Chapter 6 Efficiency and Fairness of Markets

Transcription

1 Chapter 6 Efficiency and Fairness of Markets 6.1 Resource Allocation Methods 1) Allocating resources by the order of someone in authority is a allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: E Topic: Allocation of resources Objective: Checkpoint 6.1 2) Often people trying to withdraw money from their bank must wait in line, which reflects 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

2 264 Bade/Parkin œ Foundations of Economics, Third Edition 3) When the city of Fresno holds a referendum to determine if taxes will be raised to pay for road repairs, the city is using a allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Topic: Allocation of resources Objective: Checkpoint 6.1 4) If a person will rent an apartment only to married couples over 30 years old, that person is allocating resources using a allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Topic: Allocation of resources Objective: Checkpoint 6.1 5) If you split your dessert with your date, you are using a allocation method. A) first-come, first-served B) sharing equally C) contest D) personal characteristics E) command Topic: Allocation of resources Objective: Checkpoint 6.1

3 Chapter 6 Efficiency and Fairness of Markets Value, Price, and Consumer Surplus 1) Marginal benefit A) increases as more of a good is consumed. B) decreases as more of a good is consumed. C) is the total benefit from all units consumed. D) is constant as more of a good is consumed. E) is the gain to the producer of producing and selling one more unit of a good. Topic: Marginal benefit 2) Which describes the economic meanings of value and price? A) Value is exchange worth minus marginal benefit and price is the dollars that must be paid. B) Value is the marginal benefit obtained and price is the dollars that must be paid. C) Value refers to the gain the producer gets from the good or service and price refers to the gain the consumer gets from the good or service. D) Value refers to the dollars that must be paid and price refers to the cost of producing the good. E) They are the same and both mean the dollars that must be paid. Topic: Value and price Skill: Level 1: Definition 3) To an economist, "value" is the same as A) marginal cost. B) consumer surplus. C) the minimum price that people are willing to pay for another unit of the good. D) marginal benefit. E) total surplus. Topic: Value and price Skill: Level 1: Definition Author: CD

4 266 Bade/Parkin œ Foundations of Economics, Third Edition 4) A point on the demand curve shows the A) minimum price that people are willing to pay for another unit of a good. B) dollars' worth of other goods that people must sacrifice to consume another unit of the good. C) maximum price that people are willing to pay for another unit of a good. D) consumer surplus a person gains from consuming a unit of a good. E) marginal benefit minus the consumer surplus from consuming another unit of a good. Topic: Demand curve and marginal benefit curve Author: CD 5) Which of the following is true regarding a demand curve? i) The demand curve is also the marginal benefit curve. ii) The demand curve shows the dollars' worth of other goods that people are willing to forgo to consume another unit of the good. iii) The demand curve shows the maximum price that people are willing to pay for another unit of a good. A) i and ii. B) i and iii. C) ii and iii. D) i, ii, and iii. E) i only. Topic: Demand curve and marginal benefit curve Author: CD 6) A demand curve can be interpreted as A) a marginal benefit curve. B) a total benefit curve. C) an average benefit curve. D) a marginal cost curve. E) None of the above answers is correct. Topic: Demand curve and marginal benefit curve

5 Chapter 6 Efficiency and Fairness of Markets 267 7) A demand curve shows the number of A) people who are interested in buying the good at any given price. B) dollars it takes to buy certain quantities of a good. C) dollars people are willing to give up to get a certain unit of a good. D) goods that will be produced at any given price. E) producers who demand to sell the good or service. Topic: Demand curve and marginal benefit curve 8) What must be true for a consumer to buy a good or service? A) The price must be equal to or less than the marginal benefit. B) The total benefit received must equal the total spent to buy the good or service. C) The consumer must be able to obtain some consumer surplus. D) The consumer must not be able to produce the product. E) The price must be equal to or greater than the marginal benefit. Topic: Demand curve and marginal benefit curve 9) A consumer's total benefit from consuming a good is equal to the A) total expenditure on the good. B) consumer surplus on the quantity purchased. C) consumer surplus plus the total expenditure. D) consumer surplus minus the total expenditure. E) total expenditure on the good divided by the number of units purchased. Topic: Total benefit

