Macroeconomics - Chapter 4 Questions

If the price of a product increases: A) Consumer surplus will decrease B) Consumer surplus will increase C) Total revenue will definitely increase D) Total revenue will definitely decrease

A) Consumer surplus will decrease

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of shoes is $65. What is the combined amount of consumer surplus of Jena and Jane? A) $10 B) $30 C) $130 D) $215

B) $30

Which of the following situations is not an example of market failure: A) Ben's Department Store cannot charge passers-by for using the sidewalk outside the store B) Ben cannot afford to buy a high-end Mercedes Benz luxury car C) Ben's Place is the only restaurant in town and thus he has significant power to set menu prices D) Ben's Industries is dumping its wastewater into the unregulated river behind the factory

B) Ben cannot afford to buy a high-end Mercedes Benz luxury car

What two conditions must hold for a competitive market to produce efficient outcomes? A) Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay. B) Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay. C) Firms must minimize production costs, and consumers must minimize total expenditures. D) Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay.

B) Supply curves must reflect all costs of production , and demand curves must reflect customers' full willingness to pay.

When there is overproduction of a good: A) The marginal benefit of the good exceeds its marginal cost B) The marginal cost of the good exceeds its marginal benefit C) The net benefit of producing extra units if the good is positive D) The allocative efficiency is enhanced

B) The marginal cost of the good exceeds its marginal benefit

Figure 4. Refer to the above table. The producer surplus is $4 for producer: A B C D

C

Which of the following is an example of a public good? A) A weather warning system. B) A television set. C) A sofa. D) A bottle of soda.

A) A weather warning system.

Demand-side market failures occur when: A) the demand and supply curves don't reflect consumers' full willingness to pay for a good or service. B) the demand and supply curves don't reflect the full cost of producing a good or service. C) government imposes a tax on a good or service. a good or service is not produced because no one demands it.

A) The demand and supply curves don't reflect consumers' full willingness to pay for a good or service

Diagram 1. Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas: A) a + b. B) a + b + c + d. C) c + d. D) a + c.

A) a + b. (Top left of graph)

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences: A) a consumer surplus of $10 and Tony experiences a producer surplus of $190. B) a producer surplus of $200 and Tony experiences a consumer surplus of $10. C) a consumer surplus of $670 and Tony experiences a producer surplus of $200. D) a producer surplus of $10 and Tony experiences a consumer surplus of $190.

A) a consumer surplus of $10 and Tony experiences a producer surplus of $190.

Diagram 1. Refer to the diagram. If actual production and consumption occur at Q2: A) efficiency is achieved. B) an efficiency loss (or deadweight loss) of a + b + c + d occurs. C) an efficiency loss (or deadweight loss) of a + c occurs. D) an efficiency loss (or deadweight loss) of e + f occurs.

A) efficiency is achieved.

Customer surplus: A) is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B) the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. C) the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D) rises as equilibrium price rises.

A) is the difference between the maximum, price consumers are willing to pay for a product and the lower equilibrium price

Diagram 3. Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) on the left and from S to S2 in diagram (b) on the right. We can conclude that the government is correcting for: A) negative externalities in diagram (a) and positive externalities in diagram (b). B) positive externalities in diagram (a) and negative externalities in diagram (b). C) negative externalities in both diagrams. D) positive externalities in both diagrams.

A) negative externalities in diagram (a) and positive externalities in diagram (b). (When market supply curve less than production supply curve, negative externalties. When market supply curve on top of production supply curve, positive externalities)

(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes: A) the Coase theorem. B) the optimal allocation of a public good. C) nonrivalry and nonexcludability. D) a market for externality rights.

A) the Coase theorem.

In a free-market economy, a product which entails a positive externality will be: A) Overproduced B) Underproduced C) Produced at the optimal level D) Provided solely by the government

B) Underproduced

Unlike a private good, a public good: A) has no opportunity costs. B) has benefits available to all, including nonpayers. C) produces no positive or negative externalities. D) is characterized by rivalry and excludability.

B) has benefits available to all, including nonpayers.

The market system does not produce public goods because: A) there is no need or demand for such goods. B) private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them. C) public enterprises can produce such goods at lower cost than can private enterprises. D) their production seriously distorts the distribution of income.

B) private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.

