Question :
21) A free-market economy with perfect allocative efficiency does not : 1384307
21) A free-market economy with perfect allocative efficiency does not exist in reality because
A) government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome.
B) the assumption of profit-maximization is not a realistic assumption about the behaviour of firms.
C) the assumption of utility maximization is not a realistic assumption about the behaviour of consumers.
D) firms in many industries have some degree of market power and face negatively sloped demand curves, and produce a level of output where P > MC.
E) the decentralization of economic power in a free-market economy does not allow for allocative efficiency.
22) What is meant by the term “market failure”?
A) that a small group in society is affected
B) that allocative efficiency has not been achieved
C) that the market economy is a failure
D) that one or more markets are not in equilibrium
E) that the free market has failed to achieve desirable social goals
23) The existence of imperfectly competitive firms implies a market failure because
A) they do not produce a productively efficient level of output.
B) their market power allows them to deceive consumers.
C) they lead to a socially undesirable distribution of income.
D) there is no way to prevent these firms from abusing their market power.
E) those firms will maximize profits by setting price above marginal cost.
24) Government intervention in an effort to promote allocative efficiency in all industries would likely impose a cost in terms of economic growth. One explanation for this is that
A) some policies to promote allocative efficiency will lead to increased income inequality.
B) some policies to promote allocative efficiency will lead to decreased income inequality.
C) correcting externalities inevitably reduces the economy’s growth rate.
D) firms in perfectly competitive industries that are already allocatively efficient would also be affected by the intervention and become inefficient.
E) much of the innovation and productivity growth that leads to economic growth comes from oligopolistic firms.
25) Which of the following phenomena is NOT an example of market failure?
A) moral hazard
B) a positive externality
C) asymmetric information
D) diminishing marginal returns
E) public goods
26) One cause of allocative inefficiency is
A) the provision of public goods.
B) positive or negative externalities.
C) perfect competition.
D) regulated monopolies.
E) too much information.
27) Government intervention in a particular industry is unnecessary if each of the industry’s firms is operating where
A) there are no positive externalities.
B) there are no negative externalities.
C) price is equal to private marginal cost.
D) marginal social benefit is equal to marginal social cost.
E) the demand curve is perfectly elastic.
28) The problem with externalities is essentially one of
A) a discrepancy between private and social costs.
B) asymmetric information.
C) the inability of a firm in an industry characterized by increasing returns to scale to make positive profits if it sets price equal to marginal cost.
D) a failure of the market to generate socially valued outcomes.
E) the failure of the market to solve social problems.
29) A plausible example of market failure due to an externality is
A) the cost of building new highways outside of major cities.
B) the despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers.
C) the high salaries enjoyed by professional athletes.
D) the line-ups at the theatre when a good movie is playing.
E) a farmer with an apple orchard who also keeps bees.
30) A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon. An externality associated with this decision is
A) the increased work for the homeowner in yard cleanup.
B) the cost of purchasing the dogs.
C) the neighbours’ lost sleep.
D) the homeowner’s lost sleep.
E) the veterinary costs of keeping the dogs healthy.
