Multiple choice

Question 1

Marginal revenue product measures the increase in

a. output resulting from one more unit of labor.
b. TR resulting from one more unit of output.
c. revenue per unit from one more unit of output.
d. total revenue resulting from one more unit of labor.

Answer 1

D. MRP is the increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource.

Question 2

Troll Corporation sells dolls for $10.00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101st worker only when the wage is

a. $100 or less per day.
b. more than $100 per day.
c. $5.10 or less per day.
d. none of the above.

Answer 2

A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals $10 x MP (510 - 500) = $100.

Question 3

Derived demand for labor depends on the

a. cost of factors of production used in the product.
b. market supply curve of labor.
c. consumer demand for the final goods produced by labor.
d. firm’s total revenue less economic profit.

Answer 3

C. If consumers do not purchase goods, there is no MRP and no workers are hired.

Question 4

If demand for a product falls, the demand curve for labor used to produce the product will

a. shift leftward.
b. shift rightward.
c. shift upward.
d. remain unchanged.

Answer 4

A.If consumers demand for a product decreases and supply remains constant, the price of the product falls and the MRP (P x MP) decreases.

Question 5

The owner of a restaurant will hire waiters if the

a. additional labor’s pay is close to the minimum wage .
b. marginal product is at the maximum.
c. additional work of the employees adds more to total revenue than to costs.
d. waiters do not belong to a union.

Answer 5

C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters.

Question 6

In a perfectly competitive market, the demand curve for labor

a. slopes upward.
b. slopes downward because of diminishing marginal productivity.
c. is perfectly elastic at the equilibrium wage rate.
d. is described by all of the above.

Answer 6

B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases.

Question 7

A union can influence the equilibrium wage rate by

a. featherbedding.
b. requiring longer apprenticeships.
c. favoring trade restrictions on foreign products.
d. all of the above.
e. none of the above.

Answer 7

D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor.

Question 8

In which of the following market structures is the firm not a price taker in the factor market?

a. Oligopoly.
b. Monopsony.
c. Monopoly.
d. Perfect competition.

Answer 8

B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer.

Question 9

The extra cost of obtaining each additional unit of a factor of production is called the marginal

a. physical product.
b. revenue product.
c. factor cost.
d. implicit cost.

Answer 9

C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers

Question 10

A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must

a. increase the price of its product to sell more.
b. lower the price of its product to sell more.
c. increase the wage rate to hire more labor.
d. lower the wage rate to hire more labor.

Answer 10

C. The monopsonist can hire an additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate along the labor supply curve.

Question 11

To maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to

a. marginal physical product.
b. marginal revenue product.
c. total revenue product.
d. any of the above.

Answer 11

B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers.

Question 12

BigBiz, a local monopsonist, currently hires 50 workers and pays them $6 per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to $6.25 per hour. What is BigBiz’s marginal factor cost?

a. $6.25 per hour.
b. $12.50 per hour.
c. $18.75 per hour.
d. $20.00 per hour.

Answer 12

C. Its total cost would increase by $18.75 to hire that additional worker (0.25 x 50 + 6.25).

Question 13

Suppose a firm can hire 100 workers at $8.00 per hour, but must pay $8.05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately equal to

a. $8.00.
b. $8.05.
c. $13.05.
d. $13.00.

Answer 13

C. The firm’s total cost would increase $13.05 to hire the 101st worker (.05 x 100 + 8.05).

Question 14

A monopsonist in equilibrium has a marginal revenue product of $10 per worker hour. Its equilibrium wage rate must be

a. less than $10.
b. equal to $10.
c. greater than $10.
d. equal to $5.

Answer 14

A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market.

Question 15

Explicit costs are payments to

a. hourly employees.
b. insurance companies.
c. utility companies.
d. all of the above.

Answer 15

D. Explicit costs are payments to non owners of a firm.

Question 16

Implicit costs are the opportunity costs of using the resources of

a. outsiders.
b. owners.
c. banks.
d. retained earnings.

