Chapter 4 Microeconomics
What is a situation in which one party to a market transaction possesses substantially more information than the other party? Asymmetric information Direct controls Deadweight loss Negative externality
Asymmetric information
Which of the following are likely reactions by market participants in a market characterized by inadequate buyer information about sellers? Sellers increase production Buyers and sellers support government intervention Buyers opt out of the market Buyers increase consumption
Buyers and sellers support government intervention Buyers opt out of the market
The government can correct for a situation in which negative externalities result in the overallocation of resources by using which of the following types of interventions? Direct controls Government provision Subsidies Pigovian taxes
Direct controls Pigovian taxes
What are the negative effects of asymmetric information? Lack of trust between buyers and sellers Inefficient allocation of resources Many new producers rushing to market Prices set above equilibrium
Lack of trust between buyers and sellers Inefficient allocation of resources
Which of the following are solutions that governments use to counter overproduction caused by negative externalities? Government provision Pigovian taxes Subsidies Direct controls
Pigovian taxes Direct controls
Which type of government intervention seeks to increase the supply of a beneficial good? Direct controls Pigovian taxes Subsidies to producers Subsidies to consumers
Subsidies to producers
Which curve shows the seller's minimum acceptable price for each unit of the product? Revenue curve Supply curve Demand curve
Supply curve
market failure
The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or asymmetric information, or because markets fail to provide desired public goods.
Government provision refers to the government's providing a good or service for free in order to correct for ______. extremely large positive externalities relatively small negative externalities relatively small positive externalities extremely large negative externalities
extremely large positive externalities
A market failure that occurs when a third party to a transaction experiences uncompensated costs is called a(n) ______ externality, or spillover cost.
negative
Vaccinations against common diseases are an example of a ______ externality. positive horizontal negative vertical
positive
Chad sells oranges, and his minimum acceptable price for a bag of oranges is $8. If the actual price is $8, what is the value of his producer surplus? $8 $16 $0
$0
Which of the following could give rise to a negative externality? An improved health care system A coal generated power plant Unemployed workers A vaccination program
A coal generated power plant
How might sellers respond to a situation in which lack of buyer information about sellers resulted in buyers opting out of the market? By changing their target market By going out of business By increasing production By welcoming government intervention
By welcoming government intervention
direct controls
Government policies that directly constrain activities that generate negative externalities. Examples include maximum emissions limits for factory smokestacks and laws mandating the proper disposal of toxic wastes.
Which government interventions can be used to counter underproduction caused by positive externalities? Government provision Subsidies Direct controls Pigovian taxes
Government provision Subsidies
Which of the following markets are more likely to experience positive externalities? Immunizations Airline travel Education Coal power generation
Immunizations Education
Which of the following conditions are necessary for a competitive market to produce efficient outcomes? Market demand curves that reflect the full willingness to pay of every person benefiting from a product Market supply curves that reflect the full cost of production Equilibrium prices that are proportional to the median income of consumers in the target market A level of resource allocation in which marginal costs exceed marginal benefits
Market demand curves that reflect the full willingness to pay of every person benefiting from a product Market supply curves that reflect the full cost of production
What kind of market situation results in equilibrium output being larger than optimal output, leading to an overallocation of resources? Price ceiling Negative externalities Monopoly Positive externalities
Negative externalities
Which of the following are pressures that make government more likely to produce undesirable economic outcomes? The pressure to accrue benefits to firms in the politician's home state The pressure to correct negative externalities The pressure to balance marginal benefits with marginal costs The pressure to be elected and earn reelection
The pressure to accrue benefits to firms in the politician's home state The pressure to be elected and earn reelection
True or false: Efficiency losses are reductions of combined consumer surplus and producer surplus associated with either underproduction or overproduction of a product.
True
Consumer surplus can be illustrated as the area _____ the demand curve and ______ the market price. above; below below; below below; above above; above
below; above
The area depicted below the demand curve and above the market price is known as ______. a shortage economic surplus producer surplus consumer surplus
consumer surplus
Economic ______ is achieved at the equilibrium quantity.
efficiency
Consumer surplus is the difference between the ___ price a consumer is willing to pay for a product and the price paid. maximum minimum actual equilibrium
maximum
Some individuals do not directly consume a product but accrue indirect benefits from others who do consume the product. As a result, there is a(n) ______. overallocation of resources to the beneficial product underallocation of resources to the beneficial product an urgency to maintain resources at the same level in the production of the beneficial product demand for government to mandate use of the beneficial product by society
underallocation of resources to the beneficial product
When positive externalities exist, demand curves fail to reflect the willingness to pay of the people who receive the positive externality, resulting in products being ______. pulled from the market overproduced underproduced overpriced
underproduced
Which of the following are achieved at the equilibrium quantity of a good or service? A shortage of the good or service Productive efficiency Allocative efficiency A surplus of the good or service
Productive efficiency Allocative efficiency
What is the market result of a situation in which buyers possess more information than sellers? Reduced market activity Rising prices of goods Falling marginal costs to producers Increased production but decreased consumption
Reduced market activity
efficiency loss
Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss.
