Political Economy
Final Examination

These multiple choice questions are a sample from the mid-term and final exams.

 

Lesson 1

1. For private property, what does a “bundle of rights” mean?

A) Property owners have the right to do anything with their property, even if it harms neighbors.
B) Government has limited resources.
C) Government restricts activities on private property, where the activities could harm neighbors, like zoning laws.
D) Government owns all land, machines and equipment.

2. Which of the following goods is the market sector most likely to undersupply, because the good is a public good?

A) Radios
B) Internet access
C) Bread
D) Roads and access to roads cannot be restricted.

3. Which of the following goods is the market sector most likely to undersupply, because the good is a public good?

A) Steel.
B) Television sets.
C) Mosquito abatement programs.
D) Internet access.

4. Assume there is a group of sellers that can restrict entry into a market. Compared to a competitive situation, the group will often be able to enlarge its total profit by:

A) Raising price and reducing output.
B) Raising price and expanding output.
C) Lowering price and expanding output.
D) Raising price and leaving output unchanged.

5. Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful chemicals into rivers. What type of problem is this?

A) This is an example of an externality.
B) This is an example of an unregulated monopoly.
C) This is an example of an asymmetric problem.
D) Property rights are well defined.

6. What is the definition of capitalism?

A) Government owns all the machines and equipment of society.
B) Competitive markets determine price and output.
C) Decisions of prices and output are made “collectively” by a government committee.
D) Property is privately owned, but government heavily regulates property.

7. Suppose government allows a petroleum company, free of charge, to pollute the air. What type of problem is this?

A) Property rights are well defined.
B) This is an example of an unregulated monopoly.
C) This is an example of an externality.
D) This is an example of an asymmetric problem.

8. Which of the following is true about the market and public sectors?

A) Government can use force to modify behavior, while private sector is more limited.
B) Competition is not present in the public sector.
C) Both the private and public sectors establish the legal structure.
D) Government has infinite resources, while the private sector has limited resources.

9. What is the definition of socialism?

A) Government owns all the machines and equipment of society.
B) Competitive markets determine price and output.
C) Decisions of prices and output are made by consumers and producers.
D) Property is privately owned, and government only protects property rights.

10. What is the definition of social regulation?

A) Government taxes one market and subsidizes another market.
B) Government sees a societal problem, and passes regulation to correct problem.
C) Government protects property against invaders.
D) Government provides a public good.

11. What is asymmetric information problem?

A) Regulations conflict among different levels of government.
B) A monopoly increases market price and decreases quantity.
C) Both the buyer and seller have the same, and equal information.
D) Either the buyer or the seller has more information than the other person.

12. What is difference between the public and private sectors?

A) Both sectors use the rule: Benefits of activity is greater than costs.
B) Government can raise taxes, if it has financial problems, while firms can bankrupt.
C) Both government and firms have limited resources.
D) Competitive behavior is present for both sectors.

13. What is a problem of regulation?

A) Regulators and their regulated companies never become too friendly.
B) Regulations among different government branches never conflict.
C) Government passes regulations to address a problem, but the regulations make the problem worse.
D) Bureaucrats put the public interests before self-interest.

14. What is a problem of regulation?

A) Bureaucrats are never political.
B) Regulations among different government branches never conflict.
C) Bureaucrats always keep rules and regulations simple.
D) Bureaucrats have self-interest.

15. What is difference between the public and private sectors?

A) Both sectors use the rule: Benefits of activity is greater than costs.
B) Government can redistribute wealth while the private sector cannot.
C) Both government and firms have limited resources.
D) Competitive behavior is present for both sectors.

16. What is a problem of regulation?

A) Regulators and their regulated companies never become too friendly.
B) Regulations among different government branches never conflict.
C) Regulations can become rigid and not change when society changes.
D) Bureaucrats put the public interests before self-interest.

17. The total cost of government activities is:

A) The costs expended by regulatory agency
B) The cost of government collecting of taxes
C) Price distortions, where regulations and taxes have a negative impact on regulated markets
D) The sum of a, b, and c

Lesson 2

18. The term ceteris paribus means that:

A) Everything is variable.
B) All variables except those specified are constant.
C) No one knows which variables will change and which will remain constant.
D) The Law of Demand does not apply.

19. Who is considered to be the father of economics?

A) Adam Smith and the writing of The Wealth of Nations (1776).
B) David Ricardo and the writing of The Principles of Political Economy and Taxation (1817).
C) Aristotle and the writing of Politics and Ethics (350 B.C.).
D) Moses and the Ten Commandments.

20. The Law of Demand asserts that:

A) Every physical good has a use.
B) When people want a good badly enough, they will steal it.
C) The desire for a good relates directly to its price.
D) The market price and quantity are inversely related.

21. Which of the following will decrease the demand for coffee?

A) The discovery that caffeine can cause heart problems.
B) A decrease in the number of doctors.
C) An increase in the price of tea.
D) An increase in the price of coffee.

