Download Market Failure and the Role of Government Sample Questions

Mr. Bordelon
AP Economics
1.
Which of the following is an example of an activity
generating a negative externality?
a)
b)
c)
d)
e)
You buy a new car, and then discover it needs a new
transmission.
Jane enjoys canoeing on a quiet mountain lake.
The only two coffee shops in town conspire to raise
prices.
After Jane bought health insurance, she began racing
motorcycles on the weekends.
Your next-door neighbor mows the lawn at 6AM.
1.
Which of the following is an example of an activity
generating a negative externality?
a)
b)
c)
d)
e)
You buy a new car, and then discover it needs a new
transmission.
Jane enjoys canoeing on a quiet mountain lake.
The only two coffee shops in town conspire to raise
prices.
After Jane bought health insurance, she began racing
motorcycles on the weekends.
Your next-door neighbor mows the lawn at 6AM.
1.
If the current amount of
pollution emitted is 150,
then:
This economy needs to
increase production goods
that generate pollution.
b) The marginal social
benefit is greater than the
marginal social cost of
pollution.
c) This is not the socially
optimal level of pollution.
d) This economy is producing
at the socially optimal
level of pollution.
e) Efficiency would be
improved by subsidizing
goods that generate
pollution.
a)
1.
If the current amount of
pollution emitted is 150,
then:
This economy needs to
increase production goods
that generate pollution.
b) The marginal social
benefit is greater than the
marginal social cost of
pollution.
c) This is not the socially
optimal level of pollution.
d) This economy is producing
at the socially optimal
level of pollution.
e) Efficiency would be
improved by subsidizing
goods that generate
pollution.
a)
1.
The socially optimal
level of pollution
emissions for this
economy is:
a) 0.
b) 50.
c) 100.
d) 150.
e) 200.
1.
The socially optimal
level of pollution
emissions for this
economy is:
a) 0.
b) 50.
c) 100.
d) 150.
e) 200.
1.
In the absence of
government
intervention, the
quantity of pollution
will be:
a) 20 tons.
b) 30 tons.
c) 40 tons.
d) 45 tons.
e) 15 tons.
1.
In the absence of
government
intervention, the
quantity of pollution
will be:
a) 20 tons.
b) 30 tons.
c) 40 tons.
d) 45 tons.
e) 15 tons.
1.
If this market produced
_____ tons, then _____.
a)
b)
c)
d)
e)
20; the marginal social
benefit would be $7
45; marginal social cost
would be less than
marginal social benefit
20; marginal social
benefit would be less
than marginal social
cost
30; it would be efficient
15; the marginal social
benefit would be $5
1.
If this market produced
_____ tons, then _____.
a)
b)
c)
d)
e)
20; the marginal social
benefit would be $7
45; marginal social cost
would be less than
marginal social benefit
20; marginal social
benefit would be less
than marginal social
cost
30; it would be efficient
15; the marginal social
benefit would be $5
1.
According to the Coase theorem, the private market
can achieve an efficient outcome:
a)
b)
c)
d)
e)
As long as the enforcement of property rights costs
less than the marginal benefit of emissions.
Only if the property right to clean air is assigned to
the polluter.
Only if the property right to clean air is assigned to
the party harmed by pollution.
If bargaining costs are low.
If the number of parties involved in the bargaining is
large.
1.
According to the Coase theorem, the private market
can achieve an efficient outcome:
a)
b)
c)
d)
e)
As long as the enforcement of property rights costs
less than the marginal benefit of emissions.
Only if the property right to clean air is assigned to
the polluter.
Only if the property right to clean air is assigned to
the party harmed by pollution.
If bargaining costs are low.
If the number of parties involved in the bargaining is
large.
1.
An optimal Pigouvian
tax of _____ can move
the market to the
socially optimal
quantity of pollution.
a) $5
b) $15
c) $25
d) $45
e) $10
1.
An optimal Pigouvian
tax of _____ can move
the market to the
socially optimal
quantity of pollution.
a) $5
b) $15
c) $25
d) $45
e) $10
1.
