The Shortcomings Of Free Markets Ch15 Verified Test Bank - Microeconomics Principles and Policy 14e | Test Bank by Baumol by William J. Baumol. DOCX document preview.
Indicate whether the statement is true or false. |
1. An increase in wages in the public sector is always accompanied by an increase in labor productivity.
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2. Rent seeking is a way of earning profit without adding to the product’s value.
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3. Markets will always create more efficient outcomes without government intervention.
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4. As productivity in the manufacturing sector increases, the service sector must keep pace or it will become more expensive in the long run.
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5. Externalities can be either detrimental or beneficial to others.
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6. Productivity in manufacturing sectors has risen faster than in service sectors.
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7. Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.
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8. A free rider is one who enjoys the benefits of a public good without paying for it.
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9. Government action can usually perfectly correct the market’s shortcomings.
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10. A monopoly price reflects a good’s marginal utility.
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11. Examples of public goods include national defense, police, and the U.S. Postal Service.
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12. If both a buyer and a seller have the same information, they are said to have symmetric information.
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13. Society would be better off with more products that create beneficial externalities.
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14. Competitive markets tend to produce an inefficiently large amount of beneficial externalities.
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15. On balance, markets do some things very well, and some things poorly.
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16. Moral hazard encourages people to take risks.
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17. A potential cause of competitive market failure is symmetric information.
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18. Private goods are not excludable.
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19. A public good has the quality of excludability but not the quality of depletability.
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20. Government gives subsidies to encourage production of products with beneficial externalities.
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21. Due to Pigou’s “defective telescopic faculty,” a market economy is inefficient in allocating resources between the present and the future.
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22. Marginal social cost is made up of marginal private cost and external cost.
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23. It is possible to charge a price for a pure public good.
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24. An industry that generates detrimental externalities will have a marginal social cost higher than the marginal private cost to the industry.
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25. The pollution emitted by a power plant is an example of a detrimental externality.
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26. There is no way that externalities can be corrected.
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27. An unregulated market economy provides material wealth but does not generate effective control of environmental damage.
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28. Private ownership of rivers and lakes will halt all water pollution.
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29. In the event of a detrimental externality that affects the public interest, government action is the only solution.
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30. If polluters are forced to pay for the cost of their pollution, they will reduce pollution toward a socially optimal amount.
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31. Imposing fines on companies that contribute heavily to air and water pollution is an attempt to bring marginal private costs in line with marginal social costs.
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32. If a firm’s activities generate detrimental externalities, the marginal social cost will be less than the marginal private cost.
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33. The production possibilities frontier shows the feasible combinations of production without waste.
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34. As wages for manufacturing workers rise, wages for service workers will stay the same.
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35. Education is subsidized because it generates beneficial externalities.
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36. Government can deal with externalities through the use of taxes and subsidies.
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37. Markets are primarily responsible for the rapid rise in productivity during the 20th century.
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38. All externalities are detrimental.
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39. A market will be efficient even if there is imperfect information as long as the market is competitive.
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40. Most Americans would voluntarily support defense without required taxation.
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41. If the market mechanism is efficient, the marginal cost accurately measures the opportunity cost of a good or service.
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42. Markets can efficiently handle irreversible decisions without involvement of government.
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43. An efficient allocation of resources requires that a product’s price equals its average cost.
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44. As manufacturing becomes more efficient, services can be expected to become more costly.
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45. The opportunity cost of postponing income to some future time depends on the interest rate.
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46. For most industrial nations, health-care costs have increased faster than the rate of inflation.
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47. Productivity growth tends to affect all industries to the same degree.
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48. As long as the market sets prices above marginal costs, production will be efficient.
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49. If a commodity’s price is above its marginal cost, the market will tend to produce too much of the good.
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50. A market economy provides solutions to almost all social ills such as poverty and environmental damage.
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51. Rent seeking refers to unproductive activity in the pursuit of profit.
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52. The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources among different industries.
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53. Low interest rates will persuade corporations to invest more right now.
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54. Public goods could effectively be provided by private markets, but we choose to provide them through government.
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55. An increase in wages in the public sector is caused solely by increased labor productivity in that sector.
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56. The cost disease of services explains the problems surrounding the health-care crisis.
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57. An efficient allocation of resources requires each product’s price equals its marginal cost.
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58. Market economies produce only a few relatively minor defects.
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59. Marginal social costs are the sum of marginal private costs and incidental costs.
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60. The interest rate is determined purely by market forces, and not by government involvement.
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61. Because technology has automated so many functions, personal services have become cheaper in order to compete.
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62. A private good is characterized by excludability and depletability.
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63. When General Motors pays an outside vendor for auto parts, this is an external cost.
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64. The cost of trash removal goes up, in part at least, because labor productivity in auto manufacturing goes up.
