ECON 1B 10-15 Midterm

What is command-and-control environmental regulation?

: A command and control regulation simply dictates the amount of production firms can engage in, in order to produce the socially optimal quantity of a good.

What arguments do low-income countries make in international discussions of global environmental clean-up?

: Low-income countries argue that they do not have the luxury of worrying about the environment too much, when their people are starving. For these countries, economic development is the number one priority.

What is a corporate merger? What is an acquisition?

A corporate merger is when two firms combine to create one. An acquisition is when one firm absorbs another into its current form.

19. Will a free market tend to encourage or discourage discrimination? Explain briefly.

A free market tends to discourage discrimination because employers who arbitrarily exclude the most productive workers due to prejudice will not be as competitive as those that do not discriminate, and may ultimately be driven out of business by the competition as a result.

What is a pollution charge and what incentive does it provide for a firm to take external costs into account?

A pollution charge imposes a fee on firms based on the amount of pollution. This incentive firms to reduce pollution if it can do so for less than the cost of the fee.

What is a tie-in sale? How might it reduce competition and when might it be acceptable?

A tie-in sale requires the buyer to purchase an additional product along with the one he wants. This can be anticompetitive when it is used to leverage market power in one market into another, but can be appropriate when the products naturally go together, as a right and left shoe do.

21. Describe how affirmative action is applied in the labor market.

Affirmative action states that, if an employer is faced with a choice between two candidates of equal qualifications, the employer must select the one from the minority group.

23. How would you expect immigration by primarily low-skill workers to affect American low-skilled workers?

An increase in low-skilled immigrants shifts the supply of low-skilled workers to the right, decreasing wages and increasing the equilibrium quantity of low skilled workers. If the minimum wage prevents wages from dropping, unemployment will result.

9. In what way do company investments in research and development create positive externalities?

New technologies, once discovered, can be used by other firms who did not pay the cost of development (although patent laws reduce this somewhat.)

Which of the following tax systems would help reduce income inequality the most? a proportional tax system a regressive tax system a progressive tax system a consumption tax system

a progressive tax system

Redistribution programs create a disincentive to work among taxpayers only. benefit recipients only. both taxpayers and benefit recipients. neither taxpayers nor benefit recipients.

both taxpayers and benefit recipients.

A cost of an activity that falls on people not engaged in the activity is called a(n): positive externality. prisoner's dilemma. external benefit. negative externality.

negative externality An external cost, also called a negative externality, is a cost of an activity that falls on people other than those who pursue the activity.

The tragedy of the commons refers to the: failure of the Coase theorem when negotiation is costly. overuse of resources that have no price. overuse of resources that have no cost. under production of goods that have external benefits.

overuse of resources that have no price. The tragedy of the commons is the tendency for a resource that has no price to be used until its marginal benefit is zero.

What is the poverty rate? the percentage of households who qualify for government assistance to meet the minimal requirement for adequate nutrition the percentage of working adults whose annual income is sufficiently low as to be are exempt from paying income taxes the rate at which the number of people relative to the size of the population fall below the poverty line the percentage of the population earning an annual income below the poverty line, according to the federal government's definition

the percentage of the population earning an annual income below the poverty line, according to the federal government's definition

For people with very low incomes, the Earned Income Tax Credit operates like a(n): in-kind transfer. wage subsidy. tax on wages. lump sum transfer.

wage subsidy. For very low-wage workers, the EITC functions as a wage subsidy.

The existence of a negative externality will result in: prices that are artificially high. a greater than optimal level of production. elimination of deadweight loss. a less than optimal level of production.

a greater than optimal level of production. A supplier will not consider external costs, and so will produce more than is socially optimal.

A benefit of an activity received by people not participating in the activity is called a(n): external cost. positive externality. winner's curse. negative externality.

positive externality. An external benefit, also called a positive externality, is a benefit of an activity received by people other than those who pursue the activity.

