Download Multiple Choice

Chapters 12 and 13
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Markets fail to allocate resources efficiently when
a. prices fluctuate.
b. people who have property rights abuse their privileges.
c. property rights are poorly enforced or not well established.
d. the government refuses to intervene in private markets.
A market transaction causes an externality if someone
a. directly involved in the transaction receives uncompensated benefits or costs from it.
b. not directly involved in the transaction receives uncompensated benefits or costs from it.
c. directly involved in the transaction seeks legal assistance to ensure that the transaction is
carried out.
d. not directly involved in the transaction interferes in it by imposing regulations or product
standards.
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Many external costs occur because
a. people do not pay the true cost of using a resource.
b. people do not pay the private cost of using a resource.
c. companies do not pay the market price for natural resources.
d. companies pay more than the true cost of using a resource.
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Which of the following is most likely to lead to the underpricing and overuse of an economic
resource?
a. Human greed and selfishness.
b. Capital markets.
c. The absence of an enforceable property right.
d. The lack of understanding of pollution and its effects.
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The key explanation for the prevalence of waterway pollution is
a. the inclusion in production of all costs involving use of the waterway.
b. that there are private costs but no costs to society.
c. that waterways are often an open access, commonly owned resource.
d. that waterways are subject to the market's normal control procedures.
Externalities
a. are always detrimental.
b. are always beneficial.
c. arise when all costs, external and private, are included in production cost.
d. cause the price system to misallocate resources.
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The primary cause of air and water pollution is that
a. air and water are often not priced.
b. people want to pollute.
c. air and water have no value to society.
d. firms are profit maximizers.
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Which of these activities will most likely result in an external benefit?
a. A college student buys a deck of cards to play solitaire in her dorm room.
b. An elderly woman plants a flower garden on the vacant lot next to her house.
c. An executive purchases a book to read on a business trip.
d. A ten-year-old uses his allowance to buy new Nike shoes.
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Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by
the student in the form of higher wages. If there are no government subsidies for MBAs, then which
of the following statements is correct?
a. The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
b. The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
c. The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
d. The equilibrium price of MBAs will be greater than the efficient price of MBAs.
Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by
the student in the form of higher wages. If the government offers subsidies for MBAs, then which of
the following statements is correct?
a. The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
b. The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
c. The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
d. The tuition paid by the student would be exceed the efficient amount.
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Relative to a competitive situation, if a market lacks competition, economic theory suggests that
a. output will be lower and price higher.
b. output will be higher and price lower.
c. both output and price will be higher.
d. both output and price will be lower.
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If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total
profit by
a. raising price and reducing output.
b. raising price and expanding output.
c. lowering price and expanding output.
d. raising price and leaving output unchanged.
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When competitive forces in an industry are weak,
a. the absence of competition generally leads to overproduction.
b. prices may exceed the amount consumers are willing to pay.
c. the operational efficiency of private firms will be enhanced.
d. higher prices and less than optimal production may result.
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In a market that lacks sufficient competition,
a. output will generally be less than the output that is ideal from the standpoint of economic
efficiency.
b. output will generally be greater than the output that is ideal from the standpoint of economic
efficiency.
c. price will generally be less than the price that would result if the market was competitive.
d. profit rates will generally be so low that government subsidies will be necessary to ensure that
the firms remain in business.
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Sellers have a strong incentive to lobby government for legal restrictions that would reduce the
intensity of competition in their market because
a. the firms wish to be more efficient than competition will permit.
b. competition tends to result in lower prices and lower profits.
c. legal restrictions that lessen competition in a market generally benefit consumers.
d. the firms fear that intense competition will lead to higher profits that will attract additional
rivals into the market.
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The laws that make it illegal for firms to collude or attempt to monopolize a market are known as
a. competition laws.
b. antitrust laws.
c. profit margin laws.
d. polygamy laws.
The spillover effects of actions that affect the well-being of nonconsenting third parties are called
a. side components.
b. externalities.
c. free riders.
d. internalizations.
When externalities are present,
a. suppliers will refuse to produce desired goods and services.
b. this indicates that property rights are well-defined and enforced.
c. competitive market outcomes may be inconsistent with ideal economic efficiency.
d. competitive markets will generally achieve ideal economic efficiency.
Externalities cause the market mechanism to allocate goods and resources inefficiently because
a. nonconsenting third parties are generally not hurt by externalities.
b. producers and consumers ignore signals given by the competitive market.
c. prices are always higher than they should be.
d. competitive markets fail to give producers and consumers correct price signals.
Externalities are fundamentally the result of
a. the absence of competition in a market.
b. the lack of well-defined or enforced property rights.
c. poor information on the part of consumers.
d. the presence of significant comparative advantages in production.
Which of the following is the best example of an action that imposes an external cost?
a. wear and tear on your car as the result of frequent use
b. deterioration in the average quality of a house you own as the result of poor maintenance
c. water pollution from an upstream factory that increases the cost of providing clean water to
downstream residents
d. a rose garden on your property from which your neighbor gets much enjoyment
If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs
borne by these firms, you could conclude that
a. pollution is not a serious problem in this industry.
b. the consumers of steel are unwilling to bear the costs of pollution generated from steel
production.
c. pollution is an externality in this market, since producers and purchasers of steel do not bear
the full costs of the pollution.
d. pollution creates an external benefit rather than an external cost in this case.
When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a
recreational waterway lowering the value boaters receive from the waterway, the
a. firm’s cost of producing electricity will be higher than the community’s true opportunity cost.
b. firm will tend to produce too little electricity from the viewpoint of economic efficiency.
c. community generally receives an external benefit from the production of electricity.
d. firm’s cost of producing electricity will be lower than the community’s true opportunity cost.
