good is: a) private. b) nonexcludable. c) nonrival. d) artificially scarce.

d) variable input.

An input whose quantity can be changed during a particular period is a(n): a) incremental input. b) marginal input. c) fixed input. d) variable input.

a) fixed input.

An input whose quantity cannot be changed during a particular period is a(n): a) fixed input. b) variable input. c) marginal input. d) incremental input.

d) nonrival and excludable.

As a big music fan, you want to attend a weekend blues festival in your town. The purchase of a wristband gives you, and thousands of other fans, access to the outdoor concert pavilion. The blues festival is a good that has the characteristics of: a) rival and excludable. b) rival and nonexcludable. c) nonrival and nonexcludable. d) nonrival and excludable.

b) tradable emissions permits.

Assume the federal government determines the total level of pollutants that can be discharged by city industries. A city is able to exchange the rights to this total discharge level with other cities. This is an example of: a) Pigouvian taxes. b) tradable emissions permits. c) environmental standards. d) emissions taxes.

d) variable cost times output.

Average variable cost equals all the following except: a) average total cost minus average fixed cost. b) variable cost divided by output. c) (total cost - fixed cost) divided by output. d) variable cost times output.

a) individuals tend to ignore the cost their use of the resource has on others.

Common resources tend to be overused because: a) individuals tend to ignore the cost their use of the resource has on others. b) the individual marginal cost is greater than the marginal social cost. c) common resources are nonrival and nonexcludable. d) the marginal cost of allowing one more unit of consumption is zero.

c) screening to deal with adverse selection.

Companies offering life insurance often require a drug test to determine whether the buyer is a smoker. A smoker then must pay a higher premium. This is an example of: a) pooling of risk with others. b) the demand curve shifting right because of an increase in risk. c) screening to deal with adverse selection. d) providing the buyer with a personal stake, a way of dealing with moral hazard.

c) an ice-cream cone

Which of the following goods best fit the characteristics of a private good? a) fire protection b) disease prevention c) an ice-cream cone d) a professor giving a lecture in a large classroom

a) a public beach with free access

Which of the following is an example of a common resource? a) a public beach with free access b) seats on an airplane c) a city sewer system d) a highway to which access is granted only to those who pay a specified toll

a) Your next-door neighbor installs a bat house and the bats eat mosquitoes.

Which of the following is an example of an activity generating a positive externality? a) Your next-door neighbor installs a bat house and the bats eat mosquitoes. b) You buy a new car and then find $5,000 in the door panel. c) Joe buys health insurance, but decides not to take the time to get a flu shot. d) Your next-door neighbor mows the lawn at 6 A.M.

d) legal limits on SO2 emissions

Which of the following is an example of environmental standards? a) tradable pollution permits b) taxes on the level of pollution c) production subsidies d) legal limits on SO2 emissions

d) When the marginal product of labor is upward-sloping, the marginal cost curve is upward-sloping.

Which of the following statements is false? a) When the marginal cost curve is above the average cost curve, the average cost curve is upward-sloping. b) The average fixed cost curve is downward-sloping and approaches the horizontal axis. c) The marginal cost curve intersects the average variable cost curve at the minimum of average variable cost. d) When the marginal product of labor is upward-sloping, the marginal cost curve is upward-sloping.

c) to minimize the impact of moral hazard.

Fire insurance policies include deductibles: a) to minimize the impact of adverse selection. b) because it is too expensive to insure fully something against fire. c) to minimize the impact of moral hazard. d) because when it comes to fire, most people are risk-averse.

a) there will be too little pollution.

If government officials set an emissions tax too high: a) there will be too little pollution. b) pollution will be unabated. c) the marginal social cost of pollution will exceed the marginal social benefit of pollution. d) there will be too much pollution.

d) signals

In practice, insurance companies faced with adverse selection use which of the following strategies to deal with it? a) deductibles b) co-pays c) moral hazard d) signals

a) zero.

In the absence of government action, polluters will pollute up to the point at which the marginal social benefit of pollution is: a) zero. b) maximized. c) greater than the marginal social cost of pollution. d) equal to the marginal social cost of pollution.

a) the average variable cost curve gets closer and closer to the average total cost curve.

In the short run, as output gets larger and larger: a) the average variable cost curve gets closer and closer to the average total cost curve. b) fixed cost gets smaller. c) marginal cost gets smaller. d) average total cost decreases after the point of diminishing returns.

c) some inputs are fixed and some inputs are variable.