22. Which factors shift the demand function?

A) Consumer tastes and preferences
B) Consumer income
C) Prices of substitutes and complements
D) All answers shift the demand function

23. What is consumers' surplus?

A) An aggregate benefit to all consumers in the market
B) An aggregate benefit to all producers in the market
C) A factor that shifts the demand function
D) A factor that shifts the supply function

24. Scientist discover a new technology for making beer that allows the same amount of beer to be produced with only half as much barley and hops. What will happen in the beer market?

Write out the graph, if you need to!

A) The supply of beer will decrease, and the price will increase.
B) The supply of beer will decrease, and the price will decrease.
C) The supply of beer will increase, and the price will increase.
D) The supply of beer will increase, and the price will decrease.

25. Prices is important in a market economy because it:

A) Eliminates imbalances between supply and demand.
B) Communicates information to buyers and sellers.
C) Coordinates the choices of consumers and producers and brings them into harmony.
D) All of the above.

26. What happens in a market, if there is excess demand (i.e. shortage) of a product with no government price control?

A) Price tends to fall
B) Price is above market price
C) Producers will decrease output and sales will fall
D) Price tends to increase

27. If bicycles and bus travel are substitutes:

A) An increase in the price of bicycles will decrease the demand for bus travel.
B) Consumers buy fewer bicycles if bus fares fall.
C) An increase in the price of bicycles will decrease purchases of both bicycles and bus trips.
D) A rise in the price of bus travel will shift the demand curve for bicycles to the left.

28. Bill pays $150 a month for electricity, when he would gladly pay $250 for the same service. This is an example of:

A) Irrational pricing by the electric company.
B) Price discrimination.
C) Consumers' surplus.
D) This is a trick question because nobody pays less for something than it is worth to them.

29. When economists say the demand for a product has decreased, they mean that:

A) The demand curve has shifted to the left.
B) The product price has increased, and consequently, consumers are buying less of the product.
C) Consumers are now willing and able to buy more of this product at each possible price.
D) Consumers no longer value the product.

30. The Law of Supply asserts that:

A) Every physical good has a use
B) When people want a good badly enough, they will steal it
C) Prices tend to increase over time
D) The market price and quantity are positively related

31. What is producers' surplus?

A) Every physical good has a use
B) When people want a good badly enough, they will steal it
C) An aggregate benefit to producers in the market
D) The market price and quantity are inversely related

32. What is a market surplus?

A) Producers supply more product than consumers want
B) Producers supply less product than consumers want
C) An aggregate benefit to producers in the market
D) An aggregate benefit to consumers in the market

33. What is a market shortage?

A) Producers supply more product than consumers want
B) Producers supply less product than consumers want
C) An aggregate benefit to producers in the market
D) An aggregate benefit to consumers in the market

34. What is elasticity of demand?

A) How responsive consumers are to changes in market price
B) A measure of social welfare
C) An aggregate benefit to producers in the market
D) An aggregate benefit to consumers in the market

35. When there is excess supply (i.e. surplus) of a product in a market with no government controls:

A) Price tends to rise.
B) Price is above equilibrium price.
C) Producers will expand output and sales will rise.
D) Price is below equilibrium price.

36. Which factors shift the supply function?

A) Taxes
B) Prices for resource inputs
C) The number of sellers in the market
D) All answers shift the supply function

37. How will an increase in lumber prices influence the home construction market?

A) The demand for newly constructed homes will rise.
B) The demand for newly constructed homes will fall.
C) The supply of newly constructed homes will rise.
D) The supply of newly constructed homes will fall.

38. In the Wealth of Nations, Adam Smith argued that:

A) Government control over economic activity is essential for the talents of individuals to be directed toward their highest valuation.
B) The economic wealth of a nation is determined by a nation’s holdings of precious metals, such as gold and silver.
C) Public policy should prohibit domestic producers from selling their goods to foreigners.
D) Free (competitive) markets will bring individual self-interest and the public interest into harmony.

39. Using the supply and demand curves for the automobile market, what happens to the automobile market if the automobile taxes decreases? Select the correct answer below.

A) The demand increases and shifts to the right.
B) The demand decreases and shifts to the left.
C) The supply increases and shifts to the right.
D) The supply decreases and shifts to the left.

40. Using the same information in Question 39, what happens to the market price of automobiles.

A) The market price increases.
B) The market price decreases.
C) The market price does not change.
D) There is not enough information to answer this question.

41. Using the same information in Question 39, what happens to the equilibrium quantity of automobiles?

A) The equilibrium quantity increases.
B) The equilibrium quantity decreases.
C) The equilibrium quantity does not change.
D) There is not enough information to answer this question.

Lesson 3

42. If a new government price support program sets the price of beef above market equilibrium (price floor), which of the following will most likely happen?

A) Demand for beef will increase.
B) Supply of beef will increase.
C) There will be a surplus of beef.
D) There will be a shortage of beef.