6 268 Bade/Parkin œ Foundations of Economics, Third Edition 10) If Pat paid $10 for a bag of groceries and received $25 worth of consumer surplus, what is the total marginal benefit that Pat obtained from the bag of groceries? A) $10 B) $15 C) $25 D) $35 E) $5 Topic: Total benefit 11) Samantha was willing to pay $10 for a hamburger because she was hungry but she only paid $2.50. What is the marginal benefit Samantha gained from the hamburger? A) $2.50 B) $7.50 C) $10.00 D) $12.50 E) None of the above answers is correct. Topic: Total surplus 12) Consumer surplus is equal to A) marginal benefit minus price. B) price minus marginal benefit. C) marginal benefit. D) price. E) marginal benefit plus price. Topic: Consumer surplus

7 Chapter 6 Efficiency and Fairness of Markets ) Samantha was willing to pay $10 for a hamburger because she was hungry but she only paid $2.50. What did Samantha realize from the hamburger? A) a marginal benefit equal to $2.50 B) a marginal benefit equal to $10 minus $2.50 C) a marginal benefit of $2.50 D) consumer surplus equal to $10 minus $2.50 E) a marginal benefit equal to $10 plus $2.50 Topic: Consumer surplus 14) The consumer acquires a consumer surplus on a good if the marginal benefit is A) equal to the price. B) greater than the price. C) less than the price. D) zero. E) less than the marginal cost. Topic: Consumer surplus 15) Suppose Dan is willing to pay a maximum of $3,000 for a piano, but finds one he can buy for $2,500. Dan's consumer surplus is A) $5,500. B) $3,000. C) $2,500. D) $500. E) zero because he buys the piano. Topic: Consumer surplus

8 270 Bade/Parkin œ Foundations of Economics, Third Edition 16) Consumer surplus exists because A) it costs less to produce goods than buyers must pay for them. B) consumers value the good more highly than what they must pay to buy it. C) taxes on goods are less than the appropriate amount. D) the marginal benefit of the good is always equal to or less than the price of the good. E) the price of the good is generally greater than the marginal cost of producing a unit of the good. Topic: Consumer surplus 17) Which of the following is an example of consumer surplus? A) Jose buys a hamburger for $2 and tells you he would not have paid a penny more. B) John believes the price he paid for his computer was too high. C) Mary buys a paper tablet for $2 and finds the same good at another store for $1.50. D) Sue would have paid $15 for a new compact disc but paid only $10. E) Anne finds a mountain bike for which she is willing to pay a maximum of $550 and the price of the bike is $600. Topic: Consumer surplus Skill: Level 1: Definition 18) If you are willing to pay no more than $4 for a slice of pizza and the price of a slice of pizza is $4, then A) if you buy it, you would be cheated because you would realize no benefit from the purchase. B) you buy it but you get no marginal benefit from the purchase. C) you will not buy it. D) you buy it but you get no consumer surplus from the purchase. E) you might buy it depending on how the slice's marginal benefit compares to its price. Topic: Consumer surplus

9 Chapter 6 Efficiency and Fairness of Markets ) You pay $4 for every slice of pizza you buy. You buy three slices. Which of the following is correct? A) You must have received no consumer surplus from either the first or the second slice. B) You received no benefit from the third slice. C) The total benefit you receive is equal to what you paid. D) You have probably received some consumer surplus. E) You definitely received no consumer surplus on the third slice because that was the last slice you purchased. Topic: Consumer surplus Skill: Level 4: Applying models 20) In the summer of 2005, the price of gasoline increased greatly. Which of the following occurred? A) Drivers received no consumer surplus after the price increase. B) Consumer surplus increased if drivers drove less. C) Consumer surplus decreased. D) If consumers drove the same amount, they received less total benefit. E) Both the marginal benefit from each gallon of gasoline and the consumer surplus from each gallon of gasoline decreased. Topic: Consumer surplus Skill: Level 4: Applying models

10 272 Bade/Parkin œ Foundations of Economics, Third Edition 21) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from her 10th soda is A) $0.00. B) $0.50. C) $1.00. D) $1.50. E) $2.50 Topic: Consumer surplus Author: CD

11 Chapter 6 Efficiency and Fairness of Markets ) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from her 15th soda is A) $0.00. B) $0.50. C) $1.00. D) $1.50. E) $2.50. Topic: Consumer surplus Author: CD 23) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from all 15 sodas is A) $ B) $ C) $ D) $8.00. E) $1.50. Topic: Consumer surplus Author: CD 24) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's total benefit from consuming 15 sodas is A) $ B) $ C) $ D) $0. E) None of the above answers is correct. Topic: Total benefit Author: CD