A Pigouvian tax of $10
will result in a quantity
of pollution for which
the:
a)
b)
c)
d)
e)
Marginal social benefit
is less than the marginal
social cost.
Marginal social benefit
exceeds the marginal
social cost.
Marginal social benefit
equals the marginal
social cost.
Resources are allocated
efficiently.
Social welfare has been
maximized.
1.
A Pigouvian tax of $10
will result in a quantity
of pollution for which
the:
a)
b)
c)
d)
e)
Marginal social benefit
is less than the marginal
social cost.
Marginal social benefit
exceeds the marginal
social cost.
Marginal social benefit
equals the marginal
social cost.
Resources are allocated
efficiently.
Social welfare has been
maximized.
1.
If the government imposed an
environmental standard that did not
allow the quantity of pollution to
exceed 40 tons, there would be:
a)
b)
c)
d)
e)
A socially optimal quantity of
pollution.
Too little pollution, because the
marginal social benefit of pollution
would exceed the marginal social
cost of pollution.
Too much pollution, because the
marginal social cost of pollution
would exceed the marginal social
benefit of pollution.
Too little pollution, because the
marginal social cost of pollution
would exceed the marginal social
benefit of pollution.
Too much pollution, because the
marginal social benefit of pollution
would exceed the marginal social
cost of pollution.
1.
If the government imposed an
environmental standard that did not
allow the quantity of pollution to
exceed 40 tons, there would be:
a)
b)
c)
d)
e)
A socially optimal quantity of
pollution.
Too little pollution, because the
marginal social benefit of pollution
would exceed the marginal social
cost of pollution.
Too much pollution, because the
marginal social cost of pollution
would exceed the marginal social
benefit of pollution.
Too little pollution, because the
marginal social cost of pollution
would exceed the marginal social
benefit of pollution.
Too much pollution, because the
marginal social benefit of pollution
would exceed the marginal social
cost of pollution.
1.
Three firms in a small
city are responsible for
emitting pollution, and
the marginal benefit of
the individual polluters
is shown in the figure. If
each company is only
allowed to emit 300 tons
of pollution per day,
which company will be
most adversely affected?
Firm A
Firm B
Firm C
They are equally
affected.
e) Firms B and C will be
equally the most
adversely affected.
a)
b)
c)
d)
1.
Three firms in a small
city are responsible for
emitting pollution, and
the marginal benefit of
the individual polluters
is shown in the figure. If
each company is only
allowed to emit 300 tons
of pollution per day,
which company will be
most adversely affected?
Firm A
Firm B
Firm C
They are equally
affected.
e) Firms B and C will be
equally the most
adversely affected.
a)
b)
c)
d)
1.
If the city imposes a tax
of $400 per ton of
mercury, Firm B will
produce _____ while
Firm A will produce
_____ than Firm C.
a)
b)
c)
d)
e)
600 tons;
700 tons;
300 tons;
more
300 tons;
300 tons;
more
200 tons less
200 tons less
500 tons
200 tons less
200 tons
1.
If the city imposes a tax
of $400 per ton of
mercury, Firm B will
produce _____ while
Firm A will produce
_____ than Firm C.
a)
b)
c)
d)
e)
600 tons;
700 tons;
300 tons;
more
300 tons;
300 tons;
more
200 tons less
200 tons less
500 tons
200 tons less
200 tons
1.
At what tax rate would
Firm C produce zero
tons of pollution?
a) $150
b) $100
c) $200
d) $400
e) $0
1.
At what tax rate would
Firm C produce zero
tons of pollution?
a) $150
b) $100
c) $200
d) $400
e) $0
1.
No individual is willing to pay for providing the
efficient level of a public good since the:
a)
b)
c)
d)
e)
Marginal cost of production is zero.
Good will be non-rival, and thus under consumed.
Individual’s marginal benefit is less than the marginal
social benefit.
Marginal benefit of allowing one more individual to
consume the good is zero.
Good is non-excludable and overconsumed.
1.
No individual is willing to pay for providing the
efficient level of a public good since the:
a)
b)
c)
d)
e)
Marginal cost of production is zero.
Good will be non-rival, and thus under consumed.