43. Which of the following will result from rent controls that reduce rents below market equilibrium?

A) The quality of existing housing will deteriorate.
B) The future supply of rental housing will decrease.
C) Property owners will force tenants to pay “under the table” payments..
D) All of the above are correct.

44. Which of the following statements is true?

A) In both black and normal markets, supply and demand determine price.
B) The quality of products sold in black and normal markets are similar.
C) The price of products in black markets tends to be the same as those in normal markets for otherwise identical products.
D) The rate of violence is similar in black markets and normal markets.

45. Black markets develop when people try to:

A) Avoid taxes.
B) Purchase illegal items.
C) Evade costly regulations.
D) All of the above are correct.

46. The “incidence of a tax” is the term used to indicate:

A) The person responsible for collecting the tax.
B) Who actually bears the economic burden of the tax.
C) Who the tax is initially levied on.
D) The regressive rate structure of the tax.

47. The graph below represents a tax on a product. Which area represents the deadweight loss to society?

A) c + f
B) a + b
C) d + e
D) a + b + d + e

Economic impact of a tax

48. Using the graph from the last question, which area represents the tax collected by government?

A) c + f
B) a + b
C) d + e
D) a + b + d + e

49. The graph below represents a subsidy on a product. Which area represents the subsidy paid to producers?

A) c
B) a + b
C) d + e + f
D) a + b + c + d + e + f

An impact of a subsidy

50. Looking at the graph in the last question, which area represents the deadweight loss of the subsidy?

A) c
B) a + b
C) d + e + f
D) a + b + c + d + e + f

51. If a $2 tax per bottle of wine is imposed on wine producers, which of the following will occur?

A) The price of wine will increase, consumers purchase fewer bottles, and there will be a deadweight loss from this tax.
B) The price of wine will increase, consumers purchase more bottles, and consumers will gain as the result of this tax.
C) The price of wine will decrease, consumers purchase more bottles, and there will be a deadweight loss from this tax.
D) The supply of wine will increase, and the price of wine will be unchanged.

52. Many economists believe a general sales tax on food takes a larger proportion of income from low-income households than from high-income households. If this is true, a general sales tax is a:

A) Regressive tax.
B) Neutral tax.
C) Proportional tax.
D) Progressive tax.

53. Which of the following taxes takes an equal percentage of one’s income, regardless of income level?

A) Regressive tax.
B) Neutral tax.
C) Proportional tax.
D) Progressive tax.

54. The Laffer curve illustrates the relationship between:

A) Equity and efficiency.
B) Tax rates and tax revenues.
C) Inflation and unemployment.
D) Personal income and transfer payments.

55. Looking at the Laffer curve below with a current tax rate of 40%, how can government increase its tax revenue collection by changing the tax rate?

A) The government should decrease the tax rate.
B) The government should increase the tax rate.
C) The government should increase the tax rate to 100%.
D) The government cannot change its revenue by changing its tax rate.

The Laffer Curve

56. Looking at the Laffer curve above, how much tax revenue does government collect if the tax rate is 100%?

A) $0
B) The government should increase the tax rate
C) Government collects all money from the economy
D) The government cannot change its revenue by changing its tax rate

Lesson 4

57. If a government weakens its currency on the international markets, what happens to imports and exports?

A) Exports increase and imports decrease
B) Exports decrease and imports increase
C) Both imports and exports increase
D) Both exports and imports decrease

58. If a government strengthens its currency on the international markets, what happens to imports and exports?

A) Exports increase and imports decrease
B) Exports decrease and imports increase
C) Both imports and exports increase
D) Both exports and imports decrease

59. What is the argument behind protecting an “infant industry?”

A) A government opens country to international trade.
B) Government protects the export of “high technology”
C) Government protects young industries, so the industries can prosper and grow
D) Government nationalizes its industries

60. When government protects an industry, because the industry is critical, like petroleum, which reason is government using?

A) Protect an “infant industry”
B) Protect national security
C) Protect national health from contaminated products
D) Correct a balance-of-payments problem

61. If government is worried that another country will take away its comparative advantage, which reason is government using to protect its international trade?

A) Protect an “infant industry”
B) Protect national security
C) Protect national health from contaminated products
D) Protect an eroding comparative advantage

62. If government places a tax on imported goods, what is this called?

A) Tariff
B) Export subsidy
C) Quota
D) Laffer Curve

63. If government places a subsidy on exported goods, what is this called?

A) Tariff
B) Export subsidy
C) Quota
D) Laffer Curve

64. If government restricts the quantity of imports, what is this called?

A) Tariff
B) Export subsidy
C) Quota
D) Laffer Curve

65. Which area on the graph below represents the amount of tariff revenue the government collects?

A) a + c
B) a + b
C) b + d
D) c + d

An impact of a tariff

66. Which area on the graph above represents the deadweight loss of tariffs?

A) a + c
B) a + b
C) b + d
D) c + d

67. Which area on the graph below represents the deadweight loss of subsidies?

A) a + b
B) c
C) d + e + f
D) a + b + c + d + e + f

An impact of a subsidy

68. Which area on the graph above represents the amount of subsidies the government pays exporting producers?

A) d + e + f
B) a + b
C) c
D) a + b + c + d + e + f

69. Which is a characteristic of an Asian Tiger?

A) Asian tigers are natural resource abundant countries.
B) Asian tigers have high price distortions in their markets
C) Asian tigers have high education levels
D) Asian tigers closed their domestic markets to international trade

