Chapter 6 Efficiency and Fairness of Markets

Transcription

1 Chapter 6 Efficiency and Fairness of Markets 6.1 Resource Allocation Methods 1) Walmart has a limited number of day-after Thanksgiving Day special items on sale at prices well below their typical price. Walmart opens at 5 AM. Walmart is using a allocation method for these items. A) first-come, first-served B) market price C) contest D) majority rule E) command Topic: Allocation of resources Objective: Checkpoint 6.1 Author: MR 2) Honda will sell its vehicles to anyone who wants to and can buy one. Honda is using a allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Topic: Allocation of resources Objective: Checkpoint 6.1 Author: MR

2 256 Bade/Parkin œ Foundations of Economics, Third Edition 3) If a landlord will rent an apartment only to married couples, the landlord is using a allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: D Topic: Allocation of resources Objective: Checkpoint 6.1 Author: MR 6.2 Value, Price, and Consumer Surplus 1) Marginal benefit is the benefit that a person receives from consuming A) a good or service until the person has grown tired of it. B) only goods and services that are free. C) one more unit of a good or service. D) all of the possible units of a good or service that can be consumed. E) one more unit of a good and is equal to the cost of producing the unit of the good. Topic: Marginal benefit, a refresher 2) Marginal benefit is the A) total benefit we receive from consuming a good or service. B) additional benefit we receive from consuming one more unit of a good or service. C) minimum amount of other goods or services we are willing to give up. D) opportunities given up to get one more unit of a good or service. E) the benefit we receive from consuming one more unit of a good or service minus the cost of the producing one more unit of the good or service. Topic: Marginal benefit, a refresher Author: WM

3 Chapter 6 Efficiency and Fairness of Markets 257 3) The marginal benefit of a product is a measure of a good's A) opportunity cost. B) price. C) worth or value to a consumer. D) scarcity. E) marginal cost. Topic: Marginal benefit, a refresher Author: PH 4) The principle of decreasing marginal benefit explains why the marginal benefit curve A) is upward sloping. B) has an infinite slope. C) is vertical. D) is downward sloping. E) is horizontal. Answer: D Topic: Marginal benefit, a refresher Author: PH 5) Marginal cost is the opportunity cost of producing A) every unit possible. B) zero units. C) the first unit and only the first unit. D) one more unit of a good or service. E) None of the above answers is correct. Answer: D Topic: Marginal cost, a refresher

4 258 Bade/Parkin œ Foundations of Economics, Third Edition 6) In general, as the production of a good or service increases, the marginal cost of production A) increases. B) decreases. C) does not change. D) increases at first and then decreases. E) always equals the marginal benefit of consumption. Topic: Marginal cost, a refresher 7) The marginal cost curves slope upward because of the principle of A) decreasing marginal benefits. B) increasing marginal cost. C) increasing marginal benefits. D) decreasing marginal cost. E) decreasing total benefit. Topic: Marginal cost, a refresher Author: PH 8) As more of a good is consumed, marginal benefit and as more of a good is produced, marginal cost. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Topic: Marginal benefit versus marginal cost, a refresher Author: WM

5 Chapter 6 Efficiency and Fairness of Markets 259 9) In order to efficiently allocate goods and services, we have to compare A) total cost to total benefit. B) total cost to price. C) marginal benefit to price. D) marginal cost to marginal benefit. E) price to marginal cost. Answer: D Topic: Efficiency, a refresher Author: WM 10) We allocate resources efficiently when A) marginal benefit is equal to marginal cost. B) marginal benefit is greater than marginal cost by any amount. C) marginal cost is greater than marginal benefit. D) total benefit is greater than total cost. E) marginal benefit is greater than marginal cost by as much as possible. Topic: Efficiency, a refresher Author: WM 11) If the difference between the marginal benefit and the marginal cost of a good is as large as possible, A) resources are being used with maximum efficiency. B) resources would create more value producing other goods and hence the production of this good should be decreased. C) more of the good should be produced. D) allocative efficiency has been attained. E) Both answers A and D are correct. Topic: Efficiency, a refresher

6 260 Bade/Parkin œ Foundations of Economics, Third Edition 12) Allocative efficiency is achieved when the marginal benefit of a good A) exceeds the marginal cost regardless of how much the difference is. B) is less than its marginal cost. C) is equal to its marginal cost. D) equals zero. E) exceeds the marginal cost by as much as possible. Topic: Efficiency, a refresher Author: PH 13) Allocative efficiency occurs whenever A) resources are allocated equally among all users. B) the marginal benefit of a good equals its marginal cost. C) the marginal benefit of a good exceeds its marginal cost. D) there is equity as well as efficiency in allocation of resources. E) None of the above answers is correct. Topic: Efficiency, a refresher