(Consider This) Suppose that a new band, "Balin and the Wolf Riders," tries to sell its music on the internet. Economists would expect: A) all of those enjoying the music to pay for downloads and compensate the band for its costs B) some of those enjoying the music to "free ride" through illegal file sharing and digital piracy. C) government to tax those attempting to download the band's music. D) there to be no consumer surplus for those who download the band's music.

B) some of those enjoying the music to "free ride" through illegal file sharing and digital piracy.

Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) on the left and from S to S2 in diagram (b) on the right. The shift of the supply curve from S to S1 in diagram (a) might be caused by a per-unit: A) subsidy paid to the producers of this product. B) tax on the producers of this product. C) subsidy paid to the buyers of this product. D) tax on the buyers of this product.

B) tax on the producers of this product.

Supply-side market failures occur when: A) the demand and supply curves don't reflect consumers' full willingness to pay for a good or service. B) the demand and supply curves don't reflect the full cost of producing a good or service. C) government regulates production of a good or service. D) a good or service is not supplied because no one wants it.

B) the demand and supply curves don't reflect the full cost of producing a good or service

Because of the free-rider problem: A) the market demand for a public good is overstated. B) the market demand for a public good is nonexistent or understated. C) government has increasingly yielded to the private sector in producing public goods. D) public goods often create serious negative externalities.

B) the market demand for a public good is nonexistent or understated.

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates: A) the adverse selection problem. B) the moral hazard problem. C) the special interest effect. D) logrolling.

B) the moral hazard problem.

In response to the financial crisis that began in 2007, the government began to bail out baenks deemed "too big to fail." Critics of this action argued that this would creat the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future. This illustrates: A) the adverse selection problem. B) the moral hazard problem. C) the principal-agent problem. D) logrolling.

B) the moral hazard problem.

Figure 4. Refer to the above table. What is the producer surplus for all producers A, B, C, and D? A) $6 B) $13 C) $19 D) $24

C) $19

Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the fifth unit of a public good; Kara, $15; and Susie, $25. Government should produce the fifth unit of the public good if the marginal cost is less than or equal to: A) $25. B) $15. C) $60. D) $300.

C) $60

Which of the following is an example of a negative externality? An increase in the value of land you own when a nearby development is completed B) The costs paid by a company to build an automated factory C) Falling property values in a neighborhood where a disreputable nightclub is operating D) The higher price you pay when you buy a heavily advertised product

C) Falling property values in a neighborhood where a disreputable nightclub is operating

Which of the following statements about market failure is not true: A) Market failure causes an inefficient allocation of resources, even in a competitive market B) Market failure can come from causes on the demand-side or the supply-side of a market C) Market failure always results from some government action or policy in a market D) Market failure can result from the number of sellers in a market being too few to ensure competition

C) Market failure always results from some government action or policy in a market

Street entertainers face the free-rider problem when they perform because of the: A) Law of Demand B) Diminishing marginal utility C) Nonexcludability characteristic D) Rivalry characteristic

C) Nonexcludability characteristic

Government can reallocate resources away from private goods towards public goods, usually through: A) Import tariffs and quotas B) The laws of supply and demand C) Taxes and government spending D) Positive and negative externalities

C) Taxes and government spending

Among the following examples, the one that best illustrates a public good is: A) The laptops used by students in a college or university B) The movies produced by Hollywood companies C) The bike paths around a city or town D) The airline tickets bought by vacationers

C) The bike paths around a city or town

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences: A) a consumer surplus of $12 and Nathan experiences a producer surplus of $3. B) a producer surplus of $9 and Nathan experiences a consumer surplus of $3. C) a consumer surplus of $9 and Nathan experiences a producer surplus of $3. D) a producer surplus of $9 and Nathan experiences a producer surplus of $12.

C) a consumer surplus of $9 and Nathan experiences a producer surplus of $3.

Diagram 1. Refer to the diagram. If actual production and consumption occur at Q1: A) efficiency is achieved. B) consumer surplus is maximized. C) an efficiency loss (or deadweight loss) of b + d occurs. D) an efficiency loss (or deadweight loss) of e + d occurs.

C) an efficiency loss (or deadweight loss) of b + d occurs

Diagram 2. Refer to the diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. Without government interference, this market will reach A) an optimal allocation of society's resources. B) an underallocation of resources to this product. C) an overallocation of resources to this product. D) a higher price than is consistent with an optimal allocation of resources.

C) an overallocation of resources to this product.