Answer 16

B. Implicit costs are opportunity costs that a business owner incurs when using resources owned by the firm.

Question 17

Which of the following equalities is true?

a. Economic profit = total revenue - accounting profit.
b. Economic profit = total revenue - explicit costs - accounting profit.
c. Economic profit = total revenue - implicit costs - explicit costs.
d. Economic profit = opportunity costs + accounting costs.

Answer 17

C. The difference between accounting profit and economic profit is that economic profit is total revenue minus both explicit and implicit costs. Accounting profit is total revenue minus explicit costs only.

Question 18

Fixed inputs are factors of production that

a. are determined by a firm’s size.
b. can be increased or decreased quickly as output changes.
c. cannot be increased or decreased quickly as output changes.
d. none of the above.

Answer 18

C. In the short run, there are two types of inputs, fixed and variable. Because a firm cannot change its plant capacity, some of its inputs are fixed. In the long run, all costs are variable.

Question 19

5. An example of a variable input is
   a. raw materials.
   b. energy.
   c. hourly labor.
   d. all of the above

Answer 19

D. As a firm produces more, it will use more raw materials, energy, and labor. Therefore, all are variable costs.

Question 20

Suppose a car wash has 2 washing stations and 5 workers and is able to wash 100 cars per day. When it adds a third station, but no more workers, it is able to wash 150 cars per day. The marginal product of the third washing station is

a. 100 cars per day.
b. 150 cars per day.
c. 5 cars per day.
d. 50 cars per day.

Answer 20

D. 50 cars is how many extra cars can be washed by adding a new machine, ceteris paribus.

Question 21

If the units of variable input in a production process are 1, 2, 3, 4, and 5 and the corresponding total outputs are 10, 22, 33, 42, and 48, respectively, the marginal product of the fourth unit is

a. 2.
b. 6.
c. 9.
d. 42.

Answer 21

C. The difference between 42 and 33 is 9, the extra output when producing 4 units instead of 3.

Question 22

The total fixed cost curve is

a. upward sloping.
b. downward sloping.
c. upward, and then downward sloping.
d. unchanged with the level of output.

Answer 22

D. Fixed costs never change regardless of the units of output; therefore its curve has to be horizontal at a fixed cost dollar value.

Question 23

Assuming that the marginal cost curve is a smooth U-shaped curve, the corresponding total cost curve has a (an)

a. linear shape.
b. S-shape.
c. U-shape.
d. reverse S-shape.

Answer 23

D. Marginal cost decreases as output increases from zero, and then increases beyond a certain output level. A reverse-S-Shape total cost curve corresponds to the changes in its slope (MC) as output expands.

Question 24

If both the marginal cost and the average variable cost curves are U-shaped, at the point of minimum average variable cost, the marginal cost must be

a. greater than the average variable cost.
b. less than the average variable cost.
c. equal to the average variable cost.
d. at its minimum.

Answer 24

C. If the margin is above the average, the average will increase. If the margin is less than the average, the average will decrease. If the margin equals the average, average does not change, that is, it is a horizontal curve.

Question 25

Which of the following is true at the point where diminishing returns set in?

a. Both marginal product and marginal cost are at a maximum.
b. Both marginal product and marginal cost are at a minimum.
c. Marginal product is at a maximum and marginal cost at a minimum.
d. Marginal product is at a minimum and marginal cost at a maximum.

Answer 25

C. The rising portion of the MP curve corresponds to the declining portion of the MC curve, and vice versa

Question 26

As shown in Exhibit 10, total fixed cost for the firm is

a. Zero.
b. $250
c. $500.
d. $750
e. $1,000

Answer 26

B. $250 is the answer because total cost is 0 when output is zero. These are costs that have to be paid even when output is zero.

Question 27

As shown in Exhibit 10, the total cost of producing 100 units of output per day is

a. Zero.
b. $250.
c. $500.
d. $750.
e. $1,000.

Answer 27

C. A vertical line drawn at 100 units crosses the total cost curve at $500.

Question 28

In Exhibit 10, if the total cost of producing 99 units of output per day is $475, the marginal cost of producing the 100th unit of output per day is approximately

a. zero.
b. $25.
c. $475.
d. $500

Answer 28

B. When total cost at 99 units is $475 and total cost at 100 units is $500, the cost of producing the 100th unit is $25.

Question 29

Each potential short-run average total cost curve is tangent to the long-run average cost curve at
a. the level of output that minimizes short-run
average total cost.
b. the minimum point of the average total cost curve.
c. the minimum point of the long-run average total cost curve.
d. a single point on the short-run average total cost curve.

