EC 012 FINAL

Costly-to-fake principle

to communicate information credibly to a potential rival, a signal must be costly or difficult to fake

Positional arms race

A series of mutually offsetting investments in performance enhancement that is stimulated by a positional externality

Commitment problem

A situation in which people cannot achieve their goals because of an inability to make credible threats or promises

Repeated prisoner's dilemma

A standard prisoners dilemma that confronts the same players repeatedly

Tit-for-tat

A strategy in which a player cooperates until the other player defects and then defects until the other player cooperates again

Payoff matrix

A table that describes the payoffs in a game for each possible combination of strategies

Head tax

A tax that collects the same amount from every tax payer

Credible threat

A threat to take an action that is in the threatener's best interest to carry out

Commitment device

A way of changing incentives to make otherwise empty threats or promises credible

Externality

An external cost or benefit of an activity

Free-rider problem

An incentive problem in which too little of a good or service is produced because nonpayers cannot be excluded from using it

Asymmetric information

Where buyers and sellers are not equally well informed about the characteristics of goods offered for sale

Nonrival good

a good whose consumption by one person does not diminish its availability for others

Pure private good

one for which nonpayers can easily be excluded and for which each unit consumed by one person means one less unit available for others

Coase Theorem

1) Government doesn't need to be involved every case of externality and 2) Private bargains and negotiations are likely to lead to an efficient solution in many social damage cases without any government involvement at all

Decision tree (game tree)

A diagram that describes the possible moves in a game in sequence and lists thee payoffs that correspond to each possible combination of moves

Fair gamble

A gamble whose expected value is zero (EV=0)

Better-than-fair gamble

A gamble with an expected value being positive

Prisoner's dilemma

A game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy

Public good

A good or service that is both nonrival and nonexcludable

Pure public good

A good or service that is both nonrival and nonexcludable

Nonexcludable good

A good that is difficult, or costly, to exclude nonpayers from consuming

Credible promise

A promise to take an action that is in the promisor's interest to keep

13. In the case of ______, the invisible hand fails to generate the efficient outcome because buyers and sellers only take their self-interests into account. A. either an external cost or an external benefit B. only an external cost C. only an external benefit D. unregulated markets

A. either an external cost or an external benefit

Proportional income tax

All taxpayers pay the same proportion of their income tax

Positional arms control agreement

An agreement in which contestants attempt to limit mutually offsetting investments in performance enhancement (steroids)

47. A commodity tax is: A. a proportional tax B. a tax imposed on a good or service C. a head tax D. none of the above

B. a tax imposed on a good or service

27. Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. Refer to the information given above. The buffet in Jamie's dorm is an example of: A. a Coase-like solution to externalities. B. a tragedy of the commons. C. excess supply in the market. D. a good with positive externalities.

B. a tragedy of the commons.

48. Excise taxes: A . are always inefficient B. are inefficient unless they are imposed on a good or service that produces a negative externality (as long as it accounts for the exact value of the externality) C. Does not create a deadweight loss D. none of the above

B. are inefficient unless they are imposed on a good or service that produces a negative externality (as long as it accounts for the exact value of the externality)

6. According to the textbook, owners of restaurants have solved the _______ their wait staff by paying low wages and encouraging tipping by customers. A. credible threats by B. commitment problem with C. credible promises by D. salary problems of

B. commitment problem with

16. The Coase Theorem states that, when transaction costs are zero, the initial allocation of a property right: A. determines all aspects of the final outcome of the negotiated agreement. B. does not matter for efficiency but it does matter for the distribution of wealth. C. Matters for efficiency and for the distribution of wealth. D. must be assigned to the person with the greatest costs

B. does not matter for efficiency but it does matter for the distribution of wealth.

33. A free rider is someone who A. obtains a good for a price less than the market equilibrium price. B. does not pay for the good but still enjoys the benefits of consumption. C. does not pay for the good and does not enjoy the benefits of consumption. D. pays for the good and does not get the benefits of consumption.

B. does not pay for the good but still enjoys the benefits of consumption.

46. The government can raise tax revenue and increase total economic surplus by taxing: A. goods that generate positive externalities. B. goods that generate negative externalities. C. luxury goods that are primarily consumed by wealthy individuals. D. goods whose supply and demand curves are highly elastic

B. goods that generate negative externalities.

50. Rent-seeking: A. is a major market failure B. is a government related failure C. is not a failure at all, it implies that entrepreneurs are looking for new profit opportunities D. none of the above

B. is a government related failure

25. In order to achieve a socially optimal level of output, production that generates positive externalities should be: A. required. B. subsidized. C. conducted by the government. D. deregulated.

B. subsidized.

11. Which of the following is NOT an example of an activity with external benefits? A. Being punctual B. Planting flowers in your front yard C. Attending class when you have the flu D. Having your car's faulty exhaust system repaired

C. Attending class when you have the flu

17. When transaction costs are zero: A. Externalities are harder to deal with. B. Negative externalities impose a larger cost on consumers. C. Externalities would not prevent society from achieving efficient outcomes. D. The Coase theorem does not work.

C. Externalities would not prevent society from achieving efficient outcomes.

42. If the government needs to raise revenue to pay for a public good, an effective tax structure would tax A. all citizens by the same amount. B. all citizens in proportion to their willingness to pay for the public good. C. all citizens by the same proportion of their income. D. only citizens who state that they will use the public good.

