An economist has estimated that the maintenance of a public park costs $25,000 a
ID: 1113684 • Letter: A
Question
An economist has estimated that the maintenance of a public park costs $25,000 a year and that the public park generates $30,000 a year in revenue for merchants near the park. From society?s point of view, the maintenance of this park is
A.
inefficient because the additional revenues generated by the park are so low.
B.
potentially efficient because no one would be made worse off as a result of maintaining the park.
C.
inefficient, because everyone in the community pays taxes to support the park, but only the merchants near the park benefit.
D.
potentially efficient because the value of the gains exceed the value of the costs.
Suppose a policy change will generate $100,000 of benefits for low-income families and $120,000 of costs for high-income families.
This change can best be described as
A.
inefficient.
B.
potentially efficient.
C.
Pareto efficient.
D.
equitable.
A voluntary exchange between Mike (the purchaser) and Wayne (the seller) occurs because
A.
Mike stands to gain and Wayne to lose.
B.
Mike stands to lose and Wayne to gain.
C.
they both gain from the transaction.
D.
they had no choice.
A household will buy a good as long as the
A.
good still provides the consumer with average utility.
B.
good's use value is less than the price being charged for the good.
C.
marginal utility from its consumption is greater than or equal to its market price.
D.
good's price is greater than the maximum a consumer would be willing to pay for it.
Sources of market failure include
A.
private goods.
B.
externalities.
C.
unequal income distribution.
D.
competitive behavior.
Assume that price underestimates the value that society places on the flu vaccine. If firms produce where P =
MC,
firms will be producing
A.
the socially efficient amount of flu vaccine.
B.
more than the socially efficient amount of flu vaccine
C.
so that consumer surplus is zero.
D.
less than the socially efficient amount of flu vaccine.
When resources are misallocated, or allocated inefficiently,
A.
market failure occurs.
B.
then it must be the case that the good is a public good.
C.
then it must be the case that there is imperfect information in the market.
D.
then there must be external costs or benefits in production.
Explanation / Answer
1) Option C
This is the case of externality. Park is a public good and for maintaining that all people are paying taxes but its benefits are skewed in favor of merchants near the park.
2) Option C
Pareto efficiency is defined as the situation where one could be better off by making somebody worse off.
In society, policy should be equitable allocation of resources and there is nothing wrong to tax more for rich people. However, aim should be to make better off everybody but is it could not be possible then it must be pareto efficiency.
3) Option C
A market is the place where buyer and seller meets for business transaction. Such transaction is the process where buyer buys product or service and seller sells it and both parties do that willingly because in normal circumstances both tends to gain from that.
4) Option C
Any consumer will look for utility of that product or service so it is obvious that he will be willing to pay higher price when utility will be high. However, as utility will diminish, he will be willing to pay less and he will buy that until value of utility derived from that greater or equal to price.
5) Option B
Externality is one of the reason for market failure. If the benefits of that good is externalized then it won't be efficient use of resources and loss of public money. It will lead to market failure and it should negated by appropriate policy.
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