7 Chapter 6 Efficiency and Fairness of Markets ) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. At 1 manatee swim per week, Kaley's marginal benefit is and Scott's marginal cost is. A) $40; $10 B) $40; $40 C) $90; $50 D) None of the above answers is correct. Topic: Efficiency, a refresher

8 262 Bade/Parkin œ Foundations of Economics, Third Edition 15) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. If Scott offers two swim tours per week, he incurs a marginal cost of A) more than $30. B) $30. C) $20. D) $10. E) $2 Topic: Efficiency, a refresher 16) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. For Kaley and Scott, allocative efficiency is achieved at what point? A) A B) B C) C D) D E) Either point A or point D Topic: Efficiency, a refresher 17) The value of a slice of pizza to a consumer is equal to A) its marginal benefit. B) the maximum price the consumer is willing to pay. C) the consumer surplus. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Value

9 Chapter 6 Efficiency and Fairness of Markets ) Which of the following statements is correct? i. Each potential buyer has a certain willingness to pay for a good. ii. The maximum price someone is willing to pay for an additional unit is the marginal benefit of that unit. iii. Value is what a consumer receives and price is what a consumer pays. A) i only. B) ii only. C) iii only. D) i and iii. E) i, ii, and iii. Answer: E Topic: Value 19) Value and price can be compared by noting that A) they are the same thing. B) value is always greater than price. C) value is what we must pay while price is what we are willing to pay. D) price is what we must pay and value is what we are willing to pay. E) value is what the seller receives when we buy a good and price is what we must pay when we buy a good. Answer: D Topic: Value Author: WM

10 264 Bade/Parkin œ Foundations of Economics, Third Edition 20) The maximum amount of other goods and services that people are willing to give up in order to get one more unit of a good is defined as the good's A) marginal benefit. B) total benefit. C) marginal cost. D) total cost. E) price. Topic: Marginal benefit 21) The marginal benefit of each additional unit of a good consumed A) increases as more is consumed. B) is always equal to its marginal cost. C) decreases as more is consumed. D) will maximize consumer surplus. E) is equal to the deadweight loss if the unit of the good is not produced. Topic: Marginal benefit 22) The phrase "decreasing marginal benefit" means that A) the more you consume of the product, the less total benefit you derive. B) the marginal cost will be increasing as you consume more of a good. C) each additional unit of a good you consume gives you less additional benefit than the previous unit. D) Both answers A and B are correct. E) Both answers A and C are correct. Topic: Marginal benefit

11 Chapter 6 Efficiency and Fairness of Markets ) Mark loves ice cream. At any point in time, he will buy an additional ice cream cone if A) the marginal benefit from it exceeds the price. B) the marginal benefit from it is zero. C) his willingness to pay is less than the price. D) there is no deadweight loss produced by his purchase of a cone. E) None of the above answers is correct. Topic: Marginal benefit 24) A point on the demand curve shows the A) price and the corresponding quantity demanded. B) marginal benefit from that unit. C) marginal cost to the seller of producing the unit. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Demand curve and marginal benefit curve 25) The demand curve is also the A) total cost curve. B) total benefit curve. C) marginal cost curve. D) marginal benefit curve. E) marginal deadweight cost curve. Answer: D Topic: Demand curve and marginal benefit curve Author: WM

12 266 Bade/Parkin œ Foundations of Economics, Third Edition 26) The demand curve for Seattle Seahawk jerseys is the same as the marginal benefit curve of Seattle Seahawk jerseys because demand represents A) the minimum price we are willing to pay for a jersey. B) the maximum price we are willing to pay for a jersey. C) how many jerseys we want. D) the marginal cost of each jersey. E) the consumer surplus we get from the jerseys. Topic: Demand curve and marginal benefit curve 27) The total benefit from buying a particular unit of a good A) is the amount paid for the unit plus the consumer surplus of the unit. B) increases as market price increases. C) is the difference between the amount paid for the unit and the market price of the unit. D) is the difference between the marginal benefit of the unit and the marginal cost of producing that unit. E) None of the above answers is correct. Topic: Total benefit 28) Consumer surplus exists when a A) person buys something with a marginal benefit less than what they paid. B) person buys something with a marginal benefit exactly what they paid. C) person buys something with a marginal benefit more than what they paid. D) producer sells something for more than it is worth. E) person buys something with a marginal cost less than what they paid. Topic: Consumer surplus

