When externalities are present in market activity and production occurs at P = MC,
a. the market generates an optimal distribution of resources
b. the market does not generate an optimal distribution of resources
c. a free-rider condition always raises price
d. P = ATC as well
e. the firm suffers economic losses
B
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Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort, so cannot specify how hard the executive works in the contract but must induce it through the incentive scheme. Which of the following wage contracts would work out best for shareholders in equilibrium?
a. A flat wage w = 2,500 with no profit share. b. A share of 35% of the gross profits. c. A share of 55% of the gross profits. d. A share of 70% of the gross profits.
A market shortage occurs if the:
A) price is above the equilibrium price. B) price is equal to the equilibrium price. C) equilibrium price is above the current price. D) equilibrium price is below the current price.
Which of the following is a positive statement?
A. When tax revenues are less than government spending there is a budget deficit. B. Inflation is the most damaging thing that can occur in an economy. C. We need to carefully protect our borders. D. Foreign aid should be reduced to help reduce the national debt.
Assume the current interest rate is 20%. The present value of $900 in one year would be
A. $180. B. $450. C. $750. D. $1,080.