National defense is an example of a good that is: only nonrival only nonexcludable. largely nonrival and nonexcludable. neither nonrival nor nonexcludable.

largely nonrival and nonexcludable. One person's enjoyment of national defense does not diminish others' enjoyment of national defense, and people who don't pay for national defense can't be excluded from enjoying its benefits.

Assume that this graph illustrates a perfectly competitive labor market. (supply-demand cross at 150,30) Equilibrium in this labor market is at a wage of ______ per hour and an employment level of ______ person-hours per day. $20; 200 $30; 100 $30; 150 $20; 125

$30; 150 The labor demand and labor supply curves intersect at a wage of $30 and an employment level of 150 person-hours per day.

14. Would you expect the presence of labor unions to lead to higher or lower pay for worker-members? Would you expect a higher or lower quantity of workers hired by those employers? Explain briefly.

: Labor unions raise the price of employment through their bargaining techniques, and consequently reduce the quantity of workers, as employers must make payroll stretch further.

13. What are the two key characteristics of public goods?

: Public goods are non-rival and non-excludable.

21. Briefly explain the differences between TANF, the earned income tax credit, SNAP, and Medicaid.

: TANF provides temporary financial assistance for people who work, earned income tax provides a tax credit that increases with hours works, SNAP provides food stamps that can be exchanged for food, and Medicaid provides medical care to the poor.

As the extent of environmental protection expands, would you expect marginal costs of environmental protection to rise or fall? Why or why not?

: The marginal costs should rise as protection expands because of diminishing marginal returns. It is fairly inexpensive to protect the first unit of the environment, but the marginal cost of protecting the last unit would be extraordinarily high.

15. What are the main causes for the recent trends in union membership rates in the United States? Why are union rates lower in the United States than in many other developed countries?

: Union membership rates have been trending downward in recent years, partially due to the popularity of Right-to-Work laws and less government support for unions than exists in other countries.

Which of the following is not an example of an activity with external benefits? Eating a sandwich in the dining hall Planting flowers in the front yard Staying home from class when you have the flu Having your smoking car repaired

Eating a sandwich in the dining hall

27. What are the main reasons economists give for the increase in inequality of incomes?

Changing family demographics, with more single-parents and households with two high-earners, as well as shifts in the distribution of wages.

What is exclusive dealing? How might it reduce competition and when might it be acceptable?

Exclusive dealing is when a firm agrees to buy or sell to only one other party. This shuts out other firms' ability to compete for that firm's business, and thus reduces competition. Exclusive dealing might be acceptable when used to encourage competition between dealers.

12. What can government do to encourage the development of new technology?

Government can try to internalize some of the externalities through patent and trade secret laws.

10. Will the demand for borrowing and investing in R&D be higher or lower if there are no external benefits?

If the external benefits could be internalized, the demand would be higher. However, if the positive externality simply disappeared, demand should be unchanged, since firms only care about private benefits.

Inga and Ron both work for the same firm on the same career ladder. Each has the same stock of human capital except for one difference: Inga has worked at the firm for 10 continuous years but Ron has had two leaves of absence mixed in with his 10 years of experience with the firm. One should expect: Inga to earn twice as much as Ron. Ron to earn more than Inga. Inga and Ron to earn the same income. Inga to earn more than Ron.

Inga to earn more than Ron. We would expect to Inga would earn more than Ron because she has had more years of work experience.

What is the United States government's formal definition of the poverty line? It is the annual income level below which a household is exempt from taxes. It is a level of annual income equal to total income in society divided by the population, adjusted for a family of four. It is a level of annual income equal to three times the amount of money necessary to purchase the minimum quantity of food required for adequate nutrition. It is a level of annual income equal to the amount of money necessary to purchase the minimum quantity of food required for adequate nutrition.

It is a level of annual income equal to three times the amount of money necessary to purchase the minimum quantity of food required for adequate nutrition.

Kyle works for a perfectly competitive firm where he receives a wage rate of $15. From this, one can infer that: Kyle's value of marginal product is at least $15. Kyle's reservation wage is $15. the price of the firm's output is at least $15. Kyle's marginal product is at least $15.