13 Chapter 6 Efficiency and Fairness of Markets ) Which of the following statements is correct? A) Consumer surplus equals the price paid for a good. B) The consumer surplus from a good is always larger than the total benefit from the good. C) An increase in price decreases consumer surplus. D) An increase in price has no effect on consumer surplus. E) The consumer surplus from a good or service must always equal producer surplus. Topic: Consumer surplus 30) Consumer surplus is the area A) below the demand curve and above the market price. B) below the supply curve and above the market price. C) above the demand curve and below the market price. D) above the supply curve and below the market price. E) below the demand curve and above the supply curve. Topic: Consumer surplus 31) Mary is willing to pay $50 for a Christmas tree, John is willing to pay $45 and Jeff is willing to pay $40. The price of a tree is $40. The total consumer surplus for Mary, John and Jeff taken together is A) $15. B) $135. C) $40. D) $95. E) $120. Topic: Consumer surplus

14 268 Bade/Parkin œ Foundations of Economics, Third Edition 32) If a seller charges a buyer the exact price the buyer is willing to pay, then the buyer would A) not buy the good. B) receive the maximum consumer surplus. C) receive no benefit from the good. D) receive no consumer surplus from that unit of the good. E) suffer a deadweight loss from buying the good. Answer: D Topic: Consumer surplus

15 Chapter 6 Efficiency and Fairness of Markets ) In the figure above, for the 3,000th unit, the maximum price a consumer is willing to pay is A) $5. B) $10. C) $15. D) $0. E) None of the above answers is correct. Topic: Marginal benefit Author: PH

16 270 Bade/Parkin œ Foundations of Economics, Third Edition 34) In the figure above, at the market price of $15, the consumer surplus equals A) $10,000. B) $30,000. C) $40,000. D) 2,000 units E) None of the above answers is correct. Topic: Consumer surplus Author: PH

17 Chapter 6 Efficiency and Fairness of Markets ) The figure above shows Lauren's demand curve for Barbie dolls and the market price for Barbie dolls. Using the area of the consumer surplus triangle, Lauren's total consumer surplus from purchasing 3 dolls is A) $5.50. B) $ C) $ D) $ E) 3 dolls Topic: Consumer surplus

18 272 Bade/Parkin œ Foundations of Economics, Third Edition 36) The figure above shows Lauren's demand curve for Barbie dolls and the market price for Barbie dolls. In order for Lauren to avoid paying more for dolls than they are worth to her, she must not purchase any more than A) 0 dolls. B) 1 doll. C) 3 dolls. D) 5 dolls. E) 4 dolls. Topic: Consumer surplus

19 Chapter 6 Efficiency and Fairness of Markets ) In the figure above, suppose that $20 is the market equilibrium price. Which area is the consumer surplus? A) A B) B C) A + B D) B - A E) B d A. Topic: Consumer surplus

20 274 Bade/Parkin œ Foundations of Economics, Third Edition 38) In the figure above, suppose that $20 is the market equilibrium price. What is the amount of the consumer surplus? A) $3,375. B) $3,000. C) $375. D) 150 units E) $1,500. Topic: Consumer surplus 6.3 Cost, Price, and Producer Surplus 1) To a seller, the cost of a good or service is and the price is. A) what must be given up to produce the good or service; what is received for the good or service B) what is received for the good or service; what must be given up to produce the good or service C) the producer surplus the seller receives; the consumer surplus the buyer receives D) the producer surplus the buyer receives; the consumer surplus the seller receives E) None of the above answers is correct. Topic: Cost versus price Objective: Checkpoint 6.3 2) The additional cost a producer incurs from producing one more unit of a product is referred to as the A) marginal benefit. B) consumer surplus. C) marginal utility. D) marginal cost. E) marginal profit. Answer: D Topic: Marginal cost Objective: Checkpoint 6.3 Author: PH

