Economics Final Cram Guide

positive externality

a benefit from an activity realized by someone not engaging in the activity examples: vaccines, installation of smoke detector in an "attached apartment," installation of Lojack in a car

externality

a benefit or cost that is realized by someone who is not directly engaging in an activity

negative externality

a cost of an activity borne by someone not engaging in the activity. examples: pollution, noise from low-flying aircraft, speeding on a highway, installation of "The Club" in a car

rival good

a good for which consumption by one person does diminish the quantity or quality of consumption by others

non-rival good

a good for which consumption by one person does not diminish the quantity or quality of consumption by others

non-excludable good

a good for which it is difficult (or very costly) to prevent consumption by those who do not pay

excludable good

a good for which it is easy to prevent consumption by those who do not pay

club good

a good that is excludable and non-rival in consumption e.g., satellite radio or television broadcast

public good

a good that is non-excludable and non-rival in consumption e.g., national defense

common good

a good that is non-excludable and rival in consumption e.g., stock of fish in the ocean

A binding price floor is... a price control that does not allow the market price to rise above a certain level. It is set below the market equilibrium, thus resulting in a persistent shortage. a price control that does not allow the market price to rise above a certain level. It is set below the market equilibrium, thus resulting in a persistent surplus. a price control that does not allow the market price to fall below a certain level. It is set above the market equilibrium, thus resulting in a persistent shortage. a price control that does not allow the market price to fall below a certain level. It is set above the market equilibrium, thus resulting in a persistent surplus.

a price control that does not allow the market price to fall below a certain level. It is set above the market equilibrium, thus resulting in a persistent surplus.

A binding price ceiling is... a price control that does not allow the market price to rise above a certain level. It is set below the market equilibrium, thus resulting in a persistent shortage. a price control that does not allow the market price to rise above a certain level. It is set below the market equilibrium, thus resulting in a persistent surplus. a price control that does not allow the market price to fall below a certain level. It is set above the market equilibrium, thus resulting in a persistent shortage. a price control that does not allow the market price to fall below a certain level. It is set above the market equilibrium, thus resulting in a persistent surplus.

a price control that does not allow the market price to rise above a certain level. It is set below the market equilibrium, thus resulting in a persistent shortage.

market failure

a situation in which the "free market outcome" is inefficient, in that there is a positive Deadweight-Loss at the resulting "free market level of trade."

8) In Economics in One Lesson, Hazlitt says that "the whole of economics can be reduced to a single lesson." What is that lesson? a. Economics trains us to examine not only the primary effects of a policy but also the secondary effects of any act or policy; it also trains us to examine the consequences of those actions/policies on all groups of people in society. b. Economics is only useful to policymakers and people in important positions of power in government and large corporations. c. Economics tells us that we could achieve a "post-scarcity" society today if we eliminated the artificial barriers imposed by various government policies that currently protect the capitalist class from being overtaken by the exploited worker class. d. Economics teaches us that a government-provided healthcare system (that is, a healthcare system that operates as a government agency) is the best way to provide and deliver healthcare goods and services to the public.

a. Economics trains us to examine not only the primary effects of a policy but also the secondary effects of any act or policy; it also trains us to examine the consequences of those actions/policies on all groups of people in society.

four common sources of market failure:

(1) profit maximization by a firm with market power, (2) market provision of public goods, (3) market provision of goods generating externalities, and (4) lack of information by market participants

The Law of Demand... ...refers to the principle that people prefer to purchase fewer goods when the price falls, and they purchase more goods when the price rises. ...refers to the principle that people prefer to purchase more goods when the price falls, and they purchase fewer goods when the price rises. ...only applies to people raised in capitalist countries. People raised in other cultures do no "obey" the law of demand. ...is a law passed by Congress that provides certain protections on the part of consumers.

...refers to the principle that people prefer to purchase more goods when the price falls, and they purchase fewer goods when the price rises.

The Law of Supply... ...is also based on the laws of the U.S. Constitution. The Constitution of the U.S. makes the law of supply mandatory in all 50 states. ...postulates that in a world of self-interest, businesses will only increase their production if prices are falling. ...states that, ceteris paribus, producers will sell more of a good as its price increases; producers will sell less of a good as its price decreases. ...is based on the theory of "Economic Man," or homo economicus. Economic Man responds to higher prices by reducing production.

...states that, ceteris paribus, producers will sell more of a good as its price increases; producers will sell less of a good as its price decreases.