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65. The factor that most often leads to underpricing and overuse of an economic resource is human greed.
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66. Rent seeking creates incentives for firms to use resources efficiently.
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67. Asymmetric information generally leads to efficient resource allocation.
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68. The marginal cost of serving an additional user of a public good is zero.
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69. Efficient resource allocation is defined as MC = AC.
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70. When MSC > MPC, there are detrimental externalities.
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Indicate the answer choice that best completes the statement or answers the question. |
71. How does imperfect information affect market decisions?
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72. Anthony Downs, in The Economic Theory of Democracy, argues that voters choose to remain “rationally ignorant” when they vote in elections, knowing relatively little about the candidates or the issues. What economic principle would you invoke to explain this behavior?
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73. The Rand Corporation estimates that external costs imposed by alcohol consumption (e.g., deaths caused by drunk drivers) to be 48 cents per ounce consumed. If taxes on alcohol are 23 cents per ounce consumed, then
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74. The construct used to demonstrate efficient use of society’s resources is the
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75. Which of the following additions to an insurance contract will not act to reduce moral hazard?
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76. Which of the following is true?
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77. Which of the following observations is true?
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78. The classic example of a detrimental externality is
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79. When beneficial externalities are present in a market, the actual output will be
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80. Moral hazard is best described as
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81. The cost disease of personal services is caused by
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82. Transitioning from a centrally planned economy to a market economy
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83. One of the reasons why firms pollute the air is that
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84. The desirable level of output in a perfectly competitive market if there exists a detrimental externality is
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85. A competitive market may misallocate resources over time because
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86. In a free market economy,
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Figure 15-1  |
87. Figure 15-1 describes conditions in the monopolized weezil industry. If the government replaces the monopolist with perfectly competitive firms and forces these firms to take account of all the costs and benefits they impose on society, the industry will produce an output equal to
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88. Asymmetric information may cause
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89. Which of the following term refers to the share of an activity’s marginal cost that is paid for by the persons who carry out the activity?
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90. Which of the following is not a problem for the price system allocating resources among different time periods?
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91. Rent-seeking behavior refers to
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92. A good’s marginal social cost is defined as its
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93. Which of the following is an example of moral hazard?
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94. The key explanation for the prevalence of waterway pollution is
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95. The principle of “comparable worth” asserts that people with comparable, if not identical, skills and responsibilities should receive the same pay. If this principle were to become law, it would tend to
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96. Which of the following is not true for a public good?
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97. It is efficient to increase the output of computers if
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98. Land on both sides of the border of Brazil and Venezuela has long been occupied by the Yanomamo people. These “fierce people” are the last Stone Age tribe left in South America. Following discovery of gold, approximately 45,000 garimpeiros (gold miners) invaded the Yanomamo territory. The mining process pollutes the rivers and scares away game, so traditional Yanomamo sources of food are almost impossible to find now. The Yanomamo are starving. Economists call this problem
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99. Is increased production of a good beneficial to society?
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100. Individuals cannot buy unemployment insurance for themselves. The most likely reason for this is
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101. An example of a beneficial externality is
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102. The prices of most services have risen much faster than inflation in recent years because
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103. A market transaction causes an externality if someone
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104. The concept of “government failure” implies
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105. When there are beneficial externalities in a market,
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106. If unemployment insurance causes someone to wait longer before looking for work, this would be called
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107. Because smoking causes illness and disability to smokers, society must maintain more health-service capacity than it would need in the absence of smoking. Since the cost of maintaining this capacity is covered to a substantial degree by health insurance, even nonsmokers must pay higher premiums. Also, smokers hurt nonsmokers as a result of “passive smoke.” The Rand Corporation estimates these costs to be 29 cents per pack of cigarettes. Cigarette taxes average 37 cents per pack. Based on the economist’s definition of efficiency, it follows that
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108. The main shortcoming of the market, in the view of many,
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Figure 15-1 |
109. Figure 15-1 portrays conditions in the monopolized weezil industry. From the diagram, the production of weezils
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110. The cost disease of personal services occurs when labor productivity in the general economy is
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111. In the allocation of resources between present and future,
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112. The factor that leads to underpricing and overuse of an economic resource is
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113. A firm is generating detrimental externalities when
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114. It is true of externalities that they
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115. A public good is
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116. When insurance causes people to take more risks, this is called
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117. Where a firm generates beneficial externalities, society would be better off if
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118. What is the meaning of “a defective telescopic faculty,” as described by A. C. Pigou?