21 Chapter 6 Efficiency and Fairness of Markets 275 3) Ben's cost of making an additional rocking chair is $75. A) If he sells it for a $100, his producer surplus is $25. B) His marginal cost is equal to $75. C) The marginal benefit to the consumer from the chair will be $75. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Marginal cost Objective: Checkpoint 6.3 4) A supply curve is the same as a A) total cost curve. B) marginal cost curve. C) total benefit curve. D) marginal benefit curve. E) deadweight loss curve. Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3 Author: WM 5) Because the marginal cost of production increases as more output is produced and because the price of a good reflects the minimum amount for which a producer will produce the good, the marginal cost curve is A) negatively sloped. B) the same as the demand curve. C) the same as the supply curve. D) almost always vertical. E) bowed away from the origin. Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3

22 276 Bade/Parkin œ Foundations of Economics, Third Edition 6) A point on the supply curve can illustrate the A) price and the corresponding quantity supplied. B) marginal cost of that unit of the good. C) price the consumer is willing to pay. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3 7) A marginal cost curve can be the same as the A) supply curve. B) marginal benefit curve. C) producer surplus curve. D) consumer surplus curve. E) deadweight production curve. Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3 8) The supply curve is upward sloping because of A) increasing marginal cost. B) decreasing marginal benefit. C) decreasing marginal cost. D) increasing marginal benefit. E) increasing total cost. Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3 Author: PH

23 Chapter 6 Efficiency and Fairness of Markets 277 9) In the above figure, what is the marginal cost of the 4th pizza? A) $0 B) $4 C) $9 D) $36 E) 4 pizzas Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3 Author: PH

24 278 Bade/Parkin œ Foundations of Economics, Third Edition 10) In the above figure, what is the marginal cost of the 8th pizza? A) $1.50 B) $12 C) $6 D) $96 E) 8 pizzas Topic: Supply curve and marginal cost curve Objective: Checkpoint 6.3 Author: PH 11) Producer surplus definitely exists when the A) price exceeds marginal benefit. B) price exceeds marginal cost. C) marginal cost exceeds the price. D) marginal benefit exceeds the price. E) marginal benefit exceeds the marginal cost. Topic: Producer surplus Objective: Checkpoint ) When the price of a product exceeds the marginal cost of producing it, producers have a A) consumer surplus. B) producer surplus. C) consumer shortage. D) producer shortage. E) deadweight surplus. Topic: Producer surplus Objective: Checkpoint 6.3 Author: PH

25 Chapter 6 Efficiency and Fairness of Markets ) The producer surplus is found by subtracting the and then adding the difference for all units sold. A) marginal cost from price B) price from marginal cost C) marginal benefit from total benefit D) marginal cost from marginal benefit E) deadweight loss from the price Topic: Producer surplus Objective: Checkpoint 6.3 Author: WM 14) Producer surplus A) increases if market price rises and the supply curve does not shift. B) decreases if market price rises and the supply curve does not shift. C) is equal to the maximum price consumers are willing to pay. D) is the same as the marginal cost. E) always must equal consumer surplus. Topic: Producer surplus Objective: Checkpoint 6.3

26 280 Bade/Parkin œ Foundations of Economics, Third Edition 15) Bill and Krista sell potted plants from a roadside stand. The figure above shows Bill and Krista's marginal cost curve and the market price. If Bill and Krista sell 60 plants per week, their producer surplus from the 60th plant will equal A) $8. B) $480. C) $0. D) $20. E) More information is needed to answer the question. Topic: Producer surplus Objective: Checkpoint 6.3

27 Chapter 6 Efficiency and Fairness of Markets ) Bill and Krista sell potted plants from a roadside stand. The figure above shows their supply curve and the market price. If Bill and Krista want to avoid selling plants for which the marginal cost exceeds the price, they should sell no more than how many plants per week? A) 0 B) 60 C) 90 D) 150 E) More information is needed to answer the question. Topic: Producer surplus Objective: Checkpoint 6.3

28 282 Bade/Parkin œ Foundations of Economics, Third Edition 17) In the figure above, the equilibrium market price is $20. $20 is the A) marginal cost of 150th unit. B) willingness to pay for the 1st unit. C) producer surplus. D) consumer surplus. E) deadweight loss. Topic: Marginal cost Objective: Checkpoint 6.3