70. Which is a characteristic of an Asian Tiger?

A) Asian tigers are natural resource abundant countries.
B) Asian tigers have low price distortions in their markets
C) Asian tigers have low education levels
D) Asian tigers have high international trade barriers

71. In regards to Asian Tigers, why is a high savings rate important?

A) People save money in banks and banks lend money to businesses for machines and equipment
B) People save money and government taxes the savings
C) People save money and government officials steal their money for their own personal gain
D) People save money and banks lose the money in the financial markets
p>72. In regards to Asian Tigers, why is high education levels necessary?

A) A country with a highly educated workforce adopt technologies slowly
B) A country with a highly educated workforce can implement new technologies faster
C) A country with a highly educated workforce has large governments. A government can control the economy better.
D) A country with a highly educated workforce tends to have lazy workers.

73. Which is a characteristic of an Asian Tiger?

A) A government in an Asian Tiger tends to devalue its currency.
B) A government in an Asian Tiger tends to strengthen its currency.
C) A government in an Asian Tiger highly regulates its economy.
D) A government in an Asian Tiger closes its economy from the world.

Lesson 5

74. Which theory of regulation says government agencies do not do the functions that they were created for, such as a corrupt government?

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

75. Which theory of regulation says “expenditures rise to meet income?”

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

76. Which theory of regulation says industry controls the public agencies?

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

77. Which theory of regulation says government agencies increase in size every year with no relationship to work?

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

78. Which theory of regulation says government agencies serve the public’s interest?

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

79. Which theory of regulation says government regulation increases social welfare?

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

80. Which theory of regulation says “Work expands so as to fill the time available for its completion?”

A) Public Interest Theory
B) Capture Theory
C) Principal Agent View
D) Parkinson’s Law

81. Which regulatory employee will likely remain in the regulatory agency?

A) Careerist
B) Politician
C) Professional
D) Does not apply to any of them

82. Which regulatory employee likes to please interest groups?

A) Careerist
B) Politician
C) Professional
D) Does not apply to any of them

83. Which regulatory employee likes complicated rules?

A) Careerist
B) Politician
C) Professional
D) Does not apply to any of them

Lesson 6

84. What kind of costs are irrelevant when making decisions?

A) Variable costs
B) Fixed costs
C) Marginal costs
D) Sunk costs

85. Which type of business is owned by one person?

A) Corporations
B) Proprietorships
C) Partnerships
D) Consumer cooperatives

86. Which type of business is owned by two or more people?

A) Corporations
B) Proprietorships
C) Partnerships
D) Consumer cooperatives

87. Which type of business issues stock and could be owned by thousands of people?

A) Corporations
B) Proprietorships
C) Partnerships
D) Consumer cooperatives

88. In the short run, the marginal cost curve crosses the average total cost curve at:

A) A point just below the average fixed cost curve
B) The maximum point of the average variable cost curve
C) The minimum point on the average total cost curve
D) All of the above points

89. What is the difference between accounting profit and economic profit?

A) Accounting profit makes no allowance for opportunity costs, while economic profit takes these costs into account
B) They are the same thing
C) They are only different if the accountant makes a mistake
D) Accounting profit is usually smaller than economic profits

90. Which of the following must be true if average total costs are declining?

A) Marginal cost is greater than average variable cost
B) Marginal cost is less than average total cost
C) Marginal cost is greater than average total cost
D) Marginal cost equals average total cost

91. An advantage of the corporate structure over proprietorship and partnership forms of business organization is that:

A) Stockholders in the corporation have limited liability, whereas proprietors or partners have unlimited liability
B) Stockholders can easily transfer ownership rights of a corporation
C) Corporations attract large investment funds
D) All of the above are correct.

92. Which of the following would be considered an opportunity cost?

A) Foregone rent on assets owned by the firm
B) Health insurance
C) The water bill
D) The salaries paid to the managers of the firm

93. Which of the following factors of production is not variable in the long run?

A) The size of the firm’s plant
B) Property taxes on the assets of the firm
C) Highly trained labor
D) All factors are variable in the long run

94. What happens to the firm if output is expanding and MC is greater than ATC?

A) ATC must be at its minimum
B) ATC must be increasing
C) ATC must be decreasing
D) The firm must be earning economic profit

95. Looking at the graph below, which curve could this be?

A) Average fixed costs (AFC)
B) Average variable costs (AVC)
C) Average total costs (ATC)
D) Marginal costs (MC)

