Exam 4

Cash aid to the poor makes up roughly __ percent of the total spending on means-tested programs

20

As insurance companies cannot distinguish perfectly between low-cost and high-cost people, there will be

An adverse-selection problem where high-cost people are most likely to buy insurance.

You are responsible for buying a fleet of 10 used cars for your employees and must pick either brand B or brand C. For your​ purposes, the two brands are identical except for one​ difference: Based on your experience with the two​ brands, you figure that 55 percent of B cars in the market are lemons and only 10 percent of C cars in the market are lemons. You are willing to pay​ $1,000 for a known lemon and​ $3,000 for a known plum. If the price of B cars is ​$2 comma 000 and the price of C cars is ​$2 comma 200 ​, which brand of car should you​ pick?

Brand C

In buying communities, like the online auction site eBay, buyers and sellers are held accountable because

Buyers and sellers leave feedback for each other after a transaction is completed.

Our problem of enforcing state-level "lemon laws" is that

Cars can be shipped to a different state without documentation that they are lemons

What is one factor why college graduates earn a higher wage than only high scool graduates

College graduates signal to firms that they have required skills

A public good is ___ in consumption and _________

Nonrival and nonexcludable

Which of the following is not an external benefit of education?

Personality externalities

Tastie Gum sells a pack of gum for $1.30. The marginal product of labor is 5 packs of gum. The marginal revenue product of labor is ____

$6.5

The wage premium for beautiful people is about ___ percent, while the wage penalty for unattractive people is about ____ percent.

5 and 8

T/F: A progressive tax system is an example of a means-tested program

False

T/F: Featherbedding increases wages and labor productivity

False

How has free trade impacted the U.S. labor market?

Many low skilled jobs were moved overseas

Your objective is to earn exactly $110 per week. If your wage decreases from $8 to $7 per hour, you will respond by working ____ hours instead of _____ hours. In other words, your labor-supply curve is ______ sloped.

More, less, downward

In the health insurance market,

The buyer knows more about their family history and risk level than does the seller.

The special-interest groups model of government explains why:

The government protects endangered species, there are subsidies to farmers, and the government fails to use resources efficiently

Sketchy Road is very dark and the parents that live on Sketchy Road are concerned about their​ children's safety. Street lights would bring comfort to 15 concerned households. The benefit per household from street lights is $95. If one generous household pays for all the lights, the external benefit for the remaining 14 households is ______.

$1330

The immigration of low-skill workers generates net benefits for high-skill workers because they benefit from lower ______ without bearing the cost associated with lower _____

High-skill, prices, and wages

The external benefit of a tree is measured by the change in __________, and is equal to about ______.

Housing values and $13,000

An important factor in growing inequality over the last 30 years is technological change that has ______ the demand for college graduates and ____ the demand for less-educated workers.

Increased and decreased.

A good that is available for everyone to consume, regardless of who pays and who doesn't is called a:

public good

In a mixed market with asymmetric information, increased buy pessimism causes

Lower prices and a lower supply of plums.

which has a higher poverty level: 1. White or Hispanics 2. White or Asians 3. Married couple or Female-headed household 4. Under 18 years or 65 years and older

1. Hispanics 2. White 3. Female-headed household 4. Under 18 years

Public goods are

Available for everyone to utilize regardless of who pays for it.

A money-back guarantee will be provided by the owners of ____, but not by the owners of ____

Plums, lemons

In the market for insurance, the moral-hazard problem is that insurance encourages

Risk-taking

Health insurers use experience rating to

Set different prices for different firms, depending on the past medical bills of the firm's employees.

What is the largest category in federal government spending?

Social security

Which of the following is true about private goods?

They are consumed by a single person, they can have external benefits, and they are rival in consumption.

T/F: An increase in the union wage increases the income of the workers who keep their jobs, but also decreases the number of union jobs

True

T/F: In the past, railroad unions forced railroads to use firemen (whose job was to shovel coal) on diesel-powered engines, which don't use coal

True

T/F: The MRP curve is also the firm's short-run demand curve for labor.

