Test Bank For Fundamentals of Economics 6th Edition William Boyes

Test Bank for Fundamentals of Economics, 6th Edition: William Boyes
Test Bank for Fundamentals of Economics, 6th

Edition: William Boyes
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Chapter 7—Business, Society, and the Government
MULTIPLE CHOICE
1. In a market system, the primary goal of a business is

a. to earn the largest economic profit possible.
b. benefit society.
c. encourage employment.
d. charge the highest possible price.
e. satisfy the needs of taxpayers and politicians in their market area.
ANS: A PTS: 1 DIF: Medium
REF: Ch 7, Section 1: Alternatives to the Market OBJ: 7.1
TOP: Market system TYP: Factual
2. In general, the market system is the most efficient allocation mechanism because
a. government oversight ensures market efficiency.
b. no monopolies are allowed to be created.
c. everyone has an equal part in determining the market outcome.
d. in pursuing their self-interest, people create efficiency.
e. of all of these.
ANS: D PTS: 1 DIF: Medium REF: Ch 7, Section Preview
OBJ: 7.1 TOP: Market system TYP: Factual
3. Economists like to illustrate the benefits of competition by comparing the results of a(n) ____ with the
results of a(n) ____.
a. supply; demand
b. commodity market; monopoly
c. oligopolist; perfect competitor
d. monopolistic competitor; perfect competitor
e. profit-making firm; firm that incurs negative profit
ANS: B PTS: 1 DIF: Easy
REF: Ch 7, Section 1: The Benefits of Competition Reviewed OBJ: 7.1
TOP: Benefits of competition TYP: Factual
4. When ____ can occur, no firm can get away with anything.
a. free exit
b. free entry
c. advertising
d. positive economic profits
e. product differentiation
5. In a competitive market situation, when a firm is earning significant positive economic profit,
a. government will intervene and establish greater regulation.
b. other firms will enter the market.
c. government will likely increase the tax rate on this firm in the long run.
d. competitors are more likely to cooperate with the leading firms.
e. common property ownership will likely be created with the economic profits.
ANS: B PTS: 1 DIF: Medium REF: Ch 7, Section Preview
OBJ: 7.1 TOP: Market system TYP: Interpretive
6. If all consumers pay the same price for a good, that price represents the
a. average value.
b. average surplus.
c. value they place on the last unit purchased.
d. average value they place on units purchased.
e. highest price per unit they would be willing to pay.
ANS: C PTS: 1 DIF: Medium
REF: Ch 7, Section 3: The Benefits of Competition OBJ: 7.3
TOP: Price TYP: Interpretive
7. Consumer surplus is
a. equivalent to value in use.
b. equivalent to value in exchange.
c. total expenditure divided by the price per unit.
d. the difference between what consumers would be willing to pay and what they have to
pay.
e. the difference between total expenditure and what consumers have to pay per unit.
ANS: D PTS: 1 DIF: Easy
TOP: Consumer surplus TYP: Factual
8. Suppose Kim is willing to pay $5 for her first ice cream sundae, $4 for a second ice cream sundae, and
$2 for a third ice cream sundae. If Kim is able to buy all three ice cream sundaes for $2 each, she has
realized a consumer surplus of
a. $6.
b. $5.
c. $4.
d. $2.
e. $0.
ANS: B PTS: 1 DIF: Medium
TOP: Consumer surplus TYP: Applied
9. Suppose Bill receives a consumer surplus of $3 on his purchase of a pizza, for which he paid $9. The
price Bill was willing and able to pay is
a. $15
b. $12
c. $9
d. $6
e. $3
10. If a consumer can gain extra satisfaction, to the extent of receiving more satisfaction than he or she is
paying for, the consumer is obtaining
a. a good deal.
b. negative utility.
c. consumer surplus.
d. the demand factor.
e. consumer sovereignty.
ANS: C PTS: 1 DIF: Easy
11. If you pay a total of $10 to purchase 2 units of a good and would have been willing to pay $14, then
a. you receive a producer surplus of $2.
b. your receive a producer surplus of $4.
c. you do not have consumer sovereignty.
d. you receive a consumer surplus of $4.
e. you receive a consumer surplus of $2.
12. When shopping in some countries, bargaining is standard. The sellers ask for a high price to start, and
then decrease the price until the sale is made. This is due to
a. prices changing so quickly that it doesn't make sense to make price tags.
b. consumers trying to gain as much consumer surplus as they can.
c. producers trying to gain as much consumer surplus as they can.
d. the market unable to reach equilibrium.
e. no government control.
Table 7.1
Table 7.1
Quantities Demanded by
Price Stephanie Roger
$4.00 0 1
$3.00 1 2
$2.00 2 3
$1.00 3 5
$0.50 4 7
13. Assume that Stephanie and Roger are the only consumers, and are willing and able to purchase one
unit each. According to Table 7.1, at a price of $3, the total consumer surplus is
a. $4.
b. $11.
c. $3.
d. $2.
e. $1.
ANS: E PTS: 1 DIF: Medium
Figure 7.1
14. Refer to Figure 7.1. At a price of P1, the consumer surplus is represented by areas:
a. 1
b. 1 + 2
c. 1 + 2 + 3 + 4
d. 1 + 2 + 3 + 5
e. 1 + 2 + 3 + 4 + 5 + 6
TOP: Consumer surplus TYP: Interpretive
15. Disneyland, Sea World, and other amusement parks commonly charge for admission but not for rides
or exhibits inside the park. This is an example of
a. a partially competitive firm practicing price discrimination.
b. an attempt by the producers to collect the entire consumer surplus.
c. the law of diminishing marginal utility.
d. a product for which there is no consumer surplus.
e. products for which there are no substitutes.
Figure 7.2
16. In Figure 7.2, consumer surplus in the case where there is just one firm is the area
a. AP2C.
b. BCF.
c. 0FQ1.
d. ACFP3.
e. P1P2CE.
ANS: A PTS: 1 DIF: Hard
TOP: Barriers TYP: Applied
17. Refer to Figure 7.2. If industry is just one firm, then the area ____ represents the consumer surplus that
is transferred to the one firm when it raises its price.
a. P1P2CB
b. P1P2CE
c. CBF
d. ACP2
e. ACEP1
TOP: Barriers TYP: Applied
Figure 7.3
18. Refer to Figure 7.3. The market price is Pfe. The consumer surplus is the region
a. ACPm
b. ABPfe
c. CEB
d. PmPfeEC
e. QmCPm0
19. Refer to Figure 7.3. When the monopoly firm raises the price from Pfe to Pm, the consumer surplus that
is transferred to the monopolist is
a. ACPm
b. ABPfe
c. CEB
d. PmPfeEC
e. QmCPm0
20. Refer to Figure 7.3. When the monopoly firm raises the price from Pfe to Pm, the deadweight loss is:
a. ACPm
b. ABPfe
c. CEB
d. PmPfeEC
e. QmCPm0
21. It is ____ that generate(s) the benefits of the market system

