FINAL ECON202

Wealth, earnings, and disposable income are just three of several ways of looking at inequality. Imagine a household that earns $80,000 per year from labor. In that year, it also receives an income of $3,000 from investments, pays $12,000 in tax, and receives $7,000 in transfers from the state. Which of the following is its market income and its disposable income?

$83,000 $78,000. Market income is $83,000 and disposable income requires us deduct taxes ($12,000) and to add any cash transfers received ($7,000).

The intergenerational elasticity provides the percentage difference in a child's status given a 1% difference in their parents status. In the US today it is approximately ____, while in a perfect meritocracy it would be ____.

0.5; 0. Figure 19.11 shows that the intergenerational elasticity is approximately 0.5 in the US. In a perfect meritocracy, in which parents' status have no impact on their children's status, the intergenerational elasticity would be 0. While no country in Figure 19.11 is a perfect meritocracy, the intergenerational elasticity in Norway is approximately 0.15.

The diagram shows the market demand and supply curves for the bread market. There are 250 identical bakeries operating in the market, but you do not know their cost structure (i.e. their average cost and marginal cost curves).

A bakery's marginal cost of producing the 21st loaf is approximately €2. At €2, the quantity supplied is 5000 loaves. Therefore each bakery will supply 20 loaves. This means that their marginal cost of supplying the 21st loaf is approximately €2.

Which of the following is an example of a negative externality?

A commuter driving to work instead of taking public transportation This is an example of a negative externality, where the driver does not take into account the negative effect on other drivers.

In which of the following markets is the equilibrium efficient?

A competitive market for a homogenous good that has no external effect This market has a Pareto efficient competitive equilibrium.

The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The per-tonne price of bananas is constant at $400.

A is the banana producers' profit-maximizing outcome. A is where the marginal private cost equates the marginal benefit (the price). Therefore this is the profit-maximizing level.

Which of the following statements are correct?

A market is in equilibrium if the actions of buyers and sellers have no tendency to change the price or the quantities bought and sold. That is the definition of a (Nash) equilibrium.

The figure shows a bakery's marginal and average cost curves, and its isoprofit curves. The bakery is a price-taker in a large bread market.

At A, the bakery would be making a loss. P1 is below the bakery's average cost for all quantities produced. If the price were P1, the bakery would produce at A to minimize its loss until it could go out of business.

Consider again the figure in Question 3. The government could implement four different policies to ensure the Pareto efficient outcome. When 38,000 bananas are produced, the difference between the marginal social cost (MSC) and the marginal private cost (MPC) is $105. In which of the following scenarios do the banana producers make the highest profit?

Coasean bargaining when the banana producers have the right to pollute. When the producers have the right to produce, the fishermen have to pay them to reduce their production level to 38,000 tons, and the producers' profits equal the producer surplus plus this payment. This is the best option for the banana producers.

Which of the following best explains the gender wage gap?

Differences in social norms The gender wage gap increases substantially after women have children, because childcare burdens fall disproportionately on women.

Which of the following statements about merit goods is correct?

Emergency healthcare is a merit good. Most would agree that emergency healthcare should be available to all, regardless of their ability to pay. In the U.S., emergency rooms do not have the right to turn away patients who are unwilling or unable to pay. This makes emergency healthcare a merit good.

Which of the following is the best example of a non-excludable public good?

Free WiFi Free WiFi is non-excludable (because it is free) and non-rival (because one person's use does not diminish another person's use, at least until huge numbers of people are using the service). Free WiFi is a good example of a non-excludable public good.

Which of the following goods is not allocated by markets in the U.S. because doing so is widely viewed as repugnant?

Human kidneys Human kidneys are allocated through a matching algorithm that was developed in part by the economist Alvin Roth using non-market mechanisms.

Which of the following statements regarding monopolistic and competitive markets is correct?

In a monopolistic market, the firm is a price-setter. In a monopoly market the firm sets the price to maximize its profit i.e. it is a price-maker rather than a price-taker.

Which of the following statements most accurately summarizes recent trends in global income inequality, as presented in Unit 19.1?

Inequality between countries is declining, while inequality within countries is rising, with the net effect being falling global inequality. Whatever the gains and losses to Western economies arising from globalization, it has helped rapid income growth in countries like India and China. Since these are also very large countries (as measured by population), the overall effect on world inequality has been negative.

Which of the following statements is correct?

Market failures occur when market prices do not fully account for the effect that actions have on others. Market failures occur whenever there are (positive or negative) externalities from market transactions.

Consider Figure 19.10. Which of the following statements cannot be inferred from the figure?

Men earn lower incomes in Denmark than in the US. While men may earn higher incomes in the US than in Denmark, it cannot be inferred from Figure 19.10. The figure says nothing about the earnings of men in the 1st or 5th quintile, only about how men's relative earnings are transmitted from one generation to the next.

