Market Failures - solution! PDF

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1. Market failure is said to occur whenever: ฀ ฀ A. private markets do not allocate resources in the most economically desirable way. B. prices rise. C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay. D. government intervenes in the functioning of private markets. 2. Which of the following is an example of market failure? ฀ A. negative externalities B. positive externalities C. public goods D. all of these

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3. 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. D. a good or service is not produced because no one demands it. 4. People enjoy outdoor holiday lighting displays, and would be willing to pay 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 5. 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. 6. 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. 7. The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes, what has occurred? ฀ ฀ A. Positive externality B. Demand-side market failure C. Supply-side market failure D. All of these.

8. 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. 9. If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then which of the following is true? ฀ ฀ A. The benefit surpluses shared between consumers and producers will be maximized. B. The benefit surpluses received by consumers and producers will be equal. C. There will be no consumer or producer surplus. D. Consumer surplus will be maximized, and producer surplus will be minimized. 10. Consumer surplus: ฀ ฀ A.is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B 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. D. rises as equilibrium price rises. 11. 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. 12. 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. 13. 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. 14. Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle: ฀ ฀ A. under the demand curve and below the actual price. B. under the demand curve and above the actual price. C. above the supply curve and above the actual price. D. above the supply curve and below the actual price.

15. Graphically, producer surplus is measured as the area: ฀ A. under the demand curve and below the actual price. B. under the demand curve and above the actual price. C. above the supply curve and above the actual price. D. above the supply curve and below the actual price.

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16. 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.

17. Refer to the above 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. 18. Refer to the above diagram. Assuming equilibrium price P1, producer surplus is represented by areas: ฀ A. a + b. B. a + b + c + d. C. c + d. D. a + c. 19. Refer to the above 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.

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20. Refer to the above 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.

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21. Refer to the above 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.

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22. Refer to the above diagram. If actual production and consumption occur at Q3: ฀ A. efficiency is achieved. B. an efficiency loss (or deadweight loss) of e + f occurs. C. an efficiency loss (or deadweight loss) of a + b + c + d occurs. D. an efficiency loss (or deadweight loss) of a + c occurs.

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23. Allocative efficiency occurs only at that output where: ฀ ฀ A. marginal benefit exceeds marginal cost by the greatest amount. B. consumer surplus exceeds producer surplus by the greatest amount. C. the combined amounts of consumer surplus and producer surplus are maximized. D. the areas of consumer and producer surplus are equal. 24. 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. 25. Which of the following conditions does not need to occur for a market to achieve allocative efficiency? ฀ ฀ A. Consumers' maximum willingness to pay equals producers' minimum acceptable price. B. 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 produced equals the marginal cost of producing that unit. 26. At the output where the combined amounts of consumer and producer surplus are largest: ฀ ฀ A. the areas of consumer and producer surplus necessarily are equal. B. the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output. C. consumer surplus exceeds producer surplus by the greatest amount. D. marginal benefit exceeds marginal cost by the greatest amount. 27. An efficiency loss (or deadweight loss): ฀ ฀ A. is measured as the combined loss of consumer surplus and producer surplus. B. results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. C. can result from underproduction, but not from overproduction. D. can result from overproduction, but not from underproduction. 28. An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which: ฀ A. marginal cost exceeds marginal benefit. B. maximum willingness to pay exceeds minimum acceptable price. C. consumer surplus exceeds producer surplus. D. producer surplus exceeds consumer surplus.

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29. The two main characteristics of a public good are: ฀ ฀ A. production at constant marginal cost and rising demand. B. nonexcludability and production at rising marginal cost. C. nonrivalry and nonexcludability. D. nonrivalry and large negative externalities. 30. Nonrivalry and nonexcludability are the main characteristics of: ฀ A. consumption goods. B. capital goods. C. private goods. D. public goods.

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31. 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. 32. 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

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33. A public good: ฀ ฀ A. can be profitably produced by private firms. B. is characterized by rivalry and excludability. C. produces no positive or negative externalities. D. is available to all and cannot be denied to anyone. 34. 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. 35. Public goods are those for which there: ฀ A. is no free-rider problem. B. are no externalities. C. is nonrivalry and nonexcludability. D. is rivalry and excludability.

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36. If one person's consumption of a good does not preclude another's consumption, the good is said to be: ฀ ฀ A. nonrival in consumption. B. rival in consumption. C. nonexcludable. D. excludable. 37. Nonexcludability describes a condition where: ฀ ฀ A. one person's consumption of a good does not prevent consumption of the good by others. B. there is no effective way to keep people from using a good once it comes into being. C. sellers can withhold the benefits of a good from those unwilling to pay for it. D. there is no potential for free-riding behavior.

