Public Finance Quiz 1 And 2

Front 1

The real cost of government goods and services is

Back 1

The private goods and services foregone.

Front 2

If the economy is currently operating on a point on the production possibility curve for government goods and services versus private goods and services,

Back 2

A decrease in the annual output of government goods and services will allow and increase in annual output of private goods and services.

Front 3

If the marginal social benefit of a good exceeds the marginal social cost at the current monthly output, then

Back 3

An increase in monthly output will be required for efficiency.

Front 4

Diamonds are sold by a monopoly firm that maximizes profits. Then it follows that:

Back 4

The marginal social benefit of diamonds exceeds its marginal social cost.

Front 5

Suppose the efficient output currently prevails in the market for ice cream. A tax on ice cream consumption will

Back 5

Result in less than the efficient output in the market.

Front 6

Which of the following is a normative statement (opinion)

Back 6

To achieve efficiency, governments should prevent monopoly on markets.

Front 7

The first fundamental theorem of welfare economics states that

Back 7

The competitive equilibrium, where supply equals demand, maximizes efficiency.

Front 8

Asymmetric information represents a market situation in which

Back 8

One party in a transaction has more information that the other party.

Front 9

If banks face a problem in loan markets when bad credit risks are the ones most likely to seek bank loans, it is

Back 9

Adverse selection.

Front 10

Ace computers suddenly increases in demand for disk drive controllers, causing the market price of controllers to increase for all its competitors and suppliers. This is an example of

Back 10

A pecuniary externality-no need to do anything, already internalized.

Front 11

An infra marginal positive externality

Back 11

Requires no action because the optimal level of output has been reached.

Front 12

A positive externality results from the purchase of smoke detectors. If smoke detectors are sold in a competitive market,

Back 12

The marginal social benefit of smoke detectors will exceed the marginal private benefit received by any consumer.

Front 13

The general theory of second best

Back 13

Suggests that efficiency might be achieved by the introduction of an offsetting economic distortion.

Front 14

A corrective unit tax

Back 14

Should be set equal to the amount of the marginal external cost at the efficient level of output.

Front 15

If the marginal external cost of gas consumption is $.25 and the market equilibrium quantity exceeds the efficient quantity by 8 billion, the dead weight loss of the externality is 1 billion.

Back 15

True. 1/2bh.

Front 16

Characteristics of pure public goods

Back 16

A. Not subject to exclusion. (non excludable)

B. Infeasible to price for market distribution.

C. It's availability results in widely consumed external benefits. (non rival)

D. Not divisible into units that can be apportioned among consumers.

Front 17

The marginal cost of distributing a pure public good to an additional consumer is

Back 17

Zero.

Front 18

Congestible public good

Back 18

Road.

Front 19

The marginal cost of making a given quantity of congestible public good available to more consumers is

Back 19

Zero at first but eventually becomes positive and increasing.

Front 20

The efficient output of a pure public good is achieved at the point at which

Back 20

The sum of the marginal benefits of all consumers equals the marginal social cost of producing the good.