Name: ______________________ Score: ________________________ AP Microeconomics Unit 6 Test Part I Multiple Choice: Select the answer that Teacher thinks is best (2 points each) 1. Which of the following BEST defines adverse selection? a. Market failure that results from externalities b. Market failure that results from imperfect information c. Market failure that results from inequality d. Market failure that results from a lack of government intervention 2. Socially efficient outcomes occur when: a. cost and benefits are internalized b. deadweight loss occurs c. a Lorenz curve bends outward d. a Gini coefficient is closest to 1 3. Equilibrium allocations deviate from socially optimum allocations due to the presence of: a. inequality b. high taxes c. externalities d. a barrier to entry 4. Which of the following BEST defines social benefit? a. The number of people who are able to enjoy a public good b. A government’s ability to eliminate free-riders c. A government’s ability to provide public goods d. The total benefit society receives when a good/service is producing or consumed 5. Which of the following BEST describes how rational agents can cause market failure? a. They provide incomplete or flawed information about their production or consumption b. They under consume when a good is non-excludable c. They fail to pay their fare share of taxes d. They fail to internalize the costs of their over-production 6. Government actions like per-unit taxes and/or subsidies generally attempt to: a. minimize the effects of inequality b. reduce or eliminate market inefficiencies c. lower costs and increase output d. Increase government revenues 7. Producing any non-efficient quantity results in: a. deadweight loss b. overproduction c. underproduction d. free-riders 8. Externalities can be either positive or negative and they arise from a lack of well-defined _______________________ and/or high transaction costs. a. income taxes b. property rights c. common goods d. consumption quotas 9. Which of the following is NOT a tool governments use to address externalities? a. Prison sentences b. Taxes and/or subsidies c. Environmental regulations d. Public provision 10. The primary purpose of government antitrust policies is to: a. help firms lower production costs b. decrease overall inequality in society c. make markets more competitive d. eliminate competition from imports 11. Which of the following is an example of a positive externality? a. Air pollution from a factory b. A neighbor planting a beautiful garden c. Traffic congestion caused by commuters d. Secondhand smoke from cigarettes 12. Which of the following are characteristics of a public good? a. It is non-rivalrous and non-excludable b. It is non-rivalrous and excludable c. It is rivalrous and non-excludable d. It is rivalrous and excludable 13. When a negative externality is present, the market equilibrium quantity is: a. higher than the socially optimal quantity b. lower than the socially optimal quantity c. the same as the socially optimal quantity d. unchanged by the externality 14. Which of the following is the BEST example of a public good? a. national defense b. private insurance c. a concert ticket d. a new car 15. Which of these BEST describes the so-called "tragedy of the commons"? a. Overuse of a common resource due to lack of property rights b. An efficient allocation of resources by the government c. Market failure caused by the absence of externalities d. A local government’s failure to provide public goods 16. If the government imposes a per-unit tax on a good that generates negative externalities, which of the following is MOST LIKELY to happen as a result? a. The equilibrium price will decrease, and the equilibrium quantity will increase b. The equilibrium price will increase, and the equilibrium quantity will decrease c. The equilibrium price will decrease, and the equilibrium quantity will increase d. The equilibrium price and quantity will remain unchanged 17. Which of these is the BEST example of a government’s response to a negative externality? a. A subsidy for renewable energy production b. A cap-and-trade system for carbon emissions c. A reduction in the minimum wage d. A tax cut for businesses 18. Which of these would be a governmental response to market failure caused by a POSITIVE externality? a. Imposing a tax on factory emissions b. Subsidizing public education c. Providing free healthcare d. Regulating monopolies 19. What does "market failure” actually mean? a. When a market reaches equilibrium b. When the quantity demanded exceeds the quantity supplied c. When the allocation of resources is inefficient and does not maximize total surplus d. When the market experiences perfect competition 20. Which of the following would be the optimal outcome for a market with negative externalities? a. A total lack of government intervention or correction b. A higher level of production and consumption than the quantity found at market equilibrium c. A lower level of production and consumption than the quantity found at market equilibrium d. A market failure with no possible solution 21. In the case of a positive externality, the market equilibrium: a. underproduces the good relative to the socially optimal quantity b. overproduces the good relative to the socially optimal quantity