ECON 202
Test Bank: I Topic: Efficiently Functioning Markets
At the output level defining allocative efficiency,
the areas of consumer and producer surplus necessarily are equal.
marginal benefitexceeds marginal cost by the greatest amount.
consumer surplus exceeds producer surplus by the greatest amount.
D. the maximum willingnesstopay for the last unit of output equals the minimum acceptable price of that unit of output.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-02 Explainthe origin of both consumersurplus and producersurplus, and explain how properly functioning markets maximizetheir sum, total surplus,while optimally allocating resources.
Test Bank: I Topic: Efficiently Functioning Markets
Which of the followingconditions does notneed to occur for a market to achieve allocative efficiency?
Consumers' maximum willingness to pay equalsproducers' minimumacceptable price for the last unit of output.
The sum of producer and consumer surplus is maximized.
C. The total revenue received by producers equals the total cost of production.
D. The marginal benefit of the last unit producedequals the marginal cost of producing that unit.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-02 Explainthe origin of both consumer surplus and producersurplus, and explain how properly functioning markets maximizetheir sum, total surplus,while optimally allocating resources.
Test Bank:I Topic: Efficiently Functioning Markets
At the output where the combinedamounts of consumerand producer surplusare largest,
the areas of consumer and producer surplus necessarily are equal.
B. the maximum willingness to pay for the last unit of output equalstheminimum acceptable price of that unit of output.
consumer surplus exceeds producer surplus by the greatest amount.
marginal benefitexceeds marginal cost by the greatest amount.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-02 Explainthe origin of both consumersurplus and producersurplus, and explain how properly functioning markets maximizetheir sum, total surplus,while optimally allocating resources.
Test Bank: I Topic: Efficiently Functioning Markets
An efficiency loss (or deadweight loss)
is measured as the combined loss of consumersurplus and producer surplus from over- or underproducing.
results from producing a unit of outputfor which the maximumwillingness to pay exceeds the minimum acceptable price.
can result from underproduction, but not from overproduction.
can resultfrom overproduction, but not from underproduction.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-02 Explainthe origin of both consumersurplus and producersurplus, and explain how properly functioning markets maximizetheir sum, total surplus,while optimally allocating resources.
Test Bank: I Topic: Efficiently Functioning Markets
An efficiency loss (or deadweight loss) declines in size when a unit of output is producedfor which
marginal cost exceeds marginal benefit.
B. maximum willingness to pay exceeds minimum acceptable price.
consumer surplus exceeds producer surplus.
producer surplus exceeds consumersurplus.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-02 Explainthe origin of both consumer surplus and producersurplus, and explain how properly functioning markets maximizetheir sum, total surplus,while optimally allocating resources.
Test Bank:I Topic: Efficiently Functioning Markets
The two main characteristics of a public good are
production at constantmarginal cost and rising demand.
nonexcludability and production at risingmarginal cost.
C. nonrivalry and nonexcludability.
D. nonrivalry and large negative externalities.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: PublicGoods
Nonrivalry and nonexcludability are the main characteristics of
consumption goods.
capital goods.
private goods.
D. public goods.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Unlike a private good, a public good
has no opportunity costs.
B. has benefits available to all, including nonpayers.
produces no positive or negativeexternalities.
is characterized by rivalryand excludability.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Which of the following is an example of a public good?
a weatherwarning system
a television set
a sofa
a bottle of soda
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: PublicGoods
A publicgood
can be profitably produced by private firms.
is characterized by rivalryand excludability.
produces no positive or negativeexternalities.
D. is available to all and cannot be denied to anyone.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank: I Topic: PublicGoods
The market system does not produce public goods because
there is no need or demand for such goods.
B. private firms cannot stop consumerswho are unwillingto pay for such goods from benefitingfrom them.
public enterprises can producesuch goods at lowercost than can private enterprises.
their production seriously distorts the distribution of income.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Public goods are those forwhich there
is no free-rider problem.
are no externalities.