12 274 Bade/Parkin œ Foundations of Economics, Third Edition 25) In general, as the consumption of a good or service increases, the marginal benefit from consuming that good or service A) increases. B) decreases. C) stays the same. D) at first increases and then decreases. E) at first decreases and then increases. Topic: Marginal benefit Skill: Level 1: Definition 26) Value is A) the price we pay for a good. B) the cost of resources used to produce a good. C) objective so that it is determined by market forces, not preferences. D) the marginal benefit we get from consuming another unit of a good or service. E) the difference between the price paid for a good and the marginal cost of producing that unit of the good. Topic: Value and price 27) A marginal benefit curve A) is the same as a demand curve. B) is the same as a supply curve. C) slopes upwards. D) is a vertical line at the efficient quantity. E) is U-shaped. Topic: Demand curve and marginal benefit curve Skill: Level 1: Definition

13 Chapter 6 Efficiency and Fairness of Markets ) The difference between the marginal benefit from a new pair of shoes and the price of the new pair of shoes is A) the consumer surplus from that pair of shoes. B) what we get. C) what we have to pay. D) the price when the marginal benefit is maximized. E) the consumer's expenditure on the shoes. Topic: Consumer surplus Skill: Level 1: Definition 29) Suppose the price of a scooter is $200 and Cora Lee is willing to pay $250. Cora Lee's A) consumer surplus from that scooter is $200. B) consumer surplus from that scooter is $50. C) marginal benefit from that scooter is $100. D) consumer surplus from that scooter is $150. E) consumer surplus from that scooter is $250. Topic: Consumer surplus 30) If the price of a pizza is $13 per pizza, the consumer surplus from the first pizza consumed the consumer surplus from the second pizza consumed. A) is greater than B) equals C) is less than D) cannot be compared to E) None of the above answers is correct because more information is needed about the marginal cost of producing the pizzas to answer the question. Topic: Consumer surplus

14 276 Bade/Parkin œ Foundations of Economics, Third Edition 6.3 Cost, Price, and Producer Surplus 1) The opportunity cost of producing one more unit of a good or service is the A) marginal cost. B) marginal benefit. C) efficient level of production. D) market outcome. E) price of the good or service. Topic: Marginal cost Skill: Level 1: Definition 2) Which of the following describes the economic meanings of cost and price? A) Cost is exchange worth, and price is dollar worth. B) Cost is what must be given up to produce a good, and price is what a seller receives when the good is sold. C) They are the same, and both mean what is received when a good is sold. D) Cost refers to what the buyers pay for the good, and price refers to what sellers receive when the good is sold. E) Cost refers to the price that buyers must pay to buy the good. Topic: Cost and price 3) The supply curve of a good or service is the same as A) the demand curve. B) the marginal benefit curve. C) the marginal cost curve. D) the total surplus curve. E) None of the above answers is correct. Topic: Supply curve and marginal cost curve

15 Chapter 6 Efficiency and Fairness of Markets 277 4) Which of the following is a correct description of the supply curve? i) The supply curve is also the marginal cost curve. ii) The supply curve shows the dollars' worth of other goods that we must sacrifice to produce another unit of a good. iii) The supply curve shows the additional cost of producing another unit of a good. A) i only B) i and ii C) ii and iii D) i, ii, and iii E) ii only. Topic: Supply curve and marginal cost curve Author: CD 5) The supply curve shows the A) marginal benefit of a firm producing another unit of a good. B) dollars' worth of other goods and services we are willing to give up to get another unit of the good. C) minimum price that firms must receive to supply a certain quantity of a good. D) the producer surplus of producing the good. E) maximum price that firms will accept in order to supply a certain quantity of a good. Topic: Supply curve and marginal cost curve Author: CD 6) A supply curve shows quantities supplied at various prices. It also shows the A) total profit the firm earns at a given level of output. B) marginal benefit of the good. C) total cost of production. D) marginal cost of production. E) producer surplus, which is equal to the slope of the supply curve. Topic: Supply curve and marginal cost curve

16 278 Bade/Parkin œ Foundations of Economics, Third Edition 7) A supply curve shows the marginal A) benefit consumers receive from consuming a good. B) profit businesses earn from selling a good. C) cost of producing the good. D) price paid for a good. E) benefit sellers receive from selling a good. Topic: Supply curve and marginal cost curve 8) Producer surplus is the difference between the summed over the quantity produced. A) price of the good and the marginal cost of producing it B) marginal benefit of the good and its marginal cost C) marginal benefit of the good and its price D) marginal cost of the good and the opportunity cost of producing it E) None of the above answers is correct. Topic: Producer surplus 9) If the price is greater than the marginal cost of producing a good, the seller has A) no benefit from the sale. B) a loss. C) some producer surplus from the sale. D) some negative consumer surplus from the sale. E) None of the above answers is correct. Topic: Producer surplus Skill: Level 1: Definition

17 Chapter 6 Efficiency and Fairness of Markets ) The producer surplus of making and selling 10 chairs is found by A) multiplying the selling price by 10. B) subtracting the marginal cost from the selling price for each chair and summing the differences. C) subtracting from the total revenue the cost of producing one chair multiplied by 10. D) adding the marginal cost and the price of all 10 chairs. E) None of the above answers is correct. Topic: Producer surplus 11) If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75, respectively, and sells them for $80 each, what is the firm's total producer surplus? A) $400 B) $225 C) $175 D) $150 E) $80 Topic: Producer surplus 12) Graphically, producer surplus is the area under the A) demand curve and above the supply curve, up to the relevant quantity. B) price and above the demand curve, up to the relevant quantity. C) price and above the supply curve, up to the relevant quantity. D) price and above the quantity axis, up to the relevant quantity. E) demand curve and above the price, up to the relevant quantity. Topic: Producer surplus

18 280 Bade/Parkin œ Foundations of Economics, Third Edition 13) ACME Doughnuts received $2,300 worth of producer surplus last month with total revenue of $4,200. What is ACME's total cost of production? A) $1,900 B) $2,300 C) $4,200 D) $7,500 E) $8,800 Topic: Producer surplus

19 Chapter 6 Efficiency and Fairness of Markets ) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The marginal cost of the 10,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $0.50 and less than $1.00. E) None of the above answers is correct. Topic: Marginal cost Author: CD

20 282 Bade/Parkin œ Foundations of Economics, Third Edition 15) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The marginal cost of the 20,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Topic: Marginal cost Author: CD 16) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The price that must be offered so that the 10,000th soda is produced is. A) minimum; $0.50 B) minimum; $1.00 C) maximum; $0.50 D) maximum; $1.00 E) minimum; more than $0.50 but less than $1.00 Topic: Marginal cost Author: CD 17) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from the 10,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Topic: Producer surplus Author: CD

21 Chapter 6 Efficiency and Fairness of Markets ) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from the 20,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Topic: Producer surplus Author: CD 19) Cost A) is what the buyer pays to get the good. B) is always equal to the marginal benefit for every unit of a good produced. C) is what the seller must give up to produce the good. D) is greater than market price, which results in a profit for firms. E) means the same thing as price. Topic: Cost 20) If a firm is willing to supply the 1,000th unit of a product at a price of $23 or more, we know that $23 is the A) highest price the seller hopes to realize for this output. B) minimum price the seller must receive to produce this unit. C) average price of all the prices the seller could charge. D) price that sets the marginal benefit equal to the marginal cost. E) only price for which the seller is willing to sell this unit of the good. Topic: Supply and marginal cost

22 284 Bade/Parkin œ Foundations of Economics, Third Edition 21) A supply curve shows the of producing one more unit of a good or service. A) producer surplus B) consumer surplus C) total benefit D) marginal cost E) marginal benefit to the producer Topic: Supply curve and marginal cost curve 22) Producer surplus is A) equal to the marginal benefit from a good minus its price. B) equal to the price of a good minus the marginal cost of producing it. C) always equal to consumer surplus. D) Both answers A and C are correct. E) Both answers B and C are correct. Topic: Producer surplus 23) Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour. What is your producer surplus? A) $5 an hour B) $10 an hour C) $15 an hour D) $25 an hour E) More than $25 an hour. Topic: Producer surplus

23 Chapter 6 Efficiency and Fairness of Markets ) In a figure that shows a supply curve and a demand curve, producer 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) between the demand curve and the supply curve. Topic: Producer surplus 6.4 Are Markets Efficient? 1) Efficiency in markets is found at the point where A) marginal cost is smallest. B) marginal benefit is largest. C) total benefit equals total cost. D) marginal benefit equals marginal cost. E) marginal benefit exceeds marginal cost by the maximum amount possible. Topic: Market efficiency Skill: Level 1: Definition 2) Efficiency in a market occurs when the production of the good is such that A) marginal benefit exceeds marginal cost. B) marginal benefit equals marginal cost. C) marginal benefit is lower than marginal cost. D) the marginal cost stops increasing. E) marginal benefit exceeds marginal cost by the maximum amount possible. Topic: Market efficiency Skill: Level 1: Definition Author: MR