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If production of a good creates external benefits, a competitive market may produce
a. less output than would maximize profit.
b. more output than would maximize profit.
c. less output than is efficient.
d. more output than is efficient.
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When a firm generates external benefits, society would be better off if
a. the firm produced a larger output level.
b. the firm reduced its output level.
c. a tax were levied on the firm equal to the dollar amount of the externalities.
d. price were fixed below the firm’s per-unit cost.
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If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost
incurred by the firm,
a. not enough of the product is being produced.
b. the price charged for the good is too high.
c. the good produces a positive externality.
d. the good produces a negative externality.
e. the government should produce the good.
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The efficient level of output of a good with an externality occurs when
a. the true marginal costs of production are equal to marginal revenues
b. the firm maximizes its profits.
c. the consumer maximizes his or her utility.
d. the true marginal cost of production equals the true marginal benefit of the good.
e. the firm is making a normal profit.
If the true marginal benefit of consuming a product exceeds the true marginal cost of producing it,
efficiency is
a. increased by reducing output.
b. decreased by expanding output.
c. unchanged by expanding or reducing output.
d. increased by expanding output.
e. maximized.
Markets fail when externalities are present
a. because all of the costs and benefits of producing a good are reflected in the market price.
b. because some of the costs and benefits of producing a good are not reflected in the market
price.
c. only if they are negative; positive externalities are not market failures.
d. because profits are not maximized.
e. if the positive externalities are less than the negative externalities.
A government passes a new law allowing only 1,000 tons of pollution per day to be generated and
simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of
the following is true?
a. The pollution will be created by those least willing and able to pay the damages.
b. The pollution will be created by those most willing and able to pay for the right to pollute.
c. The funds collected by the government will be enough to compensate any individuals harmed
by the pollution.
d. Pollution will increase from zero to 1,000 units per day.
e. There will be no incentive for polluters to try to sneak emissions past government monitoring
devices.
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If consumption of education creates an external benefit, then in order to increase efficiency relative
to the outcome determined by private decisions,
a. more education must be produced.
b. the same amount of education must be produced, and the price should be lower.
c. less education must be produced, and the price should be higher.
d. less education must be produced, and the price should be lower.
e. less education must be produced at the same price.
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If education creates external benefits,
a. actual market outcomes provide less than the efficient quantity of education.
b. actual market outcomes provide more than the efficient quantity of education.
c. actual market outcomes provide a higher price than the efficient price of education.
d. the government should impose a depletion tax.
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When production of a good provides external benefits, there will be
a. too few resources devoted to its production.
b. too many resources devoted to its production.
c. the optimal amount of resources devoted to its production.
d. abnormally high profits earned by producers of the good.
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As a general rule, if pollution costs are external, firms will produce
a. too little of a polluting good.
b. too much of a polluting good.
c. an optimal amount of a polluting good.
d. cannot be determined without additional information.
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If government taxes a firm which pollutes this will
a. increase the demand for the good produced.
b. decrease the supply of the good produced.
c. increase the equilibrium quantity of the good produced in the market.
d. decrease the equilibrium price of the good produced in the market.
e. all of the above.
Suppose the actions of the producers of a good impose an external cost which results in the actual
market price of $25 and market output of 1,000 units. How does this outcome compare to the
efficient, ideal equilibrium?
a. The efficient price would higher than $25 while the efficient output would be less than 1,000
units.
b. The efficient price would be higher than $25 while the efficient output would be greater than
1,000 units.
c. The efficient price would be lower than $25 while the efficient output would be less than 1,000
units.
d. The efficient price would be lower than $25 while the efficient output would be greater than
1,000 units.
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Suppose the actions of the producers of a good generate an external benefit which results in the
actual market price of $15 and market output of 614 units. How does this outcome compare to the
efficient, ideal equilibrium?
a. The efficient price would higher than $15 while the efficient output would be less than 614
units.
b. The efficient price would be higher than $15 while the efficient output would be greater than
614 units.
c. The efficient price would be lower than $15 while the efficient output would be less than 614
units.
d. The efficient price would be lower than $15 while the efficient output would be greater than
614 units.
Consider two goods – one that generates external benefits and another that generates external costs.
The actual market outcome would
a. result in a price that is lower than the efficient price for both goods.
b. result in a price that is higher than the efficient price for both goods.
c. result in a price that is lower than the efficient price for the good with an external benefit and a
price that is higher than the efficient price for the good with an external cost.
d. result in a price that is higher than the efficient price for the good with an external benefit and a
price that is lower than the efficient price for the good with an external cost.
Suppose external costs are present in a market which results in the actual market price of $50 and
market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?
a. The efficient outcome would be greater than 800 units.
b. The efficient outcome would be less than 800 units.
c. The efficient outcome would also be 800 units.
d. The efficient price would be less than $50.
Suppose external benefits are present in a market which results in the actual market price of $34 and
market output of 126 units. How does this outcome compare to the efficient, ideal equilibrium?
a. The efficient outcome would be greater than 126 units.
b. The efficient outcome would be less than 126 units.
c. The efficient outcome would also be 126 units.
d. The efficient price would be less than $34.
Consider two goods – one that generates external costs and another that generates external benefits.
The actual market outcome would
a. result in output that is lower than the efficient output for both goods.
b. result in output that is higher than the efficient output for both goods.
c. result in output that is lower than the efficient output for the good with an external benefit and
output that is higher than the efficient output for the good with an external cost.
d. result in output that is higher than the efficient output for the good with an external benefit and
output that is lower than the efficient output for the good with an external cost.