Answer 29

D. The long-run average cost curve is derived from all possible SRAC curves. Geometrically, the only way to draw this is to connect all the curves by a smooth curve; thus, the LRAC curve touches each SRAC curve at only one place.

Question 30

Suppose a typical firm is producing X units of output per day. Using any other plant size, the long-run average cost would increase. The firm is operating at a point which its
a. long-run average cost curve is at a
minimum.
b. short-run average total cost curve is at a minimum.
c. both (a) and (b)are true.
d. neither (a) nor (b) are true.

Answer 30

C. When a firm is producing at the minimum points of the long-run average cost curve, it is operating at the most efficient level possible.

Question 31

The downward-sloping segment of the long-run average cost curve corresponds to

a. diseconomies of scale.
b. both economies and diseconomies of scale.
c. the decrease in average variable cost.
d. economies of scale.

Answer 31

D. Economies of scale takes place when a firm increases its efficiency by producing more units of output.

Question 32

Long-run diseconomies of scale exist when the

a. short-run average total cost curve falls.
b. long-run marginal cost curve rises.
c. long-run average cost curve falls.
d. short-run average cost curve rises.
e. long-run average cost curve rises.

Answer 32

E. Diseconomies of scale are evident when increasing output leads to inefficiencies.

Question 33

Long-run constant returns to scale exist when the

a. short-run average total cost curve is constant.
b. long-run average cost curve rises.
c. long-run average cost curve is flat.
d. long-run average cost curve falls.

Answer 33

C. Constant returns to scale are evident when there is no change in costs as output increases.

Question 34

If the demand curve for good X is downward-sloping, an increase in the price will result in

a. an increase in the demand for good X.
b. a decrease in the demand for good X.
c. no change in the quantity demanded for good X.
d. a larger quantity demanded for good X.
e. a smaller quantity demanded for good X.

Answer 34

E. When price changes there is a opposite change in the quantity demanded as measured on the horizontal axis.

Question 35

The law of demand states that the quantity demanded of a good changes, other things being equal, when

a. the price of the good changes.
b. consumer income changes.
c. the prices of other goods change.
d. a change occurs in the quantities of other goods purchased.

Answer 35

A. A “change in demand” means that the whole curve shifts, but a “change in the quantity demanded” means that there is movement along a stationary curve

Question 36

Which of the following is the result of a decrease in the price tea, other things being equal?

a. A leftward shift in the demand curve for tea.
b. A downward movement along the demand curve for tea.
c. A rightward shift in the demand curve for tea.
d. An upward movement along the demand curve for tea.

Answer 36

B. Because demand curves have a negative slope, as the price declines, the quantity demanded will increase.

Question 37

Which of the following will cause a movement along the demand curve for X?

a. A change in the price of a close substitute.
b. A change in the price of good X.
c. A change in consumer tastes and preferences for good X.
d. A change in consumer income.

Answer 37

B. Movement along a given demand curve always occurs when the price changes, if anything other than price changes, then the whole curve will shift.

Question 38

Assuming that beef and pork are substitutes, a decrease in the price of pork will cause the demand curve for beef to

a. shift to the left as consumers switch from beef to pork.
b. shift to the right as consumers switch from beef to pork.
c. remain unchanged, because beef and pork are sold in separate markets.
d. none of the above.

Answer 38

A. With a decrease in the price of pork people will want to buy more pork; because beef and pork are substitutes, they will buy less at possible prices for beef.

Question 39

Assuming that coffee and tea are substitutes, a decrease in the price of coffee, other things being equal, results in a (an)

a. downward movement along the demand curve for tea.
b. leftward shift in the demand curve for tea.
c. upward movement along the demand curve for tea.
d. rightward shift in the demand curve for tea.

Answer 39

B. With a decrease in the price of coffee people will want to buy more coffee; because coffee and tea are substitutes, they will buy less at possible prices for tea.

