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| 1 | |
Natural monopoly arises when… |
| | A) | there is only one firm in the market. |
| | B) | costs are subadditive. |
| | C) | there are several high barriers to entry. |
| | D) | it is more cost-efficient to have multiple firms. |
| | E) | none of the above |
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| 2 | |
An overallocation of resources in an industry means that for the last unit produced, |
| | A) | the marginal cost of production is falling. |
| | B) | the average cost of production is falling. |
| | C) | society places a higher value on the resources required to produce the last unit than the value society places on consuming the last unit. |
| | D) | economic profit is negative but rising. |
| | E) | the demand price for the last unit exceeds the marginal cost of producing the last unit. |
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| 3 | |
When social surplus is maximized in competitive equilibrium, |
| | A) | consumer surplus is maximized. |
| | B) | allocative and productive efficiency are achieved. |
| | C) | marginal social benefit equals marginal social cost. |
| | D) | both b and c |
| | E) | all of the above |
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| 4 | |
When we say that market prices allocate goods to the highest-valued users, we mean that |
| | A) | there will be no shortage. |
| | B) | only consumers with higher incomes will get any of the good, while lower income consumers will get none of the good. |
| | C) | government allocation of the good is warranted because government can make sure that the good gets consumed equitably. |
| | D) | only consumers who value the good more than the market price of the good will choose to buy the good. |
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| 5 | |
The less information consumers have about product quality, |
| | A) | the greater will be the loss of social surplus due to productive inefficiency. |
| | B) | the greater will be the loss of social surplus due to allocative inefficiency. |
| | C) | the smaller will be the loss of social surplus due to productive inefficiency. |
| | D) | the smaller will be the loss of social surplus due to allocative inefficiency. |
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| 6 | |
Private provision of public goods fails to achieve economic efficiency because |
| | A) | the free rider problem prevents collection of sufficient revenue. |
| | B) | the free rider problem causes overproduction of the good. |
| | C) | the price of the privately supplied public good must exceed zero in order to be allocatively efficient. |
| | D) | both a and c |
| | E) | both b and c |
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| 7 | |
In long-run perfectly competitive equilibrium, economic efficiency is achieved because |
| | A) | price equals long-run marginal cost for every firm in the industry. |
| | B) | price equals minimum long-run average cost for every firm in the industry. |
| | C) | price equals average fixed cost for every firm in the industry. |
| | D) | both a and b |
| | E) | all of the above |
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| 8 | |
Firms with market power… |
| | A) | will produce where P = MR=MC. |
| | B) | will maximize profit but fail to maximize social surplus. |
| | C) | face downward sloping marginal cost curves. |
| | D) | face downward sloping average cost curves. |
| | E) | none of the above |
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| 9 | |
When a competitively produced product is subject to negative externalities in production, the industry will |
| | A) | overproduce the good because marginal private cost is less than marginal private benefit in competitive equilibrium. |
| | B) | overproduce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium. |
| | C) | underproduce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium. |
| | D) | underproduce the good because marginal private social cost is less than marginal private benefit in competitive equilibrium in competitive equilibrium. |
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| 10 | |
An underallocation of resources occurs when… |
| | A) | a positive externality in consumption exists. |
| | B) | a negative externality in production exists. |
| | C) | marginal private benefit exceeds marginal social benefit. |
| | D) | All of these will lead to underallocation of resources. |
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| 11 | |
Market or monopoly power leads to market failure because |
| | A) | firms with market power have no incentive to produce on their expansion paths. |
| | B) | when MR = MC in profit-maximizing equilibrium, the value of the last unit produced is less than the marginal cost of producing the last unit. |
| | C) | price exceeds marginal revenue, which causes the profit-maximizing firm to over-produce the good or service. |
| | D) | price exceeds marginal revenue, which causes the profit-maximizing firm to under-produce the good or service. |
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| 12 | |
The Brooklyn bridge is not a pure public good because… |
| | A) | the marginal cost of another car crossing the bridge is zero. |
| | B) | the bridge is nondepletable. |
| | C) | the bridge is not a nondepletable good. |
| | D) | the free rider problem could be solved using toll accesses or booths. |
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| 13 | |
Common property resources lead to market failure because… |
| | A) | the resource is overexploited and under supplied. |
| | B) | poorly defined property rights reduce production costs. |
| | C) | poorly defined property rights create a deadweight loss. |
| | D) | poorly defined property rights result in too little of the resource being used by society. |
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| 14 | |
When there is negative externality in production, |
| | A) | Marginal social benefit exceeds marginal private benefit. |
| | B) | Marginal social cost exceeds marginal private cost. |
| | C) | Marginal private cost exceeds marginal social cost. |
| | D) | Marginal private benefit exceeds marginal social benefit. |
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| 15 | |
As a policy option for regulating natural monopoly, marginal cost pricing is desirable because |
| | A) | allocative efficiency is achieved. |
| | B) | price is set equal to the minimum value of long-run average cost. |
| | C) | consumers pay the lowest possible price that will generate sufficient revenue to cover the costs of the natural monopolist. |
| | D) | all of the above |
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| 16 | |
Social economic efficiency means that the market is achieving |
| | A) | maximum possible consumer surplus. |
| | B) | allocative efficiency. |
| | C) | productive efficiency. |
| | D) | both a and b |
| | E) | both b and c |
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| 17 | |
___________ is/are example(s) of market failure that could justify government intervention in the market. |
| | A) | Imperfect information |
| | B) | Public goods |
| | C) | A dominant firm that undertakes pricing strategies aimed at maintaining high entry barriers |
| | D) | both a and c |
| | E) | all of the above |
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Use the figure below, which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry, to answer the next three questions.
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