Suppose external costs are present in a market which results in the actual market price of $84 and
market output of 320 units. How does this outcome compare to the efficient, ideal equilibrium?
a. The efficient price would be higher than $84.
b. The efficient price would be lower than $84.
c. The efficient price would also be $84.
d. The efficient output would be greater than 320 units.
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Suppose external benefits are present in a market which results in the actual market price of $62 and
market output of 3,000 units. How does this outcome compare to the efficient, ideal equilibrium?
a. The efficient price would be higher than $62.
b. The efficient price would be lower than $62.
c. The efficient price would also be $62.
d. The efficient output would be less than 3,000 units.
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When the actions of the producers of a good impose an external cost, the price of the good will be
a. lower, and output higher, than would be consistent with economic efficiency.
b. lower, and output lower, than would be consistent with economic efficiency.
c. higher, and output higher, than would be consistent with economic efficiency.
d. higher, and output lower, than would be consistent with economic efficiency.
70.
When external costs are present in a market,
a. less of the good will be produced than the amount consistent with economic efficiency.
b. more of the good will be produced than the amount consistent with economic efficiency.
c. the amount of the good produced will be equal to the amount consistent with economic
efficiency.
d. corresponding external benefits are always generated.
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In a competitive market, if the production process involves an external cost, such as pollution of the
environment, the market will
a. produce the economically efficient outcome.
b. result in a market price that is higher than the efficient one.
c. register a price that is lower than the efficient one.
d. result in too little of the good being produced compared to the ideal efficient outcome.
Compared to ideal economic efficiency, when the production of a good generates external costs,
competitive markets will likely result in an output that is too
a. large and a price that is too high.
b. large and a price that is too low.
c. small and a price that is too high.
d. small and a price that is too low.
Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products
into rivers. How will the price and output of the chemical products in a competitive market compare
with their values under conditions of ideal economic efficiency?
a. The price would be too low, and the output would be too large.
b. The price would be too high, and the output would be too large.
c. The price would be too low, and the output would be too small.
d. The price would be too high, and the output would be too small.
Which of the following is the best example of an action that creates an external benefit?
a. a higher trade-in value of your car as a result of taking care to properly maintain it
b. getting a measles vaccination that prevents you from getting (and thus from spreading) the
disease
c. air pollution from a factory that significantly lowers the air quality in a city
d. a neighbor playing their radio so loud that it interferes with your ability to study for an exam
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When production of a good generates external benefits, the
a. demand curve for the good will overstate the true social benefits from consumption of the
good.
b. demand curve for the good will understate the true social benefits from consumption of the
good.
c. supply curve for the good will overstate the true social cost of producing the good.
d. supply curve for the good will understate the true social cost of producing the good.
When the consumption of a good generates an external benefit,
a. the private benefit consumers receive from the good will be higher than the true social benefit.
b. too much of the good will tend to be produced from the viewpoint of economic efficiency.
c. the community generally suffers an exactly offsetting external cost from the production of the
good.
d. the market demand curve will understate the total benefits derived from consumption of the
good, and as a result, too little of it will be produced and consumed.
When the actions of the producers of a good impose an external benefit, the price of the good will
be
a. lower, and output higher, than would be consistent with economic efficiency.
b. lower, and output lower, than would be consistent with economic efficiency.
c. higher, and output higher, than would be consistent with economic efficiency.
d. higher, and output lower, than would be consistent with economic efficiency.
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When external benefits are present in a market,
a. less of the good will be produced than the amount consistent with economic efficiency.
b. more of the good will be produced than the amount consistent with economic efficiency.
c. the amount of the good produced will be equal to the amount consistent with economic
efficiency.
d. corresponding external costs are always generated.
79.
In a competitive market, if the production process involves an external benefit, the market will
a. produce the economically efficient outcome.
b. result in a market price that is higher than the efficient one.
c. result in a market price that is lower than the efficient one.
d. result in too much of the good being produced compared to the ideal efficient outcome.
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Compared to ideal economic efficiency, when the production of a good generates external benefits,
competitive markets will likely result in an output that is too
a. large and a price that is too high.
b. large and a price that is too low.
c. small and a price that is too high.
d. small and a price that is too low.
Consider two goods—one that generates external benefits and another that generates external costs.
A competitive market economy would tend to produce
a. too much of both goods.
b. too little of both goods.
c. too much of the good that generates external benefits and too little of the good that generates
external costs.
d. too little of the good that generates external benefits and too much of the good that generates
external costs.
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A good is considered to be a public good if it
a. is a good produced by the government sector.
b. is both nonrival-in-consumption and nonexcludable.
c. benefits only a small group of consumers but is very costly to produce.
d. is a good whose production is financed by tax revenue.
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
a. external benefit.
b. public good.
c. external cost.
d. repeat purchase item.
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What are the two distinguishing characteristics of a public good?
a. nonrivalry in consumption and nonexcludability
b. indivisibility in production and excludability of nonpaying customers
c. provision by government and funding through taxation
d. mass production and comparative advantage
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A good that is both nonexcludable and nonrival-in-consumption is called a
a. common good.
b. external good.
c. public good.
d. private good.
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A good for which it is impossible or at least very costly to exclude nonpaying customers from
receiving the good and for which many individuals can share in the consumption of the same unit of
the good is called a
a. public good.
b. joint good.
c. excludable good.
d. national good.
Which of the following is the best example of a public good?
a. long distance telephone service
b. national defense
c. an amusement park
d. the electric service of a public utility
Which of the following is an example of a public good?
a. a classical music concert
b. electricity
c. an effective antimissile system that defends a country against a nuclear attack
d. a national health care program that is operated by the government and financed with tax dollars
Which of the following is the best example of a public good?
a. a rock concert at an indoor arena
b. a laptop computer
c. a television broadcast signal
d. an economics textbook
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A good is considered nonrival-in-consumption if
a. many individuals can share in the consumption of the same unit of the good.
b. the consumption of the good by one individual lowers the amount available for others.
c. even nonpaying customers can receive the full benefit from the good.
d. its production is financed through tax revenue rather than market prices.