29 Chapter 6 Efficiency and Fairness of Markets ) In the figure above, the equilibrium market price is $20. Area A is the A) marginal cost of 150th unit. B) willingness to pay for the 150th unit. C) producer surplus. D) consumer surplus. E) marginal benefit of 150th unit. Topic: Producer surplus Objective: Checkpoint ) In the figure above, the equilibrium market price is $20. The producer surplus is shown by the area A) A. B) B. C) A + B. D) A d B. E) A - B. Topic: Producer surplus Objective: Checkpoint ) In the figure above, the equilibrium market price is $20. The producer surplus equals A) $20. B) $1,500. C) $3,000. D) 150. E) $4,500. Topic: Producer surplus Objective: Checkpoint 6.3

30 284 Bade/Parkin œ Foundations of Economics, Third Edition 6.4 Are Markets Efficient? 1) In a competitive market with no externalities, A) the consumer surplus is equal to zero because of competition. B) buyers cannot control the price, so the consumer surplus is zero. C) at the equilibrium price, marginal benefit exceeds marginal cost. D) at the equilibrium price, marginal benefit equals marginal cost. E) at the equilibrium price, the total amount of consumer surplus equals the total amount of producer surplus. Answer: D Topic: Market efficiency 2) A competitive market with no externalities is efficient when it is in equilibrium because A) total benefit equals total cost. B) marginal benefit equals marginal cost. C) consumer surplus equals producer surplus. D) the sum of consumer surplus plus producer surplus is minimized. E) the deadweight gain equals its maximum. Topic: Market efficiency Author: WM 3) If marginal benefit is equal to marginal cost, then the A) producer surplus is equal to the consumer surplus. B) sum of producer surplus and consumer surplus is as large as possible. C) sum of producer surplus and consumer surplus equals zero. D) market has squeezed out total surplus so that it equals zero. E) deadweight loss is more than zero but less than its maximum. Topic: Total surplus

31 Chapter 6 Efficiency and Fairness of Markets 285 4) At the market equilibrium, when efficiency is attained, the marginal benefit the marginal cost. A) is equal to B) is greater than C) is less than D) has no necessary relationship with E) is equal to the marginal deadweight loss which is equal to Topic: Market efficiency Author: PH 5) When efficiency is attained, the sum of the total amount of consumer surplus and producer surplus is A) minimized. B) maximized. C) equal to the deadweight loss. D) undefined. E) equal to zero. Topic: Market efficiency Author: PH

32 286 Bade/Parkin œ Foundations of Economics, Third Edition 6) The figure above represents the competitive market for slices of key lime pie. If the production is 40 slices per day, someone is willing to buy another slice of pie for A) more than it costs to produce the slice. B) less than it costs to produce the slice. C) an amount equal to the cost of producing the slice. D) an amount equal to the cost of producing all 40 slices. E) an amount that is not comparable to the cost of producing the slice. Topic: Market efficiency

33 Chapter 6 Efficiency and Fairness of Markets 287 7) The figure above represents the competitive market for slices of key lime pie. If the production is 80 slices per day, the cost of the 80th slice is A) less than anyone is willing to pay for it. B) more than anyone is willing to pay for it. C) equal to what someone is willing to pay for it. D) indetermine. E) equal to the deadweight loss from the 80th slice. Topic: Market efficiency 8) The figure above represents the competitive market for slices of key lime pie. When 60 slices are produced, the marginal cost A) exceeds the marginal benefit. B) is less than the marginal benefit. C) equals the marginal benefit. D) is not defined. E) equals the deadweight loss on the 60th slice. Topic: Market efficiency 9) The figure above represents the competitive market for slices of key lime pie. When the price equals $3 A) there is a shortage of slices of pie. B) there is a surplus of slices of pie. C) the efficient quantity of slices is being produced. D) the quantity produced is inefficient. E) the deadweight loss is maximized. Topic: Market efficiency

34 288 Bade/Parkin œ Foundations of Economics, Third Edition 10) In the figure above, if the market price is $12, then the total consumer surplus is A) $12. B) $10. C) minimized. D) $240. E) $480. Answer: D Topic: Consumer surplus Skill: Level 4: Applying models

35 Chapter 6 Efficiency and Fairness of Markets ) In the figure above, if the market is at equilibrium, then the total consumer surplus equals the area and the total producer surplus equals the area. A) A; B B) B; C C) C; B D) A; C E) A + B; C Topic: Consumer surplus and producer surplus Skill: Level 4: Applying models 12) In the figure above, if the market is at equilibrium, the sum of the total consumer surplus and the total producer surplus is A) $240. B) $600. C) $1,000. D) $0. E) $60. Topic: Total surplus Skill: Level 5: Critical thinking Author: MR

