Ch. 5: Public Spending and Public Choice
Elastic demand is greater than
1
Much of our legal system is involved with defining and protecting property rights. A. True B. False
A. True
A cost or benefit of an economic activity that has an impact on an individual's well-being, even though the individual was not directly involved in the activity, is known as a(n) A. externality. B. free-rider. C. capital loss. D. public good.
A. externality.
Market failure occurs when?
An unrestrained market economy leads to few too many resources going to a specific economic activity.
which of the following legal subjects is most concerned with the economic function of the legal system?
Antitrust legislation
Which of the following is an example of a transfer in kind? A. Social Security. B. Food stamps C. Disability benefits D. Unemployment insurance benefits
B. Food stamps
Presence of a negative externalities
Cause the uncorrected market to yield too much output at a low price
3 types of positive externalities
Financing the production, subsidies, regulation
Price controls
Government-mandated minimum or maximum prices that may be charged for goods/services.
externality
a consequence of an economic activity that spils over to affect third parties. Pollution is an externality
Consequently the average fixed cost and average total cost ________ as the volume of output increases.
decrease
When there are external costs, the market will tend to _________resources to the production of the good or service in question
overallocate
third parties
parties who are not directly involved in a given activity or transaction
Economic rent is
the amount paid for a resource over and above its opportunity cost
property rights
the rights of an owner to use and to exchange property
Effluent fee
A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax.
Effluent fee
A charge to a polluter that gives the right to discharge into the air or water a certain amt of pollution; also pollution tax.
Externality (external cost)
A consequence of an economic activity that spills over to affect third parties. Pollution is an _____?
Externality
A consequence of an economic activity that spills over to affect third parties. Ex. pollution.
Externality
A consequence of an economic activity that spills over to affect third parties. Pollution is externality.
Monopoly
A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.
Monopoly
A firm that can determine the market price of a good. because it has no competition.
Government sponsored good.
A good that has been deemed socially desirable through the political process. Ex. museum.
Government inhibited goods
A good that has been deemed socially undesirable through the political process. • Certain psychoactive drugs i.e. heroin
Government-inhibited good
A good that has been deemed socially undesirable through the political process. Ex. heroin.
Price ceilings
A legal maximum price that may be charged for a particular good/service.
Price floor
A legal minimum price below which a good/service may not be sold. Ex legal minimum wages.
A good that has been deemed socially desirable through the political process is known as
A merit good.
Free-rider problem
A problem that arises when indiv. presume that others will pay for public goods so that, indiv., they can escape paying for their portion w/o causing a reduction in production.
Market Failure
A situation in which the market economy leads to too few or too many resources going to a specific economic activity.
Market failure
A situation in which the market economy leads to too few or too many resources going to a specific economic activity.
In many countries, education is either wholly provided by the government or is heavily subsidized. How would an economist explain this? A. Since education has a spillover benefit, private markets will under provide for it. B. Education is a pure public good and those who do not pay cannot be excluded from it. C. Individuals will not purchase education because they do not benefit from it. D. Since education has a spillover cost, private markets will over provide for it. E. The only way to provide education is through a government-sponsored system.
A. Since education has a spillover benefit, private markets will under provide for it.
The goal of antitrust legislation is to reduce the power of firms that can determine the market price of the goods they sell. A. True B. False
A. True
Pollution produced by a factory is being dumped into a local river. The community uses local funds to clean the river. This is an example of A. an external cost as the community, not the factory, is paying for the clean up. B. an external benefit since it creates jobs in environmental science. C. a public good. D. an effluent fee because it is as if the factory is taxing the community.
A. an external cost as the community, not the factory, is paying for the clean up.
The government of country B is more heavily involved in the economy through economic functions rather than political functions because it devotes a higher fraction of its budget toward A. efforts to affect the way exchange is carried out. B. the discouragement of goods that are deemed socially undesirable. C. the encouragement of goods that are deemed socially desirable. D. activities that are subjective rather than objective.
A. efforts to affect the way exchange is carried out.
In the absence of a government-subsidized health plan, the equilibrium price of MRI tests is $500 and the amount of society's total spending on MRI tests is $___million. Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price (that is, out-of-pocket cost) to the individual of $100 per test. In this case people will consume ___MRI tests. The per-unit price that induces producers to provide the amount of MRI tests demanded at the government guaranteed price of $100 is $___and society's total spending on MRI tests becomes $___million. Under the government's coverage of MRI tests, the per-unit subsidy it provides is $__ and the total subsidy that the government pays to support MRI testing at its guaranteed price is $___million.
$500 $40 100,000 $700 $70 $600 (the difference between the supply price & gov't prince). $60
In the decision making process for markets and the public sector
-Dollar spent count as votes in the market system, but in the public sector one person gets one vote -The market system is run by proportional voting rules and the public sector is run by majority rule -The spending of dollars can indicate intensity of want, but political voting does not.
