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Macroeconomics Chapter 5—Difficult Cases for the Market and the Role of
Government
MULTIPLE CHOICE
4. From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market
allocation will often lead to
a. an output of the product that exceeds the amount consistent with ideal economic
efficiency.
b. an output of the product that is less than the amount consistent with ideal economic
efficiency.
c. an output of the product that equals the amount consistent with ideal economic efficiency.
d. product prices that are below the cost of production.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: The Potential Shortcomings of the Market KEY: Bloom's: Comprehension
MSC: Suggested Quiz
5. Competitive markets generally give consumers and producers correct incentives when
a. externalities are present in the market.
b. property rights are well-defined and enforced.
c. the good being produced and consumed is a pure public good.
d. there is a substantial lack of information on the part of either buyers or sellers.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: The role of government TOP: Thinking about the Economic Role of Government
KEY: Bloom's: Comprehension MSC: Suggested Quiz
6. Which of the following correctly describes the external benefit resulting from an individual's
purchase of a winter flu shot?
a. The flu shot is cheaper than the cost of treatment when you get the flu.
b. The income of doctors increases when you get the flu shot.
c. The flu shot reduces the likelihood others will catch the flu.
d. The flu shot reduces the likelihood you will miss work as the result of sickness; therefore,
you will earn more income.
ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: The Potential Shortcomings of the Market KEY: Bloom's: Comprehension
MSC: Suggested Quiz
8. Markets may have difficulty providing the proper quantity of a public good because
a. individuals will tend to become free riders, and private firms will have difficulty
generating enough revenue to produce an efficient quantity of the good.
b. the good generally has a very large value to consumers relative to its cost of production.
c. the good is one that tends to benefit a large number of people.
d. the large profit involved in the production of a public good is generally too much for
private firms to effectively pay out to shareholders.
ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: The Potential Shortcomings of the Market KEY: Bloom's: Comprehension
MSC: Suggested Quiz
9. Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How
will the price and output of paper in a competitive market compare with their values under conditions
of ideal economic efficiency?
a. The price will be too high, and the output will be too large.
b. The price will be too low, and the output will be too large.
c. The price will be too low, and the output will be too small.
d. The price will be too high, and the output will be too small.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: The Potential Shortcomings of the Market KEY: Bloom's: Comprehension
MSC: Suggested Quiz
10. Which of the following is a source of information that helps consumers acquire information about the
quality of a good or service?
a. brand names
b. franchising
c. consumer ratings magazines
d. all of the above
ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: The Potential Shortcomings of the Market KEY: Bloom's: Comprehension
MSC: Suggested Quiz
11. The idea that an action should be undertaken if and only if the benefits exceed the costs is known as
the concept of
a. economic efficiency.
b. public welfare maximization.
c. marginal comparative advantage.
d. monetary construction of values.
ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: A Closer Look at Economic Efficiency KEY: Bloom's: Knowledge
12. When economists say that an activity meets the criterion for economic efficiency, they mean
a. a majority of citizens favor the activity.
b. the benefits that result from the activity exceed the costs.
c. the number of people who gain from the activity exceeds the number on whom costs are
imposed.
d. the costs that result from the activity exceed the benefits.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: A Closer Look at Economic Efficiency KEY: Bloom's: Comprehension
13. If an economic action generates more costs than benefits, the action
a. by definition increases the nation's economic welfare.
b. should not be undertaken from an efficiency standpoint.
c. should be subsidized by the government in order to make sure that it is undertaken.
d. is desirable from a public welfare standpoint even though many individuals will be
harmed.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: A Closer Look at Economic Efficiency KEY: Bloom's: Application
14. Because the benefits derived from an activity decline as it is expanded, it is generally
a. wise to undertake all actions that generate benefits.
b. efficient to stop well before perfection is achieved.
c. best to continue as long as it is possible to derive some additional benefits.
d. unwise to engage in activities for which the benefits decline as you do more of it.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: If It's Worth Doing, It's Worth Doing Imperfectly KEY: Bloom's: Comprehension
15. Which of the following best explains why making automobiles completely safe is not efficient?
a. After some level of safety is reached, making cars even safer will not be worth the
additional cost.
b. Because human life is priceless, automobile safety generally doesn't matter.
c. The benefit from additional automobile safety will generally rise as automobiles are made
safer, more than offsetting the opportunity cost involved.
d. Economic efficiency suggests that automobiles should be made as safe as humanly
possible.
ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: If It's Worth Doing, It's Worth Doing Imperfectly KEY: Bloom's: Comprehension
17. There is substantial agreement among scholars that at least two functions of government are legitimate.
These two functions are the
a. protection of the rights of individuals to their person and property and the provision of
goods that cannot easily be provided through markets.
b. redistribution of income from some individuals to others and the waging of war to expand
the nation's territory.
c. production of postal services and cable television.
d. taxation of goods that are generally considered immoral or bad and the regulation of large
corporations.
ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Markets, market failure, and externalities
TOP: Thinking about the Economic Role of Government KEY: Bloom's: Comprehension
18. The maintenance of a framework of security and order through the establishment and enforcement of
rules under which people can interact peacefully with one another and be secure in their person and
property is known as the
a. productive function of government.
b. protective function of government.
c. transfer function of government.
d. illegitimate function of government.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: The role of government TOP: Thinking about the Economic Role of Government
KEY: Bloom's: Comprehension
19. Government provision of goods and services that cannot easily be provided through markets because it
is difficult to establish a one-to-one link between payment and consumption of the good is referred to
as the
a. productive function of government.
b. protective function of government.
c. construction function of government.
d. income redistribution function of government.
ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: The role of government TOP: Thinking about the Economic Role of Government
KEY: Bloom's: Comprehension
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