Potential policies to reduce the DWL associated with a "negative externality"

1. ban the activity entirely ("illegal to emit any pollution") 2. establish minimum compliance standards for manufacturers ("can only pollute up to a certain level") 3. "cap and trade" - issue a certain number of "pollution permits" for society as a whole, and allow people to trade these permits amongst themselves 4. offer subsidies to manufacturers that reduce pollution ("pay the polluter to reduce their level of pollution") 5. charge manufacturers a fee for each unit of pollution emitted ("polluter must pay for the right to pollute")

5) Which of the following is an example of a private good? a. A chicken sandwich. b. National defense. c. An unowned school of fish. d. Watching a movie in a movie theater.

A chicken sandwich.

market power

A firm has market power if they have some "control over the price of their output," in that they: (i) can increase price without losing all customers and (ii) must decrease price in order to increase sales

In Economics in One Lesson, Hazlitt says that "the whole of economics can be reduced to a single lesson." What is that lesson? (E1L chapter 1, Quiz 1 #8) A. Economics trains us to examine not only the primary effects of a policy but also the secondary effects of any act or policy; it also trains us to examine the consequences of those actions/policies on all groups of people in society. B. Economics is only useful to policymakers and people in important positions of power in government and large corporations. C. Economics tells us that we could achieve a "post-scarcity" society today if we eliminated the artificial barriers imposed by various government policies that currently protect the capitalist class from being overtaken by the exploited worker class. D. Economics teaches us that a government-provided healthcare system (that is, a healthcare system that operates as a government agency) is the best way to provide and deliver healthcare goods and services

A. Economics trains us to examine not only the primary effects of a policy but also the secondary effects of any act or policy; it also trains us to examine the consequences of those actions/policies on all groups of people in society.

Assume ceteris paribus for each of the questions associated with the following scenario. When demand increases due to an increase in population (thus causing the demand curve to shift to the right), what happens to the quantity supplied? Does this shift in the demand curve cause a shift in the supply curve? Will the new equilibrium price be higher or lower than the old equilibrium price? (chapter 4) A. Increases; no; higher B. Increases; yes; lower C. Decreases; yes; higher D. Decreases; no; lower

A. Increases; no; higher

Which of the following statements is NOT true about the study of macroeconomics? (Intro) A. There is a clear dividing line between microeconomics and macroeconomics; microeconomic principles aren't really connected to macroeconomic phenomena B. Macroeconomics studies the national (or even international) economy as a whole C. One of the primary tools of macroeconomics is the use of statistical aggregates like unemployment, gross output (GO), and gross domestic product (GDP) D. The GDP levels of many U.S. states are comparable in size to other countries

A. There is a clear dividing line between microeconomics and macroeconomics; microeconomic principles aren't really connected to macroeconomic phenomena

The Selick (2003) article "There's No Such Thing as a Nonprofit Organization" states the following: "[I]n fact, every single employee of a nonprofit institution is actually a 'profit center' in himself." Is that statement true? Why/why not? (Article, Quiz 2 #8) A. True. Employees of nonprofits still incur personal expenses in order to work, which they seek to minimize, while they seek to maximize their personal income, which results in their personal profit. B. True. Employees of nonprofits are more altruistically inclined than employees of for-profit organizations, so they view their personal profit as being tied up with the success or failure of the organization. C. False. Employees of nonprofits face no incentives to maximize their personal income since the managers of the nonprofits have personal stakes in minimizing the organization's expenses. D. False. Employees of nonprofits on average earn less than their private-sector counterparts, which shows how much more dedicated they are to the mission of their organizations.

A. True. Employees of nonprofits still incur personal expenses in order to work, which they seek to minimize, while they seek to maximize their personal income, which results in their personal profit.

In a simple model of the supply and demand for pizza, when buyers' income increases, the price of pizza _____ and the quantity purchased _____ (note: assume that pizza is a normal good). (chapter 4) A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

A. increases; increases

According to Economics in One Lesson, what are some of the effects of a minimum wage? Workers whose work is not valued by at least as much as the minimum wage will not be employed at all. If producers try to pass the cost of the minimum wage on through to their customers simply by raising their prices, some consumers will substitute away from their products while others purchase less of it. Marginal producers that cannot pass the cost of the minimum wage on through to their customers will be forced to go out of business. All of the above.

All of the above.