Corporations are subject to _______________, but sole priprietorships and partnerships ________ double taxation.
-double taxation -do not face
Bob has a highly specialized medical skill that is in great demand. His level of economic rent would be ______ because
-high -highly specialized means there are few substitutes, supply is inelastic, and the skill is in great demand.
Sally has never attended school. She is 25 years old and is an internationally known supermodel. Her levels of economic rent would be _____ because
-high -none of the above
Tim is a high school teacher and sells insurance part time. His level of economic rent would be _____ because
-low -his wage is likely close to his opportunity cost
Three goals of the law
1) Full Employment 2) Price stability 3) Economic growth
A firm changes the price of its product and its sales revenues don't change. The absolute value of the price elasticity of demand for its product must be
1.0
A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort and, if successful, receive larger budget allocation in future years. Another rationale for expanding the agency's activities is that this will make the jobs of its workers more interesting, which may help the agency attract better-qualified employees. Nevertheless, to broaden its legal mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In addition, to expand its activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. The behavior of the government agency is similar to a profit-seeking private enterprise in all of the following aspects, except A. the government agency depends on majority rule to enact the changes that it is seeking. B. the government agency is promoting competition. C. the government agency attempts to increase its budgetary allocations. D. the government agency attempts to make its workers' jobs more interesting.
A. the government agency depends on majority rule to enact the changes that it is seeking.
At a consumer optimum goods X and Y, the marginal utility of good X equals 2 utils. The price of good Y is six times the price of good X. What is the marginal utility of good Y?
12
Market failure occurs because A. the market system does not make individuals responsible for the social costs/benefits of their actions. B. the market system does not make individuals responsible for the private costs/benefits of their actions. C. the market system forces individuals to consider the social and private consequences of their actions. D. the market system forces individuals to consider the social consequences of their actions.
A. the market system does not make individuals responsible for the social costs/benefits of their actions.
Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A. transfer payments. B. demerit payments. C. merit payments. D. black market payments.
A. transfer payments.
Transaction Costs
All of the costs associated with exchange including informational costs of finding out the price and quality, service record,and durability of a product, plus e cost of contracting and enforcing that contract.
Price System
An economic system which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system as to what his relatively scarce and what is relatively abundant.
Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that A. Canadians perceive national defense as generating external costs rather than as a public good. B. Canada is able to free-ride on the defense spending of the United States. C. Canada's tax system is less efficient than other industrial nations. D. national defense is not a public good in Canada.
B. Canada is able to free-ride on the defense spending of the United States.
The most common provider of public goods is the private sector. A. True B. False
B. False
The French government recently allocated the equivalent of more than $120 million in public funds to Quaero (Latin for "I search"), an Internet search engine analogous to Google or Yahoo. Is a publicly funded Internet search engine a public good or a government sponsored good? A. It is a public good, unlikley to be provided in the private market. B. It is a public good, deemed socially desirable through the political process. C. It is a government sponsored good, deemed socially desirable through the political process. D. It is a government sponsored good, deemed politically desirable through the political process.
B. It is a public good, deemed socially desirable through the political process.
Does an Internet search engine satisfy the key characteristics of a public good? A. Yes, because it can be used by many people simultaneously at some additional opportunity cost, and it would be impossible to exclude users. B. No, it has the characteristic of non minus rivalrous consumption, but advertisers can excluded and be made to pay nothing. C. No, because the principle of rival consumption applies but users could be excluded. D. Yes, because the principle of rival consumption does not apply and it would be too costly to exclude users.
B. No, it has the characteristic of non minus rivalrous consumption, but advertisers can excluded and be made to pay nothing.
Which one of the following is a primary difference between a public good and a private good? A. Private goods are manufactured because of the workings of the price system while public goods come about through antitrust legislation. B. Private goods are subject to the principle of rival consumption while public goods are not. C. A private good is subject to the free-rider problem while a public good is not. D. Private goods are purchased by money transfers while public goods are purchased by in-kind transfers.
B. Private goods are subject to the principle of rival consumption while public goods are not.
All of the following are goals established by the Full-Employment Act of 1946 except A. price stability. B. a balanced budget. C. economic growth. D. full employment.
B. a balanced budget.
All of the following are goals established by the Full-Employment Act of 1946 except A. price stability. B. a balanced budget. C. economic growth. D. full employment.
B. a balanced budget.
A good that has been deemed socially desirable through the political process is known as A. a free-rider. B. a merit good. C. a positive externality. D. a demerit good
B. a merit good. (aka) Government-sponsored good
Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct for the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. These actions by the government lead to all the following outcomes, except A. a leftward shift of the supply curve of tobacco. B. an increase in the negative externality caused by cigarette smoking. C. a reduction in the negative externality caused by cigarette smoking. D. a leftward shift of the supply curve of cigarettes.
