Inefficiency The Pervasive Economic Problem.docx

Inefficiency The Pervasive Economic Problem True/False Questions 1. Economic efficiency exists when net benefit is as large as possible. ANSWER: T 2. The area under the demand curve represents the benefits producers receive when they sell some quantity of a product. ANSWER: F 3. The supply curve represents the marginal cost of producing various quantities of a good or service. ANSWER: T 4. If marginal social cost is greater than marginal social benefit, economic efficiency can be improved by increasing production. ANSWER: F 5. Output is being produced efficiently if marginal social benefit is equal to marginal social cost. ANSWER: T 6. A competitive industry produces the efficient level of output. ANSWER: T 7. Pollution is an example of external costs. ANSWER: T 8. Marginal social cost (MSC) is greater than marginal cost (MC) by the value of marginal external cost (MEC). That is MSC=MC+MEC. ANSWER: T 9. In determining the efficient amount of a good or service, it is only required that the benefits provided by a good or service be equal to or greater than the costs of providing it. ANSWER: F 10. A monopoly is a market in which only one seller exists. ANSWER: T 11. The monopolist will set the price at the level where its profits are maximized. ANSWER: T 12. No external benefits are provided by the public goods. ANSWER: F 13. A lighthouse is an example of a public good. ANSWER: T 14. Government rent controls promote efficiency and equity. ANSWER: F 15. Government subsidized medical care results in inefficiently high levels of demand for medical care. ANSWER: T 16. Minimum wage laws give rise to unemployment. ANSWER: T 17. Income taxes result in inefficiency because most people would work the same number of hours per year regardless of their hourly wage. ANSWER: F MultipleChoice Questions 1. The benefit consumers receive when they consume an additional unit of a good is measured by: a. the height of the supply curve. b. the height of the demand curve. c. the height of the marginal revenue curve. d. the intersection of the demand and supply curves. ANSWER: b 2. The cost to producers when they produce an additional unit of a good is measured by: a. the height of the supply curve. b. the height of the demand curve. c. the height of the marginal revenue curve. d. the intersection of the demand and supply curves. ANSWER: a 3. The total cost of production is measured as the: a. the area under the supply curve. b. the area under the demand curve. c. the net area under the demand and supply curves. d. the intersection of the demand and supply curves. ANSWER: a 4. The total benefits derived from consumption is measured as the: a. the area under the supply curve. b. the area under the demand curve. c. the net area under the demand and supply curves. d. the intersection of the demand and supply curves. ANSWER: b 5. To determine the efficient amount of a good or service. a. The benefits provided by a good or service must be equal to or greater than the costs of providing it. b. The difference between the benefits and costs must be as large as possible, or maximized. c. The marginal benefit of a good or service must be greater than the marginal cost. d. The benefits provided by a good or service must be equal to or greater than the costs of providing it, and the difference between the benefits and costs must be maximized. ANSWER: d 6. Suppose a market is currently producing at a point where marginal social benefit exceeds marginal cost. For efficiency, production should: a. be increased. b. be decreased. c. not be changed. The current level of production is generating positive net benefits for society. d. be temporarily increased in order for firms to create more jobs and then decreased to the original level before cost increases set in. ANSWER: a 7. Which of the following is NOT an example of market failure. a. Monopoly. b. Rent controls. c. External benefits. d. External costs. ANSWER: b 8. Which of the following is an example of market failure. a. Monopoly. b. Rent controls. c. Agricultural price support. d. Taxes. ANSWER: a 9. Which of the following is an example of government failure. a. Monopoly. b. Rent controls. c. External benefits. d. External costs. ANSWER: b 10. Which of the following is NOT an example of market failure. a. Public goods. b. Rent controls. c. Agricultural price support. d. Taxes. ANSWER: a Critical Thinking Multiple-Choice Questions Use the following information to answer questions 11 – 12. __________________________________ Quantity of Price per Bicycles Demanded Bicycle __________________________________ 1 $125 2 100 3 75 4 50 5 25 __________________________________ 11. The total benefit of 3 bicycles is: a. $375. b. $350. c. $300. d. $225. ANSWER: c 12. The marginal benefit of the fourth bicycle is: a. $375. b. $325. c. $50. d. $25. ANSWER: c 13. Suppose that at current production levels, marginal social benefit is $75 while marginal cost is $80. We know that: a. the efficient level of output is being produced. b. the level of output should be decreased in order to improve efficiency. c. the level of output should be increased in order to improve efficiency. d. output should be redistributed so those with lower income will be able to consume more. ANSWER: b 14. Currently 75 pairs of sandals are being exchanged in the market. The marginal social benefit of the last unit is $15 while the marginal cost of this unit is $30. We know that with regard to efficiency: a. efficiency is occurring. b. production should be decreased. c. production should be expanded. d. there should be no change in production levels. ANSWER: b 15. 