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# 6.7 MC Answers and Review

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## Answers and Review for Multiple Choice Practice on Market Failure and Role of Government

โSTOP โ Before you look at the answers, make sure you gave this practice quiz a try so you can assess your understanding of the concepts covered in Unit 6. Click here for the practice questions: AP Micro Unit 6 Multiple Choice Questions.

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Facts about the test: The AP Microeconomics exam has 70 multiple choice questions and you will be given 1 hour to complete the section. That means it should take you around 8 minutes to complete 10 questions.
*The following questions were not written by College Board and, although they cover information outlined in theย AP Microeconomics Course and Exam Description, the formatting on the exam may be different.

1.ย Of the following options, which is most likely to result in allocative efficiency?
A.ย an oligopoly
B. a perfectly price-discriminating monopoly
C. a perfectly competitive market with no externalities
D. a business producing where price = MC = ATC
Explanation: For an oligopoly, output is restricted to maximize profit and P is greater than MC or MSB is greater than MSC . Allocative inefficiency happens when a firm's output is at MSBโ MS.
๐ Unit 4.5: Oligopoly and Game Theory

2.ย Barji, a new technology company, has exclusive control over a key resource to produce new time travel machines. Barji's control over this resource would likely result in which of the following?
A.ย perfect competition, since Barji controls they key resource in produce time travel machines
B. no barriers to entering the time travel market
C. a high barrier to enter the time travel machine market, with Barji having a monopoly on time travel machines
D. a low barrier to enter the time travel market, with Barji having an oligopoly over the time travel market
Explanation: Key features of a monopoly
๐ Study Unit 4.1: Introduction to Imperfectly Competitive Markets

3.ย If there was a positive externality, the government should
A.ย impose a quota
B. pay a subsidy equal to the marginal external benefit
C. pay the remainder of black market debts in the sector
D. increase government spending and taxes
Explanation: A positive externality exists when a benefit spills over to a third-party. Government Can normally tax goods and services that generate spillover costs and create positive externalities. Governments can also encourage positive externalities by subsidizing goods and services that generate spillover benefits.
๐ Study Unit 6.2: Externalities

4.ย Suppose there is a lot of pollution associated with producing good Z. An efficient policy to address this pollution issue would
A.ย discourage the production of good Z with a per-unit tax.
B. punish the free-riders of good Z.
C. make sure that the marginal social benefit of pollution reduction equals the marginal social cost of pollution reduction.
D. impose a proportional tax.
Explanation: The socially optimal quantity is achieved when the demand of the good and its usefulness to society (Marginal Social Benefit) meets the cost of adding one more of the good to society (Marginal Social Cost). Socially Optimal Quantity = MSB = MSC
๐ Study Unit 6.1: Socially Efficient and Inefficient Market Outcomes

5.ย A third-party side effect is known as a(an)
A.ย externality
B. equilibrium
C. Nash equilibrium
D. profit reducing mechanism
Explanation: An externality is a cost or benefit that is imposed on a third party who did not agree to incur that cost or benefit.
๐ Study Unit 6.2: Externalities

6. On a graph, a negative externality would be shown if
A.ย marginal private cost (MPC) exceeds marginal social cost (MSC)
B. demand exceeds supply
C. too little output was produced at too low a price
D. marginal social cost (MSC) exceeds marginal private cost (MPC)
Explanation: At this point, the unregulated market will produce too much output at too low a price relative to the socially optimal output. This would result in allocative inefficiency, which would be then corrected by a unit tax or some other mechanism to reduce overall output.
๐ Study Unit 6.2: Externalities

7.ย If the quantity of a good produced is not the same as the socially optimal quantity, there will be
B. no equilibrium
C. both a positive and negative externality
D. fines imposed by the government
Explanation: DWL can result from too many units being produced: units for which the MSB < MSC.
๐ Study Unit 6.4: The Effects of Government Intervention in Different Market Structures

8.ย A per unit tax on pollution produced by firm A would reduce pollution and
A.ย reduce the output generated by firm A
B. increase the output generated by firm A
C. generate a surplus for firm A
D. generate a cap on employment for firm A
Explanation: The per unit tax on pollution for firm A would create an incentive for firm A to not produce as much pollution; this would be achieved by reducing output.
๐ Study Unit 6.4: The Effects of Government Intervention in Different Market Structures

9.ย Which of the following is an example of a non-exclusionary public good?
A.ย Nike sneakers
B. private daycare for children
C. national defense
D. a Starbucks latte
Explanation: When the government spends money on national defense, every person in the nation benefits from this "good" - even if a person doesn't pay his taxes, we can't exclude them from benefiting from national defense.
๐ Study Unit 6.3: Public and Private Goods

10.ย Which of the following is an example of a shared-consumption (non-rival) good?
A.ย a private gyms basketball court
B. a country club golf course
C. a private pool club
D. a town public park
Explanation: The park can't be "used up" by one person; one personโs consumption of the park does not reduce the park's usefulness to others.
๐ Study Unit 6.3: Public and Private Goods

11.ย A law designed to prevent monopolies and encourage competition are known as
A.ย anti-retention lawsย
B. anti-fiscal laws
C. antitrust laws
D. anti-equilibrium laws
Explanation: Such laws aim to prevent full control over industries by single corporations. (Sherman Act of 1890)
๐ Study Unit 6.4: The Effects of Government Intervention in Different Market Structures

12.ย A monopoly is inefficient because
A.ย it produces nothing that can benefit society
B. it produces too little and sets a price below MC
C. it produces too little and sets a price above MC
D. it produces too much and sets a price above MC
Explanation: A monopolist creates DWL and since the monopolist charges a price greater than its marginal cost, there is no allocative efficiency.
๐ Study Unit 4.2: Monopolies

13.ย Like our current federal income tax system, these taxes take a larger percent of income from high income groups.
A.ย proportional taxes
B. regressive taxes
C. fixed taxes
D. progressive taxes
Explanation: Under a progressive tax plan, the more you make, the more you pay in taxes.
๐ Study Unit 6.4: The Effects of Government Intervention in Different Market Structures

14.ย Which of the following is likely to reduce inequality in a nation's distribution of income?
A.ย job training for low-skilled workers
B. regressive taxes
C. increased defense spending
Explanation: Training low-skilled workers will increase their human capital and allow them to demand higher wages as higher-skilled workers.
๐ Study Unit 6.4: The Effects of Government Intervention in Different Market Structures

15.ย The U.S. federal government redistributes income mainly by
A.ย progressive taxing of different income levels
B. regressive taxing of different income levels
C. no taxing of different income levels
D. proportional taxing of different income levels
Explanation: Progressive taxes require those earning higher incomes to be taxed more; those taxes can be used to benefit those making less income in society.
๐ Study Unit 6.4: The Effects of Government Intervention in Different Market Structures

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๐ธUnit 1 โ Basic Economic Concepts
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๐ฐUnit 5 โ Factor Markets
๐Unit 6 โ Market Failure & the Role of Government
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