Assume that the taxes discussed in question #9 are collected through 1) personal income taxes imposed as a percentage of an individual taxpayer's income, and 2) corporate income taxes imposed as a percentage of a corporation's income. According to chapter 5 of Economics in One Lesson, what else is true regarding the imposition of those taxes on the economy? Both corporations and taxpayers still lose 100% of every dollar lostin investments that do not pan out. The taxeswill change the incentives of corporations and taxpayers to produce/invest since they do not gain 100% of every dollar "won" from making worthwhile investments. A tax rate of 50% is equivalent to working for the government for six months out of a year; a tax rate of 75% is equivalent to working for the government for nine months out of a year. All of the above.

All of the above.

Mike Tyson bought a white tigerfrom Joe Exotic for $71,000 (in early '90s dollars). Mike's reservation price was $101,000, and a total social surplus of $50,000 was generated by the trade. Therefore, JoeExotic realized a _____ from this trade. (chapter 5) A. producersurplus of $50,000 B. producer surplus of $20,000 C. consumersurplus of $20,000 D. consumersurplus of $30,000

B. producer surplus of $20,000

Consider a market in which maximum possible Total Social Surplus is equal to $850,000 (which is realized if 32,500 units are traded). If instead 28,000 units are traded, then realized Total Social Surplus is equal to $700,000. It follows that if 28,000 units are traded, then Deadweight Loss is equal to _____. (chapter 5, p. 131, #6) A. $1,550,000 B. $775,000 C. -$150,000 D. $150,000

D. $150,000

Why are pencils cheap? (Intro) A. Capitalist pencil factory owners are exploiting workers by paying low wages in sweatshop conditions to make cheaper pencils. B. The worldwide division of labor and interconnectedness through markets allows people to specialize in the production of specific goods and services, which lowers input production costs over time. C. Pencils do not have many inputs and can be made using only a few workers in a factory. D .Protectionist trade policies have kept American pencil manufacturers in business, which allows them to produce goods cheaply.

B. The worldwide division of labor and interconnectedness through markets allows people to specialize in the production of specific goods and services, which lowers input production costs over time.

Why would economists say that the Ford Motor Company has never made a choice or a decision? (Intro) A. They're wrong. Ford answers to greedy shareholders. B. To remind non-economists of methodological individualism - the concept that only individuals within an organization, rather than the organization itself, make choices C. Ford doesn't make choices - only the U.S. automobile industry does. D. Ford answers to the United Auto Workers union.

B. To remind non-economists of methodological individualism - the concept that only individuals within an organization, rather than the organization itself, make choices

Person A has a(n) _____ in the production of a good if that person can produce more of the good than Person B with the same amount of inputs. (chapter 2) A. comparative advantage B. absolute advantage C. tradeoff D. opportunity cost

B. absolute advantage

The market equilibrium price... (chapter 5, p. 131, #8) A. prevents the efficient quantity of trade from arising. B. determines the split of total gains from trade between buyers and sellers at the market outcome. C. determines if Deadweight Loss is positive or negative at the market outcome. D. None of the above answers are correct.

B. determines the split of total gains from trade between buyers and sellers at the market outcome.

Money exists to solve what central economic problem? (chapter 4) A. High transaction costs associated with barter B. You want what I have, but I don't want what you have C. Lack of double coincidence/mutual reciprocity of wants D. All of the above

D. All of the above

Chapter 4 of Economics in One Lesson discusses some of the consequences of public works projects that the government puts into action using tax dollars specifically for the purpose of providing employment. One such hypothetical is the construction of a "bridge to nowhere" that will cost $1 million (in 1950s dollars) and provide 500 jobs for a year but otherwise has no practical use (i.e., it will not be used very frequently by the public after it is built). What are some of the unseen opportunity costs ofthisgovernment project that might be overlooked if observers only focus on what is directly seen? A portion of that $1 million will be spent on those 500 workers, who will now be able to spend their incomes on various goods and services. Because public works must be paid with taxes, that $1 million must come from taxpayers. What is not seen is what those taxpayers would have done with that $1 million, which might have been spent on cars, refrigerators, etc. They would also alter their behavior in response to the tax being imposed upon them. Taxpayers that provide the $1 million of tax dollars to the government weren't going to spend that money, anyway, so there is no cost to taxing it away from them. All of the above.

Because public works must be paid with taxes, that $1 million must come from taxpayers. What is not seen is what those taxpayers would have done with that $1 million, which might have been spent on cars, refrigerators, etc. They would also alter their behavior in response to the tax being imposed upon them.

