Test 2

A  Social Security.

B  unemployment insurance.

C  Medicare.

D  national defense.

A  unfunded liabilities.

B  state budget laws.

C  inappropriate monetary policy.

D  voters wanting government programs but not wanting to pay taxes.

A  misdirection of stabilization policy.; and, unfunded liabilities.

B  chronic budget deficits, misdirection of stabilization policy, and unfunded liabilities.

C  chronic budget deficits.

A  the principal-agent problem.

B  rent-seeking behavior.

C  moral hazard.

D  logrolling.

A  bureaucratic inefficiency.

B  extensive positive externalities from public and quasi-public goods.

C  special-interest effect.

D  pressure by special-interest groups.

A  tends to be lacking because of civil service protections and the complexity of government.

B  is easy to monitor because of the small size and scope of government.

C  is not a problem because government bureaucrats are not affected by the self-interest that affects private sector individuals.

D  tends to be greater than in private firms, making government more efficient than private firms.

A  lead to economic inefficiencies because of difficulty aggregating and conveying information.

B  improve accountability of government officials, thus leading to more efficient policies.

C  enhance government’s ability make effective decisions quickly.

D  better allow the invisible hand to direct government resources to their best uses.

A  Coercing all firms to innovate and invest.

B  Promising to cover every risk of loss for private firms.

C  Taxing polluters and subsidizing firms that are creating significant positive externalities.

D  Weakening enforcement of laws and contracts.

A  Government has the legal right to force people to do things; private firms do not.

B  Government focuses primarily on equity; private firms focus only on efficiency.

C  Private firms face the constraint of scarcity; government does not.

D  Private economic activities create externalities; government activities do not.

A  private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.

B  their production seriously distorts the distribution of income.

C  there is no need or demand for such goods.

D  public enterprises can produce such goods at lower cost than can private enterprises.

A  A weather warning system.

B  A sofa.

C  A television set.

D  A bottle of soda.

A  nonrivalry and large negative externalities.

B  nonexcludability and production at rising marginal cost.

C  production at constant marginal cost and rising demand.

D  nonrivalry and nonexcludability.

A  Demand-side market failure, supply-side market failure and positive externality.

B  Supply-side market failure.

C  Positive externality.

D  Demand-side market failure.

A  costs more to produce than it provides in benefits.

B  maximizes the net benefit to society.

C  generates more of a benefit than it costs to produce.

D  produces a benefit exactly equal to the cost of producing the last unit.

A  negative externality.

B  supply-side market failure.

C  government failure.

D  demand-side market failure.

A  Negative externalities, positive externalities, and public goods.

B  Positive externalities.

C  Negative externalities.

D  Public goods.

A  prices rise.

B  some consumers who want a good do not obtain it because the price is higher than they are willing to pay.

C  private markets do not allocate resources in the most economically desirable way.

D  government intervenes in the functioning of private markets.

A  The sum of producer and consumer surplus has been maximized

B  Producer surplus has been maximized and consumer surplus has been minimized

C  Consumer surplus has been mazimized and producer surplus has been minimized.

D  The sum of producer and consumer surplus is zero.

A  Producer surplus

B  Deadweight gain

C  Consumer surplus

D  Deadweight loss

A  It will cause too many workers to be demanded.

B  If it is too high, it will cause fewer workers to be demanded.

C  It will decrease production costs and ultimately make the price of the product they produce too low.

D  All of the above are valid arguments against the minimum wage.

A  TRUE

B  FALSE

A  Household’s income and wealth.

B  Consumers’ expectations about their income, wealth and/or the price of the item

C  The price of the item

D  Changes in the price of a substitute or complement

A  Rent control is an example of a price floor.

B  A price ceiling on some item, set below its equilibrium price, creates rationing problems.

C  A price ceiling on gasoline, set below its current equilibrium price, would assure that everyone would be able to buy gasoline at an affordable price.

D  A price floor for a resource, such as the minimum wage, set above its equilibrium price, would increase the demand for that resource.

A  A price floor set below the equilibrium price in a particular market will cause a shortage.

B  A price ceiling set above the equilibrium price, in a particular market, will cause a surplus. 

C  A price floor set above the equilibrium price, in a particular market, will have no effect on that market.

D  A price ceiling set below the equilibrium price in a particular market will cause a shortage.

A  Substitution effect — that is, a price change can affect the opportunity cost of purchasing some item and your willingness  to switch to (or from) another item.

B  Diminishing marginal utility — as you consumer more, as the result of a price decrease, the additional satisfaction received from the additional units consumed will start to go down.

C  When the price of an item increases, you buy more because it is more valuable.

D  Income effect — that is, a price change can affect the amount of some item you can afford to purchase.

A  When the price of an item goes down, ceteris paribus, the quantity supplied will go down, but the supply will not change.

B  When the supply curve for an item shifts to the right, ceteris paribus, it will cause the price of that item to go up. 

C  There is a direct (positive) relationship between price and quantity supplied.

D  A change in the supply of an item will cause a change in its price, but a change in the price of an item will not cause a change in its supply.