Microeconomics Test 1
1. Demand-side market failures: Underallocations of resources that occur when private demand curves understate
consumers' full willingness to pay for a good or service
2. Private good: A good or service that is individually consumed and that can be profitably provided by privately
owned firms because they can exclude nonpayers from receiving the benefits.
3. Rivalry: The characteristic displayed by certain goods and services that con- sumption by one person precludes
consumption by others.
4. Excludability: The characteristic displayed by those goods and services for which sellers are able to prevent
nonbuyers from obtaining benefits
5. Public Good: A good or service that is characterized by nonrivalry and nonex- cludability. These characteristics
typically imply that no private firm can break even when attempting to provide such products. As a result, they are often
provided by governments, who pay for them using general tax revenues.
6. Nonrivalry: The idea that one person's benefit from a certain good does not reduce the benefit available to
others; a characteristic of a public good.
7. Nonexcludability: The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a
characteristic of a public good.
8. Free-rider problem: The inability of potential providers of an economically de- sirable good or service to obtain
payment from those who benefit. because of nonexcludability.
9. Collective demand for a public good: A schedule or a curve showing the collective willingness to pay of
consumers for a public good. Can be found by vertically adding individual demand curves, which is the equivalent to
adding the respective maximum prices that individual consumers are willing to pay for the last unit of the public good at
each possible quantity demanded.
10.Cost-benefit analysis: A method for deciding whether or not to provide a public good that involves a comparison
of the total cost of providing that public goof with its collective benefit (measured by collective willingness to pay)
11.Marginal cost - Marginal benefit rule: As it applies to cost-benefit analysis, the tenet that a government project or
program should be expanded to the point where marginal cost and marginal benefit of additional expenditures are equal.
12.quasi-public good: A good or service to which excludability could apply but that has such a large positive
externality that government sponsors its production to prevent an underallocation of resources
13.public choice theory: The economic analysis of government decision making, politics, and elections.
14.logrolling: The trading of votes by legislators to secure favorable outcomes on decisions concerning the provision
of public goods and quasi-public goods
, Microeconomics Test 1
15.paradox of voting: A situation where paired-choice voting by majority rule fails to provide a consistent ranking of
society's preferences for public goods or public services.
16.median-voter model: The theory that under majority rule the median (middle) voter will be the dominant position
to determine the outcome of an election.
17.quadratic voting: A majority voting system in which voters can express strength of preference by purchasing as
many votes as the like at a price equal to the square of the number of votes purchased. More likely (but not guaranteed)
to result in eco- nomically efficient decisions than traditional one-person-one-vote (1p1v) majority voting systems
18.mechanism design: The part of game theory concerned with designing the rules of the game so as to maximize
the likelihood of players reaching a socially optimal outcome
19.government failure: Inefficiencies in resource allocation caused by problems in the operation of the public
sector (government). Specific examples include the principal-agent problem, the special-interest effect, the collective-
action problem, rent-seeking, and political corruption.
20.principal-agent problem: 1) At a firm, a conflict of interest that occurs when agents (workers or managers)
pursue their own objectives to the detriment of the principals' (stockholders) goals
2) In public choice theory; a conflict of interest that arises when elected officials (who are the agents of the people)
pursue policies that are in their own interests rather than policies that would be in the better interests of the public (the
principals)
21.special-interest effect: Any political outcome in which a small group ("special interest") gains substantially at the
expense of a much larger number of persons who each individually suffers a small loss.
22.collective-action problem: The difficulty of getting a large group of voters to organize against a policy when the
costs of that policy are widely dispersed (so that none of them individually has much of a personal incentive to take
action).
23.earmarks: Narrow, specially designated spending authorizations placed in broad legislation by senators and
representatives for the purpose of providing benefits to firms and organizations within their constituencies. These
projects are exempt from competitive bidding and normal evaluation procedures.
24.rent seeking: Attempts by individuals, firms, or unions to use political influence to receive payments in excess of
the minimum amount they would normally be willing to accept to provide a particular good or service.
25.regulatory capture: The situation that occurs when a governmental regulatory agency ends up being controlled by
the industry that is supposed to be regulating
, Microeconomics Test 1
26.deregulation: The removal of most or even all of the government regulation and laws designed to supervise an
industry. Sometimes undertaken to combat regulatory capture.
27.political corruption: The unlawful misdirection of government resources, or actions that occur when
government officials abuse their entrusted powers for personal gain.
28.Answer the question based on the following information for a public good. Pa and Pb are the prices that
individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people
are the only two members of society. If this good were a private good instead of
the total quantity demanded at a $3 market price would be
a public one,
A. 2 units.
B. 3 units.
C. 6 units.
D. 4 units.: D. 4 units.
29.The information contained in the table illustrates
A. political logrolling.
B. the median-voter model.
C. the paradox of voting.
D. the principal-agent problem theorem.: C. the paradox of voting.
30.Public choice economists contend public bureaucracies are inefficient primarily because
A. the value of public goods is more easily measured than is the value of private goods.
B. of the absence of competitive market pressures.
C. public sector workers are more security-conscious than are private sector workers.
D. relatively low pay in government attracts workers of lesser quality.: B. of the absence of competitive market
pressures.