The Manne (2014) article "All Education Is For-Profit Education" states the following: "[T]here is a significant difference in these two forms of organization (i.e., for-profit and non-profit enterprises) that neither Hansmann nor Shireman acknowledges."What is that significant difference? (Article, Quiz 1 #10) A. Property rights in the assets and stream of income of a for-profit organization exist, but they are not transferable; property rights in the assets and stream of income of a nonprofit organization do not exist at all. B. The managers of a for-profit organization are incentivized to maximize their own personal wealth and total compensation; the managers of nonprofit organizations are much more altruistically inclined and, thus, are incentivized to maximize revenue for their organizations. C. Property rights in the assets and stream of income of the nonprofit organizations are not transferable; property rights in the assets and stream of income of a for-profit organization are transferable. D. Nonprofit organizations are, always and everywhere, better than for-profit organizations. This fact is especially true in the world of education.

C. Property rights in the assets and stream of income of the nonprofit organizations are not transferable; property rights in the assets and stream of income of a for-profit organization are transferable.

Which of the following is an accurate characterization of Say's Law? (chapter 5) A. People can benefit mutually from specialization and trade. B. Destruction of goods does not breed economic prosperity. C. The value of goods and services anyone can purchase is equal to the market value of what he/she supplies. D. Supply creates its own demand.

C. The value of goods and services anyone can purchase is equal to the market value of what he/she supplies.

The open-ended fallacy is... (chapter 5) A. a logical error that assumes that because something is true of the part of a whole, it must also be true of the whole. B. a logical error that assumes that because a later event took place after an earlier event first occurred, that earlier event must have caused that later event to occur. C. a logical error whereby someone incorrectly concludes that simply because there are benefits (to some people) from higher levels of an activity, more of the activity is always better. D. the idea that whenever a producer begins a production process for some good, it should always complete production of that good before moving on to something else.

C. a logical error whereby someone incorrectly concludes that simply because there are benefits (to some people) from higher levels of an activity, more of the activity is always better.

The term "Deadweight Loss" refers to... (chapter 5, p. 131, #4) A. the burden that consumers incur from having to pay for goods, instead of getting them for free. B. the negative impact of industrial production on our environmental resources. C. the difference between "maximum possible Total Social Surplus" and "realized Total Social Surplus." D. the negative profits (or losses) that firms make in a free-market economy when their costs of production are too high.

C. the difference between "maximum possible Total Social Surplus" and "realized Total Social Surplus."

What are some of the primary functions of profits in an economy? (Articles, chapter 4) A. To direct multitudes of producers to marshal physical resources and output efforts towards meeting the various demands of multitudes of consumers B. To incentivize producers to discover new ways of producing goods more efficiently (i.e., to use fewer resources and inputs to produce the same output) C. To compensate entrepreneurs for their risks and opportunity costs associated with engaging in their endeavors D. All of the above

D. All of the above

Assume that taxes are imposed on an economy for the express purpose of funding public works projects to provide employment. Assume also that these taxes are collected through 1) personal income taxes imposed as a percentage of an individual taxpayer's income, and 2) corporate income taxes imposed as a percentage of a corporation's income. According to chapter 5 of Economics in One Lesson, what else is true regarding the imposition of those taxes on the economy? (E1L chapter 5) A. Both corporations and taxpayers still lose 100% of every dollar lost in investments that do not pan out. B. The taxes will change the incentives of corporations and taxpayers to produce/invest since they do not gain 100% of every dollar "won" from making worthwhile investments. C. A tax rate of 50% is equivalent to working for the government for six months out of a year; a tax rate of 75% is equivalent to working for the government for nine months out of a year. D. All of the above.

D. All of the above.

Country A is more productive (i.e., has more production possibilities) in every industry than Country B. Which statement most clearly illustrates the concept of comparative advantage? (chapter 2) A. Country A will lose out in the long run if each country chooses to specialize in its lowest opportunity cost industry; both countries should cut off trade and work on improving their productivity until their production possibilities are both equal. B. Country A will lose out in the long run and should impose a tariff on cheaper imports from Country B in order to protect workers in Country A's industries. C. Country B will gain at the expense of Country A as workers who are willing to accept lower salaries and wages migrate from Country B to Country A and send funds (i.e., remittances) back to their families in Country B. D. Both countries can still benefit from specialization and voluntary trade as long as Country A has a lower opportunity cost than Country B in some industry.

D. Both countries can still benefit from specialization and voluntary trade as long as Country A has a lower opportunity cost than Country B in some industry.

Suppose cheeseburgers and hotdogs are substitute goods. If the price of hotdogs increases by 20% while the price of cheeseburgers remains the same, which is most likely to occur? (chapter 4) A. Demand for hotdogs would decrease. B. Demand for hotdogs would increase. C. Demand for cheeