Consider two goods - one that generates external benefits (i.e. positive externalities) and another that generates external costs (i.e. negative externalities). Relative to the socially-best outcome, the free market (i.e. no governmental intervention) would tend to produce:

A. too much of the good that generates external costs and too little of the good that generates external benefits.

B. too little of the good that generates external costs and too much of the good that generates external benefits.

C. too little of both goods.

D. too much of both goods.

(Hint: Look at your Productivity Graph from your note set!) The Marginal Product (MP) of a variable input (e.g. labor) reaches its maximum level:

A. when total product is at its maximum

B. when average product is at its maximum

C. at a smaller level of the variable input than where average product reaches its maximum

D. at a greater level of the variable input than where average product reaches its maximum