Question 1

Every innovation and invention has both positive and negative externalities.

Accepted Answer

Every innovation and invention has the potential to create both positive and negative effects on society, the economy, and the environment. It is important to weigh these externalities when considering the impact of a new technology or product.

Question 2

Government actions that deal with the threat of anticompetitive practices to the public interest are called public policy.

Accepted Answer

Public policy refers to the principles on which social laws are based, while government actions dealing with anticompetitive practices are specifically known as antitrust laws or competition policy.

Question 3

Selling products below cost to drive competitors out of a market is called predatory lending.

Accepted Answer

Selling products below cost to drive competitors out of a market is called predatory pricing, not predatory lending.

Question 4

Natural monopolies arise because of economies of scale.

Accepted Answer

Natural monopolies occur when a single firm can produce goods or services at a lower cost than any potential competitor due to economies of scale. As their scale of production increases, their average cost per unit decreases, making it difficult for smaller firms to compete.

Question 5

A subprime loan is a loan with a low interest rate made to individuals with a low risk of default.

Accepted Answer

A subprime loan is actually a loan made to individuals with poor credit history or a high risk of default. The interest rate charged on a subprime loan is typically higher to compensate for the increased risk.

Question 6

The pollution from SUVs creates a negative externality because the cost of the pollution is paid by other consumers.

Accepted Answer

SUVs emit pollutants that contribute to air pollution, which affects public health and the environment. The cost of addressing the negative impacts of air pollution is often paid by society and not by the individual SUV owner or manufacturer, making it a negative externality.

Question 7

When a real estate developer's actions increase silt in a river, thus making it impossible for boaters to navigate the river, the developer has created a positive externality.

Accepted Answer

The actions of the developer have created a negative externality - an unintended cost imposed on others (boaters) due to the developer's actions. The increased silt has made it impossible for boaters to navigate the river, leading to a loss in their utility.

Question 8

Government policy toward big business involves two areas: antitrust and regulation.

Accepted Answer

Antitrust laws seek to promote competition and prevent monopolies, while regulation sets standards for businesses to ensure they operate safely and fairly. Both areas of government policy are aimed at regulating and controlling the behavior of big businesses.

Question 9

Between 1997 and 2006, the price of the typical American house doubled, a rate significantly higher than at any other time during the previous decades.

Accepted Answer

The answer of Between 1997 and 2006, the price of...

Question 10

The World Trade Organization is often asked to address charges of dumping by international companies.

Accepted Answer

The World Trade Organization is indeed often asked to address charges of dumping by international companies.

Question 11

If firms are forced to internalize a negative externality, market price would increase and equilibrium quantity would decrease.

Accepted Answer

Internalizing a negative externality means that the firm is required to bear the cost of the externality themselves, which would increase their cost of production. As a result, they would need to increase the price of their product to maintain profitability, and this would lead to a decrease in the equilibrium quantity demanded. Therefore, market price would increase and equilibrium quantity would decrease.

Question 12

Suppose that a bee farmer (to make honey) is located next to an apple orchard. According to Ronald Coase, since the bees pollinate the apple flowers, the apple farmer should pay the bee farmer to internalize the externality.

Accepted Answer

Ronald Coase's Coase Theorem argues that when there are externalities between two parties, the efficient outcome (where social welfare is maximized) can be achieved regardless of who has the property rights, as long as transaction costs are low. In this case, if the bee farmer has the property rights to the bees, they could charge the apple farmer for the positive externality of pollination. If the apple farmer has the property rights to the apple orchard and therefore the flowers, they could pay the bee farmer to bring their bees to pollinate the flowers. Either way, the transaction would result in an efficient allocation of resources.

Question 13

Every activity has associated positive and/or negative externalities.

Accepted Answer

Every activity has consequences or impacts that affect parties not directly involved in the activity, either positively or negatively. These impacts are called externalities.

Question 14

One of the problems with the government's recent bailing out of firms is that it encouraged firms to undertake more risky behavior.

Accepted Answer

When firms know that they will be bailed out by the government in case of failure, they tend to take more risks without worrying about the consequences. This is known as moral hazard, and it can be a problem when the government's actions incentivize bad behavior.

Question 15

Antitrust laws are designed to prevent market dominance by one firm gained unfairly.

Accepted Answer

Antitrust laws, also known as competition laws, exist to promote fair competition among firms and prevent monopolies or market dominance achieved through unethical or illegal means such as price-fixing, collusion, or mergers that create an unfair advantage over competitors.

Question 16

The government's policies regarding anticompetitive actions take the form of antitrust policy.

Accepted Answer

Antitrust policies are designed to prevent and stop anticompetitive actions, such as monopolies or price fixing, in order to promote competition and protect consumers.

Question 17

Selling products abroad at lower prices than the prices charged in domestic markets often results in charges of dumping.

Accepted Answer

Dumping refers to a situation where a company exports a product at a price lower than the price it charges in its domestic market. This practice is often viewed as unfair competition and can result in charges of dumping.

Question 18

The immediate cause of the 2006-2010 economic crisis was the bursting of the U.S. housing bubble.

Accepted Answer

The bursting of the U.S. housing bubble in 2006 was a key factor that led to the economic crisis that lasted from 2007 to 2010. The inflated housing market created a false sense of security, causing many homeowners to take on mortgages they couldn't afford. When housing prices began to fall, many homeowners found themselves with negative equity, leading to defaults on their mortgages, foreclosures, and a ripple effect throughout the financial industry.

Question 19

Electric utilities are an example of a natural monopoly.

Accepted Answer

Electric utilities require significant infrastructure, such as power lines and substations, and it is not practical for multiple companies to duplicate this infrastructure in the same area. As a result, one company usually serves a specific geographic area, making it a natural monopoly.

Question 20

One problem for antitrust officials is determining whether actions by businesses unfairly restrict entry into a market.

Accepted Answer

Antitrust officials are concerned with preventing actions that limit competition in the marketplace. This includes actions that have the effect of restricting entry into the market, such as mergers or monopolistic practices. Determining whether such actions are unfair and violate antitrust laws can be a complex process.

Quiz 7: Business, Society, and the Government