Question 40

Assuming steak and potatoes are complements, a decrease in the price of steak will

a. decrease the demand for steak.
b. increase the demand for steak.
c. increase the demand for potatoes.
d. decrease the demand for potatoes.

Answer 40

C. With a decrease in the price of steak people will want to buy more steak; because steak and potatoes are complements, they will buy more potatoes as well.

Question 41

Assuming that steak is a normal good, a decrease in consumer income, other things being equal, will

a. cause a downward movement along the demand curve for steak.
b. shift the demand curve for steak to the left.
c. cause an upward movement along the demand curve for steak.
d. shift the demand curve for steak to the right.

Answer 41

B. Normal goods are goods that people will buy more of as their incomes increase and less of as their income decreases.

Question 42

An increase in consumer income, other things being equal, will

a. shift the supply curve for a normal good to the right.
b. cause an upward movement along the demand curve for an inferior good.
c. shift the demand curve for an inferior good to the left.
d. cause a downward movement along the supply curve for a normal good.

Answer 42

C. Inferior goods are goods that people will buy less of at possible prices as their income increases.

Question 43

Yesterday, seller A supplied 400 units of a good X at $10 per unit. Today, seller A supplies the same quantity of units at $5 per unit. Based on this evidence, seller A has experienced a (an)

a. decrease in supply.
b. increase in supply.
c. increase in the quantity supplied.
d. decrease in the quantity supplied.
e. increase in demand.

Answer 43

B. The only way sell A could supply 400 units of good X at $10 yesterday and $5 today is for the supply curve to shift rightward.

Question 44

An improvement in technology causes a (an)

a. leftward shift of the supply curve.
b. upward movement along the supply curve.
c. firm to supply a larger quantity at any given price.
d. downward movement along the supply curve.

Answer 44

C. When price changes, the supply curve itself does not change, but when other things change, the whole curve will shift. A change in technology is an example of what can cause the supply curve to shift.

Question 45

Suppose auto workers receive a substantial wage increase. Other things being equal, the price of autos will rise because of a (an)

a. increase in the demand for autos.
b. rightward shift of the supply curve for autos.
c. leftward shift of the supply curve for autos.
d. reduction in the demand for autos.

Answer 45

C. A change in costs for a business is a factor that will shift the supply curve. If costs go up, as in the case of having to pay higher wages, the supplier has less of an ability to supply cars.

Question 46

Assuming that soybeans and tobacco can both be grown on the same land, an increase in the price of tobacco, other things being equal, causes a (an)

a. upward movement along the supply curve for soybeans.
b. downward movement along the supply curve for soybeans.
c. rightward shift in the supply for soybeans.
d. leftward shift in the supply for soybeans.

Answer 46

D. With an increase in the price of tobacco farmers will want to grow more tobacco to take advantage of the higher price. Farmers will therefore plant soybeans on land they used to use for tobacco.

Question 47

If Qd = quantity demanded and Qs = quantity supplied at a given price, a shortage in the market results when

a. Qs is greater than Qd.
b. Qs equals Qd.
c. Qd is less than or equal to Qs.
d. Qd is greater than or equal to Qs.

Answer 47

D. When there are more units of something being demanded than being supplied, a shortage will result.

Question 48

Assume that the equilibrium price for a good is $10. If the market price is $5, a

a. shortage will cause the price to remain at $5.
b. surplus will cause the price to remain at $5.
c. shortage will cause the price to rise toward $10.
d. surplus will cause the price to rise toward $10.

Answer 48

C. When the price of a good is below the equilibrium price, there are more units being demanded than being supplied. The result is a shortage and consumers will bid the price up toward the equilibrium price.

Question 49

In the market shown in the previous graph, the equilibrium price and quantity of good X are

a. $0.50, 200.
b. $1.50, 300
c. $2.00, 100
d. $1.00, 200

Answer 49

D. The equilibrium price and equilibrium quantity are at the point where the quantity demanded equals the quantity supplied. This is the price toward which the economy tends.

Question 50

In the previous graph, at a price of $2.00, the market for good X will experience a

a. shortage of 150 units.
b. surplus of 100 units.
c. shortage of 100 units.
d. surplus of 200 units.

Answer 50

D. At a price of $2.00 the quantity demanded is 100 and the quantity supplied is 300; 300 units minus 100 equals 200 units.

