QUESTION 19

The change in total utility arising from a one-unit increase in consumption of a good is referred to as

a. average utility

b. the principle of diminishing marginal utility

c. real income

d. marginal utility

e. price

QUESTION 20

Because of the free rider problem

a. private solutions to externality problems are often needed

b. side payments are needed in order to achieve Pareto improvements

c. governmental solutions to externality problems are often needed

d. side payments are needed in order to solve externality problems

e. private solutions to externality problems are common

QUESTION 21

A manufacturer is less likely to offer warranties for its products if:

a. Consumer misuse is a likely source of failure and difficult to detect.

b. Its products are of higher quality than its competitors.

c. Its products are of lower quality than its competitors.

d. Choices a and b.

e. Choices a and c.

QUESTION 22

An externality is defined as

a. the revenue generated by a firm in the external market

b. a byproduct of a good or activity that affects someone not immediately involved in the transaction

c. an additional cost of consumption that is borne by a third party

d. a cost or benefit arising from price changes

e. the value of a good or service to a consumer

QUESTION 23

A nation should only import those goods for which it has

a. lower opportunity costs than its trading partner

b. higher opportunity costs than its trading partner

c. zero transaction costs

d. lower costs of production than its trading partner

e. absolute advantage in production compared to its trading partner

QUESTION 2 4

When a nation begins to export a good,

a. the domestic price of that good falls

b. less of that good is produced domestically

c. the domestic producers are made better off

d. the domestic consumers are made better off

e. both domestic and foreign consumers will purchase more of it

QUESTION 25

When renting a car, the rental company will sell you a waiver that releases you from any monetary liability for damage to the car from collisions. Compared to other types of car insurance, these waivers seem quite expensive. A possible explanation is:

a. The moral hazard problem is more severe.

b. The adverse selection problem is more severe.

c. It is more expensive to repair rental cars.

d. Choices a and b.

e. Choices b and c.

QUESTION 26

The substitution effect measures how

a. the quantity demanded of one good is influenced by a change in income, with prices constant

b. the quantity demanded of one good is influenced by a change the price of another good

c. marginal utility per dollar spent is affected by income changes

d. an increase in the price of a good is effectively the same as a reduction in income

e. the quantity demanded of one good is influenced by a change in the price of that good, with income constant

QUESTION 27

Which of the following is the most appropriate response of public policy to a negative externality like pollution?

a. modernize, update, and restore homes in run down neighborhoods to decrease

littering.

b. find ways to account for the social costs of the negative externality in economic decisions.

c. encourage high standards of public education to increase innovation capacity of youth.

d. assist the private party creating the negative externality to receive more social benefits.

e. make sure lawsuits against polluters require overwhelming evidence in order to proceed.

QUESTION 2 8

What type of good are the police?

a. public

b. private

c. common resource

d. natural monopoly

e. club

QUESTION 2 9

A consumer's budget line shows

a. the utility that an individual would receive from consuming various combinations of two goo

b. the combinations of two goods that an individual is able to purchase, given prices and incom

c. how income is influenced by prices of goods

d. how changes in income affect utility

e. the relationship between prices and income

QUESTION 3 0

ABC Farms raises a substantial number of bees and sells the honey. ABC Farms is situated next to the XYZ Orchard. The bees from the farm pollinate apple trees in the orchard. In this example, ABC Farms

a. derives more private benefit and provides less social benefit.

b. provides more social benefit than it derives in private benefit.

c. provides a marginal social benefit and derives a complete private benefit.

d. provides a complete social benefit and derives a marginal private benefit

e. comparison of social and private benefits cannot be ascertained.

QUESTION 3 1

If the price of gasoline rises at the Exxon gas station at a busy intersection, the Mobil station

at the same intersection will experience

a. an outward shift of the demand curve it faces

b. an inward shift of the demand curve it faces

c. a rightward movement along the same demand curve it faces

d. a leftward movement along the same demand curve it faces

e. neither a shift in nor a movement along the demand curve it faces

QUESTION 3 2

As we move downward along a demand curve for apples,

a. Consumer well-being decreases.

b. The marginal utility of apples decreases.

c. The marginal utility of apples increases.

d. Both a and b are true.

e. Both a and c are true.

QUESTION 3 3

How do the income and substitution effects work when the price of an inferior good decreases?

a. the income effect and the substitution effect cause an increase in the quantity demanded of the good.

b. the income effect and the substitution effect cause a decrease in the quantity demanded of the good.

c. income effect causes an increase in the quantity demanded and the substitution effect causes a decrease in the quantity demanded.

d. income effect causes a decrease in the quantity demanded and the substitution effect causes an increase in the quantity demanded.

e. None of the above.

QUESTION 3 4

If marginal utility is negative, what must be true about total utility?

a. Total utility increases with additional consumption.

b. Total utility decreases with additional consumption.

c. Total utility remains constant regardless of the number of units consumed.

d. Total utility equals zero.

e. None of the above.

QUESTION 3 5

According to the Coase theorem,

a. government intervention is necessary in order to solve an externality

problem

b. an externality is a form of market failure

c. under certain conditions, the private market will solve externality problems efficiently

d. the private market will usually solve externality problems, except when side payments are necessary

e. negative externalities are less efficient than positive externalities

QUESTION 3 6

A utility-maximizing consumer will choose a collection of goods

a. represented by a point below her budget line

b. represented by a point above her budget line

c. for which the marginal utility from each good is the same

d. for which the marginal utility divided by the price is the same or each good

e. for which the total utility from each good is the same

QUESTION 3 7

When negative externalities are present, the private market output level will be:

a. Too low.

b. Too high.

c. Socially optimal.

d. At the intersection of demand and marginal social cost.

e. At the point that minimizes the marginal external cost.

QUEST ION 3 8

Assume that as the wage rate rises a workers substitution effect for leisure is larger than the

income effect. We can conclude that in this region, the workers

a. Labor supply curve will be backward bending.

b. Labor supply curve will have the usual upward slope.

c. Labor supply curve will be completely inelastic.

d. Supply curve will be horizontal.

e. None of the above.

QUESTION 3 9

If increasing your consumption of pizza from 3 to 4 slices increases your utility, which of the following must be true?

a. The marginal utility of the 4th slice of pizza is equal to the total utility of 4 slices of pizza.

b. The marginal utility of the 4th slice of pizza is greater than the marginal utility of the 3rd slice of pizza.

c. The marginal utility of the 4th slice of pizza is positive.

d. The marginal utility of the 3rd slice of pizza is negative.

e. None of the above.

QUESTION 4 0

When a freeze in Florida increased the price of oranges in a recent year, total revenue earned by orange producers increased. We can infer from these facts that the demand for oranges is:

A) inelastic

B) unit elastic

C) elastic

D) upward sloping

E) infinitely elastic