Chapter The Market Mechanism
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1. In an ideal, competitive market economy
a. resources are allocated according to a person's needs.
b. resources are allocated according to ability to pay.
c. social and individual needs are met by the market.
d. All of the above are true.
2. A good's marginal social cost is defined as
a. its marginal private cost minus the value of any detrimental externality.
b. its incidental cost.
c. its marginal private cost plus the value of any taxes paid on its production.
d. its marginal private cost plus its incidental cost.
3. The classic example of a detrimental externality is
a. education.
b. pollution.
c. discovery of an AIDS vaccine
d. Mrs. Lewis's prize-winning rose garden.
4. The below figure describes conditions in the monopolized weezil industry. In the absence of government intervention, the monopolist will produce an output equal to ________.
a. W
b. X
c. Y
d. Z
5. In a free market where a firm's activity causes detrimental externalities,
a. marginal benefits will be less than marginal social costs
b. smaller outputs than those that maximize profits will be socially desirable
c. marginal social cost will be greater than marginal private cost.
d. All of the answers above are correct.
6. Government often finds it difficult to cope with externalities because
a. costs and benefits are difficult to assess in monetary terms.
b. taxes and subsidies are ineffective in equating MSC and MSB.
c. government has no authority to impose fines for air and water pollution.
d. marginal private cost curves cannot be shifted.
7. Which of the following is not a public good?
a. coastal lighthouse
b. national defense
c. city park playground
d. latest Walt Disney movie
8. The cost disease of personal services stems primarily from the fact that
a. prices rise too slowly to provide public receipts.
b. inflation has been with us since the early 1970s.
c. personal service requires direct contact between producer and consumer.
d. sellers of personal services have strong unions.
9. Rent-seeking behavior refers to
a. the offering of goods on a for-rent rather than for-sale basis.
b. profit maximization by producers.
c. unproductive activity in the pursuit of economic profit.
d. illegal manipulation of prices.
10. Unemployment insurance is often criticized because workers can extend the amount of time they are unemployed and thus increase the cost of the program. This phenomenon is best described as
a. rent-seeking behavior.
b. moral hazard.
c. free riding
d. a detrimental externality.
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