Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on a third party not involved in the transaction.

Question 2

Suppose the marginal private cost (MPC) of producing a good is $MPC = 10 + 0.5Q$ and the marginal external cost (MEC) is $MEC = 4$. What is the marginal social cost (MSC)?

Accepted Answer

$MSC = 14 + 0.5Q$

Question 3

Which of the following is NOT a property of a public good?

Accepted Answer

Rivalrous consumption

Question 4

Angela and Barbara are considering purchasing a public good. The marginal benefits for Angela are $MB_A = 10, 8, 6, 4, 2$ and for Barbara $MB_B = 8, 6, 4, 2, 0$. If the marginal cost is $MC = 4$, how many units should be purchased to maximize total surplus?

Accepted Answer

4

Question 5

Which of the following is an example of a common good?

Accepted Answer

A congested toll highway

Question 6

The Coase Theorem suggests that:

Accepted Answer

Private bargaining can lead to efficient outcomes if property rights are well-defined and transaction costs are low.

Question 7

Suppose a market has a positive externality. Marginal private benefits are $MPB = 80 - 0.75Q$, social marginal benefits are $SMB = 80 - 0.25Q$, and marginal costs are $MC = 20 + 0.25Q$. What is the Pigovian per-unit subsidy required to correct this externality?

Accepted Answer

$0.50$

Question 8

Which of the following best describes the Free-Rider Problem?

Accepted Answer

People benefit from a good without paying for it, leading to under-provision.

Question 9

A market has a negative externality. Marginal benefits are $MB = 100 - 0.25Q$, marginal private costs are $MPC = 0.5Q$, and marginal social costs are $MSC = 40 + 0.75Q$. What is the Pigovian per-unit tax required to correct this externality?

Accepted Answer

$0.25Q + 40$

Question 10

Which of the following is an example of adverse selection?

Accepted Answer

Purchasing more dental insurance when you know your teeth are especially bad.

Question 11

Suppose 20 commuters must choose between taking the GO Train and driving on the QEW. The average time for a commuter to reach downtown when driving on the QEW is $t = 0.5D$, where $D$ is the number of drivers. If 8 commuters drive, what is the average time?

Accepted Answer

$t = 4$

Question 12

Which of the following is NOT a solution to the tragedy of the commons?

Accepted Answer

Subsidizing use of the resource

Question 13

Moral hazard is most likely to occur when:

Accepted Answer

One party changes behavior after a transaction because they are insured.

Question 14

Which of the following is a property of a common good?

Accepted Answer

Rival and non-excludable

Question 15

Suppose the price charged for access to an unrecognized, excluded non-rivalrous good should be:

Accepted Answer

Zero; it is efficient to receive a public marginal benefit from consuming the good.

Question 16

Which of the following is an example of a public good?

Accepted Answer

A light from a lighthouse

Question 17

Which of the following best describes the principal-agent problem?

Accepted Answer

The principal cannot observe all actions taken by the agent, leading to potential conflicts of interest.

Question 18

If a vaccine has a positive externality, in the absence of government intervention, the quantity of vaccines purchased will be ______ the socially optimal quantity.

Accepted Answer

Positive; less than

Question 19

Which of the following is an example of moral hazard?

Accepted Answer

A law firm purchases additional insurance against theft, and as a result, the partners are not very careful about locking their office doors when they leave.

Microeconomics Study Guide: Market Failure, Externalities, Public Goods, Common Goods, and Information

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