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Exam 4: Market Failures Caused by Externalities Asymmetric Information

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Question 51

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Which of the following would be considered an example of adverse selection?

A) Malpractice insurance may increase the amount of malpractice.
B) Drivers may be less cautious because they have airbags installed in a car.
C) Those individuals who most need insurance are the ones most likely to buy it.
D) Work contracts that give a set number of sick-days may encourage more workers to call in sick.

E) C) and D)
F) A) and B)

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Question 52

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Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars. This is an example of

A) the moral hazard problem.
B) a spillover cost.
C) a positive externality.
D) asymmetric information.

E) A) and D)
F) B) and C)

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Question 53

Multiple Choice

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The minimum acceptable price for a product that producer Sam is willing to receive is 10. The price he could get for the product in the market is 15. How much is Sam's producer surplus?

Refer to the diagram of the market for product X. Curve Sₜ embodies all costs (including externalities) , and Dₜ embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the equilibrium output is Q₂, we can conclude that the existence of external

The government should choose pollution abatement for all sources of pollution where the marginal benefit exceeds the marginal cost of that action.

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement.

Refer to the competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₂ and S₂. If there are substantial external benefits associated with the production of Z, then

What are the limitations to government's role in the economy?

Better Business Bureaus in various cities exist partly in order to try to deal with inadequate buyer information about sellers.

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the total amount of spending that consumers would be paying for the product is represented by the area

Refer to the diagram. With MB₁ and MC₁, society's optimal amount of pollution abatement is

In terms of consumer and producer surplus, when is economic efficiency achieved?

Describe what is meant by the adverse selection problem.

Refer to the diagram. Assuming equilibrium price P₁, consumer surplus is represented by areas

What are some ways the private sector has found to overcome information difficulties without government intervention?

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Allocative efficiency occurs where (for the last unit)maximum willingness to pay exceeds minimum acceptable price by the greatest amount.

TripAdvisor provides online reviews of hotels, restaurants, and attractions at tourist destinations around the world. When a traveler is planning a vacation, TripAdvisor helps the traveler avoid

Market failure is said to occur whenever