400 limeades are being exchanged in a market. The marginal social benefit of the last unit is $0.25, while the marginal cost of this unit is $0.15. In this instance, with regard to efficiency: a. there should be no change in production levels. b. efficiency is occurring in this market. c. production should be expanded. d. production should be decreased. ANSWER: c Use the following diagram to answer questions 16 – 21. 16. If individuals are currently consuming Q2 units of compact discs. The total benefit of this consumption is given by area: a. 0BFJ. b. ABF. c. 0AFJ. d. 0BCI. ANSWER: a 17. If production of compact discs is currently represented by quantity Q2. The total cost of this production is given by area: a. 0BFJ. b. ABF. c. 0AFJ. d. 0BCI. ANSWER: c 18. If production of compact discs is currently represented by quantity Q1. The total cost of this production is given by area: a. 0AFJ. b. 0BFJ. c. 0AGI. d. 0BCI. ANSWER: c 19. The efficient level of compact discs is given by quantity: a. Q1. b. Q2. c. Q3. d. Q1 Q3. ANSWER: b 20. Total net benefits at the efficient level of production is given by area: a. GCF. b. OAFJ. c. FEH. d. ABF. ANSWER: d 21. If a monopolist produces at Q1, the quantity and price that maximizes its profits, the loss in total net benefits can be calculated as the value of the area; a. GCF. b. OAFJ. c. FEH. d. ABF. ANSWER: a Use the following diagram to answer questions 22 – 25. 22. In the above diagram the competitive level of output is: a. Q1 b. Q2 c. P3 d. C ANSWER: a 23. In the above diagram, counting the external benefits increases total benefits by area: a. Q1BCQ2 b. Q1ACQ2 c. ABC d. P1AQ1 ANSWER: a 24. In the above diagram, counting the external benefits increases total costs by area: a. Q1BCQ2 b. Q1ACQ2 c. ABC d. P1AQ1 ANSWER: b 25. In the above diagram, counting the external benefits increases net benefits by area: a. Q1BCQ2 b. Q1ACQ2 c. ABC d. P1AQ1 ANSWER: c Use the following diagram to answer questions 26 – 28. 26. In the above diagram the competitive level of output is:: a. Q1 b. Q2 c. P3 d. C ANSWER: a 27. In the above diagram the efficient level of output is:: a. Q1 b. Q2 c. P3 d. C ANSWER: b 28. In the above diagram, if the external costs are internalized (accounted for), total net benefits will decrease by area: a. Q1BCQ2 b. Q1ACQ2 c. ABC d. P1AQ1 ANSWER: c Use the following diagram to answer question 29. 29. The total net efficiency loss from government rent controls is given by area: a. CFG. b. ABF. c. FEH. d. CFE. ANSWER: a Use the following diagram to answer question 30. 30. The total net efficiency loss from government agricultural price supports is given by area: a. CFG. b. ABF. c. FEH. d. CFE. ANSWER: c Use the following diagram to answer questions 31 – 32. 31. The total net efficiency loss from government imposing a minimum wage is given by area: a. CFG. b. ABF. c. FEH. d. CFE. ANSWER: a 32. Employment loss from government imposing a minimum wage is given by: a. N1. b. N2. c. N3-N1. d. N2-N1. ANSWER: d Essay and Discussion Questions 1. Moneymakers Incorporated currently produces 100 units of output per day. At this level of production, the marginal benefit of production is $25 while the marginal cost is $20. Moneymakers is obviously producing at the efficient level because society is getting a net benefit. Is this statement true or false? Defend your answer. This statement is false. In order to be producing efficiently marginal social cost and marginal social benefit should be equal. In this case, total net benefits could be increased if Moneymakers expanded their level of production. Problems 1. Use the following diagram to find the loss in net benefits associated with pollution. The marginal social cost (MSC) for each unit is greater than the marginal cost (MC) or the supply curve, by the value of the marginal external cost (MEC) as shown in the figure. Thus, if we produce at the market level Q2, rather than socially efficient level Q1, the market over allocates resources since the producers don’t pay for pollution. The resulting inefficiency would be equal to the area FCL. Government tries to correct this market failure by internalizing the cost of pollution and reducing production to the efficient level Q1.