Review Test Submission: Quiz 2
Course Public Finance
Test
Quiz 2
Instructions
This quiz consist of 30 multiple choice questions. The first 15 questions cover the material in Chapter
2. The second 15 questions cover the material in Chapter 3. Be sure you are in the correct Chapter
when you take the quiz.
Question 1
Which of the following is a normative statement?
Answer
Correct Answer:
To achieve efficiency, governments should prevent monopoly in markets.
Question 2
If a government desires to increase production beyond the current competitively determined
efficient level, the government should:
Answer
Selected Answer:
subsidize the good at a price higher than its current price.
Correct Answer:
subsidize the good at a price higher than its current price.
Question 3
If the efficient output of a good is produced each week, then the:
Answer
week.
Correct Answer:
week.
Question 4
Normative economics:
marginal social benefit of the good equals its marginal social cost each
Answer
Correct Answer:
makes recommendations to achieve efficient outcomes.
Question 5
Diamonds are sold by a monopoly firm that maximizes profits. Then it follows that:
Answer
Selected Answer:
the marginal social benefit of diamonds exceeds its marginal social cost.
Correct Answer:
the marginal social benefit of diamonds exceeds its marginal social cost.
Question 6
The marginal social cost of bread exceeds the marginal social benefit at the current weekly output.
Therefore,
Answer
Selected Answer:
a reduction in weekly output of bread is necessary to achieve efficiency.
Correct Answer:
a reduction in weekly output of bread is necessary to achieve efficiency.
Question 7
An efficient level of output means:
Answer
Correct Answer:
the total social benefit less the total social cost is maximized.
Question 8
Positive economics is:
Answer
Correct Answer:
values.
an objective approach without a particular goal based on underlying
Question 9
Suppose the efficient output currently prevails in the market for ice cream. A tax on ice cream
con-sumption will:
Answer
Correct Answer:
result in less than the efficient output in the market.
Question 10
The extra benefit on one more unit of a good or service is its:
Answer
Selected Answer:
marginal benefit.
Correct Answer:
marginal benefit.
Question 11
The total social benefit of automobiles equals the total social cost at current annual output. Then it
follows that:
Answer
Correct Answer:
the annual output of automobiles exceeds the efficient amount.
Question 12
Positive economics:
Answer
Selected Answer:
establishes cause-and-effect relationships between economic variables.
Correct Answer:
establishes cause-and-effect relationships between economic variables.
Question 13
Normative economics is:
Answer
Selected Answer:
based on a a conscious effort to implement a particular social goal.
Correct Answer:
based on a a conscious effort to implement a particular social goal.
Question 14
A move from an inefficient resource allocation to an efficient one:
Answer
Selected Answer:
will be unanimously approved if gainers compensate losers.
Correct Answer:
will be unanimously approved if gainers compensate losers.
Question 15
If efficiency has been attained,
Answer
Correct Answer:
another.
it will not be possible to make any one person better off without harming
Question 16
Assuming a product can be manufactured competitively without any externalities at an efficient
quantity of 1,000 units and an efficient price of $100.00 per unit, what efficient quantity-price
combination would be consistent with a negative externality?
Answer
Selected Answer:
950 units, $102.00 per unit price.
Correct Answer:
950 units, $102.00 per unit price.
Question 17
Electric power is produced by an unregulated monopoly in a certain region. The monopolistic
elec­tric power company’s production of electricity results in $10 per kilowatt hour of pollution
damage to parties other than the buyers of electricity in the region. To achieve efficiency,
Answer
Correct Answer:
less than $10 per kilowatt hour corrective tax is required.
Question 18
If the marginal costs of reducing emissions varies among regions, then regulations requiring all
regions in a nation to reduce emissions by the same amount will achieve:
Answer
Selected Answer:
more than the efficient amount of pollution abatement in some regions,
but less than the efficient amount in other regions.
Correct Answer:
more than the efficient amount of pollution abatement in some regions,
but less than the efficient amount in other regions.
Question 19
The effect of a positive externality is similar to:
Answer
Correct Answer:
Question 20
A demand curve (marginal social benefit) shifting to the right.
The marginal external cost associated with paper production is constant at $10 per ton per year. The
competitive market equilibrium for paper production is currently 10 million tons per year. A
corrective tax on paper production:
Answer
Selected Answer:
will collect less than $100 million annually.
Correct Answer:
will collect less than $100 million annually.
Question 21
The current competitive market price of fish is $3 per pound. A chemical producer emits effluent
into a lake used by a commercial fishing firm. Each ton of chemical output causes a 20-pound
reduction in the annual catch of the fishing firm. Assuming that transactions costs are zero and the
chemical firm has the legal right to dump effluent into the lake,
Answer
Correct Answer:
the fishing firm would be willing to pay up to $60 per ton of chemicals per
year to induce the chemical firm to reduce chemical output.
Question 22
The effect of a negative externality is similar to:
Answer
Correct Answer:
A supply curve (marginal social cost) shifting to the left.
Question 23
The marginal external cost associated with air pollution increases with the annual output of a
pollut-ing industry. At the current competitive equilibrium level of output per year, the marginal
external cost is $10 per unit of output. To achieve efficiency,
Answer
Correct Answer:
a corrective tax of less than $10 per unit of output is required.
Question 24
If a positive externality prevails in the market for smoke detectors, then when the market is in
equilibrium,
Answer
Correct Answer:
cost.
the marginal social benefit of smoke detectors exceeds the marginal social
Question 25
The competitive market equilibrium price of sanitation services in a small town with no governmentsupplied sanitation services is $2 per trash pickup. There is a $1 marginal external benefit associated
with each trash pickup. The elasticity of supply of trash pickups is infinite in the long run, implying a
horizontal supply curve. To achieve the efficient output of sanitation services,
Answer
Correct Answer:
a corrective subsidy must decrease the price paid by consumers of
sanitation services to $1 per pickup.
Question 26
Regulations require that emissions of carbon monoxide be limited to 1,000 tons per 100 square
miles for all regions of the nation. If the marginal external cost of the emissions varies among regions
in the nation, then the regulations will:
Answer
Selected Answer:
be likely to achieve more than the efficient amount of abatement in some
regions, but less than the efficient amount in others.
Correct Answer:
be likely to achieve more than the efficient amount of abatement in some
regions, but less than the efficient amount in others.
Question 27
According to the Coase theorem, externalities can be internalized when transactions costs are zero
through:
Answer
Correct Answer:
assignment of property rights to use resources and allowing free exchange
of assigned property rights.
Question 28
Assuming a product can be manufactured competitively without any externalities at an efficient
quantity of 500 units and an efficient price of $150.00 per unit, what efficient quantity-price net
subsidy combination would be consistent with a corrective subsidy for a positive externality?
Answer
Correct Answer:
700 units, $100.00 per unit price net subsidy.
Question 29
A negative externality results from the sale of firewood in competitive markets. Then it follows that:
Answer
Correct Answer:
the marginal private cost of firewood is less than its marginal social cost.
Question 30
Which of the following is true about command-and-control regulation that allows businesses to emit
pollutants up to a certain point and bans emissions after that limit is reached?
Answer
Correct Answer:
They allow firms to emit some pollutants at zero charge.