a. government
b. monopoly power
c. entry and competition
d. consumer surplus
e. advertising
22. It is ____ that transfer(s) consumer surplus to producers and create(s) deadweight losses.
a. perfect competition
b. restrictions to entry
c. the commodity market
d. government
e. the allocation mechanism
TOP: Restrictions to entry TYP: Applied
23. Which of the following is not a common market allocation mechanism in the United States?
a. Price
b. First-come, first-served
c. Socialism
d. Random
e. Government
24. Research indicates that, with regard to health care, American consumers prefer a ____ market
allocation mechanism.
a. price
b. first-come first-served
c. socialism
d. random
e. government
ANS: E PTS: 1 DIF: Easy
25. If the market system is so efficient, why is it not universally used?

a. The rich get richer, and the poor get poorer.
b. Goods and services cannot freely move from one part of the world to another.
c. People are evading taxes, so not all transactions go through the market.
d. The market does not work very well in all situations.
e. Some governments want to control every aspect on their country's economy.
ANS: D PTS: 1 DIF: Medium
REF: Ch 7, Section 2: Government Involvement in the Market OBJ: 7.2
TOP: Disagreement with market outcome TYP: Factual
26. One reason government intervenes in the market process is to enhance competition, often referred to as
a. "sticking to your guns."
b. "let it be."
c. "all is fair in love and war."
d. "don't shoot until you see the whites of their eyes."
e. "creating a level playing field."
TOP: Market system TYP: Interpretive
27. Government does not:

a. build highways
b. decide which airline can fly to which city
c. provide medical insurance
d. tell power companies what prices they can charge for electricity
e. Governments provide all of these.
TOP: Government involvement TYP: Factual
28. All of the following are examples of a first-come, first-served system of allocation except:
a. medical care
b. classes at school
c. access to highways
d. tickets to concerts
e. All of these are examples allocated by a first-come, first-served system.
TOP: First-come, first-served TYP: Applied
29. Some people do not like market allocation because

a. some people lose their jobs as their skills are no longer needed.
b. people who are not willing and able to pay for something do not get that something.
c. people who need certain goods and services (e.g., medical care) are not able to obtain
them.
d. some people experience a loss of income as their resources become replaced.
e. All of these are reasons why people oppose market allocation.
30. According to the survey reported in the text, most people believe that health-related goods and services
should be allocated by the ____ allocation mechanism.
a. price
b. first-come, first-served
c. government
d. random
e. private
31. According to the survey reported in the text, the least number of people believe that health-related
goods and services should be allocated by the ____ allocation mechanism.
a. price
c. government
d. random
e. private
ANS: A PTS: 1 DIF: Easy
32. According to the survey reported in the text, most people believe that non-health-related goods and
services should be allocated by the ____ allocation mechanism.
a. price
c. government
d. random
e. private
33. Antitrust policy is the term used to describe government policies and programs designed to
a. promote the creation of trusts, or combinations of independent firms.
b. control the growth of monopoly and enhance competition.
c. deal with the threat of competitive practices to the public interest.
d. create an environment in which firms will trust the government.
e. create an environment in which firms will distrust the government.
TOP: Antitrust policy TYP: Factual
34. Antitrust laws are designed to

a. enhance the trustworthiness of government.
b. create trust between consumers and businesses.
c. prevent monopolization of a market.
d. make natural monopolies unnatural.
e. bail out large firms and keep them from failing, to ensure a stable economy.
TOP: Antitrust policy TYP: Factual
35. Which of the following is an antitrust question?

a. Is an agreement by FedEx Kinko's to use only Kodak paper anticompetitive?
b. Does Walmart use unfair practices to compete against small local firms?
c. Is Apple competing unfairly by making iPods incompatible with MP3 systems?
d. Would the merger of AT&T and T-Mobile USA significantly reduce competition?
e. All of these are antitrust questions.
TOP: Antitrust policy TYP: Applied
36. The goal of a business is to:

a. earn a profit
b. restrict competition
c. limit entry
d. charge consumers higher prices
e. all of these are goals of a business
TOP: Monopolization TYP: Factual
37. Government action has not resulted in

a. IBM controlling its higher price on the central processing unit
b. IBM controlling its higher price on peripherals⎯disk drives, programs, and other
components
c. AT&T to be broken into AT&T (the long-distance company) and seven local calling
companies.
d. Microsoft agreeing to license its technology so that other firms could produce equipment
that would seamlessly communicate with Windows.
e. All these are a result of government action.
38. A firm charges a lower price in another country than it does for the same product in its home country
may be a simple case of price discrimination. (For example, "international editions" of textbooks are
much lower than the American edition.) To prove dumping, it must be shown that
a. the consumers in the home country have a lower price elasticity of demand than
consumers in the foreign country.
b. the government in the home country did not subsidize production of the good.
c. the item can be produced in the foreign country.
d. the cost of production is higher than the price the firm charges for the good.
e. All of these could be used to prove dumping.
TOP: Dumping TYP: Factual
39. The international agency involved in business behavior, and studies cases in which an industry in one
country accuses competitors in another country of dumping is the
a. CIA
b. WTO
c. Department of Justice
d. EU
e. NATO
TOP: Dumping TYP: Factual
40. In the case of a natural monopoly where cost conditions lead to a sole supplier, regulation is used to
ensure that
a. competition can be enhanced.
b. the monopolist does not oversupply the market.
c. price and output are more beneficial for consumers than would be the case without
government interference.
d. the monopolist does not attempt to further increase market share.
e. the monopolist does not try to expand internationally.
TOP: Regulation TYP: Factual
41. Which of the following is not in the category of economic regulation?

a. Setting price levels for a natural monopoly
b. Setting output levels for a natural monopoly
c. Setting price and output levels for a particular industry
d. Setting price levels for an industry that is not a natural monopoly
e. Setting output and job standards that apply across several industries
TOP: Regulation TYP: Factual
42. Monopoly regulation occurs primarily because

a. there are no natural monopolies in the real world.
b. monopolies are especially guilty of unsafe industrial practices.
c. monopolies do not typically follow occupational and safety rules.
d. by comparison with competitive firms, monopolies tend to restrict output and raise prices.
e. most economists believe that most industries should conform to the purely competitive
model.
TOP: Regulation of monopolies TYP: Factual
43. The immediate cause of the 2006-2010 economic crisis was:

a. the failure of Enron
b. greedy financial advisors on Wall Street
c. the increase in imports from China
d. the bursting of the U.S. housing bubble
e. the decrease in the value of the U.S. dollar, compared with the Euro.
TOP: 2006-2010 economic crisis TYP: Factual
44. A subprime loan is a loan ____, while an ARM is a loan ____.

a. that has a low initial interest rate, but the interest rate adjusts according to market
conditions; made to individuals with a high risk of default.
b. that has low an interest rate made to low-risk borrowers; that has a low initial interest rate,
but the interest rate adjusts according to market conditions.
c. that has a low initial interest rate, but the interest rate adjusts according to market
conditions; made to low-risk borrowers.
d. made to individuals with a low risk of default, that has a low initial interest rate, but the
interest rate adjusts according to market conditions
e. made to individuals with high risk of default; that has a low initial interest rate, but the
interest rate adjusts according to market conditions.
45. Between 1997 and 2006, the price of the typical American house increased by ____, a rate
significantly higher than at any other time during the previous decades.
a. 48%
b. 82%
c. 103%
d. 124%
e. 167%
46. By September 2008, ____ of all U.S., mortgages outstanding were either delinquent or in foreclosure.
a. 3%
b. 6%
c. 10%
d. 14%
e. 19%
47. "Too big to fail" is a term used to describe a firm

a. whose assets are so large that it could never fail.
b. whose failure would cause a major ripple effect throughout the economy, causing other
firms to fail.
c. which is a natural monopoly.
d. that produces products which are necessities.
e. that produces bombs and other items for national security.
48. Situations where the market does not work efficiently or does not allocate resources to their highest
valued uses are called
a. unnatural monopolies.
b. moral hazards.
c. adverse selections.
d. market failures.
e. most-favored customers.
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Market failure
TYP: Interpretive
49. To reduce road congestion in Singapore, cars traveling into certain districts at specified times pay a
toll. This attempts to address a(n)
a. unnatural monopoly.
b. moral hazard.
c. adverse selection.
d. market failure.
e. government budget deficit.
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Market failure
TYP: Applied
50. An externality is a cost or benefit created by a transaction that

a. is outside the firm's ability to control.
b. is a result of regulatory market failure.
c. reduces antitrust concerns.
d. substitutes most-favored-customer prices for cost-plus markups.
e. is not paid for or enjoyed by those involved directly in the transaction.
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Externalities
TYP: Factual
51. Which of the following is the best example of a negative externality?