91.
A free-rider problem exists when a good that has the following characteristic?
a. Rivalry in consumption.
b. Elastic demand.
c. Inelastic demand.
d. Nonexcludable.
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Because of the free-rider problem,
a. competitive markets will tend to undersupply public goods.
b. the federal government spends too much on national defense.
c. fireworks displays have become increasingly dangerous.
d. poverty has increased.
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When the free-rider problem exists,
a. the market will devote too few resources to the production of the good.
b. the cost of the good will always be more than the benefit of the good.
c. the good will not be produced.
d. entrepreneurs will eventually find a way to make free-riders pay their share.
94.
The government sometimes provides public goods because
a. private markets are incapable of producing public goods.
b. free-riders make it difficult for private markets to supply the efficient quantity.
c. markets are always better off with some government oversight.
d. external benefits will accrue to private producers.
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The government sometimes provides public goods because
a. private markets would not produce any of the goods.
b. private markets would not produce the efficient quantity of the goods.
c. private markets would charge too high a price for the goods.
d. the government produces public goods more efficiently than private markets can.
If the consumption of a good by one individual does not change the amount of the good available to
others, the good is considered to be
a. durable.
b. nonrival-in-consumption.
c. a common good.
d. a natural resource.
How does an additional individual’s consumption of a good that is nonrival-in-consumption, such as
a radio broadcast, affect the amount of the good available to other consumers?
a. The amount available to others will decline.
b. The amount available to others will increase.
c. The amount available to others is unaffected.
d. The amount available to others is eliminated.
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How does an additional individual’s consumption of a public good, such as an aerial fireworks
display, affect the amount of the good available to other consumers?
a. The amount available to others will decline.
b. The amount available to others will increase.
c. The amount available to others is unaffected.
d. The amount available to others is eliminated.
A good is considered nonexcludable if
a. many individuals can share in the consumption of the same unit of the good.
b. the consumption of the good by one individual lowers the amount available for others.
c. it is impossible or very costly to exclude nonpaying customers from receiving the good.
d. its production is financed through tax revenue rather than market prices.
100. If it is impossible or very costly to exclude nonpaying customers from receiving a good, the good is
considered to be
a. freeware.
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b. nonexcludable.
c. a common good.
d. a receiving good.
101. When a good is nonexcludable,
a. it is impossible or very costly to exclude nonpaying customers from receiving the good.
b. individuals will have an incentive to become free riders.
c. it will be difficult for a private firm producing the good to generate revenue sufficient to cover
the cost of production.
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d. all of the above are true.
102. People who receive the benefit of a good without contributing to its costs of production are called
a. contributors in kind.
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b. free riders.
c. frequent flyers.
d. cost maximizers.
103. In economics, a free rider is the term used for a person who
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a. receives the benefit of a good without contributing to its costs of production.
b. purchases an item during a “buy one, get one free” sale.
c. lives in a town in which the city provides free bus service.
d. pays for exactly what they receive.
104. A college has found that during every home football game, a group of students sits on a hillside next
to the stadium and watches the game without purchasing tickets. In economics, the problem that this
college is facing is referred to as a
a. common good problem.
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b. free rider problem.
c. onlooker problem.
d. deadweight loss problem.
105. Which of the following is true?
a. Consumption of a public good by one individual reduces the availability of the good for others.
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b. It is extremely difficult to limit the benefits of a public good to only the people who pay for it.
c. Public goods are free to a society when they are produced by the government.
d. From an efficiency standpoint, a market economy will generally supply too much of a public
good.
106. Which of the following goods is the market sector most likely to undersupply (relative to the
criterion of ideal economic efficiency)?
a. television sets
b. steel
c. Internet access
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d. mosquito abatement programs
107. From the standpoint of economic efficiency, competitive markets tend to provide
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a. less of a public good than would be efficient.
b. more of a public good than would be efficient.
c. exactly the amount of a public good that is efficient.
d. none of the above.
108. A competitive market economy is unlikely to provide an efficient quantity of some public goods
because
a. only the government has the vast resources necessary to produce public goods.
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b. the nature of public goods makes it difficult for producers to withhold them from nonpaying
consumers.
c. the technology involved in the production of public goods makes it difficult for private firms to
produce them even though, once produced, they could be marketed efficiently.
d. private production of public goods generally results in a large amount of profit, which is
difficult for a firm to effectively pay out to shareholders.
109. Which of the following is a valid reason for government provision rather than market provision of
certain economic goods and services?
a. When the government provides economic goods, they are free; costs are only incurred when
such goods are provided by private firms.
b. Voters tend to be better informed than market consumers.
c. Decision makers in the market sector are motivated by self-interest, whereas, political decision
makers are primarily motivated by the desire to help others.
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d. Public goods tend to be undersupplied through the market since it is difficult for potential
suppliers to withhold such goods from nonpaying consumers, while the government can use
taxes to overcome this problem.
110. A car sells at different prices at different dealerships in a local market. If a consumer has imperfect
information about the price of a car at each dealership, he should
a. always gather all available information about prices.
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b. gather information about prices until the expected marginal benefit of more information equals
the marginal cost of gathering it.
c. gather information about prices only if it can be gathered without cost.
d. ignore information about prices because it is irrelevant to making an "optimally imperfect"
decision.