24 286 Bade/Parkin œ Foundations of Economics, Third Edition 3) If the market for bicycles is efficient, then A) no more bicycles can be produced. B) marginal benefit exceeds marginal cost. C) consumer surplus must be greater than producer surplus. D) it is not possible to produce more bicycles without sacrificing another, more highly valued good. E) consumer surplus must equal producer surplus. Topic: Market efficiency Skill: Level 1: Definition Author: CD 4) If the marginal benefit of a hot dog is greater than its marginal cost, then to increase efficiency, A) more hot dogs should be produced. B) fewer hot dogs should be produced. C) nothing should be done if the marginal benefit is greater than the marginal cost by the maximum amount because in this case the efficient quantity of hot dogs is being produced. D) production should be halted. E) More information is needed about the price of a hot dog in order to determine if production should be increased, decreased, or not changed. Topic: Market efficiency

25 Chapter 6 Efficiency and Fairness of Markets 287 5) The figure above shows the marginal benefit and marginal cost curves for pizza. In the figure, for which of the following quantities is the marginal benefit greater than the marginal cost? A) the 10,000th pizza. B) the 20,000th pizza. C) the 30,000th pizza. D) All of these quantities has a marginal benefit greater than its marginal cost. E) None of these quantities has a marginal benefit greater than its marginal cost. Topic: Market efficiency

26 288 Bade/Parkin œ Foundations of Economics, Third Edition 6) The figure above shows the marginal benefit and marginal cost curves for pizza. In the figure, what is the efficient quantity of pizza? A) 0 pizzas B) 10,000 pizzas C) 20,000 pizzas D) 30,000 pizzas E) The efficient quantity cannot be determine without more information. Topic: Market efficiency 7) At a competitive equilibrium, if there are no taxes, subsidies, price regulations, quantity regulations, or externalities A) the marginal benefit is greater than the marginal cost. B) resource use is efficient. C) the marginal benefit is less than the marginal cost. D) both the marginal benefit and the marginal cost of the last unit produced equal zero. E) the marginal benefit is greater than the marginal cost by as much as possible. Topic: Market efficiency

27 Chapter 6 Efficiency and Fairness of Markets 289 8) At a competitive market equilibrium, if there are no taxes, subsidies, price regulations, quantity regulations, or externalities i) consumer surplus is maximized. ii) marginal cost equals marginal benefit. iii) resources are efficiently used. iv) producer surplus is maximized. A) ii and iii. B) i and ii. C) i and iv. D) i, ii, iii, and iv. E) ii only. Topic: Market efficiency Author: CD 9) Which of the following occurs when a market is efficient? A) Consumer surplus equals producer surplus. B) Consumer surplus is as large as possible. C) Producer surplus is as large as possible. D) The sum of consumer surplus and producer surplus is maximized. E) The marginal benefit exceeds the marginal cost by as much as possible. Topic: Market efficiency 10) What did Adam Smith identify as the source of the invisible hand in 1776? A) a benevolent central government that decided was best for everyone B) an individual's concern for fellow humans C) an individual's own self-interest D) the stock market E) buyers' and suppliers' concerns to obtain and retain good reputations. Topic: Invisible hand Skill: Level 1: Definition

28 290 Bade/Parkin œ Foundations of Economics, Third Edition 11) The "invisible hand" refers to the notion that A) competitive markets send resources to their highest valued uses. B) government intervention is necessary to ensure efficiency. C) marginal benefit decreases as more is consumed. D) marginal cost increases as more is produced. E) no matter what allocation method is used, the resulting production is efficient. Topic: Invisible hand 12) The efficiency of competitive markets happens because A) of the benevolence of the butcher, the brewer, and the baker. B) people make environmentally aware purchasing decisions. C) prices adjust to make buying plans and selling plans compatible. D) government organizes and monitors production. E) the U.S. economy uses a command system to allocate resources within the competitive markets. Topic: Invisible hand Skill: Level 4: Applying models 13) When technology increases the supply of a good and lower prices increase the quantity demanded, A) the economy is reallocating resources to achieve an efficient allocation. B) consumer surplus falls. C) the invisible hand is unnecessary. D) the marginal benefit of the good increases with the quantity produced. E) the economy is no longer efficient because the quantity changes. Topic: Invisible hand Skill: Level 4: Applying models