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119. Public goods are
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120. Students in a class are assigned to groups to work on a project. A grade will be given for each project, and everyone in the group will receive that grade. For the members of a particular group, the grade is a
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121. The former communist countries of eastern Europe and the Soviet Union
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122. Marginal social cost is defined as marginal private cost
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123. The cost disease of the service sector is evidenced by
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124. If the interest rate rises, a profit-maximizing firm will tend to
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125. A local flower grower grows products in a plot of land, which is exceptionally colorful and is admired by many passersby. There is no way to charge for this in the price of the flowers. We can safely conclude that
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126. An economy is operating with optimum efficiency if
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127. A true public good is characterized by
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128. If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,
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129. In a competitive market, a good is most likely to be provided at inefficient levels if
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130. If long-term investments are increasing,
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131. In an ideal competitive market,
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132. The lure of _______ directs resources toward capital investments.
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133. The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer. Many who attend make donations for symphony expenses, but the donation is not required. Some who attend make no contributions. Economists would
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134. An externality is an event that
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135. Many motorcycle riders want to feel the wind of the open road without the constriction of helmets. But riders without helmets are more likely to suffer severe injuries that run up hospital bills at public expense. Which of the following is most likely to reduce the costs imposed on hospitals by helmetless riders?
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136. Governments can most effectively encourage a firm to produce the efficient level of output of a good whose production causes a beneficial externality by
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137. Which of the following is not a public good?
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138. The owner of a garage makes large contributions to a politician who is seeking the office of state governor. If his candidate wins, he will get the contract, which now resides with a competitor, to repair State Police vehicles. This is an example of
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139. Many detrimental externalities occur because
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140. An appropriate government policy toward negative externalities is to
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141. Which of the following statements is correct?
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142. A process through which a firm seeks to obtain earnings without contributing to production, thus wasting valuable resources, is known as
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143. Critics argue that society is depleting its energy resources far too quickly. The most likely explanation for this behavior is that
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144. Externalities are failures of
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145. An efficient tax for a product with detrimental externalities would equal
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146. What rule must be followed to obtain an efficient allocation of resources?
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147. Which of the following is not generally considered a failing of market economies?
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148. Which of the following does not cause competitive market failure?
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149. If a detrimental externality is being produced in the course of producing a good, then
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150. High interest rates
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151. Producers of computer software are plagued with the problem of “pirating,” that is, many people copy software legally purchased by others. The industry estimates that for each legal copy of a program, there are two pirated copies in use. The industry wants strict laws for the enforcement of its “intellectual property rights,” but enforcement is obviously very difficult. Economists call this problem
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152. Part of the reason why barely used cars sell for much less than new cars is that
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153. Private goods are characterized by two important attributes. What are they?
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154. AZT is a drug that inhibits the reproduction of the AIDS virus, thus preventing the full development of the disease. The drug, which is sold in an unregulated market, is very expensive, and many AIDS patients who cannot afford it die from the disease. This case provides ammunition to critics of the market system on the basis of its
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Figure 15-2  |
155. The firm illustrated in Figure 15-2 is producing
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Figure 15-1 |
156. Figure 15-1 describes conditions in the monopolized weezil industry. In the absence of government intervention, the monopolist will produce an output equal to
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157. If a firm’s production creates detrimental externalities, then in a competitive market,
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158. The “free rider” problem occurs when a good is
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159. A public good is
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160. Producing more cabbage will be inefficient if
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161. Which of the following term refers to the share of an activity’s marginal cost that is paid for by people other than those who carry out the activity?
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162. Increasing productivity in a society
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163. Which of the following is not an example of rent seeking?
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164. Market economies have air and water pollution, but nonmarket economies
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165. National defense and coastal lighthouses are examples of
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166. Competitive markets generally do not provide unemployment insurance because of
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167. If production of a good creates beneficial externalities, a perfectly competitive market will produce
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168. A commodity is ____ if it is used up when someone consumes it.
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169. According to Coase,
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170. Market economies produce outcomes that are
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171. The cable and subscription TV business is plagued with the problem of “signal theft.” People use illegal receivers to capture the company’s signal without paying. Enforcement of the company’s property right is very expensive. This problem emerges because TV signals are basically
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172. When consumers or businessmen stop collecting information to make decisions at the point where marginal cost of data collection equals the marginal utility of the data, economists would call the decisions based on existing data
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173. If the price of a commodity is above marginal cost, then the economy will tend to
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174. Which of the following is not true about moral hazard?
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175. In a market where the seller has more information than the buyer,
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176. There is much world concern over the deteriorating condition of the pyramids and other historical structures in Egypt. While people of all nations enjoy visiting these structures, there has been little financial support for preservation coming from within Egypt or from elsewhere. Economists would describe this as an example of
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177. The most threatening and damaging detrimental externality at issue today is
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178. In a competitive market without intervention, pure public goods would be
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179. The economic justification for public subsidies to university research is based on the
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180. A car sells at different prices at different dealerships in an oligopolistic market. If a consumer has imperfect information about the price of a car at each dealership, the consumer should
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181. Regarding government manipulation of the interest rate, all of these statements are correct, except
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182. The cost disease of the service sector in recent years is the result of
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183. An increase in interest rates will generally lead to a(n) ____ in present investment and a(n) ____ in future income and production.
