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[answered] 1) A cost of an activity that falls on people not engaged i


1) A cost of an activity that falls on people not engaged in the activity is call a(n):

A) external benefit.

B) prisoner's dilemma.

C) negative externality.

D) positive externality.

2) Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality.

A) a positive; a negative

B) a negative; a positive

C) a positive, no

D) no; a negative

3) If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that:

A) firms are earning an economic loss.

B) firms are earning a positive economic profit.

C) there is a positive externality associated with this good.

D) there is a negative externality associated with this good.

4) Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen?s music generates:

A) a negative externality.

B) a positive externality.

C) neither a positive nor a negative externality.

D) both a positive and a negative externality.

5) If coal mining produces a negative externality because it leads to environmental damage, then the

A) socially optimal quantity of coal is zero.

B) quantity of coal produced at the market equilibrium will be less than the socially optimal quantity.

C) quantity of coal produced at the market equilibrium will be greater than the socially optimal quantity.

D) cost to society of producing an additional ton of coal will be less than the cost to coal mining companies of producing an additional ton of coal.

6) An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity.

A) more; more

B) less; less

C) more; less

D) less; more

7) The Coase theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cuase externalities, then they:

A) can always arrive at efficient solutions to the problems caused by externalities.

B) will never arrive at efficient solutions to the problems caused by externalities.

C) will never perform activities that generate negative externalities.

D) will always perform activities that generate positive externalities.

8) Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment?

A) Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate.

B) No, because the benefit to Ali of listening to her music is less than the cost to Kate.

C) Yes, because the benefit to Ali of listening to her music is less than the cost to Kate.

D) No, because the benefit to Ali of listening to her music is greater than the cost to Kate.

9) Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

A) Kate pays $150 per month and Ali pays $450 per month

B) Kate pays $250 per month and Ali pays $350 per month

C) Kate pays $375 per month and Ali pays $125 per month

D) There is no way to split the rent to induce them to live together

10) Consider two restaurants located next door to each other: Quick Burger and The Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Caf?. The table below shows the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and does not operate a drive-through window.

Quick Burger
Operates a
Drive-Through
Window

Quick Burger
Does Not Operate
Drive-Through
Window

Quick Burger

$24,000

$15,000

The Sunshine Caf?

$11,000

$23,000



Is it socially optimal for Quick Burger to operate a drive-through window?

A) No, because The Sunshine Caf?'s payoff is lower when Quick Burger operates a drive-through window.

B) No, because total payoffs are higher when Quick Burger does not operate a drive-through window.

C) Yes, because Quick Burger's payoff is higher when Quick Burger operates a drive-though window.

D) Yes, because total payoffs are higher when Quick Burger operates a drive-through window.

11) Consider two restaurants located next door to each other: Quick Burger and The Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Caf?. The table below shows the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and does not operate a drive-through window.

Quick Burger
Operates a
Drive-Through
Window

Quick Burger
Does Not Operate
Drive-Through
Window

Quick Burger

$24,000

$15,000

The Sunshine Caf?

$11,000

$23,000


If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Caf? CANNOT negotiate with each other, then will Quick Burger operate a drive-though window?

A) No, because it is not socially efficient to operate a drive-through.

B) Yes, because Quick Burger's payoff is higher when it operates a drive-through.

C) No, because it would lower the payoff for The Sunshine Caf?.

D) It cannot be determined.


12) Consider two restaurants located next door to each other: Quick Burger and The Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Caf?. The table below shows the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and does not operate a drive-through window.

Quick Burger
Operates a
Drive-Through
Window

Quick Burger
Does Not Operate
Drive-Through
Window

Quick Burger

$24,000

$15,000

The Sunshine Caf?

$11,000

$23,000

If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Caf? would have to pay Quick Burger at least ______ per month to NOT operate a drive-through window.

A) $9,000

B) $11,000

C) $15,000

D) $24,000

13) Consider two restaurants located next door to each other: Quick Burger and The Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Caf?. The table below shows the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and does not operate a drive-through window.

Quick Burger
Operates a
Drive-Through
Window

Quick Burger
Does Not Operate
Drive-Through
Window

Quick Burger

$24,000

$15,000

The Sunshine Caf?

$11,000

$23,000

Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Caf? can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome?

A) Quick Burger pays The Sunshine Caf? $12,500 per month to operate the drive-through window.

B) Quick Burger pays The Sunshine Caf? $10,500 per month to operate the drive-through window.

C) The Sunshine Caf? pays Quick Burger $12,500 per month not to operate the drive-through window.

D) The Sunshine Caf? pays Quick Burger $10,500 per month not to operate the drive-though window.

14) If the marginal cost of reducing pollution is positive, then:

A) pollution should be reduced as much as technically feasible.

B) the marginal benefit of reducing pollution is zero.

C) the optimal amount of pollution is zero.

D) the optimal amount of pollution is greater than zero.

