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Unformatted text preview: 1. Which of the following illustrates the concept of external cost? a. Margaret purchases all her food and clothing in the big city outside her residence. b. A small business owner frequently buys raw materials by using her bank's line of credit. *c. Raymond cannot open his windows at times because he lives downwind from a mushroom farm. d. Felicia, an economics major, asks the most insightful questions in class. 2. Antibiotics may be ________, since people only consider their ________. a. underused; private costs of consumption not the social costs *b. overused; private costs of consumption not the social costs c. underused; external costs of consumption not the private costs d. overused; external costs of consumption not the private costs 3. An external cost: a. causes markets to allocate resources efficiently. b. affects producers but not consumers. *c. is a cost paid by people other than the producer or consumer trading in the market. d. leads to economic efficiency only when private costs are greater than external costs. 4. A chemical bathroom cleaner has an ingredient X which allows the cleaner to lather well and removes stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that is washed down the drain escapes into the environment and releases allergens which cause respiratory problems for people. What is the social cost of a bottle of this cleaner? a. $5.50 b. the cost paid by other people as a result of the use of such a bottle of bathroom cleaner *c. $5.50 plus the external cost of such a bottle of bathroom cleaner d. $3.60 5. When patients or farmers choose whether to use more antibiotics, they compare: a. their private benefits with the social cost. *b. their private benefits with the market price. c. the social benefits with the social cost. d. the social benefits with the market price. 6. Since the price of antibiotics does not include all the costs of using antibiotics, the price is too: a. high, and so antibiotics are overused. b. high, and so antibiotics are underused. *c. low, and so antibiotics are overused. d. low, and so antibiotics are underused. 7. Suppose that the private cost of using antibiotics is less than its social costwe would then expect people to ________ antibiotics, leading to an ________ market outcome. *a. overuse; inefficient b. underuse; inefficient c. overuse; efficient d. efficient use of; equilibrium 8. If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will: a. emit a lower level of sulfur dioxide than is socially efficient. *b. emit a higher level of sulfur dioxide than is socially efficient....
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This note was uploaded on 02/06/2012 for the course ECON 312 taught by Professor Boby during the Spring '11 term at Harvard.
- Spring '11