Unit 6: Market Failure & Government
Micro · Unit 6 · Paper 3

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 3” 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

Marginal vs average tax rate

2

Public good

3

Adverse selection

4

Pigouvian tax

5

Market failure

6

Private good

7

Club good

8

Marginal private benefit vs marginal social benefit

9

Deadweight loss from a negative externality

10

Free-rider problem

11

Pigouvian subsidy

12

Lorenz curve

Short answer 1. Define or explain: Tradable pollution permits

3 pts

Short answer 2. Define or explain: Negative externality

3 pts

Short answer 3. Define or explain: Marginal private cost vs marginal social cost

3 pts

Short answer 4. Define or explain: Asymmetric information

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.