a. A real estate developer pollutes a stream, thus making the fish inedible.
b. A trucking company converts its fleet to hydrogen-driven engines.
c. The cost of agricultural products increases as farmers apply less fertilizer.
d. The tuition at public colleges is subsidized by taxpayers.
e. Consumers purchase fewer SUVs.
TYP: Applied
52. If the owners of SUVs are not forced to compensate the people affected by their pollution, the market
result will be
a. a lower equilibrium price.
b. a higher level of demand.
c. a price that is too low and too many SUVs being driven.
d. a price that is too high and too few SUVS being driven.
e. impossible to determine from the information provided.
TYP: Applied
53. Several politicians have proposed a "guzzler" tax that would be added to the cost of
few-miles-per-gallon vehicles. If enacted, this tax would most likely
a. reduce the equilibrium price.
b. increase the equilibrium output.
c. increase U.S. dependency on foreign oil supplies.
d. shift the supply curve (for automobiles) inward.
e. do all of these.
TYP: Applied
54. If taxpayers are forced to pay for the schools needed to meet the needs created by a new real estate
development in an area,
a. a positive externality has been created.
b. the developers have transferred the negative externality to taxpayers.
c. a public good situation arises.
d. private property rights have been violated.
e. common ownership resulted in adverse selection.
TYP: Applied
55. Several years ago, schoolchildren began mailing the Styrofoam containers from McDonald's meals
they had purchased back to McDonald's headquarters. The schoolchildren wanted McDonald's to stop
using Styrofoam and instead use biodegradable packaging, which the company did. From an economic
perspective, the schoolchildren were pressuring McDonald's to
a. increase the supply of nutritional meals.
b. create a positive externality.
c. compete fairly with other fast-food chains.
d. reduce their negative externality.
e. reduce global warming.
ANS: D PTS: 1 DIF: Hard
TYP: Applied
56. Lojack anti-theft devices installed on some cars located the stolen cars and helped shut down chop
shops, where thieves cut up stolen cars and resold the parts. This reduced car theft in general, creating
a(n)
a. moral hazard.
b. positive externality.
c. adverse selection.
d. discrimination against cars most likely to be stolen.
e. logrolling.
TYP: Applied
57. Nobel Prize-winning economist Ronald Coase perceives market failures as a problem associated with
a. property rights.
b. most-favored customers.
c. facilitating practices.
d. synthetic coalitions.
e. public goods.
TYP: Factual
58. When 95% of the students in your economics receive a flu shot, the remaining 5% have less chance of
getting sick with the flu. This is an example of a(n)
a. positive externality
b. negative externality
c. common good
d. adverse selection
e. moral hazard
TYP: Applied
59. A situation where everybody owns something but nobody takes care of it illustrates the market failure
problem associated with
a. private property rights.
b. collusion.
c. social regulation.
d. common ownership.
e. situational dysfunctionality.
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Common ownership
TYP: Interpretive
60. Which of the following is not one of the problems associated with common ownership of resources
and a job that needed to be done?
a. Everybody was sure Somebody would do it.
b. Nobody realized that Everybody wouldn't do it.
c. Everybody blamed Somebody.
d. Zimbody paid Bigbody to do Antibody's job.
e. Anybody could have done it, but Nobody did it.
TYP: Interpretive
61. For a market to work, someone has to

a. own the good or resource.
b. be in charge.
c. ask government to provide market-clearing prices.
d. replace cost-plus-markup pricing with most-favored-customer pricing.
e. reduce consumer-producer interdependence.
TYP: Factual
62. In some African countries, the elephant population increased significantly when the government
facilitated
a. substitution of African elephants for Indian elephants.
b. a shift from common ownership to private property rights.
c. social regulation of elephant breeding.
d. a shift from private ownership to public ownership.
e. the creation of a natural monopoly.
TYP: Applied
63. ____ are goods that are available free to all consumers once they are produced.
a. Most-favored outcomes
b. Socially acceptable goods
c. Public goods
d. Commodities
e. Logrolls
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Public goods
TYP: Factual
64. Consumers who benefit from a public good or service without paying for it are called
a. free loafers.
b. thieves.
c. amoral hazards.
d. free riders.
e. externals.
TYP: Factual
65. The civil defense sirens warning Hawaii residents of a tsunami resulting from an earthquake in Japan
are classified as
a. common goods
b. pubic goods
c. private goods
d. positive externalities
e. moral hazards
TYP: Applied
66. Police and fire protection are often provided by government because
a. if you don't pay, you don't get to use them.
b. if you don't pay, you cannot be excluded from using them.
c. a private company providing these services would make too much profit.
d. adverse selection would result.
e. if government did not provide these services, too many people would be involved in these
activities.
TYP: Applied
67. A situation where bad quality drives good quality out of a market is known as
a. private property rights.
b. adverse selection.
d. common ownership.
e. moral hazard.
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Adverse selection
TYP: Factual
68. When hurricanes approach, Dave never prepares his house, stating "I'm insured." Dave's behavior is an
example of
a. adverse selection.
b. common ownership.
d. private property rights.
e. moral hazard.
REF: Ch 7, Section 2: Market Failures OBJ: 7.3 TOP: Moral hazard
TYP: Applied
69. One of the problems associated with government's use of taxes and subsidies to address externalities is
a. that higher tax rates discourage adverse selection.
b. that subsidies create moral hazards.
c. determining the socially optimal level of output.
d. that logrolling interferes with a natural market solution.
e. that the government must facilitate free riders.
REF: Ch 7, Section 2: Market Failures OBJ: 7.4 TOP: Market problems
TYP: Factual
70. Pollution permits are an example of

