Micro Final
Joe earns $10,000 in income and pays $1,000 in taxes while Jack earns $30,000 and pays $4,000 in taxes. The structure of this tax is: -progressive. -proportional. -regressive. -a head tax.
progressive
take a larger share of higher incomes as tax
progressive taxes
In general, a nation can enjoy a higher standard of living by ______ than by being self sufficient. -increasing its versatility -avoiding trade with other nations -specialization and trading -taxing imported goods
specialization and trading
One way sellers can credibly signal that they have a high-quality product is to: -sell very little of their product in order to create scarcity. -spend a lot of money on advertising. -lower their marginal cost of production. -simply tell buyers more about their product.
spend a lot of money on advertising.
If a society's consumption possibilities are identical to its production possibilities that society has: -a closed economy. -an open economy. -a two-person economy. -a free trade policy.
a closed economy
Technological advances that increase the marginal product of labor will lead to: -a decrease in the demand for labor because the firm won't need as many workers. -an increase in the demand for labor because workers will be more productive. -no change in demand for labor because the demand for labor depends on the wage. -a decrease in the supply of labor because fewer workers can get the job done.
an increase in the demand for labor because workers will be more productive.
When buyers and sellers are not equally informed about the characteristics of the goods and services offered for sale, information is said to be: -costly-to-fake. -asymmetric. -credible. -symmetric.
asymmetric
The country Happy Land claims that it is producing everything its citizens consume. This situation is called: -a closed economy. -an open economy. -protectionism. -autarky.
autarky
If Tim insures his car against theft, it will: -decrease the likelihood that his car will be stolen. -have no effect on the likelihood that his car will be stolen. -increase his incentive to prevent his car from being stolen. -decrease his incentive to prevent his car from being stolen.
decrease his incentive to prevent his car from being stolen.
Suppose it is observed that the equilibrium wage and employment level have both risen in a competitive labor market. One can infer that the: -supply of labor has increased. -demand for labor has decreased. -demand for labor has increased. -supply of labor has decreased.
demand for labor has increased.
occurs because insurance tends to be purchased more by those who are more costly for companies to insure
Adverse Selection
occurs when either the buyer or seller is better informed about the goods in the market
Asymmetric information
if people can negotiate the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problem caused by externalities
Coarse Theorem
a rival good that is non-excludable
Common good
Which one of the following policies mitigates the negative effects of moral hazard? -Mandatory car insurance for car owners -Lowering everyone's insurance premium -Increasing everyone's insurance premium -Insurance policies with large deductibles
Insurance policies with large deductibles
the additional output a firm gets by employing one additional unit of labor
Marginal Product of Labor (MP)
the tendency of people to expend less effort protecting insured goods
Moral Hazard
we can all enjoy more goods and services when each country produces according to its comparative advantage, and then trades with other countries
Principle of Comparative Advantage
Why is there often resistance to free trade? -Free trade does not benefit the economy as a whole. -Specific groups may be hurt by free trade. -Free trade does not benefit the global economy. -Free trade usually hurts consumers.
Specific groups may be hurt by free trade.
uses group characteristics to infer individual characteristics
Statistical discrimination
_______ on output can help get to socially optimal level when there is positive externality
Subsidy
_______ on output can help get to socially optimal level when there is negative externality
Tax
What party normally gets burdened with the law?
The party with the lowest cost
What party usually makes the adjustment to the externality?
The party with the lowest cost
the tendency for a resource that has no price to be used until its marginal benefit falls to zero
Tragedy of the Commons
the dollar value of the additional output a firm gets by employing one additional unit of labor
Value of Marginal Product of Labor (VMP)
In a competitive market, VMP=
Wage
On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music really annoying. In this case, Stan's saxophone playing generates: -a negative externality -a positive externality -neither -both
both
Adam Smith's invisible hand only leads to an efficient outcome when: -buyers are fully informed about all relevant aspects of a product and the market in which it is traded. -buyers collect information up to the point at which the marginal cost of having more information equals the marginal benefit of having more information. -buyers have more information about the product being traded than do sellers. -buyers have less information about the product being traded than do sellers.
buyers are fully informed about all relevant aspects of a product and the market in which it is traded.
The Coarse theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, then they: -can always arrive at efficient solutions to the problems caused by externalities. -will never arrive at efficient solutions to the problems caused by externalities. -will never perform activities that generate negative externalities. -will always perform activities that generate positive externalities.
can always arrive at efficient solutions to the problems caused by externalities.
When there are externalities, actions are taken to:
capture the surplus
economy that doesn't trade with the rest of the world
closed economy
a good that is to some degree non-rival but excludable
collective good
In a competitive labor market, if a firm pays a worker less than that worker's VMP, then in the long run: -the firm will earn positive economic profits. -competing firms will hire the worker away. -the worker will have no incentive to work hard. -the supply of workers will fall.
competing firms will hire the worker away.
If the labor market for doctors is perfectly competitive, then an increase in the demand for doctors is likely to cause: -doctors' wages to increase. -the working conditions of doctors to deteriorate. -a persistent shortage of doctors. -the supply of doctors to fall.
doctors' wages to increase.