36 290 Bade/Parkin œ Foundations of Economics, Third Edition 13) In the figure above, suppose the market is at equilibrium. Then area A is the A) marginal benefit. B) marginal cost. C) amount of the consumer surplus. D) amount of the producer surplus. E) deadweight loss. Topic: Consumer surplus Skill: Level 4: Applying models Author: PH 14) In the figure above, suppose the market is at equilibrium. Then area B is the A) marginal benefit. B) marginal cost. C) amount of the consumer surplus. D) amount of the producer surplus. E) deadweight loss. Answer: D Topic: Producer surplus Skill: Level 4: Applying models Author: PH

37 Chapter 6 Efficiency and Fairness of Markets ) The concept of "the invisible hand" suggests that A) products are produced out of a seller's sense of charity. B) when the seller is better off, the buyer is worse off. C) sellers exploit consumers with high prices. D) buyers and sellers are self-interested. E) the command system is the only way of efficiently allocating resources. Answer: D Topic: Invisible hand 16) Adam Smith's Wealth of Nations, written in 1776, describes the market's invisible hand representing the A) King of England's control over the colonies. B) control all governments have in organizing the market. C) efficiency the market achieves without the interference of governments. D) inefficiency of markets when governments do not organize them. E) invisible command system that efficiently allocates resources. Topic: Invisible hand Author: WM 17) The concept of "the invisible hand" suggests that to attain efficiency, the government should A) guide economic activity. B) set prices. C) leave prices and output decisions to the competitive market. D) regulate all production decisions, but not price decisions. E) make sure that a command system is used to allocate resources. Topic: Invisible hand

38 292 Bade/Parkin œ Foundations of Economics, Third Edition 18) In a competitive market for a private good with no price or quantity regulations, no external cost nor external benefit, low transactions costs, and no taxes or subsidies, A) the allocation of resources is planned by the government. B) production is organized by government organizations. C) efficiency can be attained in the market with no government intervention. D) efficiency is usually be achieved by majority rule. E) efficiency is generally obtained by using a command system. Topic: Invisible hand 19) Obstacles in achieving efficiency in a market include A) public goods. B) the presence of an external cost or benefit. C) competition. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: E Topic: Obstacles to efficiency 20) When the cost of producing a product is paid, at least in part, by someone other than the producer, the cost is referred to as A) an external cost. B) an external profit C) an external benefit. D) an external/internal cost. E) a public cost. Topic: External cost Author: PH

39 Chapter 6 Efficiency and Fairness of Markets ) A cost not borne by the producer but borne by other people is known as cost. A) a marginal B) an internal C) an external D) a nonessential E) a subsidized Topic: External cost 22) Which of the following is an example of an external cost? A) a grove of trees planted in a park in Seattle B) a library built in Philadelphia C) a new, faster computer chip D) an oil spill off the coast of South America E) a student graduating from college Answer: D Topic: External cost 23) When a product benefits people other than the buyer of the product, the product is said to have A) an external cost. B) an excludable cost. C) an external benefit. D) an excludable benefit. E) a subsidized benefit. Topic: External benefit Author: PH

40 294 Bade/Parkin œ Foundations of Economics, Third Edition 24) A benefit that accrues to people other than the buyer of a good is known as benefit. A) an internal B) an external C) a marginal D) a total E) a subsidized Topic: External benefit 25) Which of the following is an example of an external benefit? A) a ton of coal burned in a power plant to produce electricity B) a car accident that crowds a major Los Angeles freeway C) the production of a slice of pizza D) the cleanup of a large lake E) the consumption of a can of Mt. Dew Answer: D Topic: External benefit 26) A good or service that is consumed simultaneously by everyone even if they don't pay for it is called good. A) a private B) a public C) a normal D) an inferior E) an external Topic: Public good

41 Chapter 6 Efficiency and Fairness of Markets ) When people cannot be excluded from consuming a good, even if they have not paid for the good, competitive markets would A) produce more of the good than society needs. B) allocate more resources than the efficient amount to the production of the good. C) produce the good so that people could enjoy a "free ride." D) produce less than the efficient quantity. E) eliminate the deadweight loss. Answer: D Topic: Public good Author: PH 28) A monopoly is A) the single buyer of some good or service. B) a firm that has control of a market because it is the only seller. C) a firm that creates enormous external costs. D) a firm that faces intense competition. E) a cost of producing a good or service. Topic: Monopoly 29) If one producer has control over an entire market and underproduces, the producer will A) increase producer surplus by lowering pollution costs. B) increase consumer surplus by lowering producer surplus. C) increase both consumer and producer surplus. D) create a deadweight loss. E) decrease the deadweight loss that would exist if the market were efficient. Answer: D Topic: Monopoly Author: WM