In the short run: a) all inputs are fixed. b) all costs are variable. c) some inputs are fixed and some inputs are variable. d) all inputs are variable.

d) providing an incentive for insured individuals to take reasonable precautions to avoid losses by always requiring a deductible.

Insurance companies deal with the problems created by moral hazard by: a) always insuring buildings for their full replacement value. b) charging extra in cases of adverse selection. c) refusing to insure commercial properties against losses caused by fire. d) providing an incentive for insured individuals to take reasonable precautions to avoid losses by always requiring a deductible.

a) low-risk drivers.

Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible, and it is often purchased by individuals who self-identify as: a) low-risk drivers. b) high-risk drivers. c) drivers who do not care what their premium costs are. d) neither high- nor low-risk drivers.

b) $2 million

Micah is considering turning pro before his senior basketball season. If he turns pro, Micah expects a pro contract worth $2 million in present value terms. If he does not turn pro, there is a 50% chance an injury will prevent him from playing professionally and a 50% chance he will get a pro contract worth $4 million in present value terms. What is the expected present value of Micah's pro contract if he stays in college for his senior year? a) $5 million b) $2 million c) $0 d) $3.5 million

b) an individual knows more about his or her actions than other people do.

Moral hazard occurs when: Incorrect Response a) an individual has an incentive to violate his or her morals. b) an individual knows more about his or her actions than other people do. c) an individual knows more about the way things are than other people do. d) individuals do not do what is in their own best interest.

d) nonrival; nonexcludable; underprovided

Most neighborhood streets are illuminated at night by streetlights. The streetlights are ________ and ________. Therefore, they are likely to be ________ by the competitive market. a) nonrival; excludable; underprovided b) rival; excludable; efficiently provided c) nonrival; nonexcludable; overprovided d) nonrival; nonexcludable; underprovided

a) a decrease in the extra output due to the use of an additional unit of a variable input, when more and more of the variable input is used and all other things are held constant.

The term diminishing returns refers to: a) a decrease in the extra output due to the use of an additional unit of a variable input, when more and more of the variable input is used and all other things are held constant. b) a decrease in total output due to overcrowding, when too much labor is used with too little land or capital. c) a falling interest rate that can be expected as one's investment in a single asset increases. d) a reduction in profits caused by increasing output beyond the optimal point.

d) economies of scale.

When an increase in the firm's output reduces its long-run average total cost, it experiences: a) constant returns to scale. b) variable returns to scale. c) diseconomies of scale. d) economies of scale.

b) they internalize the externality.

When individuals take external costs and benefits into account: a) the market will not reach an efficient solution. b) they internalize the externality. c) the government needs to intervene in the market. d) there are no external costs.

d) private information; distort

When some people know things that other people don't know, this is known as a situation of ________; it can ________ economic decisions. a) risk aversion; facilitate b) blind trust; diversify c) blind strategy; delay d) private information; distort

b) when some inputs are fixed and some are variable.

Diminishing returns to an input set in: a) only in the long run. b) when some inputs are fixed and some are variable. c) when all inputs are fixed. d) when all inputs are variable.

c) $490,000.

Donald has a total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash. He keeps the cash in a safety deposit box so that it is completely safe. However, there is a 10% chance that his house will burn down by the end of the year and be worth nothing (and a 90% chance that nothing will happen to it). Without insurance, the expected value of his end-of-year wealth is: a) $410,000. b) $450,000. c) $490,000. d) $485,000

b) labor and food would be variable resources and a building would be a fixed resource in the short run.

For a restaurant: a) cheese and other wholesale food items would be considered fixed resources in the short run. b) labor and food would be variable resources and a building would be a fixed resource in the short run. c) a building would be a fixed resource in the short run. d) labor and food would be variable resources.

a) the level of pollution at which the marginal social cost of pollution is equal to the marginal social benefit of pollution.

Given that there is general agreement that pollution is undesirable and social welfare is increased by reducing pollution, the optimal level of pollution in a society is: a) the level of pollution at which the marginal social cost of pollution is equal to the marginal social benefit of pollution. b) zero. c) that level that reduces marginal social costs of pollution to zero. d) the level of pollution that minimizes the average total cost of producing the product.

a) to minimize the impact of moral hazard.

Health insurance policies include deductibles: a) to minimize the impact of moral hazard. b) because it is too expensive to insure fully a person's health. c) because health insurance companies often own the hospitals. d) because when it comes to health, most people are risk-averse.

d) $1,080.

