1) The basis of the argument favoring government intervention to correct informational and rationality problems is that:

A.if information is not perfect or if one trader is not rational, a trade can result in one party benefiting and the other losing.

B.entry into certain markets may be restricted so that excess profits cannot be eliminated by the forces of competition.

C.people cannot possibly know how well off they will be as a result of a trade until after the trade has occurred.

D.if individuals are free to produce whatever goods they want, then when excess profit is being made, more people will enter into the production of that good and consumers will benefit as the price is pushed down.

2. The existence of negative externalities:

A. prevents the market from working efficiently.

B. prevents government from intervening in the marketplace.

C. causes the market to work more effectively.

D. necessarily means that government must intervene in the marketplace.

3. If a negative externality exists in the production of paper and paper is sold in a perfectly competitive market, then at the equilibrium output:

A. additional net gains to society are possible by reducing the output of paper.

B. additional net gains to society are possible by increasing the output of paper.

C. the marginal social benefit of paper equals its marginal social cost.

D. additional net gains to society are not possible from either increasing or decreasing the output of paper.

4) If a negative externality exists in the market for dirt bikes and that market is perfectly competitive:

A. less than the efficient output of dirt bikes will be produced.

B. the price of dirt bikes exceeds the marginal social cost.

C. the price of dirt bikes equals the marginal social cost.

D. the price of dirt bikes is less than the marginal social cost.

5) In the Flint Hills Area of Kansas, proposals to build wind turbines to generate electricity have pitted environmentalist against environmentalist. Members of the Kansas Sierra Club support the turbines as a way to reduce use of fossil fuel, while local chapters of the Nature Conservancy say they will befoul the landscape. The Sierra Club argues that wind turbines:

A. are a source of negative externalities.

B. reduce negative externalities elsewhere in the economy.

C. create a free-rider problem.

D. are a way of solving a free-rider problem.

6) Suppose the marginal benefit (MB) of national defense is MB = 1,000 - 10Q, where Q measures units of national defense, for Charlie and MB = 400 - 4Q for Sally. Combining Charlie's and Sally's marginal benefits yields social MB = 1,400 - 14Q. If the marginal cost of providing national defense is 840 and the efficient level of national defense is provided at a cost of 420 per unit of national defense each for Charlie and Sally, then:

A. Sally would be paying more for national defense than she thinks it is worth.

B. Charlie would be paying more for national defense than he thinks it is worth.

C. the benefits of national defense would exceed the cost for both Charlie and Sally.

D. the cost of national defense would exceed the benefits for both Charlie and Sally.

7) Music spreads easily and cheaply on computer networks. As a result, music has become more like:

A. a private good.

B. a public good.

C. a merit good.

D. an inferior good.

8) The best example of a public good is:

A. competition.

B. government-subsidized lunches.

C. pollution.

D. national defense.

9) The Apple iPod is able to play digital music that has a special encoding that makes pirating music more difficult. In economic terms, this encoding is an attempt to:

A. make digital music more like a private good and less like a public good.

B. reduce the negative externalities of digital music.

C. reduce the adverse selection problem of digital music.

D. increase the marginal social benefit of digital music.

10) Both opponents of and proponents of government intervention would most likely agree with which of the following?

A. Government can and does create proper incentives to correct for externalities.

B. Property rights eliminate the need for government.

C. The market is inherently fair.

D. Property rights must exist for a market to operate.