True

Professional baseball pitchers are like?

Used cars because there is asymmetric information.

Education generates three types of external benefits

Workplace externalities, civic externalities, and crie externalities

Buying new socks is an example of a private good ___ external benefits

without

Consider a state in which automobile drivers are divided equally into two types of​ drivers: careful and reckless. The average annual auto insurance claim is ​$600 for a careful driver and ​$1 comma 400 for a reckless driver. Suppose the state adopts an insurance system in which all drivers are placed in a common pool and allocated to insurance companies randomly. An insurance company cannot refuse coverage to any driver it is​ assigned, but a driver who is unhappy with the insurance company has the option of being randomly reassigned to another insurance company. By​ law, each insurance company must charge the same price to all its customers. Predict the price of auto insurance under the two alternative policy​ scenarios: A. Under Policy M, auto insurance is mandatory. B. Under Policy V, auto insurance is voluntary.

A. The price of insurance will be $1,000 B. The price for insurance will be above $1,000.

In a given​ year, there is a 10 ​-percent chance that a fire in​ Ira's warehouse will cause​ $100,000 in property damage. If Ira spends ​$4 comma 000 on a​ fire-prevention program, the probability of a fire would drop to zero. A. If Ira doesn't have fire insurance, will he spend the money on the prevention program? B. If Ira has an insurance policy that covers 80% of the property damage from a fire (covering $80,000 of the $100,000 worth of damage), will he spend the money on he prevention program?

A. Yes B. No

The supply curve for high-quantity used cars lies _____ the supple curve for-low quality used cars because the minimum price is ____ for - quality used cars.

Above, higher

To get the market demand curve for labor,

Add up the labor demands of all the firms for each wage

The domination of the used-car market by lemons is an example of the

Adverse-selection problem.

Adverse selection requires the following two preconditions?

Asymmetric information and a mixed market.

Suppose you are willing to pay $1,200 for a low-quality used can and $6,000 a high-quality used car. If there is a 60 percent chance of getting a low-quality car and a 40 percent of getting a high-quality car, you are willing to pay ____ for a used car.

$3120

T/F: 1. Minimum wage decreases employment for some workers. 2. Minimum wage decreases the price of goods and services. 3. Minimum wage increases wages for some workers. 4. Minimum wage increases costs for some businesses.

1. True 2. False 3. True 4. True

Government transfer and tax policies increase the income share of the lowest quintile of the income distribution from about ___ percent to about ___ percent

1.5 and 4.7

Recent studies suggest that earnings differences resulting from racial discrimination have

Decreased over the last few decades

The factors that contribute most to income inequality are

Differences in labor skills and effort; luck and misfortune

T/F: A regressive tax system is an example of a means-tested program

False

T/F: Welfare and food stamp participation fell during the Great Recession.

False

The poverty rate for female-headed households is about ____ times the poverty rate for households headed by a married couple.

Four

According to the signaling effect,

Information about a person's work skills are conveyed by completing college

The average immigrant has ___ education than the average native, so immigration ____ the wages of ____ skill natives.

Less, decreases, and low

The poverty rate is relatively ___ for aged, and relatively ___ for children

Low and high

T/F: The typical unionized airline hires three workers to guide an airplane into he gate, while nonunion airlines use only two workers.

True

T/F: Welfare is a program that provides assistance to those whose income falls below a certain level

True

The poverty rate for both black and hispanics are more than _____ the poverty rates for whites

Twice

An example of a good that is non-excludable is:

a published scientific discovery.

Which of the following explains why the supply of workers in a particular occupation could be small

artificial barriers to entry, undesirable working conditions and high training costs

The college premium is defined as the percentage difference between the incomes of _____ graduates and ______ graduates. It is currently about ____ percent.

high-school, college and 74

Since 1970, the income share of the top fifth of the income distribution has _______, whole the shares of the lowest and middle fifths have _______.

increased and decreased.