What is the primary effect of the moral hazard problem on private markets? The price of the good or service affected by the moral hazard problem declines. Resources are underallocated to the good or service affected by moral hazard. Producers' marginal cost of gaining information on buyers is reduced to zero. Consumer demand declines for the good or service affected by the moral hazard problem.
Resources are underallocated to the good or service affected by moral hazard.
allocative efficiency
The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.
producer surplus
The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
consumer surplus
The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.
Based on the reality of political pressures, such as the need to satisfy constituents, which of the following statements is true? Major corporations have no interest in influencing political decisions. The role of government is always at odds with society's economic interests. Government is incapable of influencing the economy in a meaningful way. The economic role of government is not always perfectly carried out.
The economic role of government is not always perfectly carried out.
What conditions must exist for allocative efficiency to occur? The maximum willingness to pay must equal the minimum acceptable price. Combined consumer and producer surplus must be at a minimum. Marginal benefit must equal marginal cost. Price must be equal to the lowest average total cost of production.
The maximum willingness to pay must equal the minimum acceptable price. Marginal benefit must equal marginal cost.
moral hazard problem
The possibility that individuals or institutions will behave more recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto others. Example: A bank whose deposits are insured against losses may make riskier loans and investments.
When are governments most likely to impose licensing restrictions in markets featuring inadequate buyer information about sellers? When the marginal cost of obtaining information about sellers is excessively high When the price of goods or services in the market is excessively high When the allocation of resources in the market is excessively high When consumption of the goods provided by the market is excessively high
When the marginal cost of obtaining information about sellers is excessively high
When positive externalities occur, the market demand curve lies to the ______ the total-benefits demand curve. right of (above) right of (below) left of (below) left of (above)
left of (below)
As a result of negative externalities that are imposed by producers, costs are transferred to society and therefore firms incur ______ production costs and have supply curves that are ______ the full cost associated with producing their goods. higher; above lower; above lower; below higher; below
lower; below
If a market transaction imposes an uncompensated cost on a third party not directly involved in the transaction, the transaction results in a market failure known as a ______. negative externality market intervention spillover benefit positive externality
negative externality
Negative externalities (or spillover costs) result in a(n) ______ of resources to the production of the good. overallocation underallocation redistribution equalization
overallocation
A negative externality results when there is an ______ of resources to the production of a good and too ______ units are produced. underallocation; many overallocation; few overallocation; many underallocation; few
overallocation; many
Government subsidies decrease producers' costs, shifting the supply curve to the ______ and correcting the ______ of resources by producers. left; underallocation right; underallocation right; overallocation left; overallocation
right; underallocation
When government subsidizes producers, it is attempting to ______. shift supply to the right shift demand to the left shift supply to the left shift demand to the right
shift supply to the right
The seller's minimum acceptable price at each unit of the product forms a point on the ______ curve, also known as the marginal cost curve.
supply
Which of the following refers to reductions of combined consumer and producer surplus associated with the underproduction or overproduction of a good or service? Inefficiency loss Surplus loss Triangle loss Deadweight loss
Deadweight loss
How do positive externalities affect demand curves? Demand curves shift to the right. Demand curves shift to the left. Demand curves become vertical lines. Demand curves become horizontal lines.
Demand curves shift to the left.
Which of the following are solutions that governments use to counter overproduction caused by negative externalities? Subsidies Government provision Direct controls Pigovian taxes
Direct controls Pigovian taxes
How does the government overcome the problem of adverse selection when offering Social Security insurance? Individuals who receive payouts without needing them are issued a fine. The people most likely to need the insurance are excluded from the program. The people least likely to need the insurance are excluded from the program. Everyone is required to participate in the program.
Everyone is required to participate in the program.
True or false: When positive externalities occur, the market demand curve lies to the right of the total-benefits demand curve.