31.Which statement best describes the special-interest effect?
A. It is a program or policy that is adopted during a special session of Congress or a state legislature.
B. It is a policy issue in which both the supporters and opponents employ paid lobbyists to represent their
interests.
C. It is a program or policy which one political party strongly supports and other political parties strongly
oppose.
D. It is a program or policy in which a large number of people will suffer small costs, while a small number will
receive large gains.: D. It is a program or policy
, Microeconomics Test 1
in which a large number of people will suffer small costs, while a small number will receive large gains.
32.Answer this question based on the following information for a public good. Pa and Pb represent the prices
that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Qc)
of the public good. Qs represents the quantity of the public good supplied by government at each of the collective
prices. In equilibrium, the marginal ben
of the public good will be
A. $7. efit and cost
B. $6.
C. $5.
D. $3.: B. $6.
33.A demand curve for a public good is determined by
A. summing vertically the individual demand curves for the public good.
B. summing horizontally the individual demand curves for the public good.
C. combining the amounts of the public good that the individual members of society demand at each price.
D. multiplying the per-unit cost of the public good by the quantity made available.: A. summing vertically the
individual demand curves for the public good.
34. Economists (particularly public choice theorists) point out that the political process
A. differs from the marketplace in that voters and congressional representa- tives often face limited and
bundled choices.
B. is less prone to failure than is the marketplace.
C. is a much fairer way to allocate society's scarce resources than is the impersonal marketplace, which is
dominated by high-income consumers.
D. involves logrolling, which is always inefficient.: A. differs from the marketplace in that voters and congressional
representatives often face limited and bundled choices.
35."Earmarks" refer to
A. the additional votes that must be taken when a voting paradox occurs.
B. taxes that redistribute wealth or income from one income group to another.
C. authorized expenditures benefiting a narrow, specifically designated group that are included in more
comprehensive spending legislation.
D. involves logrolling, which is always inefficient.: C. authorized expenditures benefiting a narrow, specifically
designated group that are included in more com- prehensive spending legislation.
36.Deregulation can solve the problem of regulatory capture and increase economic efficiency
1. Demand-side market failures: Underallocations of resources that occur when private demand curves understate
consumers' full willingness to pay for a good or service
2. Private good: A good or service that is individually consumed and that can be profitably provided by privately
owned firms because they can exclude nonpayers from receiving the benefits.
3. Rivalry: The characteristic displayed by certain goods and services that con- sumption by one person precludes
consumption by others.
4. Excludability: The characteristic displayed by those goods and services for which sellers are able to prevent
nonbuyers from obtaining benefits
5. Public Good: A good or service that is characterized by nonrivalry and nonex- cludability. These characteristics
typically imply that no private firm can break even when attempting to provide such products. As a result, they are often
provided by governments, who pay for them using general tax revenues.
6. Nonrivalry: The idea that one person's benefit from a certain good does not reduce the benefit available to
others; a characteristic of a public good.
7. Nonexcludability: The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a
characteristic of a public good.
8. Free-rider problem: The inability of potential providers of an economically de- sirable good or service to obtain
payment from those who benefit. because of nonexcludability.
9. Collective demand for a public good: A schedule or a curve showing the collective willingness to pay of
consumers for a public good. Can be found by vertically adding individual demand curves, which is the equivalent to
adding the respective maximum prices that individual consumers are willing to pay for the last unit of the public good at
each possible quantity demanded.
10.Cost-benefit analysis: A method for deciding whether or not to provide a public good that involves a comparison
of the total cost of providing that public goof with its collective benefit (measured by collective willingness to pay)
11.Marginal cost - Marginal benefit rule: As it applies to cost-benefit analysis, the tenet that a government project or
program should be expanded to the point where marginal cost and marginal benefit of additional expenditures are equal.
12.quasi-public good: A good or service to which excludability could apply but that has such a large positive
externality that government sponsors its production to prevent an underallocation of resources
13.public choice theory: The economic analysis of government decision making, politics, and elections.
14.logrolling: The trading of votes by legislators to secure favorable outcomes on decisions concerning the provision
of public goods and quasi-public goods
, Microeconomics Test 1
15.paradox of voting: A situation where paired-choice voting by majority rule fails to provide a consistent ranking of
society's preferences for public goods or public services.
16.median-voter model: The theory that under majority rule the median (middle) voter will be the dominant position
to determine the outcome of an election.