a. government creation of public goods.
b. a market approach to internalizing negative externalities.
c. replacing a natural monopoly with a regulated monopoly.
d. social regulation of the environment.
e. offsetting collusion with a government-sponsored cartel.
ANS: B PTS: 1 DIF: Hard
REF: Ch 7, Section 2: Market Failures OBJ: 7.4 TOP: Market problems
TYP: Applied
71. Which of the following agencies is not concerned with social regulation?
a. Occupational Safety and Health Administration (OSHA)
b. Consumer Products Safety Commission (CPSC)
c. Food and Drug Administration (FDA)
d. Drug Enforcement Administration (DEA)
e. Environmental Protection Agency (EPA)
REF: Ch 7, Section 2: Market Failures OBJ: 7.4 TOP: Social regulation
TYP: Factual
72. Which of the following agencies is concerned with protecting workers against injuries and illnesses
associated with their jobs?
a. Equal Employment Opportunity Commission (EEOC)
b. Occupational Safety and Health Administration (OSHA)
c. Food and Drug Administration (FDA)
d. Environmental Protection Agency (EPA)
e. Consumer Products Safety Commission (CPSC)
TYP: Factual
73. Which of the following statements about social regulation is false?

a. There are enormous costs and benefits to social regulation.
b. The cost-benefit test for regulation would expand regulations designed to benefit a very
few at the cost of many.
c. The government should regulate industry whenever the benefits of regulation exceed the
costs.
d. Many economists contend that the cost-benefit test for regulation should include the
opportunity costs implied by interfering with the free market.
e. Some economists argue that any regulation costing more than $10 million per life saved
should not be implemented.
REF: Ch 7, Section 2: Market Failures OBJ: 7.4 TOP: Regulation
TYP: Interpretive
74. The total cost imposed on the U.S. economy from federal government regulations is estimated to be
more than ____ a year.
a. $50 billion
b. $200 billion
c. $600 billion
d. $1 trillion
e. $12 trillion
REF: Ch 7, Section 3: Market Failures OBJ: 7.3 TOP: Cost of regulation
TYP: Factual
75. All of the following are examples of social regulation except:

a. a new drug available in Canada but not in the United States.
b. lead-painted toys not allowed to be imported into the United States.
c. an elderly vice president replaced by a young college-graduate.
d. noxious fumes at a workplace.
e. the dentist obtaining a license to practice.
TYP: Applied
76. When you have to pay a deductible when you file a car accident claim, you are more likely to drive
carefully. This is an example of reducing the ____ problem.
a. moral hazard
b. adverse selection
c. common property
d. social regulation
e. externalities
TOP: Moral hazard TYP: Applied
77. A primary cause of inefficiency in government is that

a. markets interfere with governments.
b. the gains from government projects are often concentrated, while the costs are dispersed
among all taxpayers.
c. government employees tend to be lazier than private-sector employees.
d. antitrust is applied to government policies as well as market situations.
e. all of these are true.
REF: Ch 7, Section 2: Market Failures OBJ: 7.5 TOP: Logrolling
TYP: Factual
78. The practice of legislators supporting one another's projects in order to ensure support for their own is
called
a. democracy
b. partisanship
c. logrolling
d. wasteful
e. social regulation
TYP: Factual
79. The senator from Iowa supports funding for a freeway in Hawaii, because
a. the senator wants to go on a Hawaiian vacation.
b. the senator wants the Hawaii senator to support an Iowa project.
c. the freeway in Hawaii will help Iowa tourists in Hawaii.
d. the senator knows new construction jobs will benefit Iowa construction companies
e. all of these.
TYP: Applied
80. According to the text, the primary issue regarding the blow-up of the British Petroleum (BP) oil
derrick forty miles out to sea, at a depth of about one mile, in April 2010 is
a. BP because their emergency measures failed to work.
b. the U.S. government because it did not regulate the drilling tightly enough.
c. the special interest group(s) benefitting from forcing the drilling so far off shore and so
deep.
d. both BP and the U.S. government
e. Who knows? They are still debating this.
REF: Ch 7, Section 3: Market Failures OBJ: 7.3 TOP: Government inefficiencies
TYP: Applied
81. Government inefficiencies do not result from