c. leads to the same output as the socially optimal quantity d. is unchanged by either the externality or government intervention 22. Which of the following is MOST likely to be a "club good,” as defined by the AP curriculum? a. A public park b. A toll road c. A national defense program d. Clean air 23. If a good is both rivalrous and excludable, it MUST be classified as a: a. public good b. private good c. common resource d. club good 24. Which of the following is the BEST example of a common resource? a. A radio broadcast b. A public beach c. A toll road d. A members-only swimming pool 25. Which of the following is true of a tax on a good with negative externalities? a. The tax shifts the supply curve to the right b. The tax shifts the demand curve to the right c. The tax moves the market closer to the socially optimal quantity d. The tax reduces producer surplus without affecting consumer surplus 26. Which of the following statements BEST describes the inefficiency created by “free-riders?” a. The market fails because too many goods are produced b. The market fails because people use a resource without paying for it c. The market fails because the government sets prices too low d. The market fails because too few goods are available 27. Which of the following is true about a per-unit tax imposed on the seller of a good with negative externalities? a. The tax increases the equilibrium quantity of the good b. The tax decreases the equilibrium price of the good c. The tax shifts the supply curve to the left d. The tax has no effect on the consumer price 28. Which of the following is the BEST example of a private good? a. A city bus ride b. A subscription to a streaming service c. A national park d. A tsunami warning system 29. Which of the following is MOST likely to be a non-rivalrous good? a. A concert ticket b. A public broadcast c. A seat at a stadium d. A piece of clothing 30. Unlike per-unit taxes, lump-sum taxes: a. do not generate government revenue b. do not alter marginal cost or marginal benefit c. do not help fix market failure caused by externalities d. Do not help minimize inequality in society 31. Which of the following is a way to correct market failure caused by overuse of a common resource? a. Providing a subsidy for consumption b. Imposing a price floor on consumers c. Implementing a system of property rights or regulation d. Removing all forms of government regulation 32. Which of the following BEST describes the role of governments with relation to public goods? a. Reducing the production of all public goods b. Providing the public good or subsidizing its production c. Regulating the price of the good through taxes or quotas d) Imposing taxes on any goods that compete with a public good 33. Which of the following will MOST LIKELY result from a good that generates positive externalities? a. The private benefit is higher than the social benefit b. The social benefit exceeds the private benefit c. The social cost is greater than the private cost d. The good is underproduced in the market 34. Which of the following is the BEST example of government intervention to correct positive externalities? a. A subsidy for electric cars b. A tax on gasoline c. A cap on industrial emissions d. A price ceiling on health insurance 35. Which of these is the BEST an example of a "merit good?” a. Healthcare b. Cigarettes c. Alcohol d. Fast food ***EXTRA CREDIT*** What is the term used to describe a corrective tax designed to reduce a negative externality? a. A price floor b. A Pigovian tax c. A production subsidy d. A price ceiling Part II Free Response: Answer all questions in the space provided. (30 points total) 36. If Country A’s Gini ratio is .25 and Country B’s Gini ratio is .5, which is LESS equal? (2 points) 37. Suppose society consists of 5 families whose incomes are $9,500 $14,250, $23,750, $47,500, and $95,000. a. What is the total income in this society? (2 points) b. What percentage of total income is earned by the poorest quintile? (3 points) c. What percentage of total income is earned by the richest quintile? (3 points) d. What percentages of total income are received by the second, third, and fourth quintiles? (5 points) e. Construct a Lorenz curve for this five-family economy. (7 points) 38. On the graph below, demonstrate the impact that free-riders have on society by drawing an INDIVIDUAL’s marginal personal benefit curve for a common resource? (3 points) 39. On the graph below, demonstrate the impact of a positive externality in PRODUCTION, including the deadweight loss that such an externality would create. (2 points curve, 3 points deadweight loss) Name: ______________________ Score: ________________________ AP Microeconomics Unit 6 Test - ANSWER KEY Part I Multiple Choice: Select the answer that Teacher thinks is best (2 points each) 1. Which of the following BEST defines adverse selection? a. Market failure that results from externalities b. Market failure that results from imperfect information c. Market failure that results from inequality d. Market failure that results from a lack of government intervention ANSWER: B 2. Socially efficient outcomes occur when: a. cost and benefits are internalized b. deadweight loss occurs c. a Lorenz curve bends outward d. a Gini coefficient is closest to 1 ANSWER: A 3. Equilibrium