42 296 Bade/Parkin œ Foundations of Economics, Third Edition 30) Deadweight loss is created when a market produces A) either more or less than the efficient quantity. B) more than the efficient quantity but not when less than the efficient quantity is produced. C) less than the efficient quantity but not when more than the efficient quantity is produced. D) the efficient quantity. E) None of the above answers is correct because deadweight loss has nothing to do with the efficient quantity. Topic: Deadweight loss Author: WM

43 Chapter 6 Efficiency and Fairness of Markets ) The figure above shows the market for bell-bottom pants. If the efficient quantity is produced A) there will be no consumer surplus. B) the sum of consumer and producer surplus will be maximized. C) a small deadweight loss will result. D) the sum of consumer and producer surplus will be minimized. E) the consumer surplus on all the pants must equal the producer surplus on all the pants. Topic: Market efficiency Skill: Level 4: Applying models Author: WM

44 298 Bade/Parkin œ Foundations of Economics, Third Edition 32) The figure above shows the market for bell-bottom pants. If 6 million pairs of pants are produced the deadweight loss is A) zero. B) the triangle ABE. C) the triangle BCE. D) the triangle ACE. E) the triangle BCE minus the triangle ABE. Topic: Deadweight loss Skill: Level 4: Applying models Author: WM 33) The figure above shows the market for bell-bottom pants. If the production of the pants caused an external cost from pollution that is the result of the dye used, then A) 6 million pairs is the efficient quantity. B) fewer than 6 million pairs is the efficient quantity. C) more than 6 million pairs is the efficient quantity. D) None of the above answers are necessarily correct because more information is needed about the size of the external cost. E) None of the above answers are correct because it is impossible to tell whether the external cost results in underproduction or overproduction. Topic: External cost Skill: Level 4: Applying models Author: WM

45 Chapter 6 Efficiency and Fairness of Markets ) The figure above shows the market for bell bottom pants. If the government subsidizes the production of bell-bottom pants so that production expands from 6 million pairs to 7 million pairs, A) there would be no deadweight loss. B) the government's policy would have no effect on the sum of consumer surplus and producer surplus. C) a deadweight loss would result. D) the government's policy would increase the sum of consumer surplus and producer surplus. E) production would be even more efficient than if 6 million pairs of pants are produced because more is always better than less. Topic: Subsidies Author: WM 6.5 Are Markets Fair? 1) The idea that we should try to achieve the greatest happiness for the greatest number of people A) is called "Utilitarianism." B) was developed by Robert Nozick. C) accounts for the tradeoff between efficiency and equity. D) Both answers A and B are correct. E) Both answers A and C are correct. Topic: Utilitarianism Objective: Checkpoint 6.5

46 300 Bade/Parkin œ Foundations of Economics, Third Edition 2) The principle that states that society should strive to achieve "the greatest happiness for the greatest number of people" is referred to as A) egalitarianism. B) utilitarianism. C) authoritarianism. D) totalitarianism. E) the big principle. Topic: Utilitarianism Objective: Checkpoint 6.5 Author: PH 3) The concept of utilitarianism is defined as the principle in which A) equality of income brings the greatest efficiency. B) people in similar situations are treated similarly. C) opportunities are made equal for all. D) one person makes all the decisions for society. E) deadweight loss is set equal to zero. Topic: Utilitarianism Objective: Checkpoint 6.5 Author: WM 4) The idea of the "big tradeoff" points out the costs of A) using a results approach to fairness when the rules approach is correct B) transferring income under the idea of utilitarianism. C) price hikes during natural disasters. D) using a rules approach to fairness when the results approach is correct. E) None of the above answers is correct. Topic: Big tradeoff Objective: Checkpoint 6.5 Author: WM

47 Chapter 6 Efficiency and Fairness of Markets 301 5) When economists use the term "big tradeoff" when discussing efficiency they are referring to the tradeoff between A) external costs and external benefits. B) marginal cost and marginal benefits. C) producer surplus and consumer surplus. D) efficiency and fairness. E) deadweight loss and producer/consumer surplus Answer: D Topic: Big tradeoff Objective: Checkpoint 6.5 Author: PH 6) Which philosopher suggests that fairness should obey two rules: (1) private property must be protected; (2) the exchange of private property should be voluntary? A) John Rawls B) Adam Smith C) Robert Nozick D) Babe Ruth E) Bade Parkin Topic: Robert Nozick Objective: Checkpoint 6.5

