Introduction to EconomicsEC 1UCIDr. BresnockFall, 2011Quiz 7 AnswersChoose the best answer to each question and mark it on your answer form. 1. The term "marginal social benefit" means (a)Benefits that are just above the margin of being zero(b)The entire benefits obtainable from the activity(c)That part of the benefits covered by the costs of carrying on the activity(d)The change in total social benefits per unit change in the amount of the activityA)is incorrect because marginal social benefit does not have to be a positive value. If increasing the police force causes a decrease in total public safety, then total social benefit would decline, and MSB would be negative.B)is incorrect because this would be the measure of total social benefit.C)is incorrect because costs are not part of the measure of MSB. They are part of social cost.D)is correct because “marginal” is a term that represents a change in “total”. This change is measured as a one unit change in the activity. Marginal social benefit is simply the difference between what total social benefit was before the increase in the activity, and what total social benefit is now that the activity has increased by a unit.2. When there are no externalities, equilibrium in a market A)is correct because social well being is maximized when MSB=MSC. If they were unequal, benefit could be increased more than cost by simply changing the amount of an activity. Only when MSC=MSB, the equilibrium condition, will social well-being be maximized.B)is correct for the reasons given in “A”.C)is correct because private benefits and costs are the amounts that do not include externalities. Without them, MSC=MPC and MSB=MPB.
D)is correct because all the above are correct3. When the cost of an action falls on other than the person (or persons) responsible for the action, which of the following exists? A)is incorrect because positive externalities create additional benefits not factored into the market itself. This case refers to costs, which are an element of a negative externality.B)is correct because any additional cost that is not accounted for by the actors within the market itself is a negative externality. These are unwanted side effects that are felt by those who did not participate in the transaction.C)is incorrect because an externality will cause an additional cost whether it is an externality in consumption or distribution.D)is incorrect for the same reasons as”C”.
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