Kyle's value of marginal product is at least $15. Kyle will only be hired if his/her contribution to the firm's revenue (VMP) is greater than or equal to Kyle's wage.

Why can it be difficult to decide what a "market" is for purposes of measuring competition?

Market definition can be difficult because most goods satisfy a variety of needs. Is Coca-Cola in the cola market, the soft drink market, or the beverage market, or in some other market? It is difficult to say.

24. What factors can explain the relatively small effect of low-skilled immigration on the wages of low-skilled workers?

Minimum wage laws prevent wages of low-skilled workers from falling below a certain level. Additionally, immigrants and natives often do not compete for the same types of jobs. For example, a large population of low-skilled immigrants may increase the demand for native speakers of English, which benefits low-skilled natives.

18. Does a gap between the average earnings of men and women, or between whites and blacks, prove that employers are discriminating in the labor market? Explain briefly.

No. There are many reasons such a gap could exist, including differences in skills, education and the different types of jobs that attract different demographics.

16. What is the difference between poverty and income inequality?

Poverty is an absolute measure of the standard of living of individuals, whereas inequality is a relative measure of the differences between individuals.

Which of the following is a transfer payment? an excise tax a regressive tax Social Security payments a tax deduction

Social Security payments

26. What are some reasons why a certain degree of inequality of income would be expected in a market economy?

Some goods and services are more valued than others, and therefore command a higher price. The people providing these goods and services will therefore earn a higher level of income than others, and there will be inequality.

Give an example of a positive externality and an example of a negative externality.

Someone who spends money to make their house and yard look nice creates a positive externality by increasing the value of his neighbors' property. Pollution is the classic example of a negative externality, where a producer imposes a cost on others who do not benefit from his goods.

Which of the following is an example of an activity with an external cost? Raising honeybees where neighbors on all sides grow apples Keeping the front yard clean Speeding on the Interstate Having to buy batteries for the new remote that came with a TV

Speeding on the Interstate

What does a point inside the production possibility frontier represent?

Such a point indicates that either more environmental protection or more economic production could be achieved at no additional cost.

Figure 18-6 (L-curve with Sylandia lower than Islandia) Figure 18-6 shows the Lorenz curves for Islandia and Syldavia. Refer to Figure 18-6. Which country has the more unequal distribution of income? Islandia Syldavia They may have the same absolute income distribution although their relative income distribution is different. There is insufficient information to answer the question.

Syldavia

How is a Herfindahl-Hirshman Index measured? What does a low measure mean about the extent of competition?

The HHI is calculated by summing the squares of the market shares of all firms in a market. A low number means that market shares are broadly distributed among a large number of firms, and indicates much competition.

23. What is measured on the two axes of a Lorenz curve?

The cumulative share of the population is on the horizontal axis, and the cumulative share of income is on the vertical axis.

If public utilities are a natural monopoly, what would be the danger in deregulating them?

The danger would be that one firm would control the entire market for the utility, since natural barriers to entry are high and there are large economies of scale. The monopolist could then charge an extremely high price and limit output.

What is the goal of antitrust policies?

The goal of antitrust policies is to promote competition, to preserve low prices and more choice for consumers.

the marginal benefit of reduced crime equals the marginal cost of reduced crime. Any activity should be undertaken so long as the marginal benefit of that activity is greater than its marginal cost, up to the point when the two are equal.

The optimal amount of crime control occurs when: the total benefit of reduced crime equals the total cost of reduced crime. the incidence of crime is zero. the total benefit of reduced crime is greater than the total cost of reduced crime. the marginal benefit of reduced crime equals the marginal cost of reduced crime.

15. What is the poverty line?

The poverty line is the income threshold below which it is not possible to afford the basic necessities of life.

In a market without environmental regulations, will the supply curve for a firm take into account private costs, external costs, both, or neither? Explain.

The supply curve will only take into account private costs, because the producer does not have to bear the social costs.

What are the three problems that economists have noted with regard to command-and-control regulation?

