PE3 - Practice Exam 3 Multiple Choice Identify the letter...

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Practice Exam 3 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. In the absence of externalities the invisible hand of the marketplace a. induces people to act in a manner inconsistent with self-interest. b. is unable to resolve inherent inefficiencies in the market system. c. leads to a market outcome that maximizes total benefit to society. d. increases the transactions cost of contracting between parties to an exchange. ____ 2. An externality exists when a. a firm sells its product in a foreign market. b. markets are not able to reach equilibrium. c. the government intercedes in the operation of private markets by forcing the market to adjust to the balance of supply and demand. d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect. ____ 3. When a production externality has a beneficial (or positive) effect on a bystander, society could benefit from a. an increase in the production of this product. b. a decrease in the production of this product. c. the government placing a Pigovian tax on this product. d. the government not interfering in the market for this product. ____ 4. An externality will a. cause markets to allocate resources efficiently. b. usually be characterized as a form of market failure. c. strengthen the role of the "invisible hand" in the marketplace. d. always require the producer to compensate society. ____ 5. An optimal tax on pollution (a negative production externality) would be one in which a. a benevolent social planner is able to maximize production. b. producers internalize the cost of the pollution. c. producers choose not to produce any pollution. d. the value to consumers at market equilibrium exceeds the cost of production (including tax).
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____ 6. Refer to Graph 10-1. The figure reflects the presence of a a. negative consumption externality. b. positive consumption externality. c. negative production externality. d. positive production externality. ____ 7. According to Graph 10-1, which price and quantity combination represents the social optimum? a. P 1 , Q 0 . b. P 3 , Q 0 . c. P 1 , Q 1 . d. P 2 , Q 1 . ____ 8. Internalizing a negative production externality will cause the supply curve faced by an industry to a. shift to the left. b. shift to the right. c. remain unchanged. d. shift either right or left, depending on the industry. ____ 9. To enhance the well-being of society, a social planner will encourage firms to increase production when a. there is excess supply in the market. b. the firms are producing basic goods. c. technology spillovers are associated with production. d.
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PE3 - Practice Exam 3 Multiple Choice Identify the letter...

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