111. In which of the following markets are information problems likely to be most serious?
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a. used cars
b. groceries
c. toothpaste
d. compact discs
112. In which of the following markets are information problems likely to be most serious?
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a. automotive repair service
b. magazines
c. toothpaste
d. pencils
113. Sellers will tend to be most concerned with customer satisfaction when
a. it is difficult for the customer to evaluate product quality.
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b. they depend on repeat customers for most of their business.
c. they sell primarily to tourists.
d. they are a monopoly protected from competition by government licensing.
114. Which of the following statements is true regarding potential information problems faced by
consumers?
a. Sellers have little incentive to inform customers about their products.
*
b. The market provides consumers with a strong incentive to acquire information.
c. Information problems tend to be most problematic for items consumers purchase regularly.
d. In markets, people make all decisions with full information.
115. Which of the following most clearly indicates why the franchiser of a product has a strong incentive
to monitor the quality of the product among all of the franchised sellers?
a. The franchiser has a monopoly on the sale of products in his industry.
*
b. If quality is not maintained, the franchiser will be limited in his ability to sell other franchises
and collect franchise fees.
c. If quality is not maintained, the government will prohibit future sales of the franchises.
d. Franchisers do not gain financially by maintaining quality, but they generally maintain quality
anyway because they are consumers as well as producers.
116. When consumers cannot tell the difference at the time of sale between high-quality products and
those with defects, strong sales of the low-quality products will tend to depress price and drive the
high-quality products from the market. Economists call this
a. the curse of advertising.
*
b. the imperfect information problem.
c. the brand name problem.
d. an open-access resource.
117. Manny’s Bar-n-Grill is next door to a franchised fast-food restaurant near a busy freeway exit.
Essentially, the menus, food quality, atmosphere, and service are equal at the two restaurants.
Nevertheless, the nationally franchised restaurant can attract more customers, even though its prices
are higher. This situation
a. indicates that people are irrational because it never makes sense to pay a higher price when a
product is cheaper elsewhere.
*
b. is one in which the national franchise provides uninformed consumers with valuable
information that reduces their risk of being unsatisfied with the purchase.
c. reflects the greater elasticity of supply for food at Manny’s Bar-n-Grill relative to the
nationally franchised restaurant.
d. is inconsistent with the basic postulates that underlie the economic way of thinking.
118. Market failure will most likely arise from poor information when the product is
a. a repeat-purchase item.
b. easily evaluated on inspection.
c. often purchased from the same seller.
*
d. unlikely to be purchased from the same seller in the future.
119. Which of the following would be considered a repeat-purchase item for most people?
*
a. toothpaste
b. an economics textbook
c. a meal at a restaurant while traveling on vacation
d. a prescription drug for a temporary illness
120. An item purchased often by the same buyer is known as a
a. frequent transaction good.
*
b. repeat-purchase item.
c. free rider good.
d. public good.
121. Which of the following will most likely help the consumer make better-informed choices when
choosing among goods that are seldom purchased?
a. brand name reputation
b. franchising
c. consumer ratings magazines
*
d. all of the above
122. Brand names such as “Nabisco” or “Sony”
a. raise the cost of goods because they require advertising to make consumers aware of the brand
name and, therefore, generally increase the price of products to consumers without producing
any benefit to them.
b. generally convey little information about a product to consumers.
*
c. benefit consumers by assuring them of a known quality level when they buy a product that they
have little previous first-hand knowledge about.
d. provide the most value to consumers for goods that are repeat-purchase items.
CHAPTER 14 INCOME INEQUALITY AND POVERTY
93.
*
Over the past several decades, family incomes in the United States have
a. become less equal.
b. become more equal.
c. maintained the same level of inequality.
d. declined substantially for all families.
94.
Which of the following is false about data on the inequality of annual family (or household)
incomes?
a. The degree of inequality is reduced when transfers and taxes are considered.
b. The inequality in annual income data understates the true degree of inequality in lifetime
income.
c. Differences in age and family characteristics contribute to the degree of inequality.
d. The inequality in consumption spending across households is smaller than the inequality in
annual income.
*
95.
*
96.
*
Because the United States has a progressive tax system, the distribution of income after taking into
account the effects of taxes and transfers is
a. less equal than the distribution of before-tax income.
b. more equal than the distribution of before-tax income.
c. exactly the same as the distribution of before-tax income.
d. none of the above.
Which of the following has contributed to the rising income inequality in the United States?
a. The proportion of single-parent families has increased.
b. The proportion of dual-earner families has increased.
c. Earnings differentials between skilled and less-skilled workers have increased.
d. all of the above
97.
*
Use the following two statements to answer this question. (I) In a market system, resource prices
both provide incentives for the efficient allocation of resources and determine income distribution.
(II) Income and wealth are neither created nor destroyed, they are just fixed-sized pies to be
allocated among individuals.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. I is false; II is true.
98.
(I) High implicit marginal tax rates reduce the incentive of the poor to earn.
*
(II) The Samaritan’s dilemma is that transfer programs lower the opportunity cost of activities that
lead to poverty.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. II is true; I is false.
99.
*
Even if lifetime incomes were equal, there still might be substantial inequality in annual income
data because
a. wage rates might differ substantially.
b. some might have inherited their wealth.
c. some might have retired, whereas others are prime-age earners.
d. educational levels might differ substantially.
100. When deciding whether to classify a family as in poverty, official figures
a. count all transfer and welfare benefits received by the family as income.
*
b. do not count in-kind benefits in the calculation of the family’s income.
c. do not count cash benefits in the calculation of the family’s income.
d. do not count any transfer or welfare benefits as income.
101. (I) In 2006, a family of four making $20,615 would be considered living in poverty.