29 Chapter 6 Efficiency and Fairness of Markets ) When output is less than the efficient level, A) consumers are willing to pay more for another unit than it costs to produce the unit. B) the amount consumers are willing to pay equals the cost of production. C) the cost of production is greater than the price consumers are willing to pay. D) the production costs can't be measured. E) the marginal cost of producing the good must be greater than the marginal benefit from the good. Topic: Underproduction 15) When there is underproduction, so that a market produces less than the efficient amount, A) consumer surplus definitely is larger than when the efficient quantity is produced. B) the sum of producer surplus and consumer surplus is larger than when the efficient quantity is produced. C) there is a deadweight loss. D) consumers definitely lose and producers definitely gain. E) consumers definitely gain and producers definitely lose. Topic: Underproduction Author: MR 16) Overproduction results in A) external costs. B) external benefits. C) deadweight loss. D) super-efficiency. E) the marginal benefit of the last unit produced being larger than the marginal cost. Topic: Overproduction

30 292 Bade/Parkin œ Foundations of Economics, Third Edition 17) What do economists call the loss society experiences when the production of a good is less than the efficient amount? A) tax B) subsidy C) price floor D) deadweight loss E) quantity restriction. Topic: Deadweight loss Skill: Level 1: Definition 18) Which of the following leads to a deadweight loss? i) overproduction ii) underproduction iii) taxes iv) monopoly A) ii only. B) iii and iv. C) i and ii. D) i, ii, iii, and iv. E) i, ii, and iii. Topic: Obstacles to efficiency Skill: Level 1: Definition Author: CD 19) Which of the following government policies ensures market efficiency? A) subsidy B) tax C) price regulations D) quantity regulations E) None of the above answers is correct. Answer: E Topic: Obstacles to efficiency

31 Chapter 6 Efficiency and Fairness of Markets ) If the government imposes a tax on a competitive market with no externalities, then i. resource use is not efficient. ii. there is a deadweight loss. iii. consumer surplus is at its maximum. A) ii only. B) i and ii. C) iii only. D) i and iii. E) i, ii, and iii. Topic: Tax Skill: Level 1: Definition Author: CD 21) What is the impact of a government subsidy to producers? A) less is produced relative to the efficient level creating a deadweight loss B) more is produced relative to the efficient level creating a deadweight loss C) producer surplus is increased, which creates a larger consumer surplus D) producers are able to sell the product at a higher price E) consumers must pay a higher price for the good. Topic: Subsidy 22) Subsidies the price paid by the buyer and the price received by the seller. A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease E) do not change; increase Topic: Subsidy

32 294 Bade/Parkin œ Foundations of Economics, Third Edition 23) When there is a cost or benefit that affects someone other than the seller and buyer, then there is A) a tax. B) a subsidy. C) a quantity regulation. D) a price regulation. E) an externality. Answer: E Topic: Externalities Skill: Level 1: Definition 24) Air pollution is an external cost because it A) is a pollution of the external environment. B) is a cost not borne by the producer of the good. C) benefits no one. D) is not associated with resource use. E) is created only when production occurs. Topic: External cost 25) A public good A) is a good that is usually consumed in public, such as a restaurant meal. B) is a good that can be consumed simultaneously by everyone. C) is a good produced by government. D) results in an efficient allocation of resources. E) is a good for which people are willing to pay a very high price for it. Topic: Public good Skill: Level 1: Definition

33 Chapter 6 Efficiency and Fairness of Markets ) Which of the following occurs when a market is efficient? A) Producers earn the highest income possible. B) Production costs equal total benefit. C) Consumer surplus equals producer surplus. D) Scarce resources are used to produce the goods and services that people value most highly. E) Every consumer has all of the good or service he or she wants. Topic: Market efficiency 27) When a market is efficient the A) sum of consumer surplus and producer surplus is maximized. B) deadweight gain is maximized. C) quantity produced is maximized. D) marginal benefit of the last unit produced exceeds the marginal cost by as much as possible. E) total benefit equals the total cost. Topic: Market efficiency 28) The concept of "the invisible hand" suggests that markets A) do not produce the efficient quantity. B) are always fair. C) produce the efficient quantity. D) are unfair. E) allocate resources unfairly and inefficiently. Topic: Invisible hand

