Unit 6: Market Failure & Government
Micro · Unit 6 · Paper 2

Market Failure & Government unit test

A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.

Paper 1Paper 2Paper 3
Each paper is built from this unit’s 25 terms and is the same for everyone, so a teacher can assign “Unit 6, Paper 2” and every student sits the identical test. Multiple choice is marked objectively; the written sections you mark yourself against the model answer and rubric.
Suggested time 32 min 29 points0/17 attempted
1

Gini coefficient

2

Pigouvian subsidy

3

Asymmetric information

4

Public good

5

Marginal private cost vs marginal social cost

6

Private good

7

Market failure

8

Lorenz curve

9

Positive externality

10

Common resource

11

Pigouvian tax

12

Deadweight loss from a negative externality

Short answer 1. Define or explain: Deadweight loss from a positive externality

3 pts

Short answer 2. Define or explain: Adverse selection

3 pts

Short answer 3. Define or explain: Free-rider problem

3 pts

Short answer 4. Define or explain: Marginal vs average tax rate

3 pts

Free response

5 pts

This course has no free-response prompt tagged to this unit, so one from elsewhere in the course is used. It is still worth writing — the skill transfers.

SHORT FREE-RESPONSE. Ridgeline Dairy is one of many identical firms in a perfectly competitive market. The market price of milk is $6 per gallon. At Ridgeline’s profit-maximizing output of 100 gallons per day, average total cost is $8 and average variable cost is $5.

Explain the rule Ridgeline uses to choose its profit-maximizing output, and identify its marginal revenue.

Calculate Ridgeline’s daily economic profit or loss, showing your work.

Should Ridgeline continue operating in the short run? Justify your answer with a calculation.

Explain what happens in this market in the long run and what the price will be when adjustment is complete.