allocations deviate from socially optimum allocations due to the presence of: a. inequality b. high taxes c. externalities d. a barrier to entry ANSWER: C 4. Which of the following BEST defines social benefit? a. The number of people who are able to enjoy a public good b. A government’s ability to eliminate free-riders c. A government’s ability to provide public goods d. The total benefit society receives when a good/service is producing or consumed ANSWER: D 5. Which of the following BEST describes how rational agents can cause market failure? a. They provide incomplete or flawed information about their production or consumption b. They under consume when a good is non-excludable c. They fail to pay their fare share of taxes d. They fail to internalize the costs of their over-production ANSWER: D 6. Government actions like per-unit taxes and/or subsidies generally attempt to: a. minimize the effects of inequality b. reduce or eliminate market inefficiencies c. lower costs and increase output d. Increase government revenues ANSWER: B 7. Producing any non-efficient quantity results in: a. deadweight loss b. overproduction c. underproduction d. free-riders ANSWER: A 8. Externalities can be either positive or negative and they arise from a lack of well-defined _______________________ and/or high transaction costs. a. income taxes b. property rights c. common goods d. consumption quotas ANSWER: B 9. Which of the following is NOT a tool governments use to address externalities? a. Prison sentences b. Taxes and/or subsidies c. Environmental regulations d. Public provision ANSWER: A 10. The primary purpose of government antitrust policies is to: a. help firms lower production costs b. decrease overall inequality in society c. make markets more competitive d. eliminate competition from imports ANSWER: C 11. Which of the following is an example of a positive externality? a. Air pollution from a factory b. A neighbor planting a beautiful garden c. Traffic congestion caused by commuters d. Secondhand smoke from cigarettes ANSWER: B 12. Which of the following are characteristics of a public good? a. It is non-rivalrous and non-excludable b. It is non-rivalrous and excludable c. It is rivalrous and non-excludable d. It is rivalrous and excludable ANSWER: A 13. When a negative externality is present, the market equilibrium quantity is: a. higher than the socially optimal quantity b. lower than the socially optimal quantity c. the same as the socially optimal quantity d. unchanged by the externality ANSWER: A 14. Which of the following is the BEST example of a public good? a. national defense b. private insurance c. a concert ticket d. a new car ANSWER: A 15. Which of these BEST describes the so-called "tragedy of the commons"? a. Overuse of a common resource due to lack of property rights b. An efficient allocation of resources by the government c. Market failure caused by the absence of externalities d. A local government’s failure to provide public goods ANSWER: A 16. If the government imposes a per-unit tax on a good that generates negative externalities, which of the following is MOST LIKELY to happen as a result? a. The equilibrium price will decrease, and the equilibrium quantity will increase b. The equilibrium price will increase, and the equilibrium quantity will decrease c. The equilibrium price will decrease, and the equilibrium quantity will increase d. The equilibrium price and quantity will remain unchanged ANSWER: B 17. Which of these is the BEST example of a government’s response to a negative externality? a. A subsidy for renewable energy production b. A cap-and-trade system for carbon emissions c. A reduction in the minimum wage d. A tax cut for businesses ANSWER: B 18. Which of these would be a governmental response to market failure caused by a POSITIVE externality? a. Imposing a tax on factory emissions b. Subsidizing public education c. Providing free healthcare d. Regulating monopolies ANSWER: B 19. What does "market failure” actually mean? a. When a market reaches equilibrium b. When the quantity demanded exceeds the quantity supplied c. When the allocation of resources is inefficient and does not maximize total surplus d. When the market experiences perfect competition ANSWER: C 20. Which of the following would be the optimal outcome for a market with negative externalities? a. A total lack of government intervention or correction b. A higher level of production and consumption than the quantity found at market equilibrium c. A lower level of production and consumption than the quantity found at market equilibrium d. A market failure with no possible solution ANSWER: C 21. In the case of a positive externality, the market equilibrium: a. underproduces the good relative to the socially optimal quantity b. overproduces the good relative to the socially optimal quantity c. leads to the same output as the socially optimal quantity d. is unchanged by either the externality or government intervention ANSWER: A 22. Which of the following is MOST likely to be a "club good,” as defined by the AP curriculum? a. A public park b. A toll road c. A national defense program d. Clean air ANSWER: B 23. If a good is both rivalrous and excludable, it MUST be classified as a: a. public good b. private good c. common resource d. club good