The average fixed costs

96. Looking at the graph below, which function could this be?

A) Average fixed costs (AFC)
B) A goofy curve
C) Law of Demand
D) Marginal cost (MC)

The marginal costs

97. The Law of Diminishing Marginal Returns explains the general shape of the firm’s:

A) Short-run cost curves
B) Long-run cost curves
C) Both short-run and long-run cost curves
D) The Law of Diminishing Marginal Returns has nothing to do with cost curves

98. The marginal cost of a good is:

A) Lower for competitive firms than for monopolies
B) The cost of an additional unit
C) Equal to fixed cost at high output levels
D) Equal to variable cost when the firm is maximizing profit

99. Looking at the graph below, which point represents diseconomies of scale?

A) Point (a)
B) Point (b)
C) Point (c)
D) Diseconomies of scale occur in the short run, not the long run

The economies of scale

100. Looking at the graph above, which point represents economies of scale?

A) Point (a)
B) Point (b)
C) Point (c)
D) Economies of scale occur in the short run, not the long run

101. Which of the following would cause a firm’s cost functions to shift upward?

A) A reduction in resource prices
B) A decrease in taxes
C) An increase in government regulations
D) An improvement in technology

102. If government increases taxes on business, what is the effect on a firm’s cost functions?

A) Costs increase and shift upward
B) Costs decrease and shift downward
C) Costs do not change
D) Government cannot legally tax businesses

103. Sunk costs:

A) Are a component of variable costs, but not fixed costs
B) Are expenditures made in the past that cannot be regained no matter what is done now or in the future
C) A company paid for them, therefore the firm’s managers have to consider these costs when they are making current decisions
D) Can be avoided if the firm goes out of business

Lesson 7

104. In purely competitive markets, individual firms have no control over price. Therefore, the firm’s marginal revenue curve is:

A) Indeterminate
B) Downward-sloping curve
C) Precisely the same as the firm’s total revenue curve
D) Equal to the product’s market price

105. Which is a characteristic of purely competitive markets?

A) Competitive markets only have one seller in market
B) Competitive markets have many producers in market
C) Firms in competitive markets earn long-run, excessive profits
D) Firms in competitive markets can influence the market price

106. If marginal revenue exceeds marginal cost (i.e. MR > MC), a purely competitive firm should:

A) Reduce output
B) Expand output
C) Lower its price
D) Increase its price

107. Firms that are purely competitive:

A) Must be small relative to the total market
B) Produce products that are identical to its competitors
C) Can sell its output at the market price
D) Can do all of the above

108. In general, firms will produce at a rate of output such that marginal revenue equals marginal cost because this output rate will:

A) Maximize the firm’s loss
B) Maximize the firm’s profit
C) Minimizes the firm’s profit
D) Result in the highest possible average total costs of production

109. If a firm is earning zero economic profit:

A) The firm has to shutdown and leave the market
B) The firm is doing as well as typical firms in other markets
C) The firm also earns zero accounting profit
D) The firm will bankrupt

110. In the short run, the supply function of a firm in a price-taker market is:

A) The firm’s ATC curve (above the minimum AVC)
B) The firm’s AVC curve (to the right of MC)
C) A horizontal line at the market price
D) The firm’s MC curve (above the minimum AVC)

111. The only way a firm can avoid fixed costs (e.g. bank loan) is by:

A) Going out of business
B) Laying off employees
C) Shutting down
D) Reorganizing its business

112. There are one thousand identical firms in a pure competitive industry. In the short run, the firms are earning profits. What will happen in the long run?

A) Nothing, because each firm is already maximizing its profits
B) Many firms will leave the market
C) Additional firms will enter the market, and profits will keep increasing
D) Additional firms will enter the market and economic profits will be driven to zero

113. In a purely competitive market, profits are:

A) The result of consumers being charged excessive high prices
B) The result of market barriers to entry
C) A signal that resources are not efficiently used by the market
D) A reward for creating wealth

114. The ability of purely competitive firms to freely expand or contract their businesses and to enter or exit the market means that:

A) Prices will always be high enough to generate positive economic profits
B) Resources that would be more valuable elsewhere will not be trapped, unproductively, in a particular industry
C) Resources that would be more valuable elsewhere will be trapped, unproductively, in a particular industry
D) Resource owners cannot move their resources to other areas where they would be more highly valued

Lesson 8

115. Which public institution forms an association with a particular group in society? This form is common with agricultural producers.

A) Municipal Government Ownership
B) Public Corporation
C) Central Government Ownership
D) Cooperative

116. Which public institution owns the industry on a small scale in a small region? This form is common for electricity, natural gas, and water companies.

A) Municipal Government Ownership
B) Public Corporation
C) Central Government Ownership
D) Cooperative

117. Which public institution is a corporation with government being the majority shareholder?

A) Municipal Government Ownership
B) Public Corporation
C) Central Government Ownership
D) Cooperative

118. Which public institution is government owns the industry on a large scale? This was common in the Soviet Union, when government owned all buildings, equipment, and land.