The figure shows the market demand curve for bread, together with original and new supply curves, where the curve has shifted due to new bakeries entering the market. All bakeries are identical, and there are no entry costs. Which of the following statements is correct?

New bakeries will continue to enter until the market price equals the firms' average cost. If there are no entry costs -- as we assumed in this question -- then bakeries will continue to enter until the price equals the minimum of the average cost.

Based on this figure, which of the following statements is correct?

The Nash equilibrium price is $8. In equilibrium, no one has an incentive to deviate, which is the case when supply equals demand. Therefore $8 is the Nash equilibrium.

Review Figure 19.2 below. Which of the following statements is true?

The UK had a relatively high level of wealth inequality until 1970. The share of total wealth held by the richest 1% in the UK was higher than in the other countries listed, although the data shows the similar pattern over time with inequality rising (until about 1918) and falling (until about 1980).

A bakery is one of many that operate in the bread industry. The market demand curve for bread is downward-sloping. The bakery incurs fixed costs and has an upward-sloping marginal cost curve. Which of the following statements is correct?

The bakery faces a flat demand curve. For the bakery, it is not the market demand curve that affects its demand, but instead the price charged by its competitors. The demand curve faced by the bakery is therefore horizontal at this price.

Consider the perfectly competitive market for bread analyzed in Unit 8. Why is the competitive equilibrium Pareto efficient?

The gains from trade are maximized. This is true, because every producer sells bread at its marginal cost, so every loaf is sold where WTP > WTA.

Which of the following markets best approximates perfect competition?

The market for milk. Milk is highly substitutable. There are many sellers and many buyers. Therefore the milk market is highly competitive.

The figure shows the market supply curve for second-hand textbooks, together with original and new demand curves, where the curve has shifted due to the arrival of new students. Based on the figure, which of the following statements is correct?

The more elastic (or more flat) the supply curve, the smaller the price rise. For a given shift in the demand curve, the price rise would is smaller the more elastic (or more flat) the supply curve.

Consider the figure in Question 1. Suppose instead the government decides to impose a specific (or fixed) tax of T per kg of salt, to be paid by the suppliers. Which of the following statements is correct?

The supply curve shifts up in a parallel manner. Unlike a sales tax, where the tax is a percentage of the price, with a specific tax the amount of tax is fixed at T for all prices. Therefore the supply curve shifts up in a parallel manner.

The government now decides to impose a sales tax of 30% on the price of salt, to be paid by the suppliers. Which of the following statements is correct?

The tax causes a decline in the quantity traded. The quantity traded is reduced to the point where the difference between the price on the demand curve (the price received by the consumers) and the price on the supply curve (the price received by the suppliers) is 30% of the latter.

Consider the case where a government introduces a specific tax on cigarettes, which reduces the consumption of cigarettes. Which of the following statements is correct?

The tax may increase social welfare. If cigarettes harm smokers and others, the tax may increase welfare by decreasing smoking. Note the cost of tax collection is also an important consideration. For example, the Danish tax on butter was abolished after only 15 months due to the administrative burden it placed on firms, despite reducing the consumption level by 20%.

The figure shows the demand and supply curves in the salt market. The government imposes a sales tax of 30% on the price of salt, to be paid by the suppliers. This decreases the quantity traded from Q* to QT, decreases the price received by producers from P* to PT1, and increases the price paid by consumers from P* to PT2.

The total surplus is equal to A + B + D + F. The gains from trade or the total surplus is the sum of the consumer surplus A, the producer surplus F, and the tax revenue B + D.

In Guadeloupe and Martinique, the use of pesticide chlordecone on banana plantations devastated fishing communities downstream. Which of the following statements is correct?

This was an example of a social dilemma. Here the unregulated pursuit of self-interest leads to outcomes that are Pareto inefficient, compared to the outcome when individuals take into account the effect of their decision on others. Therefore it is an example of a social dilemma.

There are five students who are looking to buy one second-hand textbook each. Their willingness-to-pay are £5, £6, £8, £12, and £15, respectively. Based on this information, which of the following statements is correct?

To sell three books, the maximum price that can be charged is £8. If the price is £8, the demand is 3 books, and demand is less than 3 books for prices higher than £8.

Wealth is usually more unequally distributed than earnings. This is mainly because:

Wealth is accumulated savings that can be passed on from parents to children. Bequests of inherited wealth are a major route through which parents influence the life chances of children. Most children inherit little or no wealth from their parents, while a few inherit large fortunes. Parents' earnings do not similarly affect their children's ability to earn income, although wealthy parents are able to buy superior education and other advantages for their children.

Review Figure 19.13. Which of the following statements is true.

Wealth is distributed more unequally than most people think. People estimate that the richest 20% of Americans own about 60% of the nation's wealth, but the richest quintile actually owns about 85% of all wealth.