if my use of the public tennis court prevents your use of
the same court. In this case the public space becomes a
common resource.
b.A cheese burrito is both excludable and rival in consump-
tion. Hence it is a private good.
c.Information from a password-protected web site is exclud-
able but non rival in consumption. So it is an artificially
scarce good.
d.Publicly announced information about the path of an
incoming hurricane is nonexcludable and non rival in
consumption, so it is a public good.- A private producer will supply only a good that is exclud-
able; otherwise, the producer won’t be able to charge a
price for it that covers the cost of production. So a pri-
vate producer would be willing to supply a cheese burrito
and information from a password-protected website but
unwilling to supply a public park or publicly announced
information about an incoming hurricane.
Tackle the Test:
Multiple-Choice Questions
- a
- b
- e
- d
- e
Tackle the Test:
Free-Response Questions
- a.Nonrival in consumption: the same unit of the good can
be consumed by more than one person at the same time.
Nonexcludable: suppliers of the good can’t prevent people
who don’t pay from consuming the good.
b.The additional cost is zero. Public goods are nonrival, so
the same unit can be provided to additional community
members at no added cost.
Module 77
Check Your Understanding
- a.This practice would be illegal because it constitutes a
tying arrangement.
b.This practice would be illegal because it constitutes exclu-
sive dealing.
c.This is legal because the merger does not lead to monopo-
lization.
d.This practice would be illegal because it is a collusive
agreement to restrain trade. - Wind energy is created by a natural monopoly, which
means that marginal cost is below average total cost in
the relevant range of production. (If fact, the marginal
cost of wind energy is virtually zero, because the wind
itself is free.) Thus, a requirement to charge a price equal
to marginal cost would result in a price below average
total cost and cause the firm to incur a loss. Only with
subsidies could the firm survive with marginal cost pric-
ing. If policymakers chose average cost pricing instead,
the operator of the wind farm would make a normal
profit and no subsidy would be necessary.
Tackle the Test:
Multiple-Choice Questions- e
- b
- b
- c
- c
Tackle the Test:
Free-Response Questions - Antitrust policy: prohibit practices that create monopolies
and break up existing monopolies.
Public ownership: have government operate the monop-
oly with the goal of efficiency rather than profit.
Price regulation: restrict price to the lowest price that
does not cause losses, which is the price at which the
average total cost curve intersects the demand curve.
Module 78
Check Your Understanding- The poverty threshold is an absolute measure of poverty.
It defines individuals as poor if their incomes fall below a
level that is considered adequate to purchase the necessi-
ties of life, irrespective of how well other people are
doing. And that measure is fixed: in 2009, for instance, it
took $10,956 for an individual living alone to purchase
the necessities of life, regardless of how well-off other
Americans were. In particular, the poverty threshold is
not adjusted for an increase in living standards: even if
other Americans are becoming increasingly well-off over
time, in real terms (that is, in terms of how many goods
an individual at the poverty threshold can buy) the
poverty threshold remains the same.
Tackle the Test:
Multiple-Choice Questions - a
- b
- e
- c
- a
Tackle the Test:
Free-Response Questions - (Answers to the first part of the question will differ.)
Economics can add to our knowledge of the facts regard-
ing trade-offs involved in implementing government pro-
grams to redistribute income. However, economics can’t
resolve differences in values and philosophies.
Module 79
Check Your Understanding- The inefficiency caused by adverse selection is that an
insurance policy with a premium based on the average
risk of all drivers will attract only an adverse selection of
SOLUTIONS TO AP REVIEW QUESTIONS S-47