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AP Microeconomics – Chapter 05 Test Sarver

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1. The socially optimal amount of pollution abatement occurs where society's marginal: A. benefit of abatement exceeds its marginal cost of abatement by the greatest amount. B. benefit of abatement equals its marginal cost of abatement. C. benefit of abatement is zero. D. cost of abatement is at its maximum.

2. The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of: A. diminishing marginal utility. B. conservation of matter and energy. C. demand. D. diminishing returns.

3. Refer to the above diagram. From society's perspective, if MB1 and MC2 are relevant:

A. Q2 represents too little pollution abatement. B. Q1 represents too much pollution abatement. C. Q2 represents an optimal amount of pollution abatement. D. Q4 represents too little pollution abatement.

4. Refer to the above diagram. With MB1 and MC1, society's optimal amount of pollution abatement is: A. Q1. B. Q2. C. Q3. D. Q4.

5. The MC curves in the above diagram slope upward because of the law of: A. demand. B. conservation of matter and energy. C. diminishing marginal utility. D. diminishing returns.

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6. The MB curves in the above (above #3) diagram slope downward because of the law of: A. conservation of matter and energy. B. diminishing returns. C. diminishing marginal utility. D. increasing cost.

7. According to the Coase theorem: A. government should levy excise taxes on firms that generate spillover or external costs. B. taxes should be levied such that they change private behavior as little as possible. C. private individuals can often negotiate their own resolution of externality problems, without the need for government intervention. D. private firms should not provide public goods.

8. A cap-and-trade program: A. assigns a property right to the atmosphere. B. mandates that every firm individually cuts its emissions to below a certain level. C. assigns a property right to polluting the atmosphere. D. is easy to establish and enforce.

9. Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes: A. the Coase theorem. B. the optimal allocation of a public good. C. nonrivalry and nonexcludability. D. a market for externality rights.

10. Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that: A. the display creates negative externalities. B. government should tax the producers of holiday lighting. C. resources are currently overallocated to the provision of holiday lighting in Anytown. D. resources are currently underallocated to the provision of holiday lighting in Anytown.

11. If a good that generates positive externalities were produced and priced to take into account these spillover benefits, then its: A. price and output would increase. B. output would increase but price would remain constant. C. price would increase and output would decrease. D. price would increase but output would remain constant.



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12. Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the market equilibrium output is Q1, we can conclude that the existence of external: A. costs has resulted in an overallocation of resources to X. B. benefits has resulted in an overallocation of resources to X. C. costs has resulted in an underallocation of resources to X. D. benefits has resulted in an underallocation of resources to X.

13. Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the equilibrium output is Q2, we can conclude that the existence of external: A. costs has resulted in an overallocation of resources to X. B. benefits has resulted in an overallocation of resources to X. C. costs has resulted in an underallocation of resources to X. D. benefits has resulted in an underallocation of resources to X.



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14. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D1 and S1. If there are substantial external benefits associated with the production of Z, then: A. government can improve the allocation of resources by subsidizing consumers of Z. B. government can improve the allocation of resources by imposing a per unit tax on Z. C. a government subsidy for producers of Z would ensure that consumers are paying directly for all of the benefits they receive from Z. D. consumers are paying too much for the good.

15. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external benefits associated with the production of Z, then: A. efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits. B. an output smaller than G would improve resource allocation. C. government should levy a per unit excise tax on Z to shift the demand curve toward D1. D. an output greater than G would result in a more efficient allocation of resources.

16. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the production of Z, then: A. a price lower than B and an output greater than G would improve resource allocation. B. government should levy a per unit excise tax on Z to shift the demand curve to the right. C. government should levy a per unit excise tax on Z to shift the supply curve toward S1. D. government should subsidize the production of Z to lower equilibrium price and increase equilibrium output.



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17. Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We can conclude that the government is correcting for: A. negative externalities in diagram (a) and positive externalities in diagram (b). B. positive externalities in diagram (a) and negative externalities in diagram (b). C. negative externalities in both diagrams. D. positive externalities in both diagrams.

18. Refer to the above diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. Without government interference, this market will reach: A. an optimal allocation of society's resources. B. an underallocation of resources to this product. C. an overallocation of resources to this product. D. a higher price than is consistent with an optimal allocation of resources.



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19. A negative externality or spillover cost occurs when: A. firms fail to achieve allocative efficiency. B. firms fail to achieve productive efficiency. C. the price of the good exceeds the marginal cost of producing it. D. the total cost of producing a good exceeds the costs borne by the producer.

20. A positive externality or spillover benefit occurs when: A. product differentiation increases the variety of products available to consumers. B. the benefits associated with a product exceed those accruing to people who consume it. C. a firm does not bear all of the costs of producing a good or service. D. firms earn positive economic profits.

21. Economists consider governments to be "wasteful:" A. whenever they over- or underallocate resources to a project. B. only when they overallocate resources to a project. C. only when they underallocate resources to a project. D. whenever they attempt to correct a market failure.

22. According to the marginal-cost-marginal-benefit rule: A. only government projects (as opposed to private projects) should be assessed by comparing marginal costs and marginal benefits. B. the optimal project size is the one for which MB = MC. C. the optimal project size is the one for which MB exceeds MC by the greatest amount. D. project managers should attempt to minimize both MB and MC.

23. On the basis of the above data we can say that: A. Program D is the most efficient on economic grounds. B. Program C is the most efficient on economic grounds. C. Program B is the most efficient on economic grounds. D. Program A is the most efficient on economic grounds.

