Question 1

Which of the following best describes economic efficiency in terms of marginal benefit (MB) and marginal cost (MC)?

Accepted Answer

Economic efficiency is achieved when $$MB = MC$$ for the last unit produced.

Question 2

According to the principle 'If it’s worth doing, it’s worth doing imperfectly,' what is the main implication for government policy?

Accepted Answer

Perfection is generally not worth the cost, so government should aim for reasonable solutions.

Question 3

Which of the following is NOT one of the four main reasons the 'invisible hand' may fail to allocate resources efficiently?

Accepted Answer

Perfect information

Question 4

A market produces output $$Q_1 at $$price $$P_1. If $$negative externalities are present and not accounted for, what is the likely result?

Accepted Answer

Too many units are produced and price is lower than efficient.

Question 5

Which of the following best describes a public good?

Accepted Answer

A good that is non-rival and non-excludable.

Question 6

What is the 'free rider' problem most closely associated with?

Accepted Answer

Public goods

Question 7

Suppose a vaccine provides external benefits not captured by the market. What is the likely market outcome?

Accepted Answer

Too few vaccines will be produced.

Question 8

Which of the following is an example of the protective function of government?

Accepted Answer

Providing national defense

Question 9

If a group of sellers restricts supply to raise prices, which market failure is most likely occurring?

Accepted Answer

Lack of competition

Question 10

Which of the following is a market response to poor information?

Accepted Answer

Providing consumer information publications

Question 11

Which equation best represents the condition for economic efficiency?

Accepted Answer

$$MB = MC$$

Question 12

A monopoly restricts output to $$Q_2$$ and raises price to $$P_2. $$What is the likely effect on consumer surplus compared to a competitive market?

Accepted Answer

Consumer surplus decreases.

Question 13

Which of the following is an example of a positive externality?

Accepted Answer

Vaccination against infectious diseases

Question 14

Why might markets underproduce goods with significant external benefits?

Accepted Answer

Producers cannot capture all the benefits, so demand is understated.

Question 15

Which of the following is a potential government failure?

Accepted Answer

Government intervention leads to less efficient outcomes than the market.

Question 16

If the marginal cost of producing a good exceeds the marginal benefit, what should happen to the level of production?

Accepted Answer

Production should decrease.

Question 17

Which of the following best explains why public goods are underprovided in a free market?

Accepted Answer

The free rider problem discourages individuals from paying.

Question 18

Which of the following is an example of a market-based solution to poor information?

Accepted Answer

Brand names and warranties

Question 19

If a market produces at a quantity where $$MB \u003e MC$$, what does this indicate?

Accepted Answer

Too few units are being produced; more should be produced.

Question 20

Which of the following is a productive function of government?

Accepted Answer

Supplying infrastructure such as roads and bridges

Difficult Cases for the Market and the Role of Government

Study Guide - Practice Questions