ECON 101 EXAM PRACTICE QUESTIONS AND ANSWERS

ECON 101 EXAM PRACTICE QUESTIONS AND ANSWERS Economic Benefit - CORRECT ANSWER-value of something that provides "utility" (utility-derive from clean air, wilderness and wildlife, from recreation--- Positive, monetary effects local businesses have on a community. Economic Cost - CORRECT ANSWER-The value of all resources used to produce a good or service; opportunity cost Marginal benefit - CORRECT ANSWER-= additional benefit (change in total benefits) from an additional unit of the good (change in quantity). MB=TB/Q Marginal Benefit= Total Benefit/Quantity Marginal Cost - CORRECT ANSWER-Additional cost (change in total cost) from an additional unit of the good (change in quantity): MC=TC/Q Marginal Cost= Total Cost/Quantity Externality - CORRECT ANSWER-is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account. Example: Pollution Public Good - CORRECT ANSWER-is a good for which there is nonrival consumption In terms of benefits and costs, the efficient level of an activity is that level which - CORRECT ANSWER-maximizes net benefits If a particular action causes net benefits to increase, then - CORRECT ANSWER-) the Pareto Criterion can be met, since it is possible to fully compensate any "losers" while leaving some people better off Pareto Criterion - CORRECT ANSWER-a change is Pareto Superior if --at least one person is made better off and no one is made worse off-- (relative to their initial endowment), A market is operating efficiently when... - CORRECT ANSWER-A) the sum of producer and consumer surplus is maximized in that market B) the net benefits obtained from that market are maximized C) every unit for which the benefits exceed the costs is produced, and no unit for which the costs exceed the benefits is produced Market Failure means the market mechanism will - CORRECT ANSWER-fail to produce the efficient quantity of a good and/or service. Potential Sources of Market Failure: - CORRECT ANSWERExternalities, Public Goods, imperfect competition, imperfect information An Example of an external cost associated with the production of a good - CORRECT ANSWER-any cost of production that is not borne the producer or consumer of the good, but is borne instead by some third party A substantial external cost in the production of good X will tend to cause - CORRECT ANSWER-Overproduction of good x and the price of good x will be too low Pure Public Good - CORRECT ANSWER-a good characterized by nonrival consumption and nonexcludability Example: Air A Free Market Economy - CORRECT ANSWER-will provide less than the optimal quantity of public goods If a particular market is served by a monopoly then... - CORRECT ANSWER-A) the quantity provided by the monopolist is likely to be less than the optimal quantity B) the price charged by the monopolist is likely to be above the optimal price C) the firm may be less innovative than if it faced vigorous competition from other sellers concerns that economists have regarding market outcomes - CORRECT ANSWER-A) markets sometimes fail to provide efficient outcomes B) market outcomes may not provide for equitable provision of basic goods Examples of government programs designed to address concerns regarding equity include - CORRECT ANSWER-A) universal access to K-12 education in the U.S. B) the U.S. "food stamp" (SNAP) program C) universal access to health care in France Example of "Command and Contol' - CORRECT ANSWER-a uniform emission standard combined with a mandate to use a specific pollution control technology problems that may arise with the use of command-and-control regulation - CORRECT ANSWER-A) the allocation of abatement effort across sources is unlikely to be cost effective B) the choice of abatement technology may be subject to political distortions