34 296 Bade/Parkin œ Foundations of Economics, Third Edition 29) Which of the following can result in a market producing an inefficient quantity of a good? i. competition ii. an external cost or an external benefit iii. a tax A) i only B) iii only. C) ii only. D) ii and iii. E) i and iii. Topic: Obstacles to efficiency Skill: Level 1: Definition 30) When underproduction occurs, A) producers gain more surplus at the expense of consumers. B) marginal cost is greater than marginal benefit. C) consumer surplus increases to a harmful amount. D) there is a deadweight loss that is borne by the entire society. E) the deadweight loss harms only consumers. Topic: Underproduction 31) When production moves from the efficient quantity to a point of overproduction, A) consumer surplus definitely increases. B) the sum of producer surplus and consumer surplus increases. C) there is a deadweight loss. D) consumers definitely lose and producers definitely gain. E) consumers definitely gain and producers definitely lose. Topic: Deadweight loss

35 Chapter 6 Efficiency and Fairness of Markets Are Markets Fair? 1) People who agree with utilitarianism principles believe that A) everyone should try to maximize personal utility. B) unequal incomes are justified if wealthier people provide utility to poor people. C) only certain groups in society deserve to be happy. D) equal incomes will achieve the greatest happiness for the greatest number. E) equalizing incomes is not fair if it requires taxes. Topic: Utilitarianism 2) A modified version of utilitarianism proposed by John Rawls argues for A) the idea that an equal distribution of income is the fairest, most efficient one. B) the idea that a fair distribution of income is one in which the rules of earning income are equal for all. C) income to be redistributed to make the poorest person's share as large as possible. D) no need to redistribute income if the economic pie is as large as possible. E) using first-come, first-served as the fairest method of allocating resources. Topic: Utilitarianism 3) Utilitarianism is about A) efficient resource use. B) having an equal income distribution. C) fair rules. D) the command system of allocating resources. E) the big tradeoff. Topic: Utilitarianism

36 298 Bade/Parkin œ Foundations of Economics, Third Edition 4) Utilitarianism states that A) a society should make the maximum number of people the happiest they can be. B) only goods that provide utility should be produced. C) income transfers should be ignored. D) there is a tradeoff between efficiency and fairness. E) only the "fair rules" approach to fairness is correct. Topic: Utilitarianism Author: CD 5) The "big tradeoff" considers A) the benefit of achieving "the greatest happiness for the greatest number." B) whether the rules or the results are fair. C) the cost of using market prices to allocate resources. D) the cost of making income transfers when comparing efficiency to fairness. E) the cost of using majority rule to allocate resources. Topic: Big tradeoff Skill: Level 1: Definition Author: CD 6) Which of the following is part of the cost of income transfers? A) Tax-collecting agencies cost money to administer. B) Taxing incomes encourages people to work harder. C) Income transfers make the results more unfair. D) Income transfers increase the size of the economic pie. E) Income transfers are a similar to allocating resources using a lottery. Topic: Big tradeoff

37 Chapter 6 Efficiency and Fairness of Markets 299 7) As pointed out by the "big tradeoff," government action that redistributes incomes so that everyone has the same income leads to A) fairness according to the "fair rules" approach. B) efficient markets. C) resources being allocated according to a command system. D) a smaller total output E) lower taxes on the rich than on the poor so that the rich do not lose their incentive to work. Topic: Big tradeoff 8) Why does redistribution, so that the distribution of income is equal, bring about less total output? A) Incentives to work are reduced. B) No one can determine marginal benefit or marginal cost as a result. C) Those in political power will likely receive a larger income. D) Because the marginal benefit and marginal cost of work have been equally increased. E) The premise of the question is incorrect because an equal distribution of income would increase rather than decrease the total amount produced. Topic: Big tradeoff 9) The "big tradeoff" refers to A) producing capital goods instead of consumable goods. B) marginal benefit versus marginal cost. C) efficiency and fairness. D) taking an economics course instead of some other course. E) using market prices rather than a command system to allocate resources. Topic: Big tradeoff Skill: Level 1: Definition

