U6 MCQ
Answer B When goods are nonexcludable, individuals can consume the good without paying their share of the cost.
A free-rider problem exist when A. A good is excludable in consumption B. A good is non excludable in consumption C. A good is rival in consumption D. A good is nonrival in consumption E. A good is in abundant supply
Answer B The allocatively efficient level of output occurs where the price equals marginal cost. On the graph, price equals marginal cost at a price of $2.00 and a quantity of 80.
If the government regulates the monopolist to produce the allocatively efficient quantity and provides a subsidy sufficient to maintain zero economic profits for the firm, what price would the government set and what level of output would the firm produce? A. $1.00 and 50 B. $2.00 and 80 C. $3.00 and 50 D. $3.50 and 50 E. $4.50 and 30
Answer A The private market equilibrium in perfect competition is the same as the socially optimal output because the marginal social benefit equals the marginal social cost, where price is equal to marginal cost.
In the absence of externalities, which market structure produces the socially optimal quantity? A. Perfect competition B. Monopolistic competition C. An oligopoly D. A monopoly E. A monopsony
Answer C The Lorenz curve is a graph on which the cumulative percentage of total national income is plotted against the cumulative percentage of the corresponding population. The closer the curve is to a straight diagonal line, the more equal the distribution of income.
The closer income distribution moves toward complete equality, the closer the Lorenz curve moves to A. A horizontal line B. A vertical line C. A diagonal line D. The vertical axis E. The horizontal axis
Answer E College education represents an investment in human capital that leads to higher wages.
The higher wages college graduates receive are primarily due to A. Discrimination B. Differences in working conditions C. On-the-job training D. Differences in bargaining power E. Differences in human capital
Answer D Individuals cannot be excluded from taking advantage of a lighthouse (nonexcludable), and the use of a lighthouse by one individual does not affect another individual from using the lighthouse (nonrival). A lighthouse is a public good.
An example of a good that is nonrival and nonexcludable is A. Clean water in a stream B. A bicycle C. Higher education D. A lighthouse E. An entertainment website requiring a paid subscription
Answer D Antitrust law is intended to promote competition.
Antitrust laws are intended to A. Prevent the entry of firms into imperfectly competitive markets B. Ensure that firms produce the allocatively efficient quantity of output C. Reduce monopoly profits D. Control monopolies and maintain a competitive market environment E. Eliminate negative externalities
Answer D A market will produce where marginal private benefit equals marginal private cost. Therefore, either the demand curve did not capture all the benefits of the good or the supply curve did not capture all the costs of the good, which led to an inefficient use of resources and a suboptimal level of output being produced in the market.
Assume the government implements a policy that causes a market to produce the socially optimal level of output. Which of the following must be true? A. The government policy must have reduced the level of output produced B. The government policy must have increased the level of output produced C. The government policy must have resulted in marginal social benefit being greater than marginal social cost for the last unit produced D. Equating marginal private benefit and marginal private cost must have resulted in inefficiencies in the market E. Equating marginal social benefit and marginal social cost must have resulted in inefficiencies in the market
Answer C The competitive market in equilibrium is allocatively efficient and maximizes the total economic surplus. In the absence of externalities, the market equilibrium quantity is the same as the socially optimal quantity. At the socially optimal quantity, the marginal benefit of consuming the last unit equals the marginal cost of producing the last unit.
In the absence of externalities, the perfectly competitive market maximizes economic surplus when A. The market price is above the equilibrium price B. The market price is below the equilibrium price C. The market is at equilibrium D. For the last unit produced, marginal benefit exceeds marginal cost E. The total benefit from all units produced equals the total costs of all units produced
Answer C Playgrounds are rivals in consumption. As more children use a playground, the enjoyment each child receives is likely to decline due to overcrowding. The optimal number of playgrounds for the community to build is three playgrounds. The community is willing to pay $3,400 for the first playground, $3,000 for the second playground, and $2,600 for the third playground. Each playground will cost $2,250 to build. The first three playgrounds should be built, since the community is willing to pay more for those playgrounds than it will cost to build them. The community is willing to pay only $2,200 for the fourth playground, which is less than the $2,250 cost to build the fourth playground. Therefore, the fourth, and similarly fifth through eighth playgrounds, should not be built.
The city council divides a community's residents into three groups: individual young adults, families with children, and older adults. The following table summarizes how much each group is willing to pay for each playground. The city council must pay $2,250 to build each playground. Which of the following is a characteristic of playgrounds and what is the optimal number of playgrounds for the township to build? A. Playgrounds are nonrival in consumption, and the optimal number of playgrounds is zero B. Playgrounds are nonrival in consumption, and the optimal number of playgrounds is two C. Playgrounds are rival in consumption, and the optimal number of playgrounds is three D. Playgrounds are nonexcludable, and the optimal number of playgrounds is zero E. Playgrounds are excludable in consumption, and the optimal number of playgrounds is two
Answer C This price equals average total cost, and therefore a subsidy is not required. The natural monopoly produces a quantity of 70 and earns zero economic profit.
The diagram describes conditions for a natural monopoly. In order to regulate the monopoly to produce the largest possible output without a loss, government regulators would establish a price of A. $1.00 B. $2.00 C. $2.50 D. $3.00 E. $2.50
Answer C A per-unit tax of $1.00 equals the marginal external cost and therefore internalizes the social cost. The socially optimal quantity, which is 20 units, will be produced.
The following graph shows the marginal social cost (MSC), the marginal private cost (MPC), and the marginal social benefit (MSB) of a good. If the government wants the firm to internalize the externality, the government can do so by A. Doing nothing B. Imposing a per-unit tax of $0.50 C. Imposing a per-unit tax of $1.00 D. Imposing a per-unit subsidy of $0.50 E. Imposing a per-unit subsidy of $1.50
Answer D The marginal external cost is the vertical distance between the MSC and the MPC at each quantity of output, which is equal to $1.00. The socially optimal quantity occurs where the MSC equals the MSB, which is 20 units.
The following graph shows the marginal social cost (MSC), the marginal private cost (MPC), and the marginal social benefit (MSB) of a good. Which of the following indicate the marginal external cost and the socially optimal quantity? A. $3.00 and 40 units B. $2.50 and 60 units C. $2.00 and 40 units D. $1.00 and 20 units E. $1.00 and 80 units
Answer E The Gini coefficient ranges from a low of 0 to a high of 1. The higher the coefficient, the more unequal the distribution. Therefore, a value of 0 indicates the most equal distribution of income, and the Lorenz curve is the same as the diagonal line, that is, perfect equality of income distribution and each population percentile receives an equal percentage of the total income.
Which of the following Gini coefficients indicates that a country has an equal distribution of income? A. 1 B. 0.7 C. 0.5 D. 0.2 E. 0
Answer C With a positive externality, the marginal social benefit exceeds the marginal private benefit at all levels of output of a good or a service consumed. Being vaccinated against contagious diseases protects not only the individuals vaccinated, but also those who are not vaccinated. Thus, the marginal social benefit of immunizations exceeds the marginal private benefit.
Which of the following is an example of a positive externality? A. Traffic congestion in cities B. Emission controls on power plants C. Immunizations that prevent the spread of diseases D. Tariffs that protect a domestic industry E. Secondhand smoke from cigarettes