C. all citizens by the same proportion of their income.

39. Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Refer to the information given above. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, the quantity of diesel fuel sold after imposition of the regulation will: A. remain the same. B. increase. C. decrease. D. decrease only if diesel fuel is a normal good.

C. decrease.

1. A dilemma in the Prisoner's Dilemma comes from the fact that: A. the outcome is purely random. B. no strategy is dominant. C. if both players play the dominant strategy they each earn a smaller payoff than had they played the dominated strategy. D. it was originally devised to explain the behavior of prisoners.

C. if both players play the dominant strategy they each earn a smaller payoff than had they played the dominated strategy.

28. Brady owns a beachfront lot with a small house. During hurricanes, he refuses to leave. Afterward he applies for federal assistance to rebuild and files insurance claims for damages. By doing so, Brady is: A. pursuing life, liberty and the pursuit of happiness. B. imposing an external cost on himself. C. imposing an external cost on rescue workers, and taxpayers. D. treating his private property as common property.

C. imposing an external cost on rescue workers, and taxpayers.

49. The government: A. is not needed. Markets always produce efficient outcomes. B. is always needed. Markets are never efficient. C. produces a number of inefficiencies but is needed to help markets D. none of the above

C. produces a number of inefficiencies but is needed to help markets

40. If an activity generates a positive externality, the government can make provision of that activity more efficient by _____, and if an activity generates a negative externality, the government can make provision of that activity more efficient by _____. A. taxing it; banning it B. subsidizing it; banning it C. subsidizing it; taxing it D. publicizing it; taxing it

C. subsidizing it; taxing it

45. Even if a tax imposed in a market generates a loss in surplus for the participants in that market, the tax could still increase economic efficiency if: A. voters approve of the tax. B. the government needs to generate tax revenue. C. the public expenditures financed by the tax lead to a big enough increase in economic surplus. D. the tax revenue is used to fund spending by local governments.

C. the public expenditures financed by the tax lead to a big enough increase in economic surplus.

44. Pork barrel programs are government programs that: A. benefit agriculture. B. increase total economic surplus but lack political support. C. benefit industry. D. benefit local areas but are of questionable value from a national perspective.

D. benefit local areas but are of questionable value from a national perspective.

23. A resource that has common property rights is one that: A. is subject to common law. B. benefits everyone equally. C. has no marginal benefit. D. is treated as though it has a price of zero.

D. is treated as though it has a price of zero.

34. The invisible hand will lead to _______ information than is socially optimal because of ________. A. more; free riders B. less; a prisoner's dilemma C. more; external benefits D. less; free riders

D. less; free riders

41. If a good can be consumed by one person without reducing its availability to others, then it is a ________ good. A. nonexcludable B. pure public C. common D. nonrival

D. nonrival

29. According to the textbook, middlemen A. add no value to economic activity. B. only add value if the consumer gets a good deal. C. only add value to themselves. D. provide value through information and coordination.

D. provide value through information and coordination.

12. If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that: A. the private supply curve for the activity is to the left of the socially optimal supply curve. B. the private demand curve for the activity is below the socially optimal demand. C. there is a positive externality associated with this good. D. there is a negative externality associated with this good.

D. there is a negative externality associated with this good.

Statistical discrimination

Making judgments about the quality of people, goods, or services based on the characteristics of the groups to which they belong

Pure commons good

One for which nonpayers cannot be easily excluded and for which each unit consumed by one person means one less unit available for others

Progressive tax

One in which the proportion of income paid in taxes rises as income rises

Dominant strategy

One that yields a higher payoff no matter what the other players in a game choose

Pork barrel spending

Public spending for localized projects secured to bring money to a representative's district (hometown-Alaska's bring to nowhere)

Risk-neutral person

Someone who accepts any gamble that is fair or better

Risk-averse person

Someone who would refuse any fair gamble

What is the lemons model?

States that have asymmetric information that reduces the average quality of goods in certain markets and could even make the market for those goods collapse

Adverse selection

The pattern in which insurance tends to be purchased disproportionately by those who are most costly for companies to insure

Regressive tax

The proportion of income paid in taxes declines as income rises

Rent-seeking

The socially unproductive efforts of people or firms to win a prize

Expected value of a gamble

The sum of the possible outcomes of the gamble multiplied by their respective probabilities

Tragedy of the commons

The tendency for a resource that has no price to be used until its marginal benefit falls to zero (tragedy that describes a shared resource system where individuals acting according to their own self-interest completely deplete the resource)

Moral hazard

The tendency of people to expend less effort protecting goods that are insured against theft or damage

Positional externality

This occurs when an increase in one person's performance reduces the expected reward of another's in situations in which reward depends on relative performance

External benefits (positive externality)

a benefit of an activity received by people other than those who pursue the activity

Cartel

a coalition of firms that agree to restrict output for the purpose of earning an economic profit

External costs (negative externalities)

a cost of an activity that falls on people other than those who pursue the activity

Nash equilibrium

any combination of strategy choices in which each players choice is his or her best choice, given the other players' choice

Dominated strategy

any other strategy available to a player who has a dominant strategy

Basic elements of a game

the players, the strategies available to each player, and the payoffs each player receives for each possible combination of strategies

Logrolling

the practice whereby legislators support one another's legislative proposals

Crowding out

the tendency of increased government deficits to reduce investment spending

Disappearing political discourse

the theory that people who support a position may remain silent because speaking out would create risk of being misunderstood