*
(II) The poverty threshold level of income is adjusted for family size and for inflation (price level
changes) through time.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. II is true; I is false.
102. Imagine two countries, Lebos and Egap, that have identical average annual incomes. In Lebos, the
poorest families one year almost always end up as the richest families the next year and become
middle-income families the year after that. In Egap, however, the poor remain poor and rich remain
rich. Which of the following is true about the two countries?
a. The measured distribution of annual income in any given year is more equal in Lebos than in
Egap.
b. The measured distribution of annual income in any given year is more equal in Egap than in
Lebos.
*
c. The measured distribution of annual income in any given year will be the same in Lebos and
Egap.
d. The distribution of lifetime income is more equal in Egap than in Lebos.
103. In a market economy,
a. there is not a fixed economic pie to be divided among individuals, but rather income is created
by the individuals who earn it.
b. differences in incomes provide individuals with an incentive to supply resources that are highly
valued by others.
c. a person’s income is determined by the quantity and value of the resources that they supply to
the market.
*
d. all of the above are true.
104. Compared to low-income families, high-income families tend to
a. have smaller family sizes (fewer persons per family).
*
b. have more workers per family.
c. be headed by a person who has not completed high school.
d. supply fewer weeks of work per year.
105. Since 1970, income inequality in the United States has
a. decreased.
*
b. increased.
c. remained the same.
d. increased throughout the 1970s and 1980s but fell during the 1990s.
106. Which of the following is true?
*
a. The distribution of income after taxes and transfers is considered more equal than when they
are excluded.
b. The distribution of lifetime income tends to be more unequal than the distribution of annual
income.
c. The distribution of income has become more equal in recent years.
d. Developed, industrialized countries generally tend to have higher income inequality than lessdeveloped countries.
107. Data on income inequality in the United States indicate that
a. rich families stay rich and poor families stay poor through time.
*
b. there is substantial movement among income groupings in the United States through time.
c. most poor families never significantly rise above the poverty level, but rich families tend to
become less wealthy over time.
d. most rich families remain rich, but most poor families move up in the income distribution
through time.
108. Which of the following is accurate regarding income statistics?
a. Current annual income is also an accurate indicator of relative economic status over a longer
period, such as a decade or lifetime.
*
b. Inequalities of income observed at one point in time with annual income data overstate the
degree of true income inequality in lifetime income.
c. Recent studies indicate that the relative income position of a family generally determines the
relative income position of their children and grandchildren.
d. High-income earners generally maintain their status year after year, whereas those with low
current incomes tend to stay poor year after year.
109. Transfers that are limited to persons or families with an income below a certain cut-off point are
referred to as
*
a. means-tested income transfers.
b. poverty transfers.
c. Social Security transfers.
d. cash income transfers.
110. How do the high implicit marginal tax rates that often occur when transfer payments are inversely
linked to earnings affect the incentive of poor people to work and earn?
a. A poor person’s incentive to earn is increased.
*
b. A poor person’s incentive to earn is reduced.
c. The incentive of the poor to earn is unaffected.
d. The incentive of the poor to earn reported income is increased, but the incentive to earn
unreported income is reduced.
111. If a family earned an additional $6,000 of income from work and as a result their welfare benefits
were reduced by $3,000, the implicit marginal tax rate for this family would be
a. zero.
b. 30 percent.
*
c. 50 percent.
d. 100 percent.
112. The idea that transfer benefits to the poor encourage behavior that increases the risk of poverty is
known as the
*
a. Samaritan’s dilemma.
b. rule of inverse benefits.
c. implicit marginal tax law.
d. Smith paradox.
113. Data suggest that the large increase in government spending on income transfers over the past three
decades has been accompanied by
a. a reduced poverty rate for the nonelderly.
b. a more equal distribution of income.
c. fewer single-parent families because a married couple receives benefits twice as large.
*
d. none of the above.
114. (I) Opponents to government action to reduce income inequality argue that the pattern of economic
outcomes is more important than the process that generates the outcomes.
*
(II) Opponents of government action to reduce income inequality argue that the proposed solutions
will retard economic growth.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. I is false; II is true.
CHAPTER 15
2.
Automated production methods are only attractive when they
a. are undertaken in heavily unionized sectors of the economy.
b. reduce per-unit costs.
c. replace workers.
d. decrease labor productivity.
8.
When employment discrimination results from the personal prejudices of employers, economic
theory suggests that
a. it is costless for employers to discriminate against groups they do not like.
b. the wages of employees who are discriminated against will actually rise.
c. an employer who discriminates will experience higher costs.
d. discrimination by an employer will reduce production costs since the employer can pay lower
wages.
46.
Suppose that an employer hires workers with blue eyes and workers with brown eyes. Each type of
worker has the same productivity. Which of the following is correct if the employer discriminates
by offering blue-eyed workers lower wages than brown-eyed workers?
a. The employer will be just as cost efficient as a nondiscriminating employer.
b. The employer will face higher costs than a nondiscriminating employer.
c. The employer will have lower costs.
d. The employer will have higher profits.
e. Both a and c are correct.
*
47.
*
48.
*
49.
*
50.
*
51.
*
The fact that wage differentials continue to exist across different groups of workers leads
economists to believe that
a. discrimination by customers is the most common type of economic discrimination.
b. differences in human capital and job characteristics must be important in explaining the
differences in wages.
c. firms apparently are not profit maximizers.
d. the market has failed to properly allocate wages to different workers.
Business owners who care only about maximizing profits are
a. likely to discriminate against certain groups of workers.
b. likely to be replaced by discriminating businesses.
c. more concerned about racial discrimination than gender discrimination.
d. at an advantage when competing against those who practice discrimination.