a. the legislative process.
b. the incentives of politicians.
c. benefits being allocated to special interest groups.
d. the market system.
e. All of these lead to government inefficiencies.
TYP: Factual
82. External costs occur when
a. the costs of producing a product are private costs.
b. there are neither harmful nor beneficial spillovers associated with the production of a
product.
c. the costs of producing a product are greater than the benefits derived from it.
d. a product is produced at the least cost per unit.
e. there is a difference between the costs to society and the private costs of producing a
product.
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: External costs
TYP: Factual
83. An externality
a. enhances the efficiency of the market system.
b. is not an economic problem because it is external to the market.
c. is a private cost or benefit.
d. accrues to someone who had nothing to do with the production or consumption of a good
or service.
e. refers to some unexpected change in the equilibrium price or quantity of a product.
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Externalities
TYP: Interpretive
84. An externality exists when

a. the benefits from consuming the service affect only the purchasers of that service.
b. every person in a market system has a chance to influence how much of a product should
be produced.
c. the price of the private transaction does not reflect all the costs of the items involved in
that transaction.
d. the costs of producing a service affect only the sellers of that service.
e. only the buyers and sellers are affected by the production of a product or service.
ANS: C PTS: 1 DIF: Hard
TYP: Factual
85. Which of the following is considered an externality?

a. High-priced tickets to a Broadway show
b. The long wait before being seated at popular restaurants
c. The extra cost of gasoline, regular tune-ups, and so forth, that come with buying a car
d. The benefits gained by society as a result of a more literate populace
e. The opportunity costs of going to college full-time instead of working
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Market economy
TYP: Interpretive
86. Externalities are

a. either costs or benefits imposed on those other than the seller or the buyer.
b. always benefits realized by the buyer.
c. always unpleasant.
d. always costs imposed on the seller.
e. either costs or benefits imposed on the seller or the buyer.
TYP: Factual
87. Which of the following is most likely to produce a negative externality?

a. Cancer research
b. Hospitals
c. Highways
d. Dams
e. Cigarettes
TYP: Applied
88. Which of the following is an example of a negative externality?

a. A subsidy
b. A sales tax
c. An income tax
d. Smoke from a factory
e. A better-informed citizenry as the result of public education
TYP: Applied
89. What is the likely consequence of a negative externality if the free market is allowed to operate?
a. An efficient allocation of resources
b. Production of more than the socially efficient quantity of the good
c. Production of less than the socially efficient quantity of the good
d. Establishment of a market price that is greater than the socially efficient price
e. None of these
TYP: Applied
90. The social costs of a good are equal to the

a. external costs minus the private costs of the good.
b. private costs minus the external costs of the good.
c. sum of the private and external costs of the good.
d. private costs of the good when there are negative externalities.
e. external costs of the good when there are negative externalities.
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Social costs
TYP: Factual
91. Costs to society will equal costs to the individual when

a. there are harmful externalities in a market.
b. there is a misallocation of resources in a market.
c. some of the costs of producing a product are borne by third parties.
d. there are no externalities.
e. the firm faces an upward-sloping marginal-cost curve.
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Social and private costs
TYP: Factual
92. If the production of a product results in harmful externalities, then

a. private costs equal costs to society.
b. all costs are being borne by the producer of the product.
c. there is an overallocation of resources to the production of the product.
d. there is an underallocation of resources to the production of the product.
e. production of the product should be stopped.
TYP: Factual
93. The existence of externalities is

a. impossible in a market system.
b. an argument to keep government from becoming involved in the allocation of resources.
c. a situation where some costs or benefits of an activity affect people who had no influence
over the decision to carry out that activity.
d. a result of international trade.
e. always harmful.
TYP: Interpretive
94. A negative externality related to a product

a. results in underallocation of resources to that product.
b. results in overallocation of resources to that product.
c. can be corrected by government subsidies.
d. can be corrected by lowering the cost of production.
e. is an example of government failure.
TYP: Factual
95. Which of the following is a likely consequence of a negative externality, given that the market is
allowed to operate freely?
a. An efficient allocation of resources
b. Production of less than the socially efficient quantity of the good
c. Production of more than the socially efficient quantity of the good
d. Social costs that are equal to private costs
e. Marginal private cost exceeding marginal social cost at the market equilibrium quantity
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Market economy
TYP: Applied
96. Negative externalities that come from the production of a good

a. create an increase in the supply of the good.
b. create an increase in the demand for the good.
c. create a decrease in the demand for the good.
d. impose costs on third parties.
e. impose benefits on third parties.
TYP: Factual
97. When the production of a good creates a positive externality,

a. external costs will be present.
b. market output will be less than the socially optimal output level.
c. market output will be more than the socially optimal output level.
d. marginal social cost exceeds marginal private cost at the market equilibrium quantity.
e. private costs are equal to social costs.
TYP: Applied
98. Which of the following is an example of a negative externality?