B. an increase in the negative externality caused by cigarette smoking.
Other than correcting externalities, other economic functions of government include A. Deciding what to produce, how to produce it and for whom to produce for all sectors of the economy. B. providing a legal system, allocating public goods, promoting competition, and stabilizing the economy. C. deciding which states may or may not impose income taxes, charge fees and enforce contracts. D. income redistribution and the regulation and provision of merit and demerit goods.
B. providing a legal system, allocating public goods, promoting competition, and stabilizing the economy.
The study of collective decision making, or the process through which voters, politicians and other interested parties influence nonmarket choices is known as A. a private choice theory. B. public choice theory. C. antitrust legislation. D. the exclusion principle.
B. public choice theory.
Market failure occurs when A. the market system fails to allocate an equal share of resources to all individuals. B. the unrestrained market economy leads to too few or too many resources going to a specific economic activity. C. the market system fails to allocate resources to each individual according to their abilities. D. the market system fails to allocate resources to each individual according to their needs.
B. the unrestrained market economy leads to too few or too many resources going to a specific economic activity.
______ ______ for public schools do not necessarily translate into improved student performance.
Bigger subsidies
Many economists suggest that our nation's legal system is an example of a public good. Which of the key properties of a public good does the legal system satisfy?
Both A & B
Why are brand names and advertising important features of monopolistic competition?
Both of these techniques can be used to increase the demand for the product.
A true public good must be provided by the government. Which of the following goods provided by the government is a true public good? A. Postal service. B. Highways where tolls are collected. C. Flood control. D. Tax collection.
C. Flood control.
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents' and students' valuations of the services provided at both private and public schools adjust to equality with the true market price of educational services. As a result of this voucher program, A. the public schools and the private schools will gain equally. B. the public schools will gain. C. the public schools will lose. D. the parents of these school children will lose.
C. the public schools will lose.
Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that
Canada is able to free-ride on the defense spending of the US.
Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that
Canada is able to free-ride on the defense spending of the United States.
Majority rule
Collective decision making, with decisions based on more than 50 percent
Which of the following government policies might be effective in achieving the amount of orange production that fully reflects all social costs? A. A tax on growers commensurate with the cost to third parties. B. Government financing or production of oranges. C. Regulations that limit the use of pesticides. D. Both A and C are viable policies. E. Both A and B are viable policies.
D. Both A and C are viable policies.
Which of the following is not a difference between market and collective decision making? A. Money payments can signal intensity of desire for a product, but voting cannot. B. Government goods are often provided free of charge, while market goods have a price. C. The government can use expropriation to extract payments, but private firms cannot. D. Government goods are costless to produce, while private goods have production costs.
D. Government goods are costless to produce, while private goods have production costs.
According to the theory of public choice, the employees of Kodak and employees of the State of Washington should act differently because A. public employees act to maximize collective welfare rather than individual welfare. B. private employees are motivated only by money. C. public employees cannot be fired while private employees can. D. the incentives facing them are different.
D. the incentives facing them are different.
Most private goods ________ rival in consumption, and most public goods ________ rival in consumption. A. are not; are B. are; are C. are not; are not D. are; are not
D. are; are not
Spending of dollars can indicate intensity of want. Votes cannot indicate intensity of want; each vote counts with the same intensity.
Difference between market and collective decision making VOTING VS SPENDING
Voting versus spending
Differences between market and collective decision making: ___ Vs ____
Subsidizing medical services through Medicare A. makes medical services available to a large percentage of the population, who otherwise could not afford them. B. drives a wedge between the price received by providers and the price perceived by consumers. C. is a relatively low percentage of U.S. GDP compared to other nations. D. All of the above are true. E. Only A and B are true.
E. Only A and B are true.
In a small town, a paper mill produces water pollution. If the government does not intervene, the equilibrium price of paper will be __________, and the equilibrium quantity of paper will be __________. A. greater than the socially optimal price, greater than the socially optimal quantity B. equal to the socially optimal price, equal to the socially optimal quantity C. greater than the socially optimal price, less than the socially optimal quantity D. less than the socially optimal price, less than the socially optimal quantity E. less than the socially optimal price, greater than the socially optimal quantity The government could best correct this externality by_____.
E. less than the socially optimal price, greater than the socially optimal quantity taxing the production of paper.
Since the 1960s, public spending on education has _________, while student performance has ______________. A. decreased, remained constant or increased B. decreased, remained constant or increased C. decreased, decreased D. increased, increased E. increased, remained constant or declined
E. increased, remained constant or declined
____ _____ arises when all mutually advantageous trades have taken place.
Economic efficiency
Externality
External cost, consequence of an economic activity that spills over to affect third parties.