Louis has invested $1,000 in the stock market. At the end of one year, there is a 30% chance that his stock will be worth only $800, and a 70% chance that it will be worth $1,200. The expected value of his stock at the end of one year is: a) $1,200. b) $1,000. c) $1,160. d) $1,080.

d) she wants to decrease her exposure to risk.

Lucy decides to buy car insurance. She is doing this because: a) she wishes to increase her exposure to risk. b) she is not risk-averse. c) her marginal utility is not very dependent upon her income. d) she wants to decrease her exposure to risk.

a) adverse selection.

Many people don't reveal their smoking and eating habits on their applications for health insurance. This is an example of: a) adverse selection. b) reputation. c) screening. d) signaling.

d) falls; increases

Marginal cost ________ over the range of increasing marginal returns and ________ over the range of diminishing marginal returns. a) increases; falls b) is constant; rises c) increases; is constant d) falls; increases

d) total cost resulting from a one-unit change in output.

Marginal cost is the change in: a) total cost resulting from a one-unit change in average cost. b) total cost resulting from a one-unit change in a variable input. c) average cost resulting from a one-unit change in output. d) total cost resulting from a one-unit change in output.

b) benefits; costs

Pollution has ________ and ________. a) no opposition; only advocates b) benefits; costs c) no benefits; only costs d) short-term impacts; very little long-term impact

c) there is too little pollution.

Suppose at the current amount of pollution, the marginal social benefit of pollution is greater than the marginal social cost of pollution, then: a) the externality is minimized. b) society is achieving the optimal amount of pollution. c) there is too little pollution. d) there is too much pollution.

c) economies and diseconomies of scale.

The U-shape of the long-run average total cost curve is primarily due to: a) technological change. b) increasing and then diminishing returns. c) economies and diseconomies of scale. d) diminishing returns.

b) marginal product

The ________ is the increase in output obtained by hiring an additional worker. a) total product b) marginal product c) average product d) marginal cost

d) diminishing returns.

The average total cost curve in the short run slopes upward due to: a) diseconomies of scale. b) increasing returns. c) economies of scale. d) diminishing returns.

a) clean water.

The best example of a common resource is: a) clean water. b) a municipal library. c) public education. d) cable television broadcasting.

b) variable; fixed; fixed

The costs associated with variable inputs are ________ costs and the costs associated with ________ inputs are ________costs. a) fixed; fixed; fixed b) variable; fixed; fixed c) fixed; fixed; variable d) variable; fixed; variable

a) assigning property rights, imposing a tax on usage, or by granting a limited number of tradable permits to use the good.

The government can intervene to achieve the socially optimal quantity of a common resource by: a) assigning property rights, imposing a tax on usage, or by granting a limited number of tradable permits to use the good. b) granting a limited number of tradable permits to use the good. c) imposing a tax on usage. d) assigning property rights.

b) long enough in which to vary the quantities of all factors of production.

The long run is a period that is: a) more than one month. b) long enough in which to vary the quantities of all factors of production. c) at least one year. d) more than one week.

d) diseconomies of scale.

The long-run average cost curve will be upward sloping when the firm is experiencing: a) diminishing returns. b) economies of scale. c) constant returns to scale. d) diseconomies of scale.

a) total product divided by labor.

The marginal product of labor is all of the following except: a) total product divided by labor. b) is the slope of the total product curve. c) is the change in output resulting from a one-unit change in labor. d) can be positive at some levels of input and negative at others.

d) inversely related; screen

The premium on insurance is often ________ to the deductible, allowing insurance companies to ________ their customers. a) equal; charge offer a fair premium to b) equal; pool c) directly related; signal d) inversely related; screen

b) total cost.

The sum of fixed and variable costs is: a) marginal cost. b) total cost. c) variable cost. d) average cost.

d) free-rider

The tendency of people or firms to consume a public good without paying for it is the ________ problem. a) free-cost b) free-market c) free-goods d) free-rider

b) signaling; reputations

Used-car dealers will often advertise how long they have been in business as a means of ________ their long-term ________. a) screening; customers b) signaling; reputations c) insuring; capital at risk d) revealing; moral hazard

a) nonrival; were

When Joe watched a television movie, his viewing was ________ in consumption because other people ________ able to view the movie at the same time Joe did. a) nonrival; were b) rival; were not c) rival; were d) nonrival; were not