C. are nonrivalry and non excludability.
D. are rivalry and excludability.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Public Goods
If one person's consumption of a good does not preclude another's consumption, the good is said to be
nonrival in consumption.
rival in consumption.
nonexcludable.
excludable.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Non excludability describes a conditionwhere
one person'sconsumption of a good does not prevent consumption of the good by others.
B. there is no effectiveway to keep people from using a good once it comes intobeing.
sellers can withhold the benefits of a good from those unwillingto pay for it.
there is no potential for free-riding behavior.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: PublicGoods
Which of the followingstatements is not true?
Some public goods are paid for by private philanthropy.
Private provisionof public goods is usually unprofitable.
The free-rider problem resultsfrom the characteristics of nonrivalry and nonexcludability.
D. Public goods are only provided by government.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Toll-free roads sometimes get congested,such as during rush-hour traffic. During those times, we would say that these roads are
excludable and rival.
excludable and nonrival.
nonexcludable and nonrival.
D. nonexcludable and rival.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Because of the free-rider problem,
the market demand for a public good is overstated.
B. the market demand for a public good is nonexistent or understated.
government has increasingly yielded to the privatesector in producing public goods.
public goods often create serious negative externalities.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: PublicGoods
At the optimalquantity of a public good,
marginal benefitexceeds marginal cost by the greatest amount.
total benefit equals total cost.
C. marginal benefit equals marginalcost.
D. marginal benefitis zero.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank: I Topic: PublicGoods
46.
Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willingto pay for the last unit of a public good, rather than do withoutit. These people are the only two members of society.
Q
Pa
Pb
1
$3
$5
2
2
4
3
1
3
4
0
2
5
0
1
The collective willingness of this society to pay for the second unit of this public good is
A. $2.
B. $4.
C. $6.
D. $8.
AACSB:Knowledge Application
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Public Goods
47.
Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willingto pay for the last unit of a public good, rather than do withoutit. These people are the only two members of society.
Q
Pa
Pb
1
$3
$5
2
2
4
3
1
3
4
0
2
5
0
1
If the marginal cost of producingthis good at the optimal quantity is $4, the optimal quantity must be
1 unit.
2 units.
C. 3 units.
D. 4 units.
AACSB:Knowledge Application
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank:I Topic: Public Goods
48.
Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willingto pay for the last unit of a public good, rather than do withoutit. These people are the only two members of society.
Q
Pa
Pb
1
$3
$5
2
2
4
3
1
3
4
0
2
5
0
1
Suppose government has alreadyproduced 4 units of this public good. The amount individual B is willing voluntarily to pay for the fourth unit is
A. $14.
B. $5.
C. $2.
D. $0.
AACSB:Knowledge Application
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank: I Topic: PublicGoods
49.
Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willingto pay for the last unit of a public good, rather than do withoutit. These people are the only two members of society.
Q
Pa
Pb
1
$3
$5
2
2
4
3
1
3
4
0
2
5
0
1
If this good were a private good insteadof a public one, the total quantitydemanded at a $3 market price would be
2 units.
3 units.
6 units.
D. 4 units.
AACSB: KnowledgeApplication
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: PublicGoods
A demand curve for a public good is determined by
summing vertically the individualdemand curves for the public good.
summing horizontally the individual demand curves for the public good.
combining the amounts of the publicgood that the individual members of societydemand at each price.
multiplying the per-unitcost of the public good by the quantity made available.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Suppose that Mick and Cher are the only two members of society and are willingto pay $10 and $8, respectively, for the third unit of a public good. Also, assume that the marginal cost of the third unit is $17. We can conclude that
the third unit should not be produced.
B. the third unit should be produced.
zero units should be produced.
4 units should be produced.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Public Goods
Alex, Kara, and Susie are the only three people in a community. Alex is willingto 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 marginalcost is less than or equal to A. $25.
B. $15.
C. $60.
D. $20.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank:I Topic: PublicGoods
Alex, Kara, and Susie are the only three people in a community. Alex is willing to pay $40 for the third unit of a public good; Kara is willing to pay $25. If the marginal cost of producingthe third unit is$100, what istheminimum amount that Susie must be willing to pay for it to be efficientfor government to produce the third unit?