The steel mill doesn't have to pay the cost of dirtying the air. Rather, it is the people in the community who incur that cost in the form of dirtier clothes, dirtier cars and houses, and more respiratory illnesses is an example of
Externality ( external cost)
Monopoly
Firm that can determine the market price of a good. Extreme case, a monopoly is the ONLY seller of a good or service.
A true public good must be provided by the government. Which of the following goods provided by the government is a true public good?
Flood control.
Which of the following is an example of a transfer in kind?
Food Stamps
______ _____ problem arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods. free rider
Free rider
Private goods
Good that can be consumed by only one individual at a time. Private goods are subject to the principle of rival consumption.
government political goods
Goods (and services) provided by the public sector (2)
Government sponsored goods
Goods deemed socially desirable through the political process: (hint: museums)
Public goods
Goods for which the Princ. of rival goods does not apply & for which exclusion of nonpaying customers is too costly. Can be consumed by many indiv simultaneously at no additl. cost& w/no reduct in quality/quantity. No one who fails to pay can b denied he benefit of the good.
Private goods
Goods that can be consumed by only one individual at a time. Private goods re subject to the principle if rival consumption.
Private goods
Goods that can be consumed by only one individual at a time. Their use is exclusive to the people who purchase them.
Merit goods
Gov determines certain goods posses special qualities and seek to promote their production and consumption. "government-sponsored good". Deemed socially desirable.
Differences between market and collective decision making (give 3 examples)
Government goods at zero price Use of force Voting versus spending
_____ ______ all federal, state, and local spending. give examples:
Government outlays • Defense, income security, and Social Security—at the federal level • Education, health and hospitals, and public welfare—at the state level
know and must bear the true opportunity cost of their actions.
In a pure market system, competition generates economic efficiency only when individuals
___________ _________ Rewards and punishments affect provision of government goods.
Incentive structures
Which of the following is not an economic function of government?
Income redistribution
Transfer payments transfers in kind
Income redistribution includes progressive income tax system and transfers: (name 2)
What is not an economic function of government?
Income redistribution.
One reason that collective and private decision making differ is
Individuals working in the government sector face a different incentive structure than those in the private sector.
Suppose that the nominal interest rate in Japan is only 2.0 percent, while the comparable rate in the United States is 4.0 percent while the US inflation rate is 3.0 percent. Which economy has the higher real interest rate?
Japan
Jeanette is maximizing her utility buying hamburger and steak. This week, the price of hamburger has decreased. Jeanette considers these goods to be close substitutes. Which of the following best describes what Jeanette would be expected to do?
Jeanette will buy more hamburger and less steak.
Antitrust legislation
Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.
Antitrust legislation
Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.
The campus bookstore sells a campus mug for $10. When you buy a second campus mug, however, its price is only $6. How does this relate to marginal utility?
Marginal utility is the additional satisfaction from additional units of the good.
Antitrust legislation Monopoly power
Market failure may occur if markets are not competitive
__________encourages people to consume medical services that are low in per-unit value relative to the cost.
Medicare
The most important categories in the federal budget are
Medicare and other health-related spending, Social Security and other income-security programs, and national defense
Transfer payment
Money payments made my government to individuals for which no services or goods are rendered in return
Transfer payments
Money pymts made by govt to indiv. for which no service/goods are rendered in return. Ex. Social Sec., unemployment ins bennies.
Subsidizing medical services through Medicare
Only A and B are true
Which of the following is true regarding the differences between common stock and preferred stock?
Owners of preferred stock generally must receive at least a certain amount of dividends in each period before the owners of common stock can receive any dividends
a shift from S1 to S2 reflects the change that happens when a negative externality is taken into accounts. A shirft from D1 to D2 reflects the change that happens when a positive externality is taken into account. Refer to the above figure. Externalities exist in both panels. After correcting for the externalities the prices should be
P2 and P4.
Assume that the supply of land is perfectly inelastic as shown in the diagram. The demand for land shifted from D1 to D2. What is the total value for economic rent after the change in demand?
P2 x Q*
A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account Refer to the above figures. Which of the panels would be consistent with the situation in which external benefits exist?
Panel 2
Third parties
Parties who are not directly involved in a given activity or transaction.
Transfers in kind
Payments in the form of actual goods/services. Ex. food stamps, subsidized public housing.
In comparing the long-run equilibrium of perfect competition and monopolistic competition, which of the following is true?
Perfect competition: P = MC = minimum of ATC and zero economic profits; Monopolistic competition: P > MC, P > minimum ATC and zero economic profits.
_____ ______ is a benefit that is enjoyed by a third-party as a result of an economic transaction.
Positive externality
Rent control
Price ceilings on rents. Govt tells owners how much they can charge their tenants.