Individual’s marginal benefit is less than the marginal
social benefit.
Marginal benefit of allowing one more individual to
consume the good is zero.
Good is non-excludable and overconsumed.
1.
The table shows the
total cost and total
individual benefit of
animal control for
residents of a small
town. If there are 1,000
residents, what is the
total social benefit of
three animal control
officers?
Quantit
y of
Animal
Control
Officers
0
Total
Cost
Total
Individ
ual
Benefit
$0
$0
1
20,000
40
2
40,000
70
a) $10
3
60,000
90
b) $9,000
4
80,000
100
5
100,000
105
c) $10,000
d) $90,000
e) $90
1.
The table shows the
total cost and total
individual benefit of
animal control for
residents of a small
town. If there are 1,000
residents, what is the
total social benefit of
three animal control
officers?
Quantit
y of
Animal
Control
Officers
0
Total
Cost
Total
Individ
ual
Benefit
$0
$0
1
20,000
40
2
40,000
70
a) $10
3
60,000
90
b) $9,000
4
80,000
100
5
100,000
105
c) $10,000
d) $90,000
e) $90
1.
If there are 1,000
residents, what is the
marginal social benefit
of the fourth animal
control officer?
a) $10
b) $9,000
c) $10,000
d) $90,000
e) $100,000
Quantit
y of
Animal
Control
Officers
0
Total
Cost
Total
Individ
ual
Benefit
$0
$0
1
20,000
40
2
40,000
70
3
60,000
90
4
80,000
100
5
100,000
105
1.
If there are 1,000
residents, what is the
marginal social benefit
of the fourth animal
control officer?
a) $10
b) $9,000
c) $10,000
d) $90,000
e) $100,000
Quantit
y of
Animal
Control
Officers
0
Total
Cost
Total
Individ
ual
Benefit
$0
$0
1
20,000
40
2
40,000
70
3
60,000
90
4
80,000
100
5
100,000
105
1.
Assume that there is an
external cost involved in
the market illustrated in
the figure provided.
Economists argue that in
an unregulated private
market, _____ is
produced. In the graph,
supply curve S1 reflects
_____ cost.
Too little; private
Too much; private
Too much; external
Too little; the sum of
external and private
e) Too much; the sum of
external and private
a)
b)
c)
d)
1.
Assume that there is an
external cost involved in
the market illustrated in
the figure provided.
Economists argue that in
an unregulated private
market, _____ is
produced. In the graph,
supply curve S1 reflects
_____ cost.
Too little; private
Too much; private
Too much; external
Too little; the sum of
external and private
e) Too much; the sum of
external and private
a)
b)
c)
d)
1.
When the government
intervenes to correct
for the external cost,
the output will _____
from _____ to _____.
a) Fall; W; R
b) Increase; W; R
c) Fall; R; W
d) Fall; W; 0
e) Fall; P1; P2
1.
When the government
intervenes to correct
for the external cost,
the output will _____
from _____ to _____.
a) Fall; W; R
b) Increase; W; R
c) Fall; R; W
d) Fall; W; 0
e) Fall; P1; P2
1.
In the graph, the marginal
social cost curve lies above
the supply curve:
Because the marginal
social benefit is greater for
a common resource.
b) And the efficient quantity
of this common resource is
point E.
c) Because the marginal
social cost includes the
cost of depleting this
common resource.
d) Because this is a public
good.
e) Because this private good
generates an external
benefit.
a)
1.
In the graph, the marginal
social cost curve lies above
the supply curve:
Because the marginal
social benefit is greater for
a common resource.
b) And the efficient quantity
of this common resource is
point E.
c) Because the marginal
social cost includes the
cost of depleting this
common resource.
d) Because this is a public
good.
e) Because this private good
generates an external
benefit.
a)
1.
The graph above shows a natural
monopoly. If the firm is
regulated such that zero
economic profits are earned,
what will be the corresponding
price and quantity?
Price
Quantity
a.
ATCm
Qm
b.
Pr
Qr
c.
Pm
Qm
d.
Pc
Qc
e.
MC
Qc
1.