38. 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. 39. 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. 40. At the optimal quantity of a public good: ฀ ฀ A. marginal benefit exceeds marginal cost by the greatest amount. B. total benefit equals total cost. C. marginal benefit equals marginal cost. D. marginal benefit is zero. 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 willing to pay for the last unit of a public good, rather than do without it.

These people are the only two members of society.฀ 41. Refer to the above data. The collective willingness of this society to pay for the 2nd unit of this public good is: ฀ ฀ A. $2. B. $4. C. $6. D. $8. 42. Refer to the above data. If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be: ฀ ฀ A. 1 unit. B. 2 units. C. 3 units. D. 4 units. 43. Refer to the above data. Suppose government has already produced 4 units of this public good. The amount individual B is willing voluntarily to pay for the 4th unit is: ฀ ฀ A. $14. B. $5. C. $2. D. $0. 44. Refer to the above data. If this good were a private good instead of a public one, the total quantity demanded at a $3 market price would be: ฀ ฀ A. 2 units. B. 3 units. C. 6 units. D. 4 units.

45. A demand curve for a public good is determined by: ฀ ฀ A. summing vertically the individual demand curves for the public good. B. summing horizontally the individual demand curves for the public good. C. combining the amounts of the public good that the individual members of society demand at each price. D. multiplying the per-unit cost of the public good by the quantity made available. 46. Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the 3rd unit of a public good. Also, assume that the marginal cost of the 3rd unit is $17. We can conclude that: ฀ ฀ A. the 3rd unit should not be produced. B. the 3rd unit should be produced. C. zero units should be produced. D. 4 units should be produced. 47. Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the 5th unit of a public good; Kara, $15, and Susie, $25. Government should produce the 5th unit of the public good if the marginal cost is less than or equal to: ฀ ฀ A. $25. B. $15. C. $60. D. $300. 48. For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve? ฀ ฀ A. frozen yogurt B. bubble gum C. microwave popcorn D. courts of law

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49. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the 1st unit of this public good is: ฀ ฀ A. $18. B. $14. C. $10. D. $6. 50. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. If the marginal cost of the optimal quantity of this public good is $10, the optimal quantity must be: ฀ ฀ A. 1 unit. B. 2 units. C. 3 units. D. 4 units. 51. 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. The following data are for a series of increasingly extensive flood control projects:฀

52. Refer to the above data. For Plan D marginal costs and marginal benefits are: ฀ A. $72,000 and $64,000 respectively. B. $28,000 and $12,000 respectively. C. $24,000 and $18,000 respectively. D. $16,000 and $28,000 respectively.

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53. Refer to the above data. On the basis of cost-benefit analysis government should undertake: ฀ A. Plan D. B. Plan C. C. Plan B. D. Plan A.

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54. Refer to the above data. Plan C entails: ฀ ฀ A. marginal benefits in excess of marginal costs. B. fewer spillovers than either Plan A or Plan B. C. an overallocation of resources to flood control. D. an underallocation of resources to flood control. Answer the question on the basis of the following information for four highway programs of increasing

scope. All figures are in millions of dollars.฀ 55. The above data indicate that: ฀ ฀ A. there is no highway program that 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. C. the marginal cost and marginal benefit of Program C are $12 and $21 respectively. D. the marginal cost and marginal benefit of Program A cannot be determined.

56. On the basis of the above data we can say that: ฀ ฀ A. Program D is the most efficient on economic grounds. B. Program C is the most efficient on economic grounds. C. Program B is the most efficient on economic grounds. D. Program A is the most efficient on economic grounds. 57. According to the marginal-cost-marginal-benefit rule: ฀ ฀ A.only government projects (as opposed to private projects) should be assessed by comparing marginal costs and marginal benefits. B. the optimal project size is the one for which MB = MC. C. the optimal project size is the one for which MB exceeds MC by the greatest amount. D. project managers should attempt to minimize both MB and MC. 58. Economists consider governments to be "wasteful:" ฀ ฀ A. whenever they over- or underallocate resources to a project. B. only when they overallocate resources to a project. C. only when they underallocate resources to a project. D. whenever they attempt to correct a market failure. 59. A positive externality or spillover benefit occurs when: ฀ ฀ A. product differentiation increases the variety of products available to consumers. B. the benefits associated with a product exceed those accruing to people who consume it. C. a firm does not bear all of the costs of producing a good or service. D. firms earn positive economic profits. 60. A negative externality or spillover cost occurs when: ฀ ฀ A. firms fail to achieve allocative efficiency. B. firms fail to achieve productive efficiency. C. the price of the good exceeds the marginal cost of producing it. D. the total cost of producing a good exceeds the costs borne by the producer.

61. Refer to the above 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.

62. Refer to the above 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. subsid...