15) Numerous studies have shown that breathing second-hand cigarette smoke is harmful to your health. This suggests that a tax on cigarettes will:

A) increase total economic surplus.

B) decrease total economic surplus.

C) have no effect on total economic surplus.

D) lead to a decrease in the price of cigarettes.

16) If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity.

A) taxing; banning

B) subsidizing; banning

C) subsidizing; taxing

D) publicizing; taxing

17) The tragedy of the commons refers to the:

A) overuse of resources that have no price.

B) overuse of resources that have no cost.

C) under production of goods that have external benefits.

D) failure of the Coase theorem when negotiation is costly.

18) The essential cause of the tragedy of the commons is the fact that:

A) marginal costs are increasing.

B) one person's use of a commonly held resource imposes an external cost on others.

C) people do not always specialize according to their comparative advantage.

D) governments may choose not to tax activities that generate negative externalities.

19) Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of:

A) an efficient subsidy.

B) the tragedy of the commons.

C) excess supply in the market.

D) a good with positive externalities.


1) A cost of an activity that falls on people not engaged in the activity is call a(n):

 

A) external benefit.

 

B) prisoner's dilemma.

 

C) negative externality.

 

D) positive externality.

 

2) Given that most people like the smell of baking cinnamon rolls and dislike the smell of

 

burning tires, baking cinnamon rolls generates ______ externality, and burning tires

 

generates ______ externality.

 

A) a positive; a negative

 

B) a negative; a positive

 

C) a positive, no

 

D) no; a negative

 

3) If the market equilibrium quantity is greater than the socially optimal quantity, one can infer

 

that:

 

A) firms are earning an economic loss.

 

B) firms are earning a positive economic profit.

 

C) there is a positive externality associated with this good.

 

D) there is a negative externality associated with this good.

 

4) Carmen listens to opera music every evening when she gets home from work. Carmen

 

loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul

 

is the only person besides Carmen who can hear the music, then Carmen?s music

 

generates:

 

A) a negative externality.

 

B) a positive externality.

 

C) neither a positive nor a negative externality.

 

D) both a positive and a negative externality.

 

5) If coal mining produces a negative externality because it leads to environmental damage,

 

then the

 

A) socially optimal quantity of coal is zero.

 

B) quantity of coal produced at the market equilibrium will be less than the socially optimal

 

quantity.

 

C) quantity of coal produced at the market equilibrium will be greater than the socially

 

optimal quantity.

 

D) cost to society of producing an additional ton of coal will be less than the cost to coal

 

mining companies of producing an additional ton of coal.

 

6) An external benefit implies that private markets will provide ______ than the socially

 

optimal quantity, and an external cost implies that private markets will provide ______ than

 

the socially optimal quantity.

 

A) more; more

 

B) less; less

 

C) more; less

 

D) less; more 7) The Coase theorem states that if private parties can negotiate the purchase and sale of

 

the right to perform activities that cuase externalities, then they:

 

A) can always arrive at efficient solutions to the problems caused by externalities.

 

B) will never arrive at efficient solutions to the problems caused by externalities.

 

C) will never perform activities that generate negative externalities.

 

D) will always perform activities that generate positive externalities.

 

8) Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can

 

each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are

 

indifferent between living together and living apart, except for one problem: Kate hates Ali's

 

taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music.

 

Ali would give up listening to her music for no less than $300 per month. If Kate and Ali

 

decide to live together, is it socially optimal for Ali play her music in the apartment?

 

A) Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate.

 

B) No, because the benefit to Ali of listening to her music is less than the cost to Kate.

 

C) Yes, because the benefit to Ali of listening to her music is less than the cost to Kate.

 

D) No, because the benefit to Ali of listening to her music is greater than the cost to Kate.

 

9) Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can

 

each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are

 

indifferent between living together and living apart, except for one problem: Kate hates Ali's

 

taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music.

 

Ali would give up listening to her music for no less than $300 per month. Which, if any, of the

 

following ways of splitting the total monthly rent would induce them to live together?

 

A) Kate pays $150 per month and Ali pays $450 per month

 

B) Kate pays $250 per month and Ali pays $350 per month

 

C) Kate pays $375 per month and Ali pays $125 per month

 

D) There is no way to split the rent to induce them to live together

 

10) Consider two restaurants located next door to each other: Quick Burger and The

 

Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and

 

noise will bother customers seated outside at The Sunshine Caf?. The table below shows

 

the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and

 

does not operate a drive-through window.

 

Quick Burger

 

Quick Burger

 

Operates a Does Not Operate

 

Drive-Through Drive-Through

 

Window

 

Window

 

Quick Burger

 

$24,000

 

$15,000

 

The Sunshine Caf?

 

$11,000

 

$23,000 Is it socially optimal for Quick Burger to operate a drive-through window?

 

A) No, because The Sunshine Caf?'s payoff is lower when Quick Burger operates a drivethrough window.

