Multiple Choice Quiz


1	Most economists are ______ to accept the argument that people are unable to make rational choices in a free market ________.
		A)	willing ; for nearly every good.
		B)	willing ; for highly addictive goods (like cocaine).
		C)	willing ; for everyday goods (like milk).
		D)	Unwilling; even for highly addictive goods (like cocaine).


2	If the demand for drugs is highly inelastic then drug interdiction efforts will
		A)	lower the price and lower the amount sold.
		B)	raise the price much more than the amount sold is reduced.
		C)	raise the price much less than the amount sold is reduced.
		D)	raise the price and raise the amount sold.


3	If drug demand by recreational users is elastic while drug demand by addicts is inelastic then you would expect that drug interdiction efforts will
		A)	reduce recreational use by less than they reduce use by addicts.
		B)	reduce recreational use dramatically while leaving use by addicts nearly unaffected.
		C)	increase use by both groups equally.
		D)	decrease use by both groups equally.


4	A negative externality with regard to prostitution would affect
		A)	both the "John" as well as the prostitute.
		B)	affect the "John but not the prostitute.
		C)	affect the prostitute but not the John.
		D)	affect a third person.


5	Suppose a "John" is caught by police soliciting prostitution and is punished by having his photo published in the newspaper, this emotional cost to him would be
		A)	part of the "cost" of going to prostitutes in the first place so not an externality.
		B)	an external cost to him.
		C)	a cost to the prostitute.
		D)	an external cost to the prostitute.


6	If production costs of cocaine, marijuana and methamphetamine are relatively low then legalization of these drugs would
		A)	eliminate all externalities.
		B)	reduce those costs of crime associated with addicts needing to earn enough to pay high drug prices.
		C)	increase the externalities of drug use (if more people used these drugs).
		D)	b) and c)


7	In the presence of external costs the concern with leaving a market alone is that
		A)	prices in unregulated/untaxed markets are too high.
		B)	output in unregulated/untaxed markets is too low.
		C)	use is immoral.
		D)	output in unregulated/untaxed markets is too high.


8	Decriminalization of drug use would
		A)	increase the elasticity of demand.
		B)	increase demand.
		C)	decrease supply.
		D)	a) and b)


9	The argument that taxation could be used rather than prohibition for certain drugs suggests that the "correct" tax level would be where the tax equaled the
		A)	per-unit external cost.
		B)	price.
		C)	supply.
		D)	demand.


10	If the correct tax were put on to deal with an externality then
		A)	all externalities would cease
		B)	externalities would increase
		C)	externalities would exist but decrease
		D)	prices would fall

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