1. On Saturdays, Lisa goes to the park to play her saxophone. Some of the people in the park love listening to Lisa play, while others find her music really annoying. In this case, Lisa's saxophone playing generates

Multiple Choice

• a negative externality.
• a positive externality.
• neither a positive nor a negative externality.
• both positive and negative externalities.

2. Kate and Ali can live together in a two-bedroom apartment for $850 per month, or they can each rent a one-bedroom apartment for $600 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's smoking habit. Kate would be willing to pay up to $300 a month to avoid smelling Ali's cigarettes. Ali would give up smoking cigarettes for no less than $150 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

Multiple Choice

• Kate pays $500 per month and Ali pays $350 per month.
• Kate pays $350 per month and Ali pays $500 per month.
• Kate pays $375 per month and Ali pays $475 per month.
• There is no way to split the rent to induce them to live together.

3. Consider two restaurants located next door to each other: Quick Burger and The Sunshine Caf. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Caf. The accompanying table shows the monthly payoffs to Quick Burger and The Sunshine Caf when Quick Burger does and does not operate a drive-through window.

	Quick Burger Operates a Drive-Through Window	Quick Burger Operates a Drive-Through Window
Quick Burger	$ 24,000	$ 16,000
The Sunshine Caf	$ 10,000

If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Caf CANNOT negotiate with each other, then will Quick Burger operate a drive-through window?

Multiple Choice

• No, because it is not socially efficient to operate a drive-through.
• Yes, because Quick Burger's payoff is higher when it operates a drive-through.
• No, because it would lower the payoff for The Sunshine Caf.
• It cannot be determined.

4. The free-rider problem occurs when

Multiple Choice

• buyers pay less than their reservation price.
• sellers receive more than their reservation price.
• people who do not pay for a good or service cannot be excluded from enjoying it.
• people who pay for a good or service cannot be excluded from enjoying it.