a. Mel turns up the volume of his stereo to full blast, annoying his neighbors.
b. Jason pays $20 for an hour's worth of statistics tutoring but fails the test anyway.
c. Sheila buys a new sweater, then has to return it to the store after discovering a hole in the
sleeve.
d. Min wants to withdraw money from an ATM machine but finds a sign saying the machine
is temporarily out of order.
e. Lance lives by a bakery and every morning enjoys the smell of freshly baked bread.
ANS: A PTS: 1 DIF: Hard
TYP: Applied
99. An example of a negative externality is

a. a sales tax.
b. cigarette smoke to a nonsmoker.
c. education.
d. a measles immunization.
e. a subsidy.
TYP: Applied
100. External costs can arise when

a. demand is too low.
b. firms use resources without having to pay for them.
c. the market price of a product is greater than is necessary for an optimal allocation of
resources.
d. government no longer subsidizes an external benefit product.
e. market supply is too low.
ANS: B PTS: 1 DIF: Hard
TYP: Applied
101. After correcting for a market's external costs, the price of a good or service
a. rises and the quantity bought and sold will be lower.
b. falls and the quantity bought and sold will be lower.
c. rises and the quantity bought and sold will be higher.
d. falls and the quantity bought and sold will be higher.
e. and the quantity bought and sold stay the same.
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Correction for external costs
TYP: Factual
102. Social cost is

a. the sum of all the firms' private costs in a market.
b. always equal to private costs in a market.
c. the cost of production borne by the producer of a product.
d. likely to occur only in markets where all resources are efficiently allocated.
e. the total cost of producing and consuming a good.
REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Social vs. private costs
TYP: Factual
103. Lack of well-defined ____ may cause market problems.

a. public utilities
b. public transportation
c. private property rights
d. interest rates
e. census data
REF: Ch 7, Section 1: The Environment OBJ: 7.1 TOP: Private property rights
TYP: Factual
TRUE/FALSE
104. If the price of a good decreases due to an increase in supply, then consumer surplus will decrease.
ANS: F PTS: 1 DIF: Medium

105. Consumer surplus is the difference between total expenditures and what consumers have to pay per
unit.
ANS: F PTS: 1 DIF: Easy

106. If all consumers pay the same price for a good, then that price represents the value they place on the
last unit purchased.
ANS: T PTS: 1 DIF: Medium

TOP: Price TYP: Interpretive
107. In general, market systems are not the most efficient allocation mechanism.
ANS: F PTS: 1 DIF: Easy REF: Ch 7, Section Preview

108. When negative economic profits exist, firms will expand to become more profitable.

109. A market system sends signals to consumers regarding what to produce and what to consume.

110. Because the market system is such an efficient and beneficial mechanism, it is universally relied on for
allocating all of society's goods and resources.

111. One reason government intervenes in the market process is to enhance competition, often referred to as
"create a level playing field."
ANS: T PTS: 1 DIF: Easy

112. In a market system, the primary objective of a business is to compete.

113. The market system is not relied on to make all allocations because sometimes people don't like the
results of competition.

114. The market system is not relied on to make all allocations because the market does not work well in all
situations.

115. A result of competition is creative destruction.

TOP: Creative destruction TYP: Factual
116. When it comes to life and death issues, most people like the outcome of the market allocation
mechanism.

117. One reason that government intervenes in markets is the attitude of the general public about market
allocation.

118. Government intervenes in the market process to enhance competition.

119. The goal of a business is not to benefit society.

120. If a firm could monopolize a market, it could restrict supply.

121. Antitrust laws are designed to prevent market dominance by one firm gained unfairly.

122. The government's policies regarding anticompetitive actions take the form of antitrust policy.

TOP: Antitrust and regulation TYP: Factual
123. Government policy toward big business involves two areas: antitrust and regulation.

TOP: Government policy TYP: Factual
124. Government actions that deal with the threat of anticompetitive practices to the public interest are
called public policy.
TOP: Antitrust policy TYP: Interpretive
125. One problem for antitrust officials is determining whether actions by businesses unfairly restrict entry
into a market.

126. Selling products below cost to drive competitors out of a market is called predatory lending.

127. Selling products abroad at lower prices than the prices charged in domestic markets often results in
charges of dumping.

128. The World Trade Organization is often asked to address charges of dumping by international
companies.

129. Natural monopolies arise because of economies of scale.

TOP: Natural monopolies TYP: Interpretive
130. Electric utilities are an example of a natural monopoly.

TOP: Natural monopolies TYP: Factual
131. The immediate cause of the 2006-2010 economic crisis was the bursting of the U.S. housing bubble.

132. Between 1997 and 2006, the price of the typical American house doubled, a rate significantly higher
than at any other time during the previous decades.

133. A subprime loan is a loan with a low interest rate made to individuals with a low risk of default.

134. One of the problems with the government's recent bailing out of firms is that it encouraged firms to
undertake more risky behavior.

TOP: Moral hazard TYP: Applied
135. Suppose that a bee farmer (to make honey) is located next to an apple orchard. According to Ronald
Coase, since the bees pollinate the apple flowers, the apple farmer should pay the bee farmer to
internalize the externality.

REF: Ch 7, Section 3: Market Failures OBJ: 7.3 TOP: Internalizing externalities
TYP: Applied
136. Every activity has associated positive and/or negative externalities.

TYP: Factual
137. Every innovation and invention has both positive and negative externalities.