The graph above shows a natural
monopoly. If the firm is
regulated such that zero
economic profits are earned,
what will be the corresponding
price and quantity?
Price
Quantity
a.
ATCm
Qm
b.
Pr
Qr
c.
Pm
Qm
d.
Pc
Qc
e.
MC
Qc
1.
a.
b.
c.
d.
e.
If the firm is regulated so that
the outcome is socially
efficient, what will be the
corresponding price and
quantity?
Price Quantity
ATCm
Qm
Pr
Qr
Pm
Qm
Pc
Qc
MC
Qc
1.
a.
b.
c.
d.
e.
If the firm is regulated so that
the outcome is socially
efficient, what will be the
corresponding price and
quantity?
Price Quantity
ATCm
Qm
Pr
Qr
Pm
Qm
Pc
Qc
MC
Qc
1.
Which of the following
identifies the area of
deadweight loss in this
market?
a) ½(Pm – Pc)(Qc – Qm)
b) (Pm – ATCm)(Qm)
c) (Pm – Pr)(Qm)
d) ½(Pr – Pc)(Qc – Qr)
e) (Pr – Pc)(Qr – Qm)
1.
Which of the following
identifies the area of
deadweight loss in this
market?
a) ½(Pm – Pc)(Qc – Qm)
b) (Pm – ATCm)(Qm)
c) (Pm – Pr)(Qm)
d) ½(Pr – Pc)(Qc – Qr)
e) (Pr – Pc)(Qr – Qm)
1.
Suppose there is an unregulated natural monopoly
operating in the local market for electricity. If the
government wished to regulate the monopolist so that
the firm earned zero economic profit, the government
would:
a)
b)
c)
d)
e)
Require the firm to produce the level of output where the
demand curve intersected the marginal cost curve.
Require the firm to produce the level of output where the
marginal revenue curve intersected the marginal cost
curve.
Require the firm to set the price equal to marginal cost.
Require the firm to produce the level of output where the
marginal cost curve intersected the average total cost
curve.
Require the firm to produce the level of output where the
demand curve intersected the average total cost curve.
1.
Suppose there is an unregulated natural monopoly
operating in the local market for electricity. If the
government wished to regulate the monopolist so that
the firm earned zero economic profit, the government
would:
a)
b)
c)
d)
e)
Require the firm to produce the level of output where the
demand curve intersected the marginal cost curve.
Require the firm to produce the level of output where the
marginal revenue curve intersected the marginal cost
curve.
Require the firm to set the price equal to marginal cost.
Require the firm to produce the level of output where the
marginal cost curve intersected the average total cost
curve.
Require the firm to produce the level of output where the
demand curve intersected the average total cost curve.
1.
The government has decided to regulate a natural
monopoly so that the firm produces the perfectly
competitive level of output. Compared to the
unregulated outcome, one negative consequence of
this decision is that:
a)
b)
c)
d)
e)
The firm will earn very high and “unfair” economic
profits.
The firm will be encouraged to reduce output and
increase the price.
The government may need to subsidize the firm’s
economic losses.
Deadweight loss will increase.
Consumer surplus will fall.
1.
The government has decided to regulate a natural
monopoly so that the firm produces the perfectly
competitive level of output. Compared to the
unregulated outcome, one negative consequence of
this decision is that:
a)
b)
c)
d)
e)
The firm will earn very high and “unfair” economic
profits.
The firm will be encouraged to reduce output and
increase the price.
The government may need to subsidize the firm’s
economic losses.
Deadweight loss will increase.
Consumer surplus will fall.
1.
The government has decided to regulate a natural
monopoly so that the firm produces the break-even
level of output. Compared to the unregulated
outcome, one positive consequence of this decision is
that:
a)
b)
c)
d)
e)
The firm will earn very high and “unfair” economic
profits.
The firm will be encouraged to reduce output and
increase the price.
The government may need to subsidize the firm’s
economic losses.
Deadweight loss will decrease.
Consumer surplus will fall.
1.
The government has decided to regulate a natural
monopoly so that the firm produces the break-even
level of output. Compared to the unregulated
outcome, one positive consequence of this decision is
that:
a)
b)
c)
d)
e)
The firm will earn very high and “unfair” economic
profits.