A) Municipal Government Ownership
B) Public Corporation
C) Central Government Ownership
D) Cooperative

119. Which public institution has features of both public and private? The U.S. central bank, the Federal Reserve System, has this form.

A) Municipal Government Ownership
B) Public Corporation
C) Quasi-Government Ownership
D) Cooperative

120. Which reason does government use to take control of an industry, if government wants to protect a critical resource, like petroleum?

A) National Security
B) Prevent a monopoly from controlling the market
C) Government prevents price discrimination
D) Government exerts political control

121. Which reason does government use to take control of an industry, where government imposes high taxes and high prices?

A) Government uses price discrimination
B) Government controls distribution
C) Government takes control over a monopoly
D) Government uses macroeconomic stabilization

122. Which reason does government use to transfer market welfare from one market to another market? For example, municipal government subsidizes their public water companies from property taxes.

A) Government performs re-distributive goals
B) Government controls distribution
C) Government takes control over a monopoly
D) Government ensures health and safety

123. What is price discrimination?

A) Producers use different prices to capture consumers’ surplus
B) Producers use the mafia to extort higher prices from consumer
C) Producers use
D) Does not apply to any of them

124. Why would government nationalize an industry like minerals and petroleum.

A) These markets generate little profits and government takes control of them
B) Private markets tend to under invest in these markets
C) Government uses macroeconomic stabilization
D) These markets are a large source of profits that government can use to finance its social programs

Lesson 9

125. Which of the following creates a market barrier for new firms?

A) Licensing and patents
B) Government taxes
C) Government subsidies
D) None of the above

126. A monopoly should expand its output until:

A) MC > MR
B) MC = MR
C) MC < MR
D) P* = MR

127. Which one of the following increases the growth of a monopoly?

A) High entry barriers
B) Reduce regulations that lower entry barriers
C) Anti-trust laws
D) Increase in the number of firms in a market

128. Which of the following increases the likelihood of a monopoly controlling a market?

A) A government reduces international trade barriers
B) Government removes a critical license from the monopolist
C) A monopolist controls a critical resource input
D) A patent for a monopolist expires

129. Which of the following markets receives the highest social welfare?

A) Monopoly
B) Government ownership
C) Pure Competition
D) Economies of Scale

130. What is a natural monopoly?

A) The monopoly has economies of scale from large infrastructure costs
B) A monopolist has a critical patent
C) The monopolists has low market entry barriers
D) The monopolist controls a critical resource input

131. The monopoly's demand curve is:

A) Upward sloping
B) Downward sloping
C) Shaped an upside down “U”
D) Monopolist does not have a demand curve

132. What does a U.S. patent give a monopolist?

A) The government is required to give loans to monopolist
B) Government cannot regulate a monopolist’s patent
C) Monopolist has exclusive right to produce a product for 17 years
D) The monopolist does not have to pay taxes

133. What is a Ramsey price?

A) A Ramsey price is the amount of a government tax
B) A Ramsey price is the amount of a government subsidy
C) The monopolist charges a high market price
D) The monopolist charges two prices: A volume charge and a fixed charge

134. Which of the following is a way that government can protect a monopoly from international competition?

A) Tariffs
B) Quotas
C) Licensing requirements
D) All of the above

135. What are the problems with regulation?

A) Higher chance of corruption between the monopolist and government
B) A monopolist’s cost may increase, i.e. x-inefficiency
C) Monopolist tries to influence government and the regulatory agencies
D) All of the above

136. What is the outcome when government uses Marginal Cost Pricing in regulating the monopoly (and government does not use Ramsey prices)?

A) The regulated firm has a lower production level
B) The regulated firm will operate at a loss and eventually will fail in the long run
C) A monopolist’s profits will increase
D) The regulated firm has a higher market price

137. Government-operated firms with monopoly power:

A) Will necessarily meet the criteria of economic efficiency, as long as price equals average total cost
B) Will always be more efficient than private firms since they need not maximize profits
C) Are likely to be inefficient since some of the monopoly power is likely to serve the interests of the governmental managers and employees, rather than the interests of unorganized taxpayers and consumers
D) Are highly responsive to changes in the preferences of individual consumers since consumers are also voters

138. What is the outcome when government uses Average Cost Pricing in regulating the monopoly?

A) The regulated firm has a higher production level
B) The regulated firm will operate at a loss and eventually will fail in the long run
C) A monopolist’s profits will increase
D) The regulated firm has a higher market price

Lesson 10

139. Why does government deregulate or privatize public companies?

A) Increase investment
B) Help strengthen labor unions
C) The government financially loses
D) The private company produces at higher costs

140. How are customers affected, if government privatizes a public company?

A) Consumers pay higher prices
B) Consumers have worse service
C) Consumers have fewer choices
D) Consumers pay a lower price

141. What happens to labor unions, when government privatizes a public company?

A) Labor unions become stronger at the company
B) Labor unions become weaker at the company
C) Labor unions decrease labor wages
D) Labor unions decrease workers’ benefits