Which one of the following is a primary difference between a public good and a private good?
Private goods are subject o the principle of rival consumption while public goods are not.
Which of the following is a primary difference between a public good and private good?
Private goods are subject to the principle of rival consumption while public goods are not.
Which one of the following is a primary difference between a public good and a private good?
Private goods are subject to the principle of rival consumption while public goods are not.
Primary difference between a public good and a private good?
Private goods are subject to the principle of rival; publics are not
Economic functions of government
Providing legal system, promoting competition, providing public goods, ensuring economywide stability
List one political function of the government that leads to involvement in the economy
Public goods
_____ _____ can be used by more and more people at no additional opportunity cost.
Public goods
What is not a political function of the government that leads to involvement in the economy
Public goods.
according to the above figure, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be
Q1
The principle of rival consumption
Recognition that individuals are rivals in consuming private goods because one persons consumption reduces the amount available for others to consume.
Total utility
Rises as long as marginal utility is positive Falls as long as marginal utility is negative Is at a maximum when marginal utility is zero
The campus pizzeria sells a large pizza for $14. When you buy a second large pizza, however its price is only $10. How does this relate to marginal utility?
Since marginal utility falls as additional units of the good are consumer, consumers are only willing to purchase more as the price falls.
Which of the following is an example of a transfer payment?
Social Security
_______ lead to a higher quantity of the medical services consumed.
Subsidies
Voluntary Exchange
The act of trading, done in an elective basis, in which both parties to the trade expect to be better off after the exchange.
Consumer surplus
The difference between the total amount that consumers would have been willing to pay for an item and the total amount that they actually pay. UNDER the DEMAND curve but ABOVE mkt clearing price.
Producer surplus
The difference between the total amount that producers actually receive for an item & the total amount they would have been willing to accept for supplying that item. Area ABOVE SUPPLY curve but BELOW mkt clearing price.
A benefit of the price system?
The freedom of consumers to decide what they want to purchase.
Which of the following is a benefit of the price system?
The freedom of consumers to decide what they want to purchase.
Rational economic agents would resist consuming any good where
The marginal utility of that good was negative since this world would make you worse off The total utility of that good was falling since this would make you worse off.
What does the long-run price equal for an informational product?
The price equals average total cost.
Principle of rival consumption
The recognition at indiv. are rivals in consuming private goods because one person's consumption reduces the amount available for others to consume.
Property rights
The rights of an owner to use and to exchange property.
In the decision making process for markets and the public sector
The spending of dollars can indicated intensity of want, but political voting does not. Dollars spent count as votes in the market system, but in the public sector one person gets one vote. The market system is run by proportional voting rules and the public sector is run by majority rule
The theory of public choice
The study of collective decision making or the process which voters, politicians, political parties influence non market choices
Gains from trade
The sum of consumer surplus and producer surplus.
Incentive structure
The system of rewards and punishments individuals face with respect to their actions
______ __ ________ ________ the study of collective decision making. Assumes that individuals will act within the political process to maximize their individual (not collective) well-being.
Theory of public choice
Government-inhibited goods
Through political process, have been deemed socially undesirable.
Market failure exists ?
Too few or too many resources going to an economic activity.
What is the difference between total utility and marginal utility?
Total utility is the total amount of satisfaction derived from consuming a certain amount of a good while marginal utility is the additional satisfaction gained from consuming an additional unit of the good.
Payments that are in the form of goods and services.
Transfer in kind Examples: food stamps, subsidized public housing, and medical care
Money payments (terms) made by governments to individuals for which no services or goods are rendered in return.
Transfer payment Examples: Social Security old age and disability benefits and unemployment insurance benefits
Redistributing income give 2 examples
Transfer payments In-kind transfers
Presence of a positive externalities
Under produce and under price the good
Which of the following examples are used as evidence favoring the bounded rationality assumption?
When purchasing electric appliances such as refrigerators, people sometimes buy the lowest-priced, energy-inefficient models even though the price savings often fail to compensate for higher future energy costs.
Proportional rule
With 10 percent of "dollar votes" cast for blue cars, 10 percent of the output is blue
All of the following are goals established by the Full-Employment Act of 1946 except
a balanced budget
effluent fee
a change to a polluter that gives the right to discharge into the air or water a certain amount of pollution: also called a pollution tax
majority rule
a collective decision - making system in which group decisions are made on the basis of more than 50 percent of the vote. In other words, whatever more than half of the electorate votes for, the entire electorate has to acept.
Psychotherapy represents
a credence good, one with qualities that might be difficult for consumers lacking expertise to assess without assistance.
proportional rule
a decision-making system in which actions are based on the proportion of the "votes" cast and are in proportion to them . In a market system if 10 percent of the "dollar votes" are cast for blue cars, 10 percent of automobile output will be blue cars.
monopoly
a firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service
government-inhibited good
a good that has been deemed socially undesirable through the political process. Heroin is an example
When there are too few or too many resources going to an economic activity,
a market failure exists
A good that has been deemed socially desirable through the political process is known as
a merit good.