Economic theory suggests that college graduates receive higher wages than those with only a high
school education because
a. college graduates are more productive.
b. college graduates must be paid higher wages because their educational costs were higher.
c. college graduates have formed stronger unions.
d. the supply of high school graduates is small relative to the demand for their labor.
When employment discrimination results from the personal prejudices of employers, economic
theory suggests that
a. competitive forces will tend to reduce discrimination.
b. the wages of employees who are discriminated against will rise.
c. an employer who discriminates will have the same costs as those who do not discriminate.
d. discrimination by an employer will reduce production costs since the employer can pay lower
wages.
Suppose that Japanese and Chinese workers are equally productive, but Japanese workers receive a
higher wage than Chinese workers. Then, refusing to hire Chinese workers would
a. increase the firm’s costs.
b. decrease the firm’s costs.
c. increase the firm’s profits.
d. decrease the firm’s profits.
e. do both a and d.
52.
*
53.
*
54.
*
55.
*
56.
*
57.
*
58.
*
Suppose that Joe, a white male, and Sam, a black male, both are financial analysts, but Joe makes a
higher annual salary than Sam. From these facts, we know that
a. there is employment discrimination against Sam.
b. Joe is more productive than Sam.
c. either employment discrimination or productivity factors might explain the wage difference.
d. Joe works more diligently than Sam.
If there is employment discrimination against minorities, this will cause the
a. supply of their services to increase, and their wages to fall.
b. demand for their services to decline, and their wages to fall.
c. supply of their services to decline, and their wages to rise.
d. demand for their services to decline, and their wages to rise.
Which of the following is true?
a. Employers who discriminate against blacks and other minorities will have lower costs than
rival firms that hire employees strictly on the basis of merit (productivity).
b. After adjusting for factors such as education, experience, and location, the earnings of black
men are almost identical to the earnings of similar white men.
c. If employers can hire equally productive minority employees at a lower wage than nonminorities, the profit motive provides a strong incentive to do so.
d. The empirical evidence indicates that the earnings gap between whites and blacks is entirely
the result of employment discrimination.
Which of the following is the clearest evidence of employment discrimination against minority
employees?
a. The average wages of minority workers are lower than the average wages of whites.
b. The average wages of minority employees are lower than the average wages of whites with
similar productivity characteristics.
c. The mean number of years of schooling of minority workers is lower than that of whites.
d. The average hours worked by minority employees exceeds the hours worked by whites.
Assume that empirical evidence shows a difference in mean earnings between two groups, say,
majority and minority workers. What conclusion may be drawn?
a. The group with the lower earnings is being discriminated against.
b. The group with the lower earnings is less productive.
c. The group with the lower earnings has less human capital.
d. Any of the above statements could, either partially or entirely, explain this difference.
When comparisons are made between the earnings of whites and minorities with the same age,
quantity of schooling, marital status, sector of employment, union and industry status, regional
location, and annual hours worked, recent studies indicate that
a. the corrected earnings of minority men are about two-thirds the earnings of white men.
b. earnings differentials between whites and minorities are due almost exclusively to employment
discrimination.
c. the corrected earnings of Mexican-Americans, Asian-Americans, and American Indians were
between 7 and 9 percent less than the earnings of similar white men.
d. most minority men now have higher earnings than white men.
When earnings differentials are adjusted for such factors as age, education, and marital status, the
a. differential between the earnings of white males and those of minority males increases.
b. differential between the earnings of white males and those of minority males decreases.
c. corrected earnings of minority males are equal to those of similar white men.
d. corrected earnings of minority males are greater than those of similar white men.
84.
*
85.
*
97.
*
Assume that empirical evidence shows a difference in mean earnings between two groups, say,
majority and minority workers. What conclusion may be drawn?
a. The group with the lower earnings is being discriminated against.
b. The group with the lower earnings is less productive.
c. The group with the higher earnings has a larger quantity of human capital.
d. Any of the above statements could, either partially or entirely, explain the difference in the
mean earnings.
If a firm refuses to hire any minorities due to a personal prejudice, its profits will
a. increase markedly.
b. decrease.
c. not be affected.
d. increase slightly.
If a firm refuses to hire any minorities due to a personal prejudice, its profits
a. will increase markedly.
b. will decrease.
c. will not be affected.
d. will increase slightly.
101. Which of the following is true?
a. employers who discriminate against blacks and other minorities will have lower costs than
rival firms that hire employees strictly on the basis of productivity.
b. after adjusting for factors such as education, experience, and location, the earnings of black
men are almost identical to the earnings of white men.
*
c. if minority and white employees in a skill category are equally productive, the profit motive
provides employers with a strong incentive to hire minority employees if they are available at a
lower wage.
d. the empirical evidence indicates that the earnings gap between whites and blacks is entirely the
result of worker preference.
46.
*
47.
*
48.
*
Which of the following is true?
a. The proportion of female workers who are union members is higher than the proportion of
male workers.
b. The proportion of government employees who are union members is higher than the proportion
of private sector workers.
c. The proportion of workers in southern states who are union members is higher than the
proportion in northern states.
d. The proportion of white workers who are union members is higher than the proportion of black
workers.
Which of the following is not a cause of the decline in unionization in the United States?
a. deregulation in transportation and communication industries
b. increased foreign competition
c. growth in the number of smaller firms
d. an increase in the number of workers wishing to be union members
Which of the following is not one of the channels through which a union may raise wages?
a. supply restrictions
b. increasing the demand for union labor
c. more competitive product pricing
d. bargaining power
49.
*
50.
*
51.
*
52.