TYP: Factual
138. When a real estate developer's actions increase silt in a river, thus making it impossible for boaters to
navigate the river, the developer has created a positive externality.

TYP: Applied
139. The pollution from SUVs creates a negative externality because the cost of the pollution is paid by
other consumers.

TYP: Applied
140. If firms are forced to internalize a negative externality, market price would increase and equilibrium
quantity would decrease.

TYP: Factual
141. The fact that the average smoker dies seven years earlier than the average nonsmoker creates a positive
externality for nonsmokers who enjoy social security benefits funded by the smokers.

TYP: Factual
142. The invention of the Internet created the positive externality of new technology jobs and the negative
externality of reduced clerical jobs.

TYP: Applied
143. When you enjoy the smell and beauty of a neighbor's garden, a negative externality exists.

TYP: Applied
144. If polluting firms are forced to pay a tax for the right to pollute the air, the tax externalizes the
internality.

TYP: Interpretive
145. One way to correct a positive externality is for government to subsidize buyers to decrease the
quantities that they are willing and able to buy at each price.

TYP: Applied
146. One way to correct a negative externality is for government to subsidize firms to increase the
quantities that they are willing and able to manufacture at each price.

TYP: Applied
147. When nobody owns something, everybody takes care of it.

TYP: Interpretive
148. For a market to work, someone has to own the rights to that good or resource.

TYP: Interpretive
149. Public goods have the problems of nonrivalry and nonexcludability.

TYP: Factual
150. A situation where newcomers to a community do not have to pay for the schools, libraries, and parks
that already exist is an example of a free lunch.

TYP: Factual
151. Social regulation is concerned with the conditions under which goods and services are produced and
the impact of these goods on the public.

TYP: Factual
152. Inefficiencies with government allocation often arise not because legislators are incompetent or
ignorant, but because of problems associated with individual incentives.

TYP: Factual
153. Logrolling refers to inefficiency resulting from timber state politicians only voting in favor of projects
that protect their industry.

TYP: Factual
154. Legislators support one another's special programs, causing total government spending to increase.

TYP: Factual
155. An externality exists when some of the costs of producing a product affect people who are unable,
within a market system, to influence how much of a product should be produced.
ANS: T PTS: 1 DIF: Hard

TYP: Factual
156. If the production of a product results in harmful externalities, then there is an underallocation of
resources to the production of the product.

TYP: Factual
Test Bank for Fundamentals of Economics, 6th Edition: William Boyes
157. The private costs of a good that create a negative externality are equal to the social costs plus the
externality.

REF: Ch 7, Section 1: The Environment OBJ: 7.2 TOP: Social costs
TYP: Factual
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1. In a market system, the primary goal of a business is

21. It is ____ that generate(s) the benefits of the market system

25. If the market system is so efficient, why is it not universally used?

27. Government does not:

29. Some people do not like market allocation because

34. Antitrust laws are designed to

35. Which of the following is an antitrust question?

36. The goal of a business is to:

37. Government action has not resulted in

41. Which of the following is not in the category of economic regulation?

42. Monopoly regulation occurs primarily because

43. The immediate cause of the 2006-2010 economic crisis was:

44. A subprime loan is a loan ____, while an ARM is a loan ____.

47. "Too big to fail" is a term used to describe a firm

50. An externality is a cost or benefit created by a transaction that

51. Which of the following is the best example of a negative externality?

61. For a market to work, someone has to

70. Pollution permits are an example of

73. Which of the following statements about social regulation is false?

75. All of the following are examples of social regulation except:

77. A primary cause of inefficiency in government is that

81. Government inefficiencies do not result from

84. An externality exists when

85. Which of the following is considered an externality?

86. Externalities are

87. Which of the following is most likely to produce a negative externality?

88. Which of the following is an example of a negative externality?

90. The social costs of a good are equal to the

91. Costs to society will equal costs to the individual when

92. If the production of a product results in harmful externalities, then

93. The existence of externalities is

94. A negative externality related to a product

96. Negative externalities that come from the production of a good

97. When the production of a good creates a positive externality,

98. Which of the following is an example of a negative externality?

99. An example of a negative externality is

100. External costs can arise when

102. Social cost is

103. Lack of well-defined ____ may cause market problems.

ANS: F PTS: 1 DIF: Medium

ANS: F PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Medium

ANS: F PTS: 1 DIF: Easy REF: Ch 7, Section Preview

ANS: F PTS: 1 DIF: Easy REF: Ch 7, Section Preview

ANS: F PTS: 1 DIF: Easy REF: Ch 7, Section Preview

ANS: F PTS: 1 DIF: Easy REF: Ch 7, Section Preview

ANS: T PTS: 1 DIF: Easy

112. In a market system, the primary objective of a business is to compete.

ANS: F PTS: 1 DIF: Medium

ANS: T PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy

115. A result of competition is creative destruction.

ANS: T PTS: 1 DIF: Easy

ANS: F PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy

118. Government intervenes in the market process to enhance competition.

ANS: T PTS: 1 DIF: Easy

119. The goal of a business is not to benefit society.

ANS: T PTS: 1 DIF: Easy

44. A subprime loan is a loan , while an ARM is a loan .