1. The U.S. economy is called "mixed capitalism" because:
A.the products of many business enterprises are used partly by businesses and partly by consumers.
B.the answers to the Five Fundamental Questions are to some extent determined by government and partly by private individuals and businesses.
C.the capital of most business enterprises is furnished from Federal funds.
D.a large percentage of business enterprises are jointly owned by government and private business.


2. Which of the following is a shortcoming of the market system?
A.The production of certain goods might impose costs on individuals other than the producers and buyers of those goods.
B.Certain goods will not be produced because there is no way of excluding nonpaying ("free-rider") individuals from the associated benefits.
C.The resulting distribution of personal incomes might be quite unequal.
D.All of the above are possible shortcomings of the market system.


3. The Pure Food and Drug Act is an illustration of:
A.governmental provision of public goods.
B.the redistributional function of government.
C.governmental provision of a suitable legal framework for the market system.
D.governmental action designed to enhance competition.


4. Government may lessen income inequality by:
A.providing transfer payments to the poor.
B.directly modifying market prices as, for example, by establishing a legal minimum wage.
C.using the tax system to tax the wealthy relatively more heavily than the poor.
D.doing all of the above.


5. In a competitive market:
A.spillover benefits will always exceed spillover costs.
B.resources will be misallocated if demand and supply are not properly adjusted by government for large spillover costs and benefits.
C.resources will be allocated efficiently only if spillover benefits equal spillover costs.
D.an efficient allocation of resources is always realized.


6. A pure market economy overallocates resources to the production of goods which:
A.involve spillover costs (external costs).
B.involve spillover benefits (external benefits).
C.are public goods.
D.are inexpensive to produce.


7. If a good's production creates substantial spillover benefits and no spillover costs, then too:
A.much of the good will be produced unless firms are subsidized.
B.much of the good will be produced unless firms are taxed.
C.little of the good will be produced unless firms are subsidized.
D.little of the good will be produced unless firms are taxed.


8. Suppose a product creates substantial spillover costs. If government adopts a policy which forces producers to pay these costs, the:
A.output of the product will decrease.
B.initial misallocation of resources will be intensified.
C.output of the product will increase.
D.price of the product will decrease.


9. Suppose the production of a certain good creates substantial spillover benefits. If government adopts a policy which adjusts demand to take these benefits into account, then:
A.firms in this industry will go out of business.
B.the output of the product will increase.
C.the output of the product will decrease.
D.the price of the product will decrease.


10. Which of the following is most likely to be accompanied by external or spillover benefits?
A.the construction of a nuclear power plant
B.studying in the library
C.eating dinner at an expensive French restaurant
D.being immunized for measles


11. The existence of "spillovers" or "externalities" weakens the efficiency with which the market system functions because they:
A.are a major source of inflation.
B.mean that certain essential goods and services do not get produced at all.
C.are a major source of employment.
D.cause certain goods to be overproduced or underproduced.


12. The market system fails to produce public goods because:
A.there is no need or demand for such goods.
B.private firms cannot restrict the benefits of such goods to consumers who are willing to pay for them.
C.public enterprises can produce such goods at lower cost than can private enterprises.
D.their production seriously distorts the distribution of income.


13. An example of a public good is:
A.a movie theater.
B.a freight train.
C.a lighthouse.
D.Disneyland.


14. If the exclusion principle does not apply to product X, and X is economically desirable:
A.then X will be produced in optimal amounts by private firms.
B.no externalities will be associated with the production or consumption of X.
C.the market system will tend to overallocate resources to the production of X.
D.the production of X will have to be financed through taxation.


15. The stabilization function of government involves government's efforts to:
A.alter the output of specific goods when external costs or benefits are present.
B.reduce the after-tax incomes of the rich and increase the after-tax incomes of the poor.
C.deal with the problems of substantial unemployment and rapid inflation.
D.provide the socially desired output of public goods.



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