The firm will be encouraged to reduce output and
increase the price.
The government may need to subsidize the firm’s
economic losses.
Deadweight loss will decrease.
Consumer surplus will fall.
1.
An example of a means-tested program is:
a)
b)
c)
d)
e)
Expenditure on national defense.
Social security payments to the disabled.
Social Security payments to those who have deceased
spouses.
Purchasing a new city police car.
The food stamp program.
1.
An example of a means-tested program is:
a)
b)
c)
d)
e)
Expenditure on national defense.
Social security payments to the disabled.
Social Security payments to those who have deceased
spouses.
Purchasing a new city police car.
The food stamp program.
1.
Which of the following transactions represents a
transfer payment?
a)
b)
c)
d)
e)
The government pays an employee by making a direct
transfer to the employee’s bank account.
An army officer, paid by the government, transfers
part of the money he receives back to the government
to pay his taxes.
A senior citizen receives a Social Security payment.
The Department of Defense purchases military
vehicles from General Motors.
The government pays interest to those who have
purchased Treasury bonds.
1.
Which of the following transactions represents a
transfer payment?
a)
b)
c)
d)
e)
The government pays an employee by making a direct
transfer to the employee’s bank account.
An army officer, paid by the government, transfers
part of the money he receives back to the government
to pay his taxes.
A senior citizen receives a Social Security payment.
The Department of Defense purchases military
vehicles from General Motors.
The government pays interest to those who have
purchased Treasury bonds.
1.
In Nation X, if the median household income in
2006 was $48,000, this means that:
a)
b)
c)
d)
e)
The average income for a typical household was
$48,000.
Poverty rates fell during this period.
Half of all households in Nation X earned less than
$48,000 and half of all households in Nation X earned
more than $48,000.
Incomes in Nation X were rising.
The top 10% of households in Nation X earned more
than $48,000 and the rest of the households earned
less than $48,000.
1.
In Nation X, if the median household income in
2006 was $48,000, this means that:
a)
b)
c)
d)
e)
The average income for a typical household was
$48,000.
Poverty rates fell during this period.
Half of all households in Nation X earned less than
$48,000 and half of all households in Nation X earned
more than $48,000.
Incomes in Nation X were rising.
The top 10% of households in Nation X earned more
than $48,000 and the rest of the households earned
less than $48,000.
1.
Welfare state programs are believed to create
deadweight loss since they:
a)
b)
c)
d)
e)
Impact government’s budgets.
Affect incentives to work and to save in a society.
Are supported by many political parties.
Are based on the ability-to-pay principle.
Lessen income inequality in a nation.
1.
Welfare state programs are believed to create
deadweight loss since they:
a)
b)
c)
d)
e)
Impact government’s budgets.
Affect incentives to work and to save in a society.
Are supported by many political parties.
Are based on the ability-to-pay principle.
Lessen income inequality in a nation.
1.
The mean household income is:
a)
b)
c)
d)
e)
The income of households lying at the exact middle of
the income distribution.
The average income across all households.
The income level that policy makers wish to achieve
for all households on average.
Also the poverty threshold level.
The income level that separates the wealthy
households from the poor households.
1.
The mean household income is:
a)
b)
c)
d)
e)
The income of households lying at the exact middle of
the income distribution.
The average income across all households.
The income level that policy makers wish to achieve
for all households on average.
Also the poverty threshold level.
The income level that separates the wealthy
households from the poor households.
1.
Means-tested programs:
a)
b)
c)
d)
e)
Provide benefits for all.
Are poverty programs that specifically help those with
low incomes.
Provide benefits only for those households that earn
below the mean household income in the United
States for a given year.
Provide only in-kind benefits.
Benefit the wealthy at the expense of the poor.
1.
Means-tested programs:
a)
b)
c)
d)
e)
Provide benefits for all.
Are poverty programs that specifically help those with
low incomes.
Provide benefits only for those households that earn
below the mean household income in the United
States for a given year.
Provide only in-kind benefits.
Benefit the wealthy at the expense of the poor.