Ch4A - ECO 105: Principles of Economic Theory Chapter 4...

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ECO 105: Principles of Economic Theory Chapter 4 Answer Key for Sample Multiple-Choice Questions 1. c) is the correct answer. If marginal benefit is less than marginal cost, firms will not make a profit and, therefore, will not produce the good. 2. d) is the correct answer. In fact, just the opposite is the case. The supply curve must include all social costs. For example, if a firm is polluting the air and paying no penalty, all social costs are not reflected in the supply curve and the markets outcome will be inefficient. 3. c) is the correct answer. Since the supply curve is above the demand curve for quantities greater than the equilibrium quantity, marginal cost is greater than marginal benefit. Answer a) is incorrect because it denies the definition of marginal benefit. 4. b) is the correct answer. When income is redistributed it alters the composition of demand for different goods and services n some demands increase, others decrease. The result is a change in market equilibria. 5. b) is the correct answer. Answers a), c), and d) are all reasons the market is an attractive means of allocating resources. The market system does not allocate resources so that everyone receives an equal share. 6. a) is the correct answer. For competition to exist, neither individual buyers nor sellers can be able to influence market price, i.e., the market outcome. This requires a large number of both buyers and sellers. 7. c) is the correct answer. This is the condition for economic efficiency. Beginning at the point at which marginal social benefits equal marginal social costs, a movement in either direction, i.e, an increase or decrease in the level of output, will cause net gains to decline. 8. b) is the correct answer; it is the definition of consumer surplus. See the text. 9. a) is the correct answer. Consumers and producers must be well-informed about alternatives or their choices may not maximize benefits or minimize costs. If pollution occurs, private costs are less than social costs and the market outcome is not efficient. Therefore b) and d) are incorrect. Individuals must be assured that they will enjoy the benefits of their property if they are to engage in innovative, but risky, types of activities. Therefore c) is incorrect. 10. c) is the correct answer. The demand curve indicates the maximum amount consumers will pay for a particular quantity of a good. For example, if price = $10 and quantity demanded = 50 units, this indicates that consumers are willing to pay, at most, $10 for the 50th unit. 11. c) is the correct answer. The amount the consumer is willing to pay at each quantity represents the
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This note was uploaded on 05/16/2008 for the course HIST 101 taught by Professor Wormer during the Spring '08 term at Wake Forest.

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Ch4A - ECO 105: Principles of Economic Theory Chapter 4...

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