38 300 Bade/Parkin œ Foundations of Economics, Third Edition 10) Redistributing income from the rich to the poor creates inefficiency because of A) wasteful expenditures by people receiving welfare grants. B) administrative costs to operate the government redistribution agencies. C) the incentive to produce more output is decreased. D) Both answers B and C are correct. E) Both answers A and C are correct. Topic: Big tradeoff 11) What was John Rawls' proposal in his book entitled A Theory of Justice? A) Rich people should not be taxed. B) A good goal for society is to attempt to make the poorest as well off as possible. C) Unfairness results from the rules of a game. D) Efficient resource use is the only thing that matters. E) Governments must use a command system to allocate resources. Topic: John Rawls 12) The "equality of opportunity" idea of fairness claims A) a society should make the poorest as well off as possible. B) the results and the rules should both be fair. C) it's not fair if the rules aren't fair. D) private property can be transferred under government order. E) only a first-come, first-served system of allocating resources is fair. Topic: Fair rules Author: CD

39 Chapter 6 Efficiency and Fairness of Markets ) Assume the Nozick rules are being followed in the economy so that the distribution of income is fair. What must be true for this to create an efficient allocation of resources? A) All people are earning equal incomes. B) There are no public goods, monopolies, high transactions costs, or external costs and benefits. C) The costs of administering redistribution equals the benefits the poor receive. D) The government must redistribute income in a fashion that minimizes the "big tradeoff." E) The government must allocate resources using a command mechanism. Topic: Fair rules 14) In December 2004, Arkansas had a severe ice storm that caused electrical blackouts. The Fictitious Portable Generator firm of Little Rock had several portable generators that could be used by homeowners to provide electricity. Which of the following would be the fair-rules way to provide them? A) The government confiscates the generators owned by Fictitious and distributes them. B) Fictitious is forced by the state to rent the generators at half the normal rate. C) The state sets up a lottery to determine who rents the available generators at the normal rate. D) Fictitious rents generators at the equilibrium market price. E) Fictitious follows government commands about who gets to use the generators. Topic: Fairness in natural disasters Skill: Level 4: Applying models

40 302 Bade/Parkin œ Foundations of Economics, Third Edition 15) Which of the following is true for taxes? They are A) always administered fairly. B) a necessary part of living in an economy with a fair distribution of income. C) always administered without creating unfairness or inefficiency. D) an involuntary transfer of private property. E) do not create a big tradeoff problem. Topic: Fairness in natural disasters 16) If the government takes over the distribution of some scarce good in a time of a natural disaster and provides the good at no charge to users, what must also be done? A) the government must produce the good itself B) some rationing mechanism must be set up to determine who gets the good C) everyone hurt in the natural disaster must get one of the goods D) nothing E) because we live in a democracy, the government must use majority rule as the rationing mechanism Topic: Fairness in natural disasters 17) The idea that unequal incomes is unfair generally uses the principle of fairness. A) big tradeoff B) involuntary exchange C) voluntary exchange D) it's not fair if the result isn't fair E) it's not fair if the rules aren't fair Topic: Fair results

41 Chapter 6 Efficiency and Fairness of Markets ) The principle that states that we should strive to achieve "the greatest happiness for the greatest number" is A) equity. B) fairness. C) market equilibrium. D) utilitarianism. E) the big tradeoff. Topic: Utilitarianism 19) Which of the following is an example in which "the big tradeoff" can occur? A) the government redistributes income from the rich to the poor B) Ford increases the price of a pickup truck C) a basketball player signs a $5 million contract D) a college lowers tuition E) the price of personal computers falls year after year Topic: The big tradeoff 20) The "fair rules" approach to fairness is based on A) income transfers from the rich to the poor. B) property rights and voluntary exchange. C) utilitarianism. D) the big tradeoff. E) allocating resources using majority rule. Topic: Fair rules

42 304 Bade/Parkin œ Foundations of Economics, Third Edition 21) An unequal distribution of income is considered fair according to Robert Nozick if A) marginal cost equals marginal benefit. B) the cost of administering a welfare system is minimized. C) property rights are enforced and voluntary exchange occurs. D) the economy is producing its maximum total output. E) resources are allocated using the command method. Topic: Fair rules 22) Suppose a hurricane is poised to strike Miami and the price of plywood jumps from $15 a board to $28. If the government buys all of the plywood at $28 and offers it to consumers for $15, which of the following is true? A) There will be enough plywood for everyone at the $15 government price. B) There will be a surplus of plywood at the $15 government price. C) Some people who buy plywood at the $15 government price will resell the plywood to consumers who are willing to pay $28, earning a producer surplus of $13. D) Because the government is both buying and selling the plywood, there is no need to impose a tax to pay for the government intervention. E) The big tradeoff means that more plywood will be purchased with the government intervention than would be the case without the government intervention. Topic: Fairness in natural disasters Skill: Level 4: Applying models