Pre-Test Chap 16 e18
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Pre-Test Chap 16 e18

Course Number: ECON 101, Spring 2010

College/University: Glendale Community College

Word Count: 1738

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Pre-Test Chap 16 e18 Student: ___________________________________________________________________________ 1. Which would be considered an example of adverse selection? A. Malpractice insurance may increase the amount of malpractice B. Drivers may be less cautious because they have airbags installed in a car C. Those individuals who most need insurance are the ones most likely to buy it D. A work contract that...

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Chap Pre-Test 16 e18 Student: ___________________________________________________________________________ 1. Which would be considered an example of adverse selection? A. Malpractice insurance may increase the amount of malpractice B. Drivers may be less cautious because they have airbags installed in a car C. Those individuals who most need insurance are the ones most likely to buy it D. A work contract that gives a set number of sick days may encourage workers to claim they are sick more often 2. Which produces market failure problems in private markets? A. The maximization of consumer satisfaction B. Positive and negative externalities C. Allocative efficiency D. Productive efficiency 3. Refer to the above supply and demand graph for a public good. Line segment ad represents the amount at Q1by which the: A. Marginal benefit of this public good is less than the marginal cost B. Total benefit of this public good is less than the total cost C. Marginal benefit of this public good is greater than the marginal cost D. Total benefit of this public good is greater than the total cost 4. Public goods differ from private goods in two ways. What are the two characteristics that differentiate public goods from private goods? A. Asymmetric information and moral hazard B. The Coase theorem and adverse selection C. Negative externality and positive externality D. Nonrivalry and nonexcludability 5. The moral hazard problem arises primarily because of: A. Individual bargaining B. Negative externalities C. Asymmetric information D. Poorly defined property rights 6. Refer to the above supply and demand graph. Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective. The amount of the subsidy to be given to producers to correct this externality problem would be: A. AB B. GH C. EF D. IJ 7. By how much in degrees Fahrenheit has the earth's surface warmed over the last century? A. 0 degrees B. 1 degree C. 2 degrees D. 3 degrees 8. Suppose consumers do not know the safety risks associated with a particular good, and that the free-market equilibrium is at E as shown in the diagram above. If an agency now provides information about the harmful characteristics of the product, then: A. The supply curve will shift to the left B. The supply curve will shift to the right C. Both the new equilibrium price and quantity will be lower D. The new equilibrium price will be higher but the equilibrium quantity will be either higher or lower 9. Refer to the above supply and demand graph. In the graph, point A is the current equilibrium level of output of this product and point B is the optimal level of output from society's perspective. S is the supply curve without a tax and St is the supply curve with a tax. One solution to this externality problem is to: A. Give consumers a subsidy of the amount FG B. Give producers a subsidy of the amount AB C. Tax producers by the amount DE D. Tax consumers by the amount EF 10. Refer to the above supply and demand graph for a public good. Point c on the graph shows where the: A. Total benefit equals the total cost of the public good B. Marginal benefit equals the marginal cost of the public good C. Average benefit equals the average cost of the public good D. Total benefit equals the marginal cost of the public good Answer the next question(s) based on the following information. Waybelow Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected annual costs and benefits of these alternatives. 11. Refer to the above information. The marginal costs of additional levels of crime control are: A. $60,000 for Level Two B. $20,000 for Level Three C. $5,000 for Level Five D. $10,000 for Levels Two, Three, Four, and Five It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. Operators of hydroelectric generating plants on the river find that they must clean up the river's water before it flows through their equipment. 12. Refer to the above information. If nothing is done to correct this situation: A. There will be an overallocation of resources to the production of electricity B. There will be an underallocation of resources to the production of paper products C. There will be an overallocation of resources to the production of paper products D. The price of electricity will be lower than it should be 13. The franchising of fast-food restaurants would be an example of how business: A. Overcomes market information problems B. Solves the moral hazard problem in insurance C. Expands the limits of the Coase theorem D. Corrects the tragedy of the commons 14. Refer to the above supply and demand graph of Product X. What would happen if the government taxed the producers of this product because it has negative externalities? A. Supply would increase B. Demand would decrease C. Supply would decrease D. Price would increase 15. Because of free riders, the demand for a public good: Does A. get expressed in the market, but the good does not get produced B. Does not get expressed in the market, but the good does get produced C. Does not get expressed in the market, and the good does not get produced D. Does get expressed in the market, and the good does get produced 16. Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is associated with: A. Rival goods B. Complementary goods C. Public goods D. Capital goods 17. The average quality of a used car is: A. Determined solely by the used car lot B. Determined solely by the available demand C. Higher than the same makes and models that are not for sale D. Lower than the same makes and models that are not for sale 18. If a person drives with less care after purchasing auto insurance, this situation would be an example of a(n): A. Coase theorem problem B. Negative externality problem C. Adverse selection problem D. Moral hazard problem 19. Which is not one of the conditions for the Coase theorem to hold? A. The ownership of property is clearly defined B. The number of people involved is small C. The amount of money disputed is minor D. The costs of bargaining are negligible 20. If an activity results in an external benefit, then in a pure market economy the: A. Quantity produced is too low B. Quantity produced is too high C. Market supply is too low D. Market supply is too high 21. The market demand curve for a public good: A. Is derived in the same manner as demand curves for private goods B. Is derived by horizontally summing all individual demand curves C. Shows the total value that all individuals place on each unit of the good D. Shows the total number of units that would be produced by the private sector at each possible price 22. Suppose that the ABC industry produces a product which results in significant external costs to society. Such production suggests that: A. Resources are underallocated to the industry B. Resources are overallocated to the industry C. The firms in this industry aren't maximizing profits D. At the market price, quantity demanded is less than quantity supplied 23. There is an adverse selection problem in the market for used cars because: A. Owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars B. Owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs C. Most people prefer new cars, but the high prices for new cars force most of them to buy used cars D. Government actions to pass "lemon" laws have reduced information on used cars 24. When external benefits occur in the production of a particular product, the private market tends to provide: A. None of the product B. Too much of the product C. Too little of the product D. The socially optimal amount of the product 25. To internalize the external costs of pollution is to: A. Levy taxes on manufacturing firms located in crowded urban areas B. Auction off pollution rights to those willing to pay the most for them C. Make the polluter pay all of the costs associated with the polluting activity D. Require that private citizens rather than taxpayers pay for the harmful effects of pollution 26. The tragedy of the commons is the tendency of: A. Consumers to overconsume scare resources that are in limited supply B. Government to overregulate common property resources C. Private companies to use bribes and corruption of government officials to pollute the environment D. Society to overuse common property resources to which no one holds property rights 27. When the production of a product creates external costs greater than external benefits, a market economy will: A. Not produce the product without government intervention B. Produce a socially optimal allocation of resources C. Allocate too few resources to production of the product D. Allocate too many resources to production of the product 28. If Congress decreases the amount of government insurance on bank deposits, then this action would: A. Create a moral hazard problem B. Reduce a moral hazard problem C. Create an adverse selection problem D. Reduce an adverse selection problem 29. Which would be an example of an adverse selection problem? A. A person in ill health who purchases disability insurance B. A person who buys a product that contributes to pollution C. A person who purchases home insurance and then is less careful D. A person who lobbies for government intervention to settle a property rights dispute A government is considering undertaking one or more construction projects. The estimated marginal costs and benefits of each project are given in the table. 30. Refer to the above table and information. What is the net benefit of project 2? A. $1 million B. $3 million C. $4 million D. $5 million Pre-Test Chap 16 e18 Key 1. C 2. B 3. C 4. D 5. C 6. C 7. B 8. C 9. C 10. B 11. D 12. C 13. A 14. C 15. C 16. C 17. D 18. D 19. C 20. A 21. C 22. B 23. A 24. C 25. C 26. D 27. D 28. B 29. A 30. D

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