 

B) No, because total payoffs are higher when Quick Burger does not operate a drive-through

 

window. C) Yes, because Quick Burger's payoff is higher when Quick Burger operates a drive-though

 

window.

 

D) Yes, because total payoffs are higher when Quick Burger operates a drive-through

 

window.

 

11) Consider two restaurants located next door to each other: Quick Burger and The

 

Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and

 

noise will bother customers seated outside at The Sunshine Caf?. The table below shows

 

the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and

 

does not operate a drive-through window.

 

Quick Burger

 

Quick Burger

 

Operates a Does Not Operate

 

Drive-Through Drive-Through

 

Window

 

Window

 

Quick Burger

 

$24,000

 

$15,000

 

The Sunshine Caf?

 

$11,000

 

$23,000 If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The

 

Sunshine Caf? CANNOT negotiate with each other, then will Quick Burger operate a drivethough window?

 

A) No, because it is not socially efficient to operate a drive-through.

 

B) Yes, because Quick Burger's payoff is higher when it operates a drive-through.

 

C) No, because it would lower the payoff for The Sunshine Caf?.

 

D) It cannot be determined.

 

12) Consider two restaurants located next door to each other: Quick Burger and The

 

Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and

 

noise will bother customers seated outside at The Sunshine Caf?. The table below shows

 

the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and

 

does not operate a drive-through window.

 

Quick Burger

 

Quick Burger

 

Operates a Does Not Operate

 

Drive-Through Drive-Through

 

Window

 

Window

 

Quick Burger

 

$24,000

 

$15,000

 

The Sunshine Caf?

 

$11,000

 

$23,000 If Quick Burger has the legal right to operate a drive-through window, then the Sunshine

 

Caf? would have to pay Quick Burger at least ______ per month to NOT operate a drivethrough window.

 

A) $9,000

 

B) $11,000

 

C) $15,000

 

D) $24,000

 

13) Consider two restaurants located next door to each other: Quick Burger and The

 

Sunshine Caf?. If Quick Burger opens a drive-through window, the increased traffic and

 

noise will bother customers seated outside at The Sunshine Caf?. The table below shows the monthly payoffs to Quick Burger and The Sunshine Caf? when Quick Burger does and

 

does not operate a drive-through window.

 

Quick Burger

 

Quick Burger

 

Operates a Does Not Operate

 

Drive-Through Drive-Through

 

Window

 

Window

 

Quick Burger

 

$24,000

 

$15,000

 

The Sunshine Caf?

 

$11,000

 

$23,000 Suppose Quick Burger has the legal right to operate a drive-through window, and Quick

 

Burger and the Sunshine Caf? can negotiate with each other at no cost. Which of the

 

following arrangements would lead to the socially optimal outcome?

 

A) Quick Burger pays The Sunshine Caf? $12,500 per month to operate the drive-through

 

window.

 

B) Quick Burger pays The Sunshine Caf? $10,500 per month to operate the drive-through

 

window.

 

C) The Sunshine Caf? pays Quick Burger $12,500 per month not to operate the drivethrough window.

 

D) The Sunshine Caf? pays Quick Burger $10,500 per month not to operate the drive-though

 

window.

 

14) If the marginal cost of reducing pollution is positive, then:

 

A) pollution should be reduced as much as technically feasible.

 

B) the marginal benefit of reducing pollution is zero.

 

C) the optimal amount of pollution is zero.

 

D) the optimal amount of pollution is greater than zero.

 

15) Numerous studies have shown that breathing second-hand cigarette smoke is harmful to

 

your health. This suggests that a tax on cigarettes will:

 

A) increase total economic surplus.

 

B) decrease total economic surplus.

 

C) have no effect on total economic surplus.

 

D) lead to a decrease in the price of cigarettes.

 

16) If an activity generates a positive externality, the government can increase total

 

economic surplus by ______ the activity, and if an activity generates a negative externality,

 

the government can increase total economic surplus by ______ the activity.

 

A) taxing; banning

 

B) subsidizing; banning

 

C) subsidizing; taxing

 

D) publicizing; taxing

 

17) The tragedy of the commons refers to the:

 

A) overuse of resources that have no price.

 

B) overuse of resources that have no cost.

 

C) under production of goods that have external benefits.

 

D) failure of the Coase theorem when negotiation is costly. 18) The essential cause of the tragedy of the commons is the fact that:

 

A) marginal costs are increasing.

 

B) one person's use of a commonly held resource imposes an external cost on others.

 

C) people do not always specialize according to their comparative advantage.

 

D) governments may choose not to tax activities that generate negative externalities.

 

19) Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By

 

noon, the buffet is picked over, and by 12:30, there are very few popular items left. The

 

garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of:

 

A) an efficient subsidy.

 

B) the tragedy of the commons.

 

C) excess supply in the market.

 

D) a good with positive externalities.

 


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