*
A worker living in a state with a right-to-work law
a. cannot be employed at a union firm until he has joined the union.
b. cannot be required to join a union as a condition of employment.
c. must agree when he is hired never to join a union.
d. is guaranteed a job in government if he cannot find a private sector job.
Because the demand for a broadly defined product line (automobiles, for example) is less elastic
than the demand for a more narrow product category (Fords, for example), a union will be better
able to raise wages without large unemployment effects when
a. it has organized an entire industry rather than only one firm.
b. it organizes only a few firms in each industry.
c. it bargains with all firms in a narrow product line but ignores the rest of the industry.
d. only a small part of the industry that makes the broadly defined product is unionized.
By raising their wages, unions typically
a. increase total productivity, which must rise proportionally with the wage rate.
b. encourage employers to find substitutes for union labor.
c. raise the wages of nonunion workers as well.
d. lower the prices consumers pay for the products produced by union firms.
In 2006, approximately what percent of the nonagricultural workforce belonged to a union?
a. 2 percent
b. 12 percent
c. 35 percent
d. 98 percent
53.
*
The percent of workers belonging to a union in the United States
a. has been continuously declining since the 1950s.
b. has been continuously increasing since the 1950s.
c. has remained fairly constant since the 1950s.
d. rose sharply from 1950 to 1970 but has declined since.
54.
The experience of the Teamsters in the late 1970s and early 1980s suggests that
a. there are few restraints on the ability of a strong union to increase the wages of its members.
b. product market competition with goods made from (or services provided by) nonunion labor
significantly limits the ability of a union to get increased wages for its members.
c. higher wages tend to stimulate aggregate demand, which makes it easier for a union to gain
still higher wages.
d. wages are established by the relative skill of union and management negotiators, independent
of market conditions.
*
55.
*
From 1950 to 2006, union membership has declined from more than 30 percent of the workforce to
approximately 12 percent. Over this period, the share of national income going to labor
a. declined substantially.
b. increased substantially.
c. remained approximately the same.
d. initially increased but has fallen recently.
56.
*
A union representing a group of workers will tend to be stronger when
a. there are no good substitutes for the labor services of the unionized workers.
b. the domestic producers of the good produced by the unionized workers face intense
competition from foreign suppliers of the good.
c. the cost of employing the unionized workers is a large part of the total cost of the product that
they produce.
d. the demand for the good produced by the unionized workers is highly elastic.
57.
Which of the following statements is true for the U.S. economy?
a. Higher wages in the unionized sectors of the economy push up wages in the nonunion sectors
as well.
b. Inflation tends to accelerate when the proportion of the labor force that is unionized increases.
c. Union workers currently receive wages that are 21 percent higher, on average, than similar
nonunion workers.
d. When we compare similar union and nonunion workers, we find virtually no difference in the
wages they receive.
*
25.
*
26.
*
27.
*
In 2005, the labor force participation rate of women was
a. 20.4 percent.
b. 40.4 percent.
c. 60.4 percent.
d. 80.4 percent.
The annual earnings of full-time working women were approximately what percent of those of their
male counterparts in 2005?
a. 67 percent
b. 77 percent
c. 87 percent
d. 97 percent
The hourly earnings of full-time working women were a little more than what percent of those of
their male counterparts in 2005?
a. 60 percent
b. 70 percent
c. 80 percent
d. 90 percent
28.
*
If the wages of equally qualified women were really 20 percent less than those of men,
a. profit-seeking employers would have a strong incentive to hire more women, resulting in this
differential falling.
b. profit-seeking employers would generally find that hiring men was still more profitable.
c. employers would still be reluctant to hire women because they generally care little about their
profits.
d. profit-seeking employers would have a strong incentive to hire fewer women, resulting in this
differential rising even further.
29.
Given the traditional responsibility for monetary earnings in the family, men were more likely than
women to
a. have continuous labor force participation.
b. move in order to get a higher-paying job.
c. accept jobs with long hours, uncertain schedules, and out-of-town travel.
d. do all of the above.
*
30.
*
31.
*
32.
*
33.
*
34.
*
35.
*
36.
*
The earnings difference between single men and women is
a. significantly more than the earnings difference between married men and women.
b. significantly less than the earnings difference between married men and women.
c. about the same as the earnings difference between married men and women.
d. none of the above.
The proportion of degrees earned by women in which of the following fields has increased since
1970?
a. economics
b. engineering
c. architecture
d. all of the above
During the decade following the passage of the 1962 equal pay legislation and the 1964 civil rights
legislation,
a. the male/female wage differential became much smaller.
b. the male/female wage differential became much larger.
c. there was little change in the earnings of women relative to men.
d. the educational choices of women and men became less similar.
As a result of the educational and career choices of women becoming more like those of men during
the last two decades, the earnings of women have
a. risen toward those of men.
b. fallen relative to those of men.
c. remained relatively unchanged relative to those of men.
d. fallen in clerical occupations, but risen in business careers.
In the future, the earnings differential between women and men is expected to
a. widen.
b. become smaller.
c. remain about the same as it is now.
d. become smaller over the next five years then begin to widen again.
Which of the following would tend to cause the observed earnings of women to be lower than the
observed earnings of men?
a. The average woman has fewer years of schooling than the average man.
b. The average number of hours worked is smaller for women than men.
c. Women are more likely to prefer jobs that have more flexible hours.
d. All of the above would be causes.
When employment discrimination results from the personal prejudices of employers,
a. only legal requirements will be able to reduce the amount of employment discrimination.
b. competitive markets will generally tend to promote discrimination as firms try to lower their
costs to increase their profits.
c. competitive markets will tend to make it costly for employers to discriminate, reducing the
amount of discrimination.
d. none of the above will be true.