24. The above data indicate that: A. there is no highway program that is economically justifiable on the basis of cost-benefit analysis. B. the marginal cost and marginal benefit of Program A are $2 and $9 respectively. C. the marginal cost and marginal benefit of Program C are $12 and $21 respectively. D. the marginal cost and marginal benefit of Program A cannot be determined.



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25. Refer to the above data. On the basis of cost-benefit analysis government should undertake: A. Plan D. B. Plan C. C. Plan B. D. Plan A.

26. Cost-benefit analysis attempts to: A. compare the real worth, rather than the market values, of various goods and services. B. compare the relative desirability of alternative distributions of income. C. determine whether it is better to cut government expenditures or reduce taxes. D. compare the benefits and costs associated with any economic project or activity.



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27. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the 1st unit of this public good is: A. $18. B. $14. C. $10. D. $6.

28. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. If the marginal cost of the optimal quantity of this public good is $10, the optimal quantity must be: A. 1 unit. B. 2 units. C. 3 units. D. 4 units.



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29. Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the 5th unit of a public good; Kara, $15, and Susie, $25. Government should produce the 5th unit of the public good if the marginal cost is less than or equal to: A. $25. B. $15. C. $60. D. $300.

30. Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the 3rd unit of a public good. Also, assume that the marginal cost of the 3rd unit is $17. We can conclude that: A. the 3rd unit should not be produced. B. the 3rd unit should be produced. C. zero units should be produced. D. 4 units should be produced.

Answer the next question(s) on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society.

31. Refer to the above data. If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be: A. 1 unit. B. 2 units. C. 3 units. D. 4 units.

32. Refer to the above data. Suppose government has already produced 4 units of this public good. The amount individual B is willing voluntarily to pay for the 4th unit is: A. $14. B. $5. C. $2. D. $0.



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33. Because of the free-rider problem: A. the market demand for a public good is overstated. B. the market demand for a public good is nonexistent or understated. C. government has increasingly yielded to the private sector in producing public goods. D. public goods often create serious negative externalities.

34. Which of the following statements is not true? A. Some public goods are paid for by private philanthropy. B. Private provision of public goods is usually unprofitable. C. The free-rider problem results from the characteristics of nonrivalry and nonexcludability. D. Public goods are only provided by government.

35. Nonexcludability describes a condition where: A. one person's consumption of a good does not prevent consumption of the good by others. B. there is no effective way to keep people from using a good once it comes into being. C. sellers can withhold the benefits of a good from those unwilling to pay for it. D. there is no potential for free-riding behavior.

36. The market system does not produce public goods because: A. there is no need or demand for such goods. B. private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them. C. public enterprises can produce such goods at lower cost than can private enterprises. D. their production seriously distorts the distribution of income.

37. Which of the following is an example of a public good? A. a weather warning system B. a television set C. a sofa D. a bottle of soda

38. An efficiency loss (or deadweight loss): A. is measured as the combined loss of consumer surplus and producer surplus. B. results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. C. can result from underproduction, but not from overproduction. D. can result from overproduction, but not from underproduction.



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39. At the output where the combined amounts of consumer and producer surplus are largest: A. the areas of consumer and producer surplus necessarily are equal. B. the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output. C. consumer surplus exceeds producer surplus by the greatest amount. D. marginal benefit exceeds marginal cost by the greatest amount.

40. Which of the following conditions does not need to occur for a market to achieve allocative efficiency? A. Consumers' maximum willingness to pay equals producers' minimum acceptable price. B. The sum of producer and consumer surplus is maximized. C. The total revenue received by producers equals the total cost of production. D. The marginal benefit of the last unit produced equals the marginal cost of producing that unit.

41. At the output level defining allocative efficiency: A. the areas of consumer and producer surplus necessarily are equal. B. marginal benefit exceeds marginal cost by the greatest amount. C. consumer surplus exceeds producer surplus by the greatest amount. D. the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

42. Allocative efficiency occurs only at that output where: A. marginal benefit exceeds marginal cost by the greatest amount. B. consumer surplus exceeds producer surplus by the greatest amount. C. the combined amounts of consumer surplus and producer surplus are maximized. D. the areas of consumer and producer surplus are equal.



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43. Refer to the above diagram. Assuming equilibrium price P1, producer surplus is represented by areas: A. a + b. B. a + b + c + d. C. c + d. D. a + c.

44. A producer's minimum acceptable price for a particular unit of a good: A. is the same for all units of the good. B. will, for most units produced, equal the maximum that consumers are willing to pay for the good. C. equals the marginal cost of producing that particular unit. D. must cover the wages, rent, and interest payments necessary to produce the good, but need not include profit.

45. Graphically, producer surplus is measured as the area: A. under the demand curve and below the actual price. B. under the demand curve and above the actual price. C. above the supply curve and above the actual price. D. above the supply curve and below the actual price.

46. The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes, what has occurred? A. Positive externality B. Demand-side market failure C. Supply-side market failure D. All of these.

47. Supply-side market failures occur when: A. the demand and supply curves don't reflect consumers' full willingness to pay for a good or service. B. the demand and supply curves don't reflect the full cost of producing a good or service. C. government regulates production of a good or service. D. a good or service is not supplied because no one wants it.

48. People enjoy outdoor holiday lighting displays, and would be willing to pay to see these displays, but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a: A. negative externality B. supply-side market failure C. demand-side market failure D. government failure



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49. Which of the following is an example of market failure? A. negative externalities B. positive externalities C. public goods D. all of these

50. Market failure is said to occur whenever: A. private markets do not allocate resources in the most economically desirable way. B. prices rise. C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay. D. government intervenes in the functioning of private markets.


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