Question 51

In the previous graph, if the price of good X moves from $1.00 to $2.00, the new market condition will put

a. upward pressure on price.
b. no pressure on price to change.
c. downward pressure on price.
d. upward pressure on quantity to change.

Answer 51

C. Anytime the price is above the equilibrium price a surplus will result. Suppliers will therefore lower price to get rid of the surplus.

Question 52

Scarcity exists

a. when people consume beyond their needs.
b. only in rich nations.
c. in all countries in the world.
d. only in poor nations.

Answer 52

C. No matter what economic system a country has, it is always faced with the problem of scarcity

Question 53

Which of the following would eliminate scarcity as an economic problem?

a. Moderation of people’s competitive instincts.
b. Discovery of large new energy reserves.
c. Resumption of steady productivity growth.
d. None of the above.

Answer 53

D. Because it is impossible to provide everyone with everything they want, we will always have scarcity.

Question 54

Which of the following is not a resource?

a. Land.
b. Labor.
c. Money.
d. Capital.

Answer 54

C. Money is not a resource because it has no intrinsic value. Money that is used to make an investment is called financial capital.

Question 55

Economics is the study of

a. how to make money.
b. how to operate a business.
c. people making choices because of the problem of scarcity.
d. the government decision-making process.

Answer 55

C. Economics is the study of how people must decide among alternatives to meet their wants and needs in this world of scarcity.

Question 56

Microeconomics approaches the study of economics from the viewpoint of

a. individuals or specific markets.
b. the operation of the Federal Reserve.
c. economy wide effects
d. the national economy.

Answer 56

A. Microeconomics is the study of the decision- making process for individuals, business owners, and government.

Question 57

A review of the performance of the U.S. economy during the 1990’s is primarily the concern of

a. macroeconomics.
b. microeconomics.
c. both macroeconomics and microeconomics.
d. neither macroeconomics nor microeconomics.

Answer 57

A. Macroeconomics is the study of the economy as a whole.

Question 58

An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase “ceteris paribus” means that

a. other relevant factors like consumer incomes must be held constant.
b. the gasoline prices must first be adjusted for inflation.
c. the theory is widely accepted, but cannot be accurately tested.
d. consumers need for gasoline remains the same regardless of price.

Answer 58

A. Anytime price changes we always make the assumption that nothing else changes.

Question 59

An economist notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. The economist has

a. confused association with causation.
b. misunderstood the ceteris paribus assumption.
c. Used normative economics to answer a positive question.
d. built an untestable model.

Answer 59

A. Just because one action follows another, does not mean that the first caused the second.

Question 60

Which of the following is a statement of positive economics?

a. The income tax system collects a lower percentage of the incomes of the poor.
b. A reduction in the tax rates of the rich makes the tax system more fair.
c. Tax rates ought to be raised to finance health care.
d. All of the above are primarily statements of positive economics.

Answer 60

A. Positive economic statements are testable by facts and explain the world as it is without making value judgements.

Question 61

Which of the following is a statement of positive economics?

a. An unemployment rate of greater than 8 percent is good because prices will fall.
b. An unemployment rate of 7 percent is a serious problem.
c. If the overall unemployment rate is 7 percent, unemployment rates among African-Americans will average 15 percent.
d. Unemployment is a more severe problem than inflation.

Answer 61

C. Other answers are based on a value judgement concerning the relationship between black and white unemployment rates.

Question 62

Which of the following is a statement of normative economics?

a. The minimum wage is good because it raises wages for the working poor.
b. The minimum wage is supported by unions.
c. The minimum wage reduces jobs for less skilled workers.
d. The minimum wage encourages firms to substitute capital for labor

Answer 62

A. Even though the minimum wage reduces jobs for some working poor, it is a value judgement that the minimum wage is good for the economy overall.

Question 63

Select the normative statement that completes the following sentence: If the minimum wage is raised rapidly, then

a. inflation will increase.
b. workers will gain their rightful share of total income.
c. profits will fall.
d. unemployment will rise.