ANSWER: B 24. Which of the following is the BEST example of a common resource? a. A radio broadcast b. A public beach c. A toll road d. A members-only swimming pool ANSWER: B 25. Which of the following is true of a tax on a good with negative externalities? a. The tax shifts the supply curve to the right b. The tax shifts the demand curve to the right c. The tax moves the market closer to the socially optimal quantity d. The tax reduces producer surplus without affecting consumer surplus ANSWER: C 26. Which of the following statements BEST describes the inefficiency created by “free-riders?” a. The market fails because too many goods are produced b. The market fails because people use a resource without paying for it c. The market fails because the government sets prices too low d. The market fails because too few goods are available ANSWER: B 27. Which of the following is true about a per-unit tax imposed on the seller of a good with negative externalities? a. The tax increases the equilibrium quantity of the good b. The tax decreases the equilibrium price of the good c. The tax shifts the supply curve to the left d. The tax has no effect on the consumer price ANSWER: C 28. Which of the following is the BEST example of a private good? a. A city bus ride b. A subscription to a streaming service c. A national park d. A tsunami warning system ANSWER: B 29. Which of the following is MOST likely to be a non-rivalrous good? a. A concert ticket b. A public broadcast c. A seat at a stadium d. A piece of clothing ANSWER: B 30. Unlike per-unit taxes, lump-sum taxes: a. do not generate government revenue b. do not alter marginal cost or marginal benefit c. do not help fix market failure caused by externalities d. Do not help minimize inequality in society ANSWER: B 31. Which of the following is a way to correct market failure caused by overuse of a common resource? a. Providing a subsidy for consumption b. Imposing a price floor on consumers c. Implementing a system of property rights or regulation d. Removing all forms of government regulation ANSWER: C 32. Which of the following BEST describes the role of governments with relation to public goods? a. Reducing the production of all public goods b. Providing the public good or subsidizing its production c. Regulating the price of the good through taxes or quotas d. Imposing taxes on any goods that compete with a public good ANSWER: B 33. Which of the following will MOST LIKELY result from a good that generates positive externalities? a. The private benefit is higher than the social benefit b. The social benefit exceeds the private benefit c. The social cost is greater than the private cost d. The good is underproduced in the market ANSWER: B/D 34. Which of the following is the BEST example of government intervention to correct positive externalities? a. A subsidy for electric cars b. A tax on gasoline c. A cap on industrial emissions d. A price ceiling on health insurance ANSWER: A 35. Which of these is the BEST an example of a "merit good?” a. Healthcare b. Cigarettes c. Alcohol d. Fast food ANSWER: A ***EXTRA CREDIT*** What is the term used to describe a corrective tax designed to reduce a negative externality? a. A price floor b. A Pigovian tax c. A production subsidy d. A price ceiling ANSWER: B Part II Free Response: Answer all questions in the space provided. (30 points total) 36. If Country A’s Gini ratio is .25 and Country B’s Gini ratio is .5, which is LESS equal? (2 points) COUNTRY B IS LESS EQUAL. THE GINI RATIO RANGES FROM 0-1, WITH LOWER VALUES REPRESENTING MORE EQUALITY AND HIGHER NUMBERS REPRESENTING LESS EQUALITY. 37. Suppose society consists of 5 families whose incomes are $9,500 $14,250, $23,750, $47,500, and $95,000. a. What is the total income in this society? (2 points) b. What percentage of total income is earned by the poorest quintile? (3 points) c. What percentage of total income is earned by the richest quintile? (3 points) d. What percentages of total income are received by the second, third, and fourth quintiles? (5 points) e. Construct a Lorenz curve for this five-family economy. (7 points) a. Total income in the society is $9,500 + $14,250, $23,750 + $47,500 + $95,000 = $190,000 b. Since there are only 5 families, the poorest quintile consists of the lowest-income family, which earns just $9,500. As a percentage of total income, this is 5%: 9,500/160,000 = .05, or 5%. c. The richest quintile consists only of the highest-income family, which earns $95,000. This is half, or 50%, of the total income of $190,000. d. Second quintile: $14,250/$190,000 = 7.5% Third quintile: $23,750/$190,000 = 12.5%; Fourth quintile: $47,500/$190,000 = 25% e. The Lorenz curve with the above values would look like this: 38. On the graph below, demonstrate the impact that free-riders have on society by drawing an INDIVIDUAL’s marginal personal benefit curve for a common resource? (3 points) The individual’s Marginal Personal Benefit curve is drawn on the graph MPB 39. On the graph below, demonstrate the impact of a positive externality in PRODUCTION, including the deadweight loss that such an externality would create. (2 points curve, 3 points deadweight loss) MPC Note that MSC is greater than MPC Deadweight area is the triangle shaded in black .
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