A. $35 B. $100 C. $65
D. The amount cannot be determined with the information provided.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Public Goods
For which one of the followinggoods would we need to sum individualdemand curves vertically to obtain the total demand curve?
frozen yogurt
bubble gum
microwave popcorn
D. courts of law
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Public Goods
55.
Refer to the diagrams, in which figures(a) and (b) show demand curves reflecting the pricesAlvin and Elmer arewilling to pay for a public good, rather than do without it. The collective willingness to pay for the first unit of this public good is
A. $18.
B. $14.
C. $10.
D. $6.
AACSB: KnowledgeApplication
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: Public Goods
56.
Refer to the diagrams, in which figures(a) and (b) show demand curves reflecting the pricesAlvin and Elmer arewilling to pay for a public good, rather than do without it. If the marginalcost of the optimal quantity of this public good is $10, the optimalquantity must be
1 unit.
2 units.
C. 3 units.
D. 4 units.
AACSB: KnowledgeApplication
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank: I Topic: Public Goods
Cost-benefit analysis attemptsto
compare the real worth, rather than the market values,of various goods and services.
compare the relative desirability of alternative distributions of income.
determine whether it is better to cut government expenditures or reducetaxes.
D. compare the benefits and costs associated with any economic project or activity.
AACSB:Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firmscannot normally produce public goods.
Test Bank: I Topic: Cost-Benefit Analysis
58.
The followingdata are for a seriesof increasingly extensive flood-control projects.
Total Cost Per Year
Total Benefit PerYear
Plan
A = Levees
$10,000
$16,000
Plan
B = Small Reservoir
24,000
36,000
Plan
C = Medium Reservoir
44,000
52,000
Plan
D = Large Reservoir
72,000
64,000
For Plan D marginal costs and marginal benefits are
A. $72,000 and $64,000, respectively.
B. $28,000 and $12,000, respectively.
$24,000 and $18,000, respectively.
$16,000 and $28,000, respectively.
AACSB: KnowledgeApplication
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Cost-Benefit Analysis
59.
The followingdata are for a seriesof increasingly extensive flood-control projects.
Total Cost Per Year
Total Benefit PerYear
Plan
A = Levees
$10,000
$16,000
Plan
B = Small Reservoir
24,000
36,000
Plan
C = Medium Reservoir
44,000
52,000
Plan
D = Large Reservoir
72,000
64,000
On the basis of cost-benefit analysis, government should undertake
Plan D.
Plan C.
C. Plan B.
D. Plan A.
AACSB:Knowledge Application
Blooms:Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Cost-Benefit Analysis
60.
The followingdata are for a seriesof increasingly extensive flood-control projects.
Total Cost Per Year
Total Benefit PerYear
Plan
A = Levees
$10,000
$16,000
Plan
B = Small Reservoir
24,000
36,000
Plan
C = Medium Reservoir
44,000
52,000
Plan
D = Large Reservoir
72,000
64,000
Plan C entails
marginal benefits in excess of marginalcosts.
fewer spillovers than either Plan A or PlanB.
C. an overallocation of resources to flood control.
D. an underallocation of resources to flood control.
AACSB:Knowledge Application
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank: I Topic: Cost-Benefit Analysis
61.
Answer the question on the basis of the following information for four highway programs of increasing scope.All figures are in millionsof dollars.
Program
Total Cost
Total Benefit
A
$2
$9
B
6
16
C
12
21
D
20
23
The data indicate that
A. there is no highway programthat is economically justifiable on the basis of cost-benefit analysis.
B. the marginal cost and marginal benefit of Program A are $2 and $9, respectively.
the marginalcost and marginal benefit of Program C are $12 and $21, respectively.
program D is optimal because it maximizes the total benefit.
AACSB: KnowledgeApplication
Blooms: Understand Difficulty: 02 Medium
LearningObjective: 04-03 Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
Test Bank:I Topic: Cost-Benefit Analysis
62.
Answer the question on the basis of the following information for four highway programs of increasing scope.All figures are in millionsof dollars.
Program
Total Cost
Total Benefit
A
$2
$9
B
6
16
C
12
21
D
20
23
On the basis of the data, we can say that