These regulations create no incentive for companies to reduce pollution below a minimum standard, they make no distinction between firms that can easily reduce pollution and those that cannot, and they are subject to political lobbying and loopholes.

What is a minimum resale price maintenance agreement? How might it reduce competition and when might it be acceptable?

This agreement restricts a dealer's ability to sell below a certain price, which prevents dealers from competing with each other. This could be acceptable if it were not stated as an outright requirement, but merely a suggested price.

How is a four-firm concentration ratio measured? What does a high measure mean about the extent of competition?

This four-firm concentration ratio is measured by adding the market shares of the four largest firms in a market. If this measure is very high, it means that that only a few firms are doing most of the business in the market and there is not much serious competition.

Which of the following would be most vulnerable to the tragedy of the commons? Timber on public land Cattle on a ranch Apples in Phoebe's apple orchard Restrooms in a restaurant

Timber on public land The tragedy of the commons is most likely to arise when nobody owns a resource, so nobody has an incentive to use it optimally.

Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly? a. No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes. b. Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to entry. c.No, Peet's is not a monopoly because there are many branches of Peet's. d. Yes, there are no substitutes to Peet's coffee.

a. No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.

A monopolist faces a. a downward-sloping demand curve. b. a perfectly inelastic demand curve. c. a horizontal demand curve. d. a perfectly elastic demand curve.

a. a downward-sloping demand curve.

In the United States, government policies with respect to monopolies and collusion are embodied in a. antitrust laws. b. common law, which the United States adopted from English law. c. the Supreme Court. d. the U.S. Constitution.

a. antitrust laws.

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n): a. cartel. b. duopoly. c. pure monopoly. d. oligopoly.

a. cartel. A cartel is a coalition of firms that agree to restrict output in order to earn an economic profit.

"Market power" refers to a firm's ability to: a. raise its price without losing all of its sales. b. influence the price its competitors charge. c. force consumers to buy high-priced products. d. undercut its competitors' prices.

a. raise its price without losing all of its sales. Market power is defined as a firm's ability to raise price and not lose all of its sales.

A Herfindahl-Hirschman Index is calculated by a. summing the squares of the market shares of each firm in the industry. b. dividing the advertising expenditures of the firms that want to merge by total industry advertising expenditures. c. summing the amount of sales by the four largest firms and dividing by total industry sales. d. dividing the number of firms wanting to merge by the total number in the industry.

a. summing the squares of the market shares of each firm in the industry.

A prisoner's dilemma illustrates situations in which: a. there is a conflict between the narrow self-interest of individuals and the broader interests of a group. b. resources with the lowest opportunity cost should be used first. c. efficiency is an important social goal. d. everyone does best when each person specializes in the activities in which he or she has a comparative advantage.

a. there is a conflict between the narrow self-interest of individuals and the broader interests of a group. A prisoner's dilemma is 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. Thus, everyone would be better off if they did not pursue their narrow self-interest.

A good is characterized by network economies if it: a. can be used by more than one person at a time. b. becomes more valuable as more people own it. c. is widely advertised on television. d. becomes cheaper to produce as more people buy it.

b. becomes more valuable as more people own it. Network economies exist when the value a consumer places on a good increases when other consumers have the same or compatible goods.

A price setter is a firm that: a. faces perfectly inelastic demand. b. has some degree of control over its price. c. has the ability to set price at any level it wishes. d. attempts but fails to be perfectly competitive.

b. has some degree of control over its price. A price setter has at least some latitude to set the price of its output.

The monopolist will maximize profits at the output level for which: a. price equals marginal cost. b. marginal revenue equals marginal cost. c. marginal revenue equals average total cost. d. price equals average total cost.

b. marginal revenue equals marginal cost. Following the Cost-Benefit Principle, all firms maximize their profit by choosing the level of output at which marginal revenue equals marginal cost.

