Purdue University North Central

                       Economics 210 - Review Questions Chapter 9 - Government Intervention

 

(1)        Which of the following is most likely a private good?

 

(a)        Natural gas.

(b)        National defense.

(c)        Roads.

(d)        Flood control projects.

 

(2)        In economics, a public good:

 

(a)        is any good produced by the government.

(b)        is provided in an optimal amount by the market.

(c)        cannot be denied to consumers who do not pay.

(d)        only consumed by the purchaser.

 

(3)        The term “externalities” refers to:

 

(a)        illegal economic activity.

(b)        all costs and benefits of a market activity borne by a third party.

(c)        the impacts on markets of goods imported from foreign countries.

(d)        All of the above.

 

(4)        The government has intervened to clean lead from drinking water.  What is the market failure that most likely prompted the government intervention?

 

(a)        Equity.

(b)        Externalities.

(c)        Market power.

(d)        Monopoly.

 

(5)        Social costs are:

 

(a)        the full resource costs, from society’s perspective, of an economic activity.

(b)        usually less than private costs.

(c)        the costs of an economic activity borne by the producer.

(d)        of no concern to society.

 

(6)        When external costs result from the production of a good:

 

(a)        producers have an incentive to produce too little.

(b)        consumers have an incentive to consume too little.

(c)        producers and consumers have an incentive to produce and consume too much.

(d)        producers and consumers are not affected.

(7)        The federal government’s role in antitrust enforcement is justified by considerations of:

 

(a)        equity.

(b)        public goods and externalities.

(c)        market power.

(d)        macro failure.

 

Consider Figure 1 in answering Question (8) below.

                                                                        Figure 1

 

Quantity (Q)
 
(8)        In Figure 1, if pollution costs are external, the rate of output will be:

 

(a)        less than Q(1).

(b)        Q(1).

(c)        Q(2).

(d)        greater than Q(2).

 

 

 

 

 

 

 

 

 

 

Consider Figure 2 in answering Question (9) below.

                                                                        Figure 2

 

Public Goods
 

 
 
 

 


(9)        Using Figure 2, suppose that the point C represents the optimal mix of public and private goods for a society.  The market mechanism is likely to result in a mix of output represented by point:

 

(a)        B because the market mechanism tends to underproduce public goods.

(b)        D because the market mechanism tends to underproduce private goods.

(c)        C because it represents the optimal mix of output and the market mechanism is efficient.

(d)        A because the market mechanism is inefficient in determining the mix of output.

 

 

 

 

 

 

 

 

 

 

 

 

 

Consider Figure 3 in answering Question (10) below.

                                                                        Figure 3

 

 

(10)      Figure 3 describes the production decision for a producer of electricity. The solid cost schedules represent private costs, and the dashed cost schedules (with *s) represent social costs. Social costs include external costs such as air and water pollution damages. Which statement is correct?

 

(a)        Profits of the power plant will increase if social costs are included in the production decision.

(b)        Incorporating social costs, the marginal and average costs of operation will increase, and output will fall below 1,000 kilowatt hours.

(c)        The output of power at 1,000 kilowatt hours is too low from a social point of view.

(d)        Third parties will not benefit from the incorporation of social costs in the production decision.

 

 

 

 

 

 

 

 

Consider Figure 4 in answering Question (11). The figure illustrates the market for public education.

Figure 4

 

Q(2)
 

Quantity (Q)
 

(11)      Which statement utilizing Figure 4 is correct?

 

            (a)        The social demand for public education is represented by D(1).

            (b)        The socially optimal level of public education spending is represented by Q(2).

            (c)        The market demand for public education is represented by D(2).

            (d)        The socially optimal level of public education spending is represented by Q(1).

 

(12)      Which statement related making a case for government intervention in markets to ensure a fairer distribution of income is correct?

 

            (a)        The market mechanism leaves some people with too little income, and others with too much.

            (b)        Transfer payments are the means to pay for labor services in the marketplace and ensure a decent, minimum standard of living.

            (c)        Transfer payments are payments to individuals for which no current goods or services are exchanged, and are a means to redistribute income.

            (d)        Both (a) and (c) are correct.