The Graphs Below Refer to Two Separate Product Markets

question 26

Multiple Choice

The graphs below refer to two separate product markets.Assume that society's optimal level of output in each market is Q₀ and that government purposely shifts the market supply curve from S to S₁in diagram (a) and from S to S₂ in diagram (b) .We can conclude that the government is correcting for:

• A)negative externalities in diagram (a) and positive externalities in diagram (b).
• B)positive externalities in diagram (a) and negative externalities in diagram (a).
• C)negative externalities in both diagrams.
• D)positive externalities in both diagrams.

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Definitions:

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.

Gambler's Fallacy

The erroneous belief that if a particular event occurs more frequently than normal during the past, it is less likely to happen in the future, or vice versa, in situations that are truly random.

Ignoring Base Rates

Ignoring base rates is a cognitive bias that involves disregarding or underestimating general information (base rates) in favor of specific individual information when making decisions or judgments.

Availability Bias

A cognitive bias that causes people to overestimate the likelihood of events based on their availability in memory, often leading to skewed decision-making.