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Chapter 10 practice quiz



Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 
 
Figure 10-1
chapter_10_practice_files/i0020000.jpg
 

 1. 

Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates
a.
positive externalities.
b.
negative externalities.
c.
no externalities.
d.
no equilibrium in the market.
 

 2. 

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are
a.
$1.90 and 38 units, respectively.
b.
$1.80 and 35 units, respectively.
c.
$1.60 and 42 units, respectively.
d.
$1.35 and 58 units, respectively.
 

 3. 

Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are
a.
$1.90 and 38 units, respectively.
b.
$1.80 and 35 units, respectively.
c.
$1.60 and 42 units, respectively.
d.
$1.35 and 58 units, respectively.
 

 4. 

An externality is
a.
the costs that parties incur in the process of agreeing and following through on a bargain.
b.
the uncompensated impact of one person's actions on the well-being of a bystander.
c.
the proposition that private parties can bargain without cost over the allocation of resources.
d.
a market equilibrium tax.
 

 5. 

Which of the following statements is correct?
a.
Government should tax goods with either positive or negative externalities.
b.
Government should tax goods with negative externalities and subsidize goods with positive externalities.
c.
Government should subsidize goods with either positive or negative externalities.
d.
Government should tax goods with positive externalities and subsidize goods with negative externalities.
 

 6. 

The impact of one person's actions on the well-being of a bystander is called
a.
an economic dilemma.
b.
deadweight loss.
c.
a multi-party problem.
d.
an externality.
 

 7. 

When a negative externality exists in a market, the cost to producers
a.
is greater than the cost to society.
b.
will be the same as the cost to society.
c.
will be less than the cost to society.
d.
will differ from the cost to society, regardless of whether an externality is present.
 

 8. 

Pizza is a normal good if
a.
the demand for pizza rises when income rises.
b.
the demand for pizza rises when the price of pizza falls.
c.
the demand curve for pizza slopes downward.
d.
the demand curve for pizza shifts to the right when the price of burritos falls, assuming pizza and burritos are substitutes.
 

 9. 

Which of the following represents a way that a government can help the private market to internalize an externality?
a.
taxing goods that have negative externalities
b.
subsidizing goods that have positive externalities
c.
The government cannot improve upon the outcomes of private markets.
d.
Both a and b are correct.
 

 10. 

US light-vehicle sales
a.
rose in April due to rising gasoline prices
c.
fell 7.6% in April due to falling gasoline prices and a housing slump
b.
fell 7.6% in April due to rising gasoline prices and a housing slump
d.
rose in April due to falling international vehicles sales
 

 11. 

Chad's maple tree hangs over Amy's fence and drops leaves into her yard each autumn. The benefit to Chad of lower utility bills due to the tree’s shade in the summer is $300. The cost to Amy of having her lawn cleaned and reseeded is $350. Based on the Coase theorem,
a.
Chad should pay Amy $400 so that he may keep the tree.
b.
Chad should pay Amy $350 to have her lawn repaired and cleaned.
c.
Amy should pay Chad $325 to cut down the tree.
d.
Amy should build a fence.
 

 12. 

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?
a.
A well-maintained yard conveys a positive externality because it increases the home's market value.
b.
A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner.
c.
A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
d.
A well-maintained yard cannot provide any type of externality.
 

 13. 

The Coase theorem suggests that private markets may not be able to solve the problem of externalities
a.
if the government does not become involved in the process.
b.
when the number of interested parties is large and bargaining costs are high.
c.
if the firm in the market is a monopoly.
d.
if some people benefit from the externality.
 

 14. 

The supply curve for a product reflects the
a.
willingness to pay of the marginal buyer.
b.
quantity buyers will ultimately purchase of the product.
c.
cost to sellers of producing the product.
d.
seller's profit from producing the product.
 

 15. 

In the absence of externalities, the "invisible hand" leads a market to maximize
a.
producer profit from that market.
b.
total benefit to society from that market.
c.
both equity and efficiency in that market.
d.
output of goods or services in that market.
 

 16. 

Since air pollution creates a negative externality,
a.
social welfare will be enhanced when some, but not all air pollution is eliminated.
b.
social welfare is optimal when all air pollution is eliminated.
c.
governments should encourage private firms to consider only private costs.
d.
the free market result maximizes social welfare.
 

 17. 

Private contracts between parties with mutual interests
a.
will reduce the well-being of society.
b.
will lead to market outcomes in which the public interest is sacrificed for personal gain.
c.
can solve some inefficiencies associated with positive externalities.
d.
will create negative externalities.
 

 18. 

When externalities exist, buyers and sellers
a.
neglect the external effects of their actions, but the market equilibrium is still efficient.
b.
do not neglect the external effects of their actions, and the market equilibrium is efficient.
c.
neglect the external effects of their actions, and the market equilibrium is not efficient.
d.
do not neglect the external effects of their actions, and the market equilibrium is not efficient.
 

 19. 

Reaching an efficient bargain is difficult when the
a.
externality is large.
b.
number of interested parties is large.
c.
externality is negative.
d.
government becomes involved.
 

 20. 

At any given quantity, the willingness to pay in the market for gasoline is reflected in the
a.
height of the demand curve at that quantity.
b.
height of the supply curve at that quantity.
c.
value to the producer of the last unit of gasoline sold.
d.
total quantity of gasoline exchanged in the market.
 

 21. 

In a market economy, government intervention
a.
will always improve market outcomes.
b.
reduces efficiency in the presence of externalities.
c.
may improve market outcomes in the presence of externalities.
d.
is necessary to control individual greed.
 

 22. 

In which of the following cases is the Coase theorem most likely to solve the externality?
a.
Richard is annoyed because his roommate smokes.
b.
Chemicals from farms in the Mississippi Valley are polluting the Gulf of Mexico.
c.
Car exhaust in a small town is making one of its residents ill.
d.
Industrialization around the world is causing acid rain.
 

 23. 

Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are called
a.
transaction costs.
b.
opportunity costs.
c.
deadweight loss.
d.
corrective taxes.
 

 24. 

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called
a.
the transaction cost theorem.
b.
a corrective tax.
c.
the externality theorem.
d.
the Coase theorem.
 

 25. 

Private markets fail to account for externalities because
a.
externalities don't occur in private markets.
b.
sellers include costs associated with externalities in the price of their product.
c.
decisionmakers in the market fail to include the costs of their behavior to third parties.
d.
the government cannot easily estimate the optimal quantity of pollution.
 

 26. 

If a paper manufacturer does not bear the entire cost of the dioxin it emits, it will
a.
emit a lower level of dioxin than is socially efficient.
b.
emit a higher level of dioxin than is socially efficient.
c.
emit an acceptable level of dioxin.
d.
not emit any dioxin in an attempt to avoid paying the entire cost.
 

 27. 

If only a few people are affected by an externality, then it is likely that
a.
corrective taxes will provide the most efficient solution to the externality.
b.
command-and-control regulation will provide the most efficient solution to the externality.
c.
a private solution to the inefficiency will occur.
d.
a private solution will be very difficult to negotiate.
 



 
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