Answer 63

B. To say that workers have right to a certain part of total income entails a value judgement.

Question 64

Suppose prices for new homes have risen, yet sales of new homes have also risen. We can conclude that

a. the demand for new homes has risen.
b. the law of demand has been violated.
c. new firms have entered the construction industry.
d. construction firms must be facing higher costs.

Answer 64

A. The demand for new homes has risen causing the price to increase and the quantity of new homes to increase as illustrated on the next page.

Question 65

Which of the following statements if true of a market?

a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity.
b. An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity.
c. A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity.
d. all of the above are true.

Answer 65

A. See previous graph.

Question 66

Consider the market for chicken. An increase in the price of beef will

a. decrease the demand for chicken, resulting in a lower price and a smaller amount of chicken purchased in the market.
b. decrease the supply of chicken, resulting in a higher price a and a smaller amount of chicken purchased in the market.
c. increase the demand for chicken, resulting in a higher price and a greater amount of chicken purchased in the market.
d. increase the supply of chicken, resulting in a lower price and a greater amount of chicken purchased in the market.

Answer 66

C. An increase in the price of beef will cause an increase in the demand for chicken because beef and chicken are substitutes.

Question 67

An increase in consumer income increases the demand for oranges. As a result of the adjustment to a new equilibrium, there is a (an)

a. leftward shift of the supply curve.
b. downward movement along the supply curve.
c. rightward shift of the supple curve.
d. upward movement along the supply curve.

Answer 67

D. As the demand curve shifts to the right along the upward sloping supply curve, there is a movement along the supply curve as illustrated on the next page.

Question 68

An increase in the wage paid to grape pickers will cause the

a. demand curve for grapes to shift to the right, resulting in higher prices for grapes.
b. demand curve for grapes to shift to the left, resulting in lower prices for grapes.
c. supply curve for grapes to shift to the left, resulting in lower prices for grapes.
d. supply curve for grapes to shift to the left, resulting in higher prices for grapes.

Answer 68

D. An increase in costs is one factor that will cause the supply curve to shift to the left as production becomes more expensive as illustrated on the next page.

Question 69

If the federal government wants to raise the price of cheese, it will

a. take cheese from government storage and sell it.
b. encourage farmers to research ways to produce more cheese.
c. subsidize purchases of farm equipment.
d. encourage farmers to produce less cheese.

Answer 69

D. As the supply curve for cheese shifts to the left and moves along a downward sloping demand curve, equilibrium price will increase as illustrated on the next page.

Question 70

Which of the following is least likely to result from rent controls set below the equilibrium price for rental housing?

a. Shortages and black markets will result.
b. The existing rental housing will deteriorate.
c. The supply of rental housing will increase rapidly.
d. People will demand more apartments than are available.

Answer 70

C. The supply curve will shift to the left, not to the right, as suppliers produce fewer rental units due to the lower price and lower profits.

Question 71

Suppose the equilibrium price set by supply and demand is lower than the price ceiling set by the government. The result will be

a. a shortage.
b. that quantity demanded is equal to quantity supplied.
c. a surplus.
d. a black market.

Answer 71

B. The purpose of price ceilings is to set a maximum price by law. If it is set higher than the equilibrium price, it will have no effect on the equilibrium price as illustrated on the next page.

Question 72

A good that provides external benefits to society has

a. too few resources devoted to its production.
b. too many resources devoted to its production.
c. the optimal resources devoted to its production.
d. not provided profits to producers of the good.

Answer 72

A. An external benefit is an unintentional byproduct of the market.

Question 73

Pollution from cars is an example of

a. a harmful opportunity cost.
b. a negative externality.
c. a production dislocation.
d. none of the above.

Answer 73

B. A negative externality imposes costs on third parties when drivers discharge pollution into the air, they erode the quality of life of others.

Question 74

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

a. Pencils.
b. Education.
c. Defense.
d. Trucks.

Answer 74

C. None of the other answers fit the definition of a public good. A public good is something from which everyone benefits and no one can be excluded.

Question 75

A public good may be defined as any good or service that

a. allows users to collectively consume benefits.
b. must be distributed to all citizens in equal shares.
c. is never produced by government.
d. is described by answers a and c above.

Answer 75

A. Once a public good is provided, for instance a road, everyone collectively benefits from it.