The labor agreements of the National Basketball Association favor players with close to the ____ salaries.

median

A fire extinguisher is an example of a

private good that generates external benefits

Adding fire detectors to your home is a private good ____ external benefits.

with

Keeping your grass neatly trimmed is an example of a private good ____ external benefits

with

The Genetic Information Nondiscrimination Act (GINA) protects people from genetic discrimination in _____ insurance but not in _____ insurance.

Health, life

A decrease in the supple of nurses will _____ the equilibrium wage and _____ the equilibrium quantity of nursing services.

Increase and decrease

An increase in demand for nurses will ____ the equilibrium wage and ____ the equilibrium quantity of nursing services.

Increase and increase

According the the marginal principle, it is logical to

Increase the level of an activity as long its marginal benefit exceeds its marginal cost.

In an insurance market, the presence of high-cost customers ____ the average cost of providing insurance. The resulting ____ in the number of low-cost consumers ______ the average cost of providing insurance and _____ the price.

Increase, decrease, increases, and increases

In 2010, the U.S. Congress approved legislation to regulate the nation's health insurance markets and reduce the number of uninsured people. Which of the following is not true regarding the new law.

It will significant;y reduce subsidies and tax credits for small businesses.

The special-interest theory of government suggests a government will approve an inefficient project if the costs of the project are paid by a _____ number of citizens and the benefits go to a ____ number of citizens.

Large and small

Beautiful workers get wider opportunities to _________, so small difference in innate characteristics can lead to a large difference in _______

Learn through experience and wages.

Many professional athletes purchase insurance against career-ending injuries. We expect the uninsured players to experience _____ injuries than insured players.

Less

Suppose each nurse in the city of Florence initially works 36 hours per week at an hourly wage of $10 and the wage increases to $12. Reasonable responses to the higher wage include:

Lester works fewer hours, Maureen works more hours, and Sam works the same number of hours.

In some countries, it is customary to tip restaurant waiters. We would expect the wages paid to waiters to be _____ in countries where tips are customary.

Lower

In the example of ice-cream vendors, the vendors choose the ____ location, and this is an ____ choice.

Median and inefficient

Reports from carfax.com and product reviews from consumer reports

Mitigate the problem of asymmetric information

What are three ways to over come the free rider problem?

Providing token private goods, arranging for a matching contribution, and appealing to a person's sense of civic or moral responsibility

The clearing of space debris is an example of a

Public good that suffers from the free rider problem.

When asymmetric information causes a thin market,

Some high-quality goods are sold, but not as many that would with perfect information.

An external benefit is experienced by

Someone other than the person buying the good.

Peter works in a toy factory and he receives a pay raise of $4.00 per hour. If Peter chooses to now work more hours and consume fewer hours of leisure, the ______ is dominant over the _______.

Substitution effect and income effect.

The wage for a particular occupation will be relatively high if labor _____ is small relative to labor ______

Supply and demand

The median-voter rule is

The idea that the choices made by the government will match the preferences of the median voter

T/F: The MRP curve shows the relationship between the MPlabor and the quantity of labor demanded in the short run.

True

T/F: The MRP is equal to the price of output times the marginal product of labor.

True

Consider a course with 40​ students, some of whom are confused after the professor explains a concept. The professor​ doesn't know whether students are​ confused, but will clarify the concept if one student asks a question. A student who asks a question-dash and reveals his or her confusion-dash loses 16 utils. When the professor clarifies the concept in response to a​ question, each confused student gets a benefit of 1 util. a. A question from a confused student will be socially efficient if ___ students in the classroom are confused. b. In the absence of participation incentives, will a confused student ask a question when it would be socially efficient to do so? c. Which of the following incentive systems would be most likely to generate efficient questioning? .

a. 16 b. No c. Confused students appeal to each other's sense of civic or moral responsibility; Confused students who do not ask the question must compensate the confused student who does ask the question; and confused students agree to take turns asking questions.