(Last Word) A cap-and-trade program: A) assigns a property right to the atmosphere. B) mandates that every firm individually cut its emissions to below a certain level. C) assigns a property right to polluting the atmosphere. D) is easy to establish and enforce.

C) assigns a property right to polluting the atmosphere.

Diagram 1. Assuming equilibrium price P1, producer surplus is represented by areas: A) a + b. B) a + b + c + d. C) c + d. D) a + c.

C) c + d. (Bottom left of graph)

People enjoy outdoor holiday lighting displays and would be willing to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a: A) negative externality. B) supply-side market failure. C) demand-side market failure. D) government failure.

C) demand-side market failure

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of: A) increasing costs. B) diminishing returns. C) diminishing marginal utility. D) conservation of matter and energy.

C) diminishing marginal utility.

A producer's minimum acceptable price for a particular unit of a good: A) is the same for all units of the good. B) will, for most units produced, equal the maximum that consumers are willing to pay for the good. C) equals the marginal cost of producing that particular unit. D) must cover the wages, rent, and interest payments necessary to produce the good but need not include profit.

C) equals the marginal cost of producing that particular good

Producer surplus: A) is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B) rises as equilibrium price falls. C) is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D) is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

C) is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price

Which of the following is an example of a market failure? A) Negative externalities. B) Positive externalities. C) Public goods. D) All of these.

D) All of these.

If many people in a community get flu shots, the whole community benefits including those that did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of: A) The market allocating resources efficiently B) Monopoly power due to lack of competition C) Supply-side market failure D) Demand-side market failure

D) Demand-side market failure

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. If the government intervenes and corrects the externality in the situation described above, we would expect: A) The output of the paper mills to increase B) The price of paper from the mills to decrease C) Production of the hydroelectric power plants to decrease D) Production in the paper mills to decrease

D) Production in the paper mills to decrease

Which of the following statements is not true? A) Some public goods are paid for by private philanthropy. B) Private provision of public goods is usually unprofitable. C) The free-rider problem results from the characteristics of nonrivalry and nonexcludability. D) Public goods are only provided by government.

D) Public goods are only provided by government.

Diagram 1. Refer to the diagram. The area that identifies the maximum sum of consumer surplus and producer surplus is: A) a + b + c + d + e + f. B) c + d + f. C) a + b + e. D) a + b + c + d.

D) a + b + c + d. (Left portion of graph)

Cost-benefit analysis attempts to: A) compare the real worth, rather than the market values, of various goods and services. B) compare the relative desirability of alternative distributions of income. C) determine whether it is better to cut government expenditures or reduce taxes. D) compare the benefits and costs associated with any economic project or activity.

D) compare the benefits and costs associated with any economic project or activity.

From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically: A) generates more of a benefit than it costs to produce. B) produces a benefit exactly equal to the cost of producing the last unit. C) maximizes the net benefit to society. D) costs more to produce than it provides in benefits.

D) costs more to produce than it provides in benefits

Nonrivalry and nonexcludability are the main characteristics of: A) consumption goods. B) capital goods. C) private goods. D) public goods.

D) public goods.

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that: A) the display creates negative externalities. B) government should tax the producers of holiday lighting. C) resources are currently overallocated to the provision of holiday lighting in Anytown. D) resources are currently underallocated to the provision of holiday lighting in Anytown.

D) resources are currently underallocated to the provision of holiday lighting in Anytown.

Diagram 2. Refer to the diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should: A) not intervene because the market outcome is optimal. B) subsidize consumers so that the market demand curve shifts leftward. C) subsidize producers so that the market supply curve shifts leftward (upward). D) tax producers so that the market supply curve shifts leftward (upward).

D) tax producers so that the market supply curve shifts leftward (upward). (When market supply curve lower than production cost supply curve, tax producers to make market supply curve go up/left)

At the output level defining allocative efficiency: A) the areas of consumer and producer surplus necessarily are equal. B) marginal benefit exceeds marginal cost by the greatest amount. C) consumer surplus exceeds producer surplus by the greatest amount. D) the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

D) the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem? A) Levy a tax on the consumers of paper products and use the tax revenues to conduct research on new energy sources B) Levy a tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper products C) Levy a tax on the producers of electricity and use the tax revenues to clean up the river D)Levy a tax on the producers of paper products and use the tax revenues to clean up the river

D)Levy a tax on the producers of paper products and use the tax revenues to clean up the river