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Chapters 10 and 11 Practice questions


Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 
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.
 

2. 
An externality exists when
a.
the government intercedes in the operation of private markets by forcing the market to adjust to the balance of supply and demand.
b.
markets are not able to reach equilibrium.
c.
a firm sells its product in a foreign market.
d.
a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.
 

3. 
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 take account of the external effects of their behavior.
d.
the government can easily correct any adverse effect on the market that externalities may cause.
 

4. 
Negative externalities occur when one person's actions
a.
cause another person to lose money in a stock market transaction.
b.
cause his or her employer to lose business.
c.
reveal his or her preference for foreign-produced goods.
d.
adversely affect the well-being of a bystander who is not party to the action.
 

5. 
Which of the following illustrates the concept of a negative externality?
a.
A college professor plays a vigorous game of racquet ball with the racquet he recently purchased.
b.
A flood wipes out a farmer's entire corn crop.
c.
A college student plays his new stereo system at 2:00 a.m.
d.
A janitor eats a Big Mac during his lunch break.
 

6. 
When negative externalities are present in a market
a.
producers will be affected, but not consumers.
b.
overproduction will occur.
c.
demand will be too high.
d.
the market will still maximize total benefits.
 

7. 
Dioxin emission that results from the production of paper is a good example of a negative externality because
a.
self-interested paper firms are generally unaware of environmental regulations.
b.
there are fines for producing too much dioxin.
c.
self-interested paper producers will not consider the full cost of the dioxin pollution they create.
d.
toxic emissions are the only form of an externality.
 

8. 
Too few resources are generally devoted to research in new technologies in developing countries because
a.
new technologies cannot be patented.
b.
government research grants are not easily obtainable.
c.
negative externalities are created from some research.
d.
inventors cannot capture the full benefits of their inventions.
 

9. 
Which of the following statements about a well-maintained yard best conveys the general nature of the externalities?
a.
A maintained yard conveys a positive externality because it increases the home's market value.
b.
A maintained yard conveys a negative externality because it increases the property tax liability of the owner.
c.
A maintained yard conveys a negative externality because it makes other property owners in the neighborhood feel like their homes are less valuable.
d.
A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
 

10. 
When a beekeeper places his hives of bees in an orchard so that the bees can gather nectar to produce honey, the bees pollinate the orchard, which increases the yield of fruit. This benefits
a.
only the beekeeper.
b.
the beekeeper, but creates a negative externality because the bees are a hazard to the orchard owner.
c.
only the owner of the orchard.
d.
both the beekeeper and the orchard owner.
 
 
Figure 10-2
chapters_10_and_11__files/i0120000.jpg
 

11. 
Refer to Figure 10-2. This market is experiencing
a.
government intervention.
b.
a positive externality.
c.
a negative externality.
d.
None of the above are correct.
 

12. 
Refer to Figure 10-2. The optimum amount of this product from society's standpoint would be
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
 

13. 
A good is excludable if
a.
one person's use of the good diminishes another person's enjoyment of it.
b.
the government can regulate its availability.
c.
it is not a normal good.
d.
people can be prevented from using it.
 

14. 
If one person's use of a good diminishes another person's enjoyment of it, the good is
a.
rival.
b.
excludable.
c.
normal.
d.
exhaustible.
 

15. 
Goods that are both excludable and rival would be considered
a.
natural monopolies.
b.
common resources.
c.
public goods.
d.
private goods.
 

16. 
A cheeseburger is
a.
excludable and rival.
b.
excludable and nonrival.
c.
nonexcludable and rival.
d.
nonexcludable and nonrival
 

17. 
Most goods in the economy are
a.
natural monopolies.
b.
common resources.
c.
public goods.
d.
private goods.
 

18. 
An example of a natural monopoly would be
a.
cable TV.
b.
tornado sirens.
c.
clothing.
d.
the environment.
 

19. 
When goods are not excludable
a.
the good will be produced as a private good but not as a public good.
b.
the good will not be produced since no one values it.
c.
the free-rider problem prevents the private market from supplying them.
d.
everyone can have all they want and the good will have a zero price.
 

20. 
National defense is a classic example of a public good because
a.
private security services are very difficult to find.
b.
it is difficult to exclude people from receiving the benefits from national defense once it is provided.
c.
everyone agrees that some level of national defense is important, but only the government knows the optimal amount.
d.
if individuals were required to purchase their own armored tank, there wouldn't be enough to go around.
 

21. 
Basic research is a public good because it
a.
is difficult to exclude those who might benefit from it.
b.
is used to develop public goods.
c.
always benefits developed countries at the expense of developing countries.
d.
is a rival good.
 

22. 
Because general knowledge is not excludable
a.
the government contributes to its production.
b.
the cost generally outweighs the benefit to society.
c.
private markets would choose to not supply any general knowledge to society.
d.
general knowledge cannot be "supplied" to the market by anyone since it is not a product.
 

23. 
Advocates of antipoverty programs believe that Fighting poverty
a.
can make everyone better off.
b.
is most successfully done by charities.
c.
can be done efficiently by the market system.
d.
should not be done with tax dollars.
 

24. 
Suppose that Martin owns a lighthouse and Lewis owns a nearby port. Martin's lighthouse benefits only those ships that enter Lewis's port. Which of the following statements is NOT true?
a.
Martin's lighthouse may be considered a private good.
b.
Martin can combat the free-rider problem by charging Lewis a usage fee.
c.
Martin can exclude Lewis's port from benefiting from the lighthouse by simply turning the power off.
d.
Martin's lighthouse would be considered a common resource.
 

25. 
Simply asking people how much they value a highway is not a reliable way of measuring the benefits and costs because
a.
those who stand to gain have an incentive to tell the truth.
b.
those who stand to lose have an incentive to exaggerate their true costs.
c.
answers to the survey questions will always be downwardly biased.
d.
not everyone asked will be using the highway.
 

26. 
When a single firm can supply a product to an entire market at a smaller cost than could two or more firms, the industry is called a
a.
resource industry.
b.
exclusive industry.
c.
government monopoly.
d.
natural monopoly.
 



 
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