142. Why does X-inefficiency occur?

A) A monopoly or government agency have no incentive to reduce costs
B) A monopoly or government agency has too much competition
C) A monopoly or government agency practice good management
D) A monopoly or government agency are good at motivating workers

143. What happens to government, when government privatizes a public company?

A) Government collects revenue for selling company
B) Government has a new company to tax
C) Government can reduce subsidies and tax credits
D) All of the above could happen

144. Which of the following is true?

A) Government is better at running companies than private companies
B) Government is not good at running companies
C) Government has more trouble regulating private companies than public ones
D) Government over invests in public companies

145. What is a property voucher?

A) Government grants property rights of public land and buildings to the people for free
B) Government sells public land and buildings to private corporations
C) Government organizes the public company as a corporation and government becomes majority shareholder
D) Government requires a foreign corporation to be partners with a local, public corporation

146. How can government privatize a public company?

A) Government increases subsidies and regulations for a public company
B) Government decreases subsidies and regulations to a public company.
C) Government increases taxes and subsidies for a public company
D) Government nationalizes a company

147. What is a joint venture?

A) Government grants property rights of public land and buildings to the people for free
B) Government sells public land and buildings to private corporations
C) Government organizes the public company as a corporation and government becomes majority shareholder
D) Government requires a foreign corporation to be partners with a local, public corporation

148. What is a partial sale of a public company?

A) Government grants property rights of public land and buildings to the people for free
B) Government sells public land and buildings to private corporations
C) Government organizes the public company as a corporation and government becomes majority shareholder; overtime government sells its shares
D) Government requires a foreign corporation to be partners with a local, public corporation

149. What is a direct sale of a public company?

A) Government grants property rights of public land and buildings to the people for free
B) Government sells public land and buildings to private corporations
C) Government organizes the public company as a corporation and government becomes majority shareholder; overtime government sells its shares
D) Government requires a foreign corporation to be partners with a local, public corporation

150. How do property rights change, when government privatizes public companies?

A) Government introduces property rights
B) Government introduces a system of contract law
C) Government introduces a judicial system that enforces contracts
D) All of the above are true

151 What is a benefit of privatizing a public company?

A) The company’s costs and prices become higher
B) Company profits tend to be lower
C) Workers become more productive
D) Workers become less productive

152. What is a cost of privatizing a public company?

A) The new company may lay off workers, especially the older workers
B) The new private company increase wages, especially if the company has a labor union
C) The new company tend not to hire young people
D) All of the above is true

Lesson 11

153. What is an exhaustible resource?

A) A resource is plentiful and increases over time
B) A resource is limited; and decrease over time with usage
C) A resource is open, and can be consumed by anyone from the public
D) A resource that has a biological growth rate and harvest rate

154. What is a renewable resource?

A) A resource is limited and can be recycled
B) A resource is limited; and decrease over time with usage
C) A resource is open, and can be consumed by anyone from the public
D) A resource that has a biological growth rate and harvest rate

155. What is an open-access resource?

A) A resource is limited and can be recycled
B) A resource is limited; and decrease over time with usage
C) A resource is open, and can be consumed by anyone from the public
D) A resource that has a biological growth rate and harvest rate

156. What is Mathusian economics (Mathus)?

A) Food shortages, wars, and diseases keep the population from growing too quickly
B) An exhaustible resource can be recycled
C) A renewable resource can grow over time
D) Resource prices continually increase over time as resource is depleted

157. If a resource or property is open access, what tends to happen to the property?

A) The public will improve the property
B) People have a strong incentive to take care of the property
C) The public takes care and maintains the property
D) The public abuses and over uses the property

158. What is a Hotelling Price?

A) A resource price increases over time, as the resource is depleted
B) A resource price decreases over time, as the resource is depleted
C) The price time path is a “U” shape
D) The price remains constant over time

159. What is Tragedy of the Commons?

A) Exhaustible resource prices have a “U” shape
B) Ensures future generations are not worse off
C) A problem with open-access resources
D) Backstop technology

160. What is a problem with Hotelling price?

A) High prices encourage producers to locate new reserves and deposits
B) Technology can decrease an exhaustible resource’s price
C) Requires all resource deposits are known and fixed
D) All of the above is true

161. Which idea says an exhaustible resource price should have a “U” shape?

A) Hubbert’s Life Cycle hypothesis
B) Hotelling’s price
C) Mathusian price
D) Individually transferable quota price

162. What happens if government taxes effort on a renewable resource?

A) The tax increases the harvest rate
B) The tax decreases the harvest rate
C) The tax causes the resource industry to collapse
D) The tax has no impact on the harvest rate

163. What is a backstop technology?

A) A technology that creates infinite energy
B) A government policy that limits how much energy society can use
C) Government strictly controls the technology
D) One resource is a perfect substitute for another resource, but that resource has a higher price