Refer to the above figure. The market equilibrium quantity is Q1. Point Q. Point Q2 represents the optimal amount of production. This indicates that there is
a positive externality
the "principle of rival consumption" applies to which of the following?
a private good
free-rider problem
a problem that arises when individuals presume that others will pay for public goods so that , individually, they can escape paying of their portion without causing a reduction in production
When the qualities of a good are relatively easy to assess in advance of their purchase, the good is known as
a search good.
A wool overcoat represents
a search good, since it possesses qualities that are relatively easy for consumers to assess in advance of their purchase.
A heavy-duty filing cabinet represents
a search good, since it possesses qualities that are relatively easy for consumers to assess in advance of their purchase.
market failure
a situation in which the market economy leads to too few or too many resources going to a specific economic activity
When personal income in the country rises, so do alcohol consumption and traffic fatalities. It can be said that
alcohol is a normal good and has a positive income elasticity of demand.
A firm can obtain funds for investing by
all of the above
In the decision making process for markets and the public sector
all of the above
A restaurant meal represents
an experience good, since people must actually consume before they can determine their qualities.
Pollution produced by a factory is being dumped into a local river. The community uses local funds to clean the river. This is an example of
an external cost as the community, not the factory, is paying for the clean up.
Market failure occurs when
an unrestrained market economy leads to too few or too many resources going to a specific economic activity
Subsidies
another term for negative tax
Free riders
anticipate that others will pay
Externalities
are examples of market failures.
Assume that every time you wanted to take this quiz you were charged a fee. The publisher's cost for developing the quizzes and making them available does not vary with the number of times you or anyone else takes the quizzes. These quizzes
are known as an informational product.
Business organizations that help reduce the cost of monitoring job performance
are proprietorships and partnerships
Using indifference curve analysis, the consumer optimum occurs
at the point of tangency between an indifference curve and a budget line
Using indifference curve analysis, the consumer optimum occurs
at the point of tangency between an indifference curve and a budget line.
Total revenues are maximized
at the point of unit-elasticity on the demand curve.
The price elasticity of a particular commodity depends upon all of the following except
availability of complementary goods.
In this case, then, the low and constant marginal cost is ________ the average cost.
below
One reason the Medicare system costs so much is
beneficiaries are entitled to receive services for which the per-unit cost exceeds their own personal out-of-pocket payment.
supply curve unchanged demand curve shifts inward (left) showing a decrease in demand
both equilibrium price & equilibrium quantity fall.
The advertising of credence goods contains
both informational and persuasive advertising, so as to provide detailed information and at the same time persuade the consumer to try the product.
_____ ______ ______ how voters, politicians, and other interested parties act and how these actions influence nonmarket decisions.
collective decision making
Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the U.S. government except
consumers of Medicare tend to only consume the high valued medical services
Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the US government except
consumers of Medicare tend to only consume the high valued medical services.
The type of business organizations that are responsible for the greatest share of all business revenues in the US are
corporations
The last unit of educational services provided is likely to ____ _____ _____ __ ______ by parents and students.
cost more than its valuation by parents and students
Goods are deemed socially undesirable.
demerit
which of the following is NOT an economic function of the U.S. government
encouraging production of government-inhibited goods
the services provided _____ _____ _____ _____ to promoting student learning. exceed those best suited to promoting student learning
exceed those best suited
It is difficult to charge for a public good based on consumption; this is called the _____ _____ .
exclusion principle
The economic activities of government include (1) correcting for _____, (2) providing a _____, (3) promoting _____, (4) producing _____ goods, and (5) ensuring _____. The principle of _____ does not apply to public goods as it does to private goods.
externalities, legal system, competition, public, economywide stability rival consumption
A cost or benefit of an economic activity that has an impact on an individual's well-being, even though the individual was not directly involved in the activity is known as a(n)
externality
A cost or benefit of an economic activity that has an impact on an individual's well-being, even though the individual was not directly involved in the activity, is known as a(n)
externality.