A​ three-person city is considering a fireworks display. Bertha is willing to pay ​$105 for the proposed fireworks​ display, Marian is willing to pay ​$30​, and Sam is willing to pay ​$25. The cost of the fireworks display is​ $120. a. Will any single citizen provide the display on his or her own? b. If the cost f the fireworks display is divided equally among its citizens, will a majority vote in favor of the display? c. Which of the following transactions would benefit all three citizens?

a. No b. No c. The fireworks display would be provided with Bertha paying $90, Marian paying $20, and Sam paying $10.

Consider a small town with​ 1,000 households. The town could install a wireless WiFi network that would give everyone in town access to the Internet. Each household is willing to pay a maximum of ​$60 per year for the​ network, and the cost of the system is ​$15,000 per year. a. Is the WiFi system efficient? b. Suppose the town asks for voluntary contribution to support the network. Would you expect the total contributions to cover the $15,000 cost? c. Suppose the town keeps track of contributions and issues passwords to people who contributed at least $15. Would you expect the total contributions to cover the $15,000 cost?

a. Yes b. Maybe not c. Yes

Suppose the demand for automobile mechanics decreases. This will ____ the equilibrium wage and _____ the equilibrium quantity of automobile mechanics. Suppose a new television program makes car repair look like an attractive occupation. This will ______ the equilibrium wage, and _____ the equilibrium quantity.

decrease, decrease, increase and increase

We cannot predict a worker's response to an increase in the wage because the ______ effect and the substitution effect work in ______ direction(s)

income, substitution and opposite

Because of special interest groups, the government is ____ likely to invest in economically inefficient projects.

more

The government subsidizes goods that generate external benefits such as

research at universities and other nonprofit organizations.

Purchasing new underwear is an example of a private good _____ external benefits.

without

The long-run market demand curve for labor is

Flatter than the short-run demand because the number of firms in the market can change in the long run.

Suppose the likelihood that a person will get disease X is determined in large part​ (but not​ exclusively) by his or her genes.​ Initially, it is impossible to determine who carries the gene for the​ disease, and many people spend ​$700 on special health insurance to cover the cost of treatment for the disease. Suppose scientists uncover the gene responsible for the disease and develop a simple test for the gene. A. Suppose the government passes a law that prevents insurance companies from getting the results of a customer's genetic test for X. The new price will be ________ than $700. B. Suppose the insurance companies have access to the results of genetic tests and they require all customers to gt the test. How will the insurance company change its price of X insurance?

A. Greater B. Raise the price above $700 for customers with the gene and reduce the price below $700 for those without the gene.

The marginal cost of expanding a highway is​ $58. The marginal benefit is approximately​ $35. The people who use this highway the most strongly express their views to the government to have the highway​ expanded, and the government complies. The people that expressed their opinion to the government to hvbe the highway expanded are called

A special interest group

Sabrina works for a​ workers' cooperative that initially pays her a lump sum of ​$300 per week​ (as long as she works at least 15 hours per​ week) and a wage of ​$16per hour of work. She initially works 25 hours per week. Suppose the cooperative changes its pay plan by increasing the​ lump-sum payment to ​$360 and decreasing the hourly wage to ​$14 A. If Sabrina continues to work 25 hours per week, by how much does the change in the pay plan change her total income? B. The wage rate increases, making the price of leisure _______. Thus, we would expect Sabrina to work _____. However, her overall work hours are unchanged. This is due to influence of the _______.

A. $10 B. More expensive, more hours, income effect

Suppose the value of a​ high-quality week-old car​ (a plum) is ​$22 comma 000 ​(the same as the purchase price of a new​ car), while the value of a​ low-quality week-old car​ (a lemon) is ​$11 comma 000 . Suppose that at a price of ​$18 comma 700 per​ car, 7 of 10 cars on the used market are plums and 3 of 10 are lemons. A. How much s the typical buyer willing to pay for a used car in the mixed market? B. Is the $18700 price an equilibrium price? C. Suppose that for every 10 new cars sold by the new-car dealers, 9 are plums ad only 1 is a lemon. Why is the equilibrium, mix the used car market different from the mix of new cars sold?