Alex just got a new car. Because Alex obtained full-coverage car insurance, Alex will have an incentive to ______ because of ______. -drive more cautiously than if he didn't have insurance; moral hazard -drive more cautiously than if he didn't have insurance; adverse selection -drive less cautiously than if he didn't have insurance; adverse selection -drive less cautiously than if he didn't have insurance; moral hazard
drive less cautiously than if he didn't have insurance; moral hazard
fair gamble
expected value of zero
a benefit of an activity received by people other than those who pursue the activity
external benefit (positive externality)
a cost of an activity that falls on people other than those who pursue the activity
external cost (negative externality)
the name given to an external cost or benefit of an activity
externality
Protectionism is the view that: -a country's free trade agreements should be enforced. -free trade is harmful and should be restricted. -a country can best defend itself against foreign attack if it opens itself to trade. -free trade agreements best protect a nation's economic interests.
free trade is harmful and should be restricted.
when non-payers can't be excluded from consuming a good
free-rider problem
The United States imports garments from third world countries. This means that if the U.S. economy were closed, the domestic price of goods would be _____ the world price of garments. -less than -greater than -equal to -close to
greater than
If all taxpayers pay the same dollar amount, the tax is termed a: -proportional tax. -progressive tax. -head tax. -per unit tax.
head tax
tax that collects same amount from every taxpayer
head tax
statistical discrimination occurs when: -individuals are judged solely on the basis of their personal characteristics. -individuals are judged on the basis of the groups to which they belong. -firms have perfect information about each potential buyer. -statistics are used to make employment decisions.
individuals are judged on the basis of the groups to which they belong.
How are externalities corrected if negotiations are not costless?
laws can be put in place
If a country is a net importer of a good, domestic suppliers will supply _____ of that good after it opens itself to international trade. -more -the same amount -none -less
less
With external benefits are markets likely to provide more or less than socially optimal?
less than
With external costs are markets likely to provide more or less than socially optimal
more than
If the price of a good in a closed economy is greater than the world price, then if the country opens its markets to world trade the country will be a ______ of that good. -net importer -net exporter -importer and exporter -producer
net importer
a type of good that is difficult or costly to exclude non-payers from consuming
non-excludable good
a type of good whose consumption by one person does not diminish its availability to others
non-rival good
A swing at a popular, unfenced public park is: -nonrival. -nonexcludable. -a collective good. -a pure public good.
nonexcludable
If a good can be consumed by one person without reducing its availability to others, then it is a ______ good. -nonexcludable -pure public -common -nonrival
nonrival
The value of marginal product curve is downward sloping because: -firms must lower price to sell more. -at lower wages, only less qualified workers are available. -of the law of diminishing returns. -profits decline as more workers are hired.
of the law of diminishing returns.
The essential cause of the tragedy of the commons is the fact that: -it can be difficult to solve the free-rider problem. -one person's use of a commonly held resource imposes an external cost on others. -when a resource has no price, it leads to a positional externality. -governments may not tax activities that generate negative externalities.
one person's use of a commonly held resource imposes an external cost on others.
Citizens can consume more of everything in a(n): -autarky. -closed economy. -open economy. -economy with many citizens.
open economy
economy that trades with other countries
open economy
equilibrium equals
optimal amount
negative externalities result in
overproduction
risk-neutral person
person would except fair gamble
risk-adverse person
person would refuse a fair gamble
better-than-fair gamble
positive expected value
A benefit of an activity received by people not participating in the activity is called a: -winner's curse -positive externality -external cost -negative externality
positive externality
a good where non-payers can easily be excluded ad each unit consumed by one person means one less unit available for others
private good
requires all taxpayers to pay the same proportion of their incomes in taxes
proportional income tax
If all taxpayers pay the same percentage of their income in taxes, the tax is termed a(n): -proportional tax. -progressive tax. -head tax. -per unit tax.
proportional tax
the view that free trade is injurious and should be restricted
protectionism
both non-rival and non-excludable good
public good
Legal limit on the quantity of a good that may be imported
quota
has a tax rate that varies inversely with income
regressive tax
If taxpayers pay a smaller fraction of their income in taxes as their incomes rise, the tax is ______ and if taxpayers pay a larger fraction of their income in taxes as their income rise, the tax is ______. -regressive; progressive -progressive; regressive -proportional; progressive -regressive; proportional
regressive; progressive
If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity. -taxing; banning -subsidizing; banning -subsidizing; taxing -publicizing; taxing
subsidizing; taxing
Expected value of gamble =
sum of possible outcomes x their probability
There is 5 percent average tax on imported goods in the United States. This tax is known as a(n) ________. -income tax -sales tax -tariff -quota
tariff
tax imposed on an imported good
tariff
The optimal amount of information to acquire before making a purchase is: -zero. -as much as possible. -the amount such that the total cost of acquiring information equals the total benefit. -the amount such that the marginal cost of acquiring information equals the marginal benefit.
the amount such that the marginal cost of acquiring information equals the marginal benefit.
a proportional tax results in: -a larger percentage of income going to taxes as income rises. -a smaller percentage of income going to taxes as income rises. -the same dollar amount going to taxes for all taxpayers. -the same percentage of income going to taxes for all taxpayers.
the same percentage of income going to taxes for all taxpayers.
If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that: -the private supply curve for the activity is to the left of the socially optimal supply curve. -the private demand curve for the activity is below the socially optimal demand. -there is a positive externality associated with this good. -there is a negative externality associated with this good.
there is a negative externality associated with this good
What do externalities do to the economic efficiency?
they reduce economic efficiency
positive externalities result in
underproduction