Suppose that the cross price elasticity of demand between eggs and bacon is -0.10. What would you expect to happen to the sales of bacon if the price of eggs rises by 10 percent? The demand for bacon would ______ by ______ percent.
fall ; 1.0
An effluent fee refers to a government regulation which specifies a maximum allowable rate of pollution.
false
Transfer payments are money payments made by governments in exchange for goods or services.
false
A true public good must be provided by the government. Which of the following goods provided by the government is a true public good?
flood control
governemnt, or political, goods
goods (and services) provided by the public sector, they can be either private or public goods
Public
goods are not subject to rival consumption
public goods
goods for which the principle of rial consumption does not apply and for which exclusion of nonpaying consumers is too costly to be feasible. They can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity. Furthermore, no one who fails to help pay for the good can be denied the benefit of the good.
private goods
goods that can be consumed by only one individual at a time. Private goods are subject to principle or rival consumption
How the Government can correct positive externalities? Give 3 examples
government financing and production subsidies regulations
which of the following is NOT an example of a transfer payment?
government salaries
If a nation's government determines that consumption of cigarettes should be discouraged, then this means that the government has judged cigarettes to be a(n)
government-inhibited good
Sports stadiums, museums, ballets, plays, and concerts are examples of
government-sponsored goods.
When a firm produces an information product, the initial or fixed costs are
high
collective decision making
how voters, politicians, and other interested parties act and how these actions influence non market decisions.
If ceiling is below mkt clearing price
imposing a price ceiling creates a shortage.
Suppose the government adopts a policy that forces pesticide producers to bear the social costs of groundwater contamination associated with the with the use of their product. This policy will ______ the price of pesticides.
increase
as a share of total national income, government spending generally has
increased over the last fifty years
Since the 1960s, public spending on education has _________, while student performance has ______________.
increased, remained constant or declined
One reason that collective and private decision making differ is
individuals working in the government sector face a different incentive structure than those in the private sector
A business organization that is owned by many
is a corporation
Making stock trades based on "inside information"
is illegal
antitrust legislation
laws that restrict the formation of monopolies and regulate certain anti competitive business practices
Correcting negative externalities will result in a new, corrected, market supply curve that is to the
left of the initial curve. This will decrease the output level.
In a small town, a paper mill produces water pollution. If the government does not intervene, the equilibrium price of paper will be ___, and the equilibrium quantity of paper will be ___. The government could best correct this externality by ___.
less than the socially optimal price, greater than the socially optimal quantity taxing the production of paper
Which of the following is not a main source of corporate funds?
loans from banks
In the figure, P and Q locate the socially optimal price and quantity of a good. In the case of a good that generates positive externalities, the market price would be _____ P and the market quantity would be ______ Q, while in the case of a good that generates negative externalities, the market price would be ________ P and the market quantity would be ____________ Q.
lower than lower than lower than higher than
Political system is run by ______ rule Market system is run by ______ rule
majority proportional
In the long run, monopolistically competitive firms
make zero economic profits.
The water-diamond paradox was solved by realizing the price people are willing to pay for a unit of a particular commodity is determined by
marginal utility.
Since most of the costs are the initial fixed costs of development, once the product is developed, the ________ cost of producing more units of the product are typically low and ________.
marginal, constant
Goods are deemed socially desirable.
merit
transfer payments
money payments made by government to individuals for which no services or goods are rendered in return. Examples are Social Security old-age and disability benefits and unemployment insurance benefits
Elastic or inelastic: A specific brand of bottled water
more elastic
Elastic or inelastic: A type of high-powered ski boat that you can rent from any one of a number of rental agencies
more elastic
Elastic or inelastic: A 75-cent guitar pick for the lead guitarist of a major rock band
more inelastic
Elastic or inelastic: Automobile insurance in a state that requires autos to be insured but has few insurance companies
more inelastic
Elastic or inelastic: A 45-cent box of salt that you but once a year
more inelestatic
The absolute value of the short-run elasticity of demand for bread has been estimated to be 0.15. Its long-run elasticity of demand is
more than 0.15
Experience goods are goods that consumers
must consume in order to assess them properly
A ______ ______ is a cost that is suffered by a third party as a result of an economic transaction.
negative externality
One would expect that the cross price elasticity of ski poles and skis would be
negative since they are complements
Public goods have two characteristics: (1) Once they are produced, there is no additional _____ when additional consumers use them, because your use of a public good does not deprive others of its simultaneous use; and (2) consumers cannot conveniently be _____ on the basis of use.
opportunity cost charged
transfers in kind
payments that are in the form of actual goods and services, such as food stamps, subsidized public housing, and medical care, and for which no goods or services are rendered in return
Externalities can also be _____.
positive
The income elasticity of a normal good is
positive
An important difference between common stock and preferred stock is that
preferred stockholders are entitled to their dividends before common stockholders
Market failure
prevent the price system from attaining economic efficiency and individual freedom.
The greater the monopolistically competitive firm's success at product differentiation the lower is (are) the firm's
price elasticity of demand.
In its most ideal form, a _____ _____ allows resources to move from lower-valued to higher-valued uses through voluntary exchange.
price system
Goods are subject to rival consumption.
private
The fact that a monopolistically competitive firm does not produce at the minimum ATC can be viewed as the cost of generating
product differentiation and variety.