48 302 Bade/Parkin œ Foundations of Economics, Third Edition 6.6 Integrative Questions 1) The figure above shows the market for brooms. If the market is efficient, A) 0 brooms are produced. B) 600 brooms are produced. C) more than 1000 brooms are produced. D) between 0 and 600 brooms are produced. E) between 600 and 1000 brooms are produced. Topic: Integrative Objective: Integrative Author: CD

49 Chapter 6 Efficiency and Fairness of Markets 303 2) The figure above shows the market for brooms. If 800 brooms are produced, A) consumer surplus is maximized. B) producer surplus is maximized. C) a deadweight loss occurs. D) marginal cost is less than marginal benefit. E) there is no deadweight loss. Topic: Integrative Objective: Integrative Author: CD 3) The figure above shows the market for brooms. If 800 brooms are produced, A) marginal cost exceeds marginal benefit. B) a deadweight loss does not occur because everyone who wants to buy a broom can. C) the "big tradeoff" occurs. D) value exceeds price. E) the "fair results" approach to fairness is definitely not violated. Topic: Integrative Objective: Integrative Author: CD 4) The figure above shows the market for brooms. If 400 brooms are produced, A) consumer surplus is maximized. B) producer surplus is maximized. C) a deadweight loss occurs. D) marginal cost is greater than marginal benefit. E) consumer surplus equals zero. Topic: Integrative Objective: Integrative Author: CD

50 304 Bade/Parkin œ Foundations of Economics, Third Edition 5) The figure above shows the market for brooms. Which of the following could lead to the production of fewer than 600 brooms? A) a monopoly B) a deadweight loss C) subsidies D) an external cost E) a big tradeoff Topic: Integrative Objective: Integrative Author: CD 6) When marginal benefit exceeds marginal cost in a market, A) only consumer surplus is reduced. B) only producer surplus is reduced. C) consumer surplus and producer surplus are not affected compared to when production is such that marginal cost equals marginal benefit. D) the deadweight loss is negative. E) None of the above answers is correct. Answer: E Topic: Integrative Objective: Integrative Author: CD 7) At a competitive equilibrium with no externalities, which of the following occurs? i) an efficient outcome ii) definitely a fair outcome when judged by the fair-results approach iii) marginal cost equals marginal benefit iv) producer surplus equals consumer surplus A) i and iii B) i, ii and iii C) ii and iii D) i, ii, iii and iv E) only i Topic: Integrative Objective: Integrative Author: CD

51 Chapter 6 Efficiency and Fairness of Markets 305 8) Utilitarianism states that A) utility is maximized when marginal cost equals marginal benefit. B) an efficient outcome occurs at market equilibrium. C) value should always exceed price to maximize utility. D) complete equality is the only fair outcome. E) the big tradeoff does not exist. Answer: D Topic: Integrative Objective: Integrative Author: CD 9) The fair results approach to fairness A) requires property rights and voluntary exchange. B) supports transferring income from the rich and giving it to the poor. C) requires efficient market outcomes. D) ensures that marginal cost equals marginal benefit. E) never creates a big tradeoff. Topic: Integrative Objective: Integrative Author: CD 10) The fair rules approach to fairness requires A) consumer surplus equals producer surplus. B) income transfers from rich to poor. C) property rights and voluntary exchange. D) that marginal cost equal marginal benefit. E) utilitarianism. Topic: Integrative Objective: Integrative Author: CD

52 306 Bade/Parkin œ Foundations of Economics, Third Edition 11) Consumer surplus equals A) producer surplus at a market equilibrium. B) marginal benefit minus price, summed over the quantity consumed. C) price minus marginal cost. D) the deadweight loss if there is underproduction. E) the deadweight loss plus the producer surplus. Topic: Integrative Objective: Integrative Author: CD 12) Suppose a market produces 5,000 tons of wheat. At this quantity, the marginal cost exceeds the marginal benefit. This outcome could be the result of A) a quantity regulation limiting the amount that can be produced. B) a monopoly. C) a subsidy. D) an external benefit. E) producing a public good. Topic: Integrative Objective: Integrative Author: CD