A. $18700 B. Yes C. Owners of high-quality week-old cars worth $22,00 are less likely to be willing to sell them for $18,700

You are willing to pay​ $7,000 for a​ high-quality car a plum. The current price of used cars is ​$3 comma 500 ​, and 4 of 5 cars in the market are​ lemons, meaning that 1 in 5 is a plum. A. Suppose you could pay a finder's fee to a personal shopper/mechanic who will find you a plum at a price of $3,500. The maximum you are willing to pay as a finder's fee is ____ B. As you shop for a used car, you will bring each car you consider to your mechanic, who will thoroughly inspect the car and tell you certain whether it is a plum or lemon. If the price per Inspection is $400, is it worth the money? C. Would the inspection be worth the money if only 1 out of 10 used cars was a plum?

A. $3,500 B. Yes C. No

There is asymmetric information in the used-car market because _____ cannot distinguish between lemons and plums but _____ can.

Buyers, sellers

This is because a players _______ has better information about the pitcher's health and likelihood of injury

Current owner

Car insurance increases traffic _____ because insured drivers ______

Death, drive less cautiously.

A minimum wage will _____ the quantity of labor demanded and ____ the quantity of labor supplied

Decrease and increase

The logic of substitution effect for leisure is that a decrease in the wage ________ the opportunity cost of leisure time, which ____leisure time and ______ labor time.

Decreases, increase and decreases.

The external benefit of LoJack is about ___ per year, compared to an annual cost per LoJack of ____.

$1,300 and $100.

The external benefit of transforming a high-school dropout into a graduate is about _____ per year.

$1,600

Suppose that the average annual malpractice cost is ​$35 comma 000 for reckless doctors and ​$1 comma 000 for careful doctors. If half of an insurance​ company's insured doctors are​ reckless, the company will earn zero economic profit if the price of insurance is $________. If careful doctors are not willing to pay more than ​$6,000 for​ insurance, the price required for zero economic profit is ​$______ .

$1800 and $35000

Suppose 1,000 people would each get a benefit of $40 from a levee. Building the levee is socially efficient if its cost is less than ________. If the cost is $26,0000, a tax of _____ per person would generate unanimous support for the levee.

$40,000 and $26

Consider the market for newspaper delivery kids in Kidsville. Each news kid receives a piece rate of ​$2 per subscriber per month and has a fixed territory that initially has 200 subscribers. How much is the monthly income of a typical news kid? Suppose the new city council of Kidsville passes a law that establishes a minimum piece rate of ​$4 per subscriber per month. As a​ result, the publisher increases the monthly price of a subscription by 10 percent. The price elasticity of demand for subscriptions is 3.0. Now, how much is he monthly income of a typical news kid?

400 and 560.

Several of your friends have offered to take you on a tandem skydiving​ adventure: Strapped together with a single set of parachutes​ (main and​ emergency), you jump out of an airplane and then either float to earth or crash. All your skydiving friends are equally​ skillful, and none of them has the​ thrill-seeking gene. You can ask each of them a single question. A. What's your question? B. What's the answer you are looking for in a skydiving mate?

A. Do you have life insurance? B. You're looking for someone without life insurance because they'll be more careful.

Suppose a healthy baseball pitcher is worth ​$5 million per year to his​ team, compared to only ​$4 million per year for an unhealthy pitcher. Suppose that half the pitchers in the league are​ healthy, and half are unhealthy. According to an executive of a baseball​ team, "If my assumptions are​ correct, our team is willing to pay a maximum of ​$4.5 million for a pitcher in the​ free-agent market." A. What are the executive's assumptions? B. Are these assumptions realistic?

A. Half of the pitchers available in the free-agent market are healthy and half are unhealthy B. No

Advocates of higher salaries for teachers point out that most teachers have college degrees and that teaching children is an important job. A. Why aren't teacher's salaries higher, given the importance of the hob and education required? B. Suppose a new law establishes a minimum teacher salary that is 25 percent higher than the prevailing salary. How would you expect this law to affect the average quality of teachers and the taxes paid by the typical household?