Other than correcting externalities, other economic functions of government include
providing a legal system, allocating public goods, promoting competition, and stabilizing the economy.
The study of collective decision making, or the process through which voters, politicians and other interested parties influence nonmarket choices is known as
public choice theory
The study of collective decision making, or the process through which voters, politicians and other interested parties influence nonmarket choices is known as
public choice theory.
Which of the following is not a political function of the government that leads to involvement in the economy?
public goods
Subsidizing medical services through Medicare
raises the price per unit of medical care received by producers.
Market system
run by proportional rule
Political system
run my majority rule
Similarities and differences with market system structures. 1. ____ and _____ are ______. 2. ____ ______ and _______ are _______ .
scarcity; competition; similarities. Legal coercion; majority rule; differences.
Negative externalities, at least two avenues are open to the government. Name 2 examples special taxes and legislative regulation or prohibition
special taxes and legislative regulation or prohibition
some economists argue that corporate income taxes are typically not paid by firms, but by
stockholders, employees, and consumers
government goods are provided to the consumer at a zero price. This means that
the coast of the goods is the value of the resources used to produce the good
tax incidence referes to
the distribution of tax burdens among groups, or who really pays tax
which law specifically mandated the federal government's responsibility to economy-wide stability?
the employment act of 1946
supply curve unchanged & demand curves shifts outward (right)
the equilibrium price and quantity rise.
an example of a public good is
the fire department
As people consume more and more of a particular good or service, we can predict that
the marginal utility of each additional good consumed will fall and total utility will increase, but more slowly than before
The demand curve unchanged, supply decreases (left)
the market clearing price increases & equilibrium quantity falls
Market failure occurs because
the market system does not make individuals responsible for the social costs/benefits of their actions.
If the average total costs are the same for a perfectly competitive firm and a monopolistically competitive firm, then we know that
the monopolistically competitive firm will produce fewer units than the perfectly competitive firm.
Price elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price.
The theory of public choice is the study of
the process through which voters, politicians, and other interested parties interact to influence nonmarket choices.
which of the following functions of government gives property owners the incentive to use their property efficiently?
the protection of property rights
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents' and students' valuations of the services provided at both private and public schools adjust to equality with the true market price of educational services. As a result of this voucher program,
the public schools will lose.
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents' and students' valuations of the services provided at both private and public schools adjust to equality with the true market price of educational services. As a result of this voucher program,
the public schools will lose.
When the price of gasoline increases, Dennis buys less gasoline and less of all other goods. This information describes
the real income effect of a price increase.
The PE ratio measures
the stock price divided by the earnings per share.
theory of public choice
the study of collective decision making
incentive stucture
the system of rewards and punishments individuals face with respect their own actions.
The law of diminishing marginal utility insures that
the total utility curve will eventually increase at a decreasing rate.
Which of the following is a dissimilarity between the market sector and the public sector decision making?
the type of voting system
Market failure occurs when
the unrestrained market economy leads to too few or too many resources going to a specific economic activity.
Market failure occurs when
the unrestrained market economy leads to too few or too many resources going to a specific economic activity. The market system does not make individuals responsible for social costs/benefits for their actions.
In consumer theory, utility is
the want-satisfying power of a good or service
If the closing price of a stock traded on a particular day is $60 per share, and the dividend paid is $2.74 per share
the yield is 4.6%
Markets tend to over-allocate resources to the production of a good when
there are negative externalities
Which of the following is a similarity between the market sector and the public sector decision making?
there is an opportunity cost associated with every action
in which of the following ways is the private market sector similar to the public sector in terms of decision making?
there is competition for scarce resource in both sectors
Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as
transfer payments
Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as
transfer payments.
Much of our legal system is involved with defining and protecting property rights.
true
All of the following are advantages of proprietorships except
unlimited liability
An increase in input prices shifts the supply curve? up and to the left
up and to the left
If a firm is selling a search good it is more likely to
use informational advertising.
When a firm is selling an experience good it is more likely to
use persuasive advertising.
An example of free riding would be
walking on a golf course to play without paying.
Suppose that one of your classmates informs you that he has developed a method of forecasting stock market returns based on past trends. With a monetary investment by you, he claims that the two of you could profit handsomely from this forecasting method. Your classmate is
wrong since there are no predictable trends that can be used to "get rich quickly;" stock prices go up following a "random walk"
An online video game has the technical capability for a large number of players to participate, as long as a game administrator works to assure constant functionality of the game. Adding any additional players deprives no other participants of the entertainment services provided by the online game. It has been easy, however, to set up a system for excluding participation by anyone who fails to contribute $5 per month to a fund that assures covering extra expenses generated by that player's participation. Is this game a public good?
No, this game is not a public good because the exclusion of nonpaying consumers is not too costly to be feasible.