Patents, which confer market power, are intended to: a. enable patent holders to charge lower prices for new and innovative products. b. maintain the dominance of U.S. firms. c. encourage innovation by helping firms recoup the costs of research and development. d. protect consumers from imitations, or knock-offs.

c. encourage innovation by helping firms recoup the costs of research and development. Patents allow inventors and developers to recoup some of the costs of developing new ideas. In this way, they help promote innovation.

Few firms in the United States are monopolies because a. most firms produce products for which there are no close substitutes. b. monopolies are technically illegal in the United States. c. when a firm earns profits, other firms will enter its market. d. few firms experience economies of scale.

c. when a firm earns profits, other firms will enter its market.

A monopoly is the only seller of a product a. with many substitutes. b. with a perfectly inelastic demand. c. without a close substitute. d. without a well-defined demand curve.

c. without a close substitute.

Charlie is getting a divorce. He selects a female lawyer at a large law firm because he believes they are more aggressive in obtaining favorable settlements in divorce cases. Charlie's behavior is an example of ______ discrimination. market employee employer customer

customer Here the discrimination stems from the customer, Charlie.

The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm: a. produces a good with no close substitutes. b. coordinates their output decisions with other firms. c. faces high barriers to entry. d. faces a downward-sloping demand curve.

d. faces a downward-sloping demand curve. The essential difference between perfectly competitive firms and imperfectly competitive firms is that a perfectly competitive firm faces a horizontal demand curve while an imperfectly competitive firm faces a downward-sloping demand curve.

Cartel agreements are difficult to sustain because: a. cartel members do not face the economic incentives inherent in a prisoner's dilemma. b. the collective payoff to all the cartel members is lower when they all abide by the cartel agreement. c. it's usually easy to discover if one of the members has cheated. d. it's a dominant strategy for each cartel member to cheat on the cartel agreement.

d. it's a dominant strategy for each cartel member to cheat on the cartel agreement. Cartels are inherently unstable because each member has an incentive to cheat on the cartel agreement.

Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must: a. increase the value of its product. b. lower its quality. c. increase its advertising. d. lower its price.

d. lower its price. An imperfectly competitive firm faces a downward-sloping demand curve.

The government subsidizes education because: private firms will not provide education. the government can provide a better education than can private firms. education is thought to have positive externalities. it is a pure public good.

education is thought to have positive externalities. Since education entails positive externalities, market demand will not reflect all of the benefits of education.

Pollution permit policies achieve an ______ outcome because _____. inefficient; wealthier firms can afford to purchase more permits. efficient; firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits. inefficient; the supply of permits is set by the government, and so is perfectly inelastic. efficient; firms that have the lowest cost of reducing pollution will be able to pay more for each permit.

efficient; firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits. Selling pollution permits promotes efficiency because firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits, so that the reductions in pollution will be accomplished by firms that can do so the most cheaply.

An arbitrary preference by an employer for one group of workers over another is termed: customer discrimination. statistical discrimination. employee discrimination. employer discrimination.

employer discrimination. An arbitrary preference by an employer for one group of individuals over another is called employer discrimination.

In competitive labor markets, _____ demand labor and ______ supply labor. workers; firms labor unions; firms firms, workers firms; labor unions

firms, workers

Compared to taxing pollution, an advantage of auctioning pollution permits is that: it allows the public to directly reduce pollution by purchasing permits. auctioning permits raises revenue for the government. it ensures that all firms reduce pollution by the same amount. the largest reductions in pollution are made by the firms that can do so the most cheaply.

it allows the public to directly reduce pollution by purchasing permits. Private citizens can reduce pollution by purchasing pollution permits.

The essential reason some species of whales have nearly been driven to extinction is that: the demand for whales is extremely high. it is difficult to define and enforce property rights to whales. the price of whales is very low. experienced whalers find it easy to catch whales.

it is difficult to define and enforce property rights to whales. The fact that it is difficult to define and enforce the property rights to whales means that whalers do not adequately take into consideration the fact that harvesting an extra whale today reduces the breeding population, and hence the size of the future whale population.