A. The demand for teachers has increased less than supply, the supply of teachers is higher than the labor supply in other occupations, and teaching professions has a higher proportion of females who earn less than males. B. The average quality of teachers would increase but the change in taxes paid by the typical household canny be determined.

The company responded to the loss of customers by increasing its price. This is puzzling because you might think the insurance company would drop its price to prevent other employees from switching to other companies. A. What is the rationale for increasing the price? B. If you change one word in the second sentence, it would be logical for the insurance company to decrease rather than increase its price. What's the word, and why is it decisive?

A. The fraction of high-cost customers insured by the company has increased. B. "Younger", because younger workers typically have lower medical bills; conversely, if older workers left the plan, the price would drop.

An insurance company assumes a​ 50-50 mix of​ low- and​ high-cost customers, and prices accordingly. If it turns out there are more than​ 50% high-cost​ customers, the​ company's average cost will

Exceed its estimate and the company's profit will decrease.

Your favorite professional team is considering hiring a new player for $6 million per year. It will be sensible (profitable) to hire the player if his _____ is greater than the $6 million cost.

Extra revenue generated, marginal-revenue product, and MRP

T/F: The marginal product of labor is the change in cost from one additional unit of labor.

False

The logic of the output effect is that an increase in the wage will ______ production cost, so the price of output will ______ and the quantity of output demanded will _____. As a result, the quantity of labor demanded will ________.

Increase, increase, decrease, and decrease.

Government regulations for kiwifruit

Increased the average quality and increased the average price of kiwifruit

If you offer insurance against bicycle theft and base your price on last year's theft rate, you are likely to lose money because insurances ______ theft rates.

Increases

The federal government receives more money from ________ than from any other source.

Individual income taxes

In​ 2010, the government approved legislation​ ("ObamaCare") to take steps to reduce the number of uninsured individuals. This legislation requires

Individuals to purchase health insurance, and requires penalties if they do not do so.

Which of the following is not a way that a car buyer can avoid the lemons problem?

Taking a quick test drive.

Suppose the monitoring of El​ Niño's current costs a total of​ $12 billion per decade. Over a​ decade, early warning of the​ current's path would reduce its damages by​ $9 billion in the United​ States, $6 billion in​ Canada, and​ $3 billion in Mexico. a. Does any country, acting unilaterally have an incentive to monitor El Nino? b. Do the social benefits of monitoring exceed the costs? c. A cost-sharing arrangement that will cause all three countries to support a monitoring system would be

a. No. No one country experiences damage more than the cost of monitoring. b. Yes, sine the sum of the damages is great than the monitoring costs. c. For each country to pay their portion of the combined expected damages.

Consider a trout stream that is threatened with destruction by a nearby logging operation. Each of the​ 10,000 local fishers would be willing to pay ​$6 to preserve the stream. The owner of the land would incur a cost of ​$20,000 to change the logging operation to protect the stream. a. Is the preservation of the stream efficient from the social perspective? b. If the landowner has the right to log the any way he wants, will the stream be preserved? c. Which of the following solutions would benefit the fishers and the landowner?

a. Yes b. No c. Each of the 10,000 local fishers could contribute $4 to pay the landowner to preserve the stream.

Each of the 90,000 citizens in a particular county is willing to pay ​$0.10 to increase the number of wolf litters by one. Each litter of wolves imposes a cost of ​$5,000 in livestock losses to ranchers. a. Is the provision of an additional litter of wolves efficient from the social perspective? b. Which of the following systems would most likely generate the socially efficient outcome?

a. Yes b. Use contributions from the county's citizens to compensate ranchers for livestock killed by wolves.

A minimum wage for restaurant workers brings good news to workers who ___ their jobs, but bad news to workers who ____ their jobs, as well as bad news for ____

keep, lose and diners

Sellers can identify a car as a plum in a sea of lemons by offering

warranties