17.quadratic voting: A majority voting system in which voters can express strength of preference by purchasing as
many votes as the like at a price equal to the square of the number of votes purchased. More likely (but not guaranteed)
to result in eco- nomically efficient decisions than traditional one-person-one-vote (1p1v) majority voting systems
18.mechanism design: The part of game theory concerned with designing the rules of the game so as to maximize
the likelihood of players reaching a socially optimal outcome
19.government failure: Inefficiencies in resource allocation caused by problems in the operation of the public
sector (government). Specific examples include the principal-agent problem, the special-interest effect, the collective-
action problem, rent-seeking, and political corruption.
20.principal-agent problem: 1) At a firm, a conflict of interest that occurs when agents (workers or managers)
pursue their own objectives to the detriment of the principals' (stockholders) goals
2) In public choice theory; a conflict of interest that arises when elected officials (who are the agents of the people)
pursue policies that are in their own interests rather than policies that would be in the better interests of the public (the
principals)
21.special-interest effect: Any political outcome in which a small group ("special interest") gains substantially at the
expense of a much larger number of persons who each individually suffers a small loss.
22.collective-action problem: The difficulty of getting a large group of voters to organize against a policy when the
costs of that policy are widely dispersed (so that none of them individually has much of a personal incentive to take
action).
23.earmarks: Narrow, specially designated spending authorizations placed in broad legislation by senators and
representatives for the purpose of providing benefits to firms and organizations within their constituencies. These
projects are exempt from competitive bidding and normal evaluation procedures.
24.rent seeking: Attempts by individuals, firms, or unions to use political influence to receive payments in excess of
the minimum amount they would normally be willing to accept to provide a particular good or service.
25.regulatory capture: The situation that occurs when a governmental regulatory agency ends up being controlled by
the industry that is supposed to be regulating
, Microeconomics Test 1
26.deregulation: The removal of most or even all of the government regulation and laws designed to supervise an
industry. Sometimes undertaken to combat regulatory capture.
27.political corruption: The unlawful misdirection of government resources, or actions that occur when
government officials abuse their entrusted powers for personal gain.
28.Answer the question based on the following information for a public good. Pa and Pb are the prices that
individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people
are the only two members of society. If this good were a private good instead of
the total quantity demanded at a $3 market price would be
a public one,
A. 2 units.
B. 3 units.
C. 6 units.
D. 4 units.: D. 4 units.
29.The information contained in the table illustrates
A. political logrolling.
B. the median-voter model.
C. the paradox of voting.
D. the principal-agent problem theorem.: C. the paradox of voting.
30.Public choice economists contend public bureaucracies are inefficient primarily because
A. the value of public goods is more easily measured than is the value of private goods.
B. of the absence of competitive market pressures.
C. public sector workers are more security-conscious than are private sector workers.
D. relatively low pay in government attracts workers of lesser quality.: B. of the absence of competitive market
pressures.
31.Which statement best describes the special-interest effect?
A. It is a program or policy that is adopted during a special session of Congress or a state legislature.
B. It is a policy issue in which both the supporters and opponents employ paid lobbyists to represent their
interests.
C. It is a program or policy which one political party strongly supports and other political parties strongly
oppose.
D. It is a program or policy in which a large number of people will suffer small costs, while a small number will
receive large gains.: D. It is a program or policy
, Microeconomics Test 1
in which a large number of people will suffer small costs, while a small number will receive large gains.
32.Answer this question based on the following information for a public good. Pa and Pb represent the prices
that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Qc)
of the public good. Qs represents the quantity of the public good supplied by government at each of the collective
prices. In equilibrium, the marginal ben
of the public good will be
A. $7. efit and cost
B. $6.
C. $5.
D. $3.: B. $6.
33.A demand curve for a public good is determined by
A. summing vertically the individual demand curves for the public good.
B. summing horizontally the individual demand curves for the public good.
C. combining the amounts of the public good that the individual members of society demand at each price.
D. multiplying the per-unit cost of the public good by the quantity made available.: A. summing vertically the
individual demand curves for the public good.
34. Economists (particularly public choice theorists) point out that the political process
A. differs from the marketplace in that voters and congressional representa- tives often face limited and
bundled choices.
B. is less prone to failure than is the marketplace.
C. is a much fairer way to allocate society's scarce resources than is the impersonal marketplace, which is
dominated by high-income consumers.
D. involves logrolling, which is always inefficient.: A. differs from the marketplace in that voters and congressional
representatives often face limited and bundled choices.
35."Earmarks" refer to
A. the additional votes that must be taken when a voting paradox occurs.
B. taxes that redistribute wealth or income from one income group to another.
C. authorized expenditures benefiting a narrow, specifically designated group that are included in more
comprehensive spending legislation.
D. involves logrolling, which is always inefficient.: C. authorized expenditures benefiting a narrow, specifically
designated group that are included in more com- prehensive spending legislation.
36.Deregulation can solve the problem of regulatory capture and increase economic efficiency