The presence of an unregulated negative externality means that the unregulated market equilibrium quantity is: efficient. larger than is optimal. greater than demand. smaller than is optimal.

larger than is optimal. In the presence of a negative externality, more than the socially optimal quantity is produced because not all of the cost of producing or consuming the product is reflected in the supply curve.

Imposing a minimum wage above the equilibrium wage: makes some workers worse off. makes all workers better off. increases the size of the total wage bill. lowers labor costs.

makes some workers worse off. Imposing a minimum wage above the equilibrium wage will lower employment, making some workers worse off.

The additional output a firm gets from hiring an additional unit of labor is the value of the marginal product of labor total product of labor average product of labor marginal product of labor

marginal product of labor The marginal product labor is defined as the additional a firm gets by employing one additional unit of labor.

32. A program under which the government gives all citizens a substantial lump sum payment that is financed by a tax earned income is termed a(n)______. 33. 34. in-kind transfer. 35. 36. 37. positive income tax. 38. 39. 40. negative income tax. 41. 42. 43. unearned income tax credit.

negative income tax. A negative income tax is a system under which the government grants each citizen a cash payment, financed by an additional tax on earned income.

If it is difficult, or costly, to prevent people who do not pay for a good from consuming the good, then the good is a ______ good. pure public nonrival nonexcludable private

nonexcludable A nonexcludable good is a good that is difficult, or costly, to prevent nonpayers from enjoying.

If a good can be consumed by one person without reducing its availability to others, then it is a ______ good. common nonexcludable pure public nonrival

nonrival A nonrival good is a good whose consumption by one person does not diminish its availability to others.

The level of income below which the federal government classifies a family as poor is called the: relative measure of poverty. poverty threshold. absolute measure of poverty. median income threshold.

poverty threshold. The poverty threshold is the level of income below which the federal government classifies a family as poor.

A good or service that is both rival and excludable is a: collective good. commons good. public good. private good.

private good. Private goods are both rival and excludable.

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. publicizing; taxing subsidizing; banning taxing; banning subsidizing; taxing

subsidizing; taxing Subsidies are used to increase provision of activities with positive externalities and taxes are used to decrease provision of activities that generate negative externalities.

A firm is unlikely to hire a worker if: the additional output a firms gets by hiring the worker is greater than his or her wage. there are diminishing marginal returns to labor. the minimum wage set by law is less than the equilibrium wage in the market. the additional revenue generated by hiring the worker is less than his or her wage.

the additional revenue generated by hiring the worker is less than his or her wage. A firm will not hire a worker if the revenue generated by hiring the worker is less than the cost of hiring the worker.

If official poverty statistics for the United States included transfer payments individuals receive from the government, such as Social Security payments and other non-cash benefits such as food stamps poverty would be eliminated. the poverty rate would be overstated. income inequality would be greater. the poverty rate would be lower.

the poverty rate would be lower.

If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state, then: state courts can provide adequate remedies. the acid rain ceases to be an externality. the individual states can easily reach a solution to the problem. the problem is best addressed through federal regulation.

the problem is best addressed through federal regulation. The problem of pollution is difficult to solve when the various sources of pollution (in this case, states) are not subject to regulatory control by a single government.

If the market equilibrium quantity is less than the socially optimal quantity, one can infer that: there is a negative externality associated with this good. the private demand curve for the activity is above the socially optimal demand. there is a positive externality associated with this good. the private supply curve for the activity is below the socially optimal supply curve.

there is a positive externality associated with this good. Buyers and sellers do not consider external benefits, so the market will produce less than the socially optimal quantity.

Assume that this graph illustrates a perfectly competitive labor market. (supply-demand cross at 150,30) Suppose a minimum wage law required the wage to be at least $20 per hour in this market. If that happened, then: there would be an excess supply of person-hours. there would be excess demand for person-hours. there would be no change the equilibrium number of person-hours. the demand for person-hours would shift to the right.

there would be no change the equilibrium number of person-hours. Nothing would be different because the equilibrium wage is above $20.