Question

Which of the following statements is (are) correct?

Select one:

A. National defense is provided by the government because free-riders make it difficult for private markets to supply the socially optimal quantity.

B. National defense is an example of a public good because it is nonrivalrous and it is difficult to exclude people from receiving the benefits from national defense once it is provided.

C. National defense is a typical example of a public good because if individuals were required to purchase their own armored tank, there wouldn’t be enough to go around.

D. A and B, only

E. B and C, only

To increase safety at a railroad crossing, you must decide whether to install additional safety equipment in your hometown at a cost of $37,500. If the safety equipment reduces the risk of a fatality by 0.4 percent and the value of a human life is about $12.5 million, you should _________ the safety equipment because the expected benefit of __________.

Select one:

A. not install; $50,000 is less than the cost.

B. not install; $5,000 is less than the cost.

C. not install; $500,000 is greater than the cost.

D. install; $500,000 is greater than the cost.

E. install; $50,000 is greater than the cost.

Answer 1

1. D. A and B, only

Explanation: National defense is a public good and the market cannot provide it efficiently because of the free-rider problem.

2. E. install; $50,000 is greater than the cost.

Explanation:

The benefit expected is 0.4% of $12.5 million = 0.4/100 * $12.5 million = 0.004 * $12.5 million = $50,000.

The cost is $37,500.