164. What are individually transferable quotas (ITQs)?

A) Producers can buy and sell ITQs, and ITQs limit how much of a resource producers can harvest
B) A special government tax
C) Government strictly controls the resource
D) One resource is a perfect substitute for another resource, but that resource has a higher price

165. What is a method to ensure sustainability?

A) Current generation uses as much energy as possible
B) Current generation rapidly consumes exhaustible resources
C) Allow pollution to increase over time
D) Harvest rate should be lower than the biological growth rate for renewable resources

166. What is sustainability?

A) A resource is plentiful and increases over time
B) A resource is limited; and decrease over time with usage
C)) A resource is open, and can be consumed by the public
D) Ensuring future generations are not worse off than today’s generation

Lesson 12

167. What is point source pollution?

A) Government can easily identify and monitor the pollution source
B) Pollution occurs in one country and affects other countries with no pollution problem
C) Government cannot identify pollution source, because there are too many
D) Pollution does not harm the environment

168. What is command-and-control regulations?

A) Government uses market system to correct pollution
B) Government dictates how and which equipment to use to correct pollution
C) Government uses tradable pollution permits to correct pollution
D) Government imposes a tax on pollution

169. What is a Pigouvian tax?

A) Government dictates how to control pollution
B) Government uses tradable pollution permits
C) Government imposes a tax on pollution
D) Government uses Coase’s theorem to control pollution

170. What are tradeable permits?

A) Allows firms to purchase permits, and a permit sets the maximum pollution level
B) A tax on pollution
C) Government dictates the equipment and methods to reduce pollution
D) Voluntary agreements

171. What is non-point pollution?

A) Government can easily identify the source of pollution
B) Government cannot identity the source of pollution; too many sources
C) Government charges block prices
D) Government charges a flat price

172. What is transboundary pollution?

A) Government can easily identify the source of pollution
B) Government cannot identity the source of pollution; too many sources
C) Government charges block prices
D) Pollution from one country impacts another country

173. Which pollution control freezes technology and limits a firm’s flexibility for dealing with pollution?

A) Command-and-control regulations
B) Tradable pollution permits
C) Pigouvian tax
D) Porter’s Hypothesis

174. What is grandfathering?

A) Government sells permits
B) Government gives permits freely
C) Government taxes permits
D) Government steals permits

175. How can government correct waste disposal?

A) Government should use block price; the more garbage, the more it costs
B) Government should use a flat price
C) Government should use Coase’s Theorem
D) Government should use Pigouvian tax

176. What is Coase’s Theorem?

A) Environmental damage and a country’s GDP has a “U” shape
B) Parties that have a pollution problem will voluntarily solve the pollution problem
C) Regulations may spur innovation
D) A Pigouvian tax corrects pollution problems

177. What is the Porter’s Hypothesis?

A) Environmental damage and a country’s GDP has a “U” shape
B) Parties that have a pollution problem will voluntarily solve the pollution problem
C) Regulations may spur innovation
D) A Pigouvian tax corrects pollution problems

178. What is the environmental Kuznets Curve?

A) Environmental damage and a country’s GDP has a “U” shape
B) Environmental damage and a country’s GDP is a straight line
C) Regulations may spur innovation
D) A Pigouvian tax corrects pollution problems

Answers:

1. C 2. B 3. C 4. A 5. A 6. B 7. C 8. A 9. A 10. B
11. C 12. B 13. C 14. D 15. B 16. C 17. D 18. B 19. A 20. C
21. A 22. D 23. A 24. D 25. D 26. D 27. B 28. C 29. A 30. D
31. C 32. A 33. B 34. A 35. B 36. D 37. D 38. D 39. C 40. B
41. A 42. C 43. D 44. A 45. D 46. D 47. A 48. D 49. D 50. A
51. A 52. A 53. C 54. B 55. B 56. A 57. A 58. B 59. C 60. B
61. D 62. A 63. B 64. C 65. A 66. C 67. B 68. D 69. C 70. B
71. A 72. B 73. A 74. C 75. D 76. B 77. D 78. A 79. A 80. D
81. A 82. B 83. C 84. D 85. B 86. C 87. A 88. C 89. A 90. B
91. D 92. A 93. D 94. B 95. A 96. D 97. A 98. B 99. C 100. A
101. C 102. A 103. B 104. D 105. B 106. B 107. D 108. B 109. B 110. D
111. A 112. D 113. D 114. B 115. D 116. A 117. B 118. C 119. C 120. A
121. B 122. A 123. A 124. D 125. A 126. B 127. A 128. C 129. C 130. A
131. B 132. B 133. D 134. D 135. D 136. B 137. C 138. A 139. A 140. D
141. B 142. A 143. D 144. B 145. A 146. B 147. D 148. C 149. B 150. D
151. C 152. A 153. B 154. D 155. C 156. A 157. D 158. A 159. C 160. D
161. A 162. B 163. D 164. A 165. D 166. D 167. A 168. B 169. C 170. A
171. B 172. D 173. A 174. B 175. A 176. B 177. C 178. A    
 

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