False
Which of the following are methods that private businesses can use to overcome information difficulties without government intervention? Sales promotions Franchising Inclusive hiring Product warranties
Franchising Product warranties
Which of the following terms is used to describe economically inefficient outcomes caused by shortcomings in the public sector? Negative externality Deadweight loss Market failure Government failure
Government failure
Solar panels provide a benefit to those who buy them by reducing their electricity bill. They also benefit society as a whole by reducing pollution and resource consumption. Because producers calculate demand based on actual purchases rather than total benefit, solar panels are underproduced. Which types of government intervention could be used to counter this situation? Direct controls Pigovian taxes Government provision Subsidies
Government provision Subsidies
Which of the following are effects of adverse selection on the insurance industry? The insurance pool is dominated by low risk. Insurance premiums go down. Insurance premiums go up. The insurance pool is dominated by high risk.
Insurance premiums go up. The insurance pool is dominated by high risk.
What is the primary effect of asymmetric information? It becomes difficult to distinguish trustworthy sellers from untrustworthy sellers. Producers are unable to determine the wants and needs of consumers. The completed sales transaction is not recorded in the producer's financial records. Consumers struggle to understand how to use a product.
It becomes difficult to distinguish trustworthy sellers from untrustworthy sellers.
What effect would the moral hazard problem have on the behavior of individuals who obtain insurance against the financial risks of divorce? It makes them less likely to file for divorce but more likely to encourage others to do so. It has no effect on the likelihood of their filing for divorce. It makes them more likely to file for divorce. It makes them less likely to file for divorce.
It makes them more likely to file for divorce.
Which of the following would eliminate the risk of adverse selection in the health insurance market? Mandatory universal participation Extensive fitness tests before offering insurance Exclusive care agreements with certain health care providers Strong punishments for purchasers who are unlikely to need the insurance
Mandatory universal participation
Which term describes a situation in which a person or institution behaves more recklessly after they obtain contracts that shift the financial burden of bad outcomes onto others? Moral hazard Consumer surplus Adverse selection Free rider
Moral hazard
Pigovian taxes and direct controls are two government solutions for which market situation? Competitive markets Pure monopoly Negative externalities Positive externalities
Negative externalities
Which of the following results in an overallocation of resources to the production of a good or service? Negative externality Economic surplus Positive externality Spillover benefit
Negative externality
What occurs in a market transaction characterized by asymmetric information? Both parties possess incorrect information. One party possesses significantly more information than the other party. Both parties possess the maximum amount of information. Neither party possesses any information.
One party possesses significantly more information than the other party.
What is the difference between the actual price a seller receives and the minimum acceptable price? Consumer surplus Producer surplus Producer profit Extra surplus
Producer surplus
______ ______ is the difference between the actual price a seller receives and the minimum acceptable price. (Enter one word in each blank.)
Producer surplus
An ice cream shop sells single-scoop cones for $5, but its minimum acceptable price is $3. What is the ice cream shop's producer surplus? $3 $5 $2 $8
$2
If Bob is willing to pay $13 for a bag of oranges and the actual price is $8, what is the amount of his consumer surplus? $5 $21 $13
$5
Shawn is buying a new spring jacket, and he is willing to pay as much as he paid for the last jacket he bought, which was $38. He finds one that he likes on sale and buys it for $29. In this case, Shawn receives a consumer surplus of $.
$9
adverse selection problem
A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs. Example: Individuals who have the poorest health are most likely to buy health insurance.
asymmetric information
A situation where one party to a market transaction has more information about a product or service than the other. The result may be an under- or overallocation of resources.
negative externality
A cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers. Also known as an external cost or a spillover cost.
externality
A cost or benefit from production or consumption that accrues to someone other than the immediate buyers and sellers of the product being produced or consumed (see negative externality and positive externality).
Which term describes a situation in which the first party to a contract possesses information not known to the second and, as a result, the second party incurs major costs? Government failure Moral hazard Adverse selection Negative externality
Adverse selection
What must the market supply curve reflect for a competitive market to produce efficient outcomes? Only those costs that are passed on to consumers or subsidized by the government All the costs of production, including those that fall to persons not directly involved with production Only those costs paid directly by the producer Only those costs that exceed expected revenues
All the costs of production, including those that fall to persons not directly involved with production
What occurs when marginal benefits are equal to marginal cost, maximum willingness to pay is equal to minimum acceptable price, and total surplus is at a maximum? Deadweight losses Negative externalities Productive efficiency Allocative efficiency
Allocative efficiency
___ is defined as the difference between the maximum price a consumer is willing to pay for a product and the actual price. Producer surplus Deadweight loss Consumer surplus Product surplus
Consumer surplus
Why does government impose licensing or oversight restrictions on some markets characterized by a lack of buyer information about sellers but not others? The process of obtaining information in some markets imposes unacceptably high human and economic costs. The process of intervening in situations of asymmetric information is too time consuming and expensive for most markets. The government imposes restrictions only on markets that produce negative externalities. Buyers are strongly opposed to government attempts to equalize information in most markets.
The process of obtaining information in some markets imposes unacceptably high human and economic costs.
productive efficiency
The production of a good in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized.
Why does allocative efficiency occur at the equilibrium quantity, where maximum willingness to pay is exactly equal to the minimum acceptable price? Multiple choice question. The quantity produced minimizes the sum of consumer and producer surplus. The benefits of units produced at this quantity far exceed the costs. The costs of units produced at this quantity far exceed the benefits. The quantity produced maximizes the sum of consumer and producer surplus.
The quantity produced maximizes the sum of consumer and producer surplus.
Which of the following are the effects of a subsidy to producers? The subsidy reduces the marginal cost of producing the good. The quantity of the product increases to the economically optimal quantity, eliminating the overallocation of resources. The supply curve shifts to the left because of a decrease in supply. The supply curve shifts to the right because of an increase in supply. The quantity of the product increases to the economically optimal quantity, eliminating the underallocation of resources.
The subsidy reduces the marginal cost of producing the good. The supply curve shifts to the right because of an increase in supply. The quantity of the product increases to the economically optimal quantity, eliminating the underallocation of resources.
total surplus
The sum of consumer surplus and producer surplus; a measure of social welfare; also known as social surplus.
social surplus
The sum of consumer surplus and producer surplus; a measure of social welfare; also known as total surplus.
Moral hazard is a situation in which people or institutions behave more recklessly after which of the following happens? They become solely responsible for the success or failure of their actions. They obtain insurance or a contract that shifts the financial burden of bad outcomes onto others. They receive a large financial reward. They are placed in a position of high responsibility.
They obtain insurance or a contract that shifts the financial burden of bad outcomes onto others.
How does adverse selection manifest itself in the insurance industry? Some health care providers do not accept certain types of insurance. Consumers have no knowledge of when their insurance premiums will go up. Those who have high-quality insurance coverage are more likely to engage in risky behavior. Those who are most likely to need insurance payouts are the most likely to purchase insurance.
Those who are most likely to need insurance payouts are the most likely to purchase insurance.
In which situation are buyers capable of taking advantage of sellers? When buyers possess more information than sellers When neither buyers nor sellers possess any information When both buyers and sellers possess the maximum amount of information When sellers possess more information than buyers
When buyers possess more information than sellers
In which situation are governments likely to use subsidies or government provision to achieve economic efficiency? When competition forces prices to come down When positive externalities cause underproduction When negative externalities cause overproduction When monopoly power results in price fixing
When positive externalities cause underproduction
Equilibrium quantity is efficient because the maximum willingness to pay is ______ the minimum acceptable price. greater than less than equal to
equal to
A cost or a benefit accruing to an individual or group that is external to a market transaction is known as a(n) ______. deadweight loss externality internal cost producer surplus
externality
A(n) ______ occurs when some of the costs or benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller.
externality
A government ______ is any economically inefficient outcome that results from adverse political pressure or other shortcomings in the public sector. consensus failure decree provision
failure
The result of positive externalities is that the market produces too ______ units of a product that could benefit society, resulting in producers ______ resources to that product. few; overallocating many; overallocating many; underallocating few; underallocating
few; underallocating
A government provision is a good or service provided _______ in order to correct for very large _______ externalities. for free to businesses; negative at cost to everyone; negative for free to everyone; positive at cost to the poor; positive
for free to everyone; positive
When a producer's supply curve is to the right of (or below) the total-cost supply curve, this represents the fact that its ______. demand curve does not capture all the costs legitimately associated with the production of its goods supply curve does not capture all the costs legitimately associated with the production of its goods supply curve does not capture all the revenue legitimately associated with the production of its goods supply curve captures all the costs legitimately associated with the production of its goods
supply curve does not capture all the costs legitimately associated with the production of its goods
An externality causes some of the benefits or costs of a market transaction to be passed on to a ______. government entity third party market supplier market consumer
third party