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184. An “optimally imperfect” decision is one that
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185. If the interest rate on saving is 5 percent per period, then the true opportunity cost of being paid $100 next period instead of this period is
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186. A main cause of the cost disease of personal services is
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187. Government often finds it difficult to cope with externalities because
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188. Which of the following is not an attempt to remedy and externality?
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189. In an efficient market without externalities,
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190. If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,
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191. A 2 percent wage increase for teachers or police officers
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192. If interest rates fall, the opportunity cost of spending money today rather than tomorrow
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193. Which of the following is an imperfection of market economies?
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194. What do you mean by Coase theorem? |
195. Why do markets tend to underproduce public goods? |
196. Hostile takeovers of corporations have been in the business news for some time now. Several states have passed laws making it harder for out-of-state corporations to acquire firms headquartered in their states. Several corporations have established “golden parachutes” to give executives high payoffs in case of hostile takeover. What market imperfection is likely to be worsened by these actions? Explain. |
197. During the 1992 presidential campaign, H. Ross Perot made much of the various “special interests” which lobby in Washington, D.C. How might an economist view this? Which specific market breakdown may occur if there is lobbying? Relate your answer to the study of monopoly and oligopoly. |
198. In general, monopolies decrease economic efficiency. But in the presence of detrimental externalities, is it possible for a monopoly to be more efficient than a competitive market? Why, or why not? |
199. Suppose that the government decided to increase interest rates in order to encourage saving. Would this likely lead to an increase in investment and higher future economic growth rates? Explain. |
200. Give an appropriate remedy for correcting excessive pollution and note any difficulties in implementing it. |
201. The interest rate is the opportunity cost of transferring spending power between time periods. However, the market mechanism may fail to provide adequately for future economic growth. List the reasons why a market might fail. |
202. What are private goods? Mention two important attributes of private goods. |
203. Briefly and concisely define the following concepts and terms. a. marginal social cost b. detrimental externalities c. free-rider problem d. cost disease e. “defective telescopic faculty” |
204. It was once common for people to have servants who helped with the cooking and cleaning. Use the cost disease of the personal services dilemma to explain why these services have declined, even though one would expect an increased use in this age of the two-worker household. |
205. Explain whether the market produces too little, too much, or the right amount of goods with (a) detrimental externalities and (b) public good characteristics. |
206. If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor? Why? a. prohibiting the activity b. charging fees for continuing the activity c. requiring that the public be informed of the activity d. government purchase of the item for the public |
207. Some would cite the purchase of defective products and the rising cost of health care as market failures. Argue that these are not true market failures. |
208. Are national forests public goods? Explain. |
209. Explain why government, rather than private firms, is required for efficient mosquito eradication programs. |
210. It has been said that well-educated citizens are necessary for democracy. Discuss this idea in economic terms. What market imperfection might occur and what are the appropriate government policies to correct it? |
211. An economy produces only two goods: paper and scissors. Dyes from paper production pollute a nearby river. Use a production possibilities curve (PPC) to illustrate your explanation of how the unfettered market would fail to provide the efficient mix of paper and scissors. |
212. The supply of public goods must be left to government and nonprofit institutions. Why? |
213. Unscrupulous managers have learned ways to manipulate stock options and undermine their benefits to stockholders. Discuss some provisions that could be built into the process to curb such practices. |
214. Define the following terms and explain their importance to the study of economics. a. public good b. externality c. irreversible decision d. moral hazard e. rent seeking |
215. Explain how stock options can ensure compatibility between the interest of stockholders and managers. |
216. SouthState Chemical Co. produces pine oil cleaners in a process that produces emissions that discolor the paint on nearby houses, although the emissions have been declared nontoxic to humans. a. Is the price for the cleaner likely to be allocatively efficient? Use a graphic illustration in your answer. b. If your answer to (a) is no, what is an appropriate government policy to correct the problem? |
217. Many cities have summer pops series in which the local orchestra performs light classical music in a public park. These performances are free in some areas. Apply the concept of a public good to pops performances and explain whether an admission charge is efficient. |
218. Pleasure boaters enjoy the use of waterways, but sometimes run into problems and need rescue. Coast Guard boats, supported by tax revenue, are often used for rescue. Is it likely that there will be an efficient amount of boating and rescuing? |
219. Discuss the role of trust as a critical piece of any principal-agent situation. In particular, what role did trust play in the recent stock market scandals? |
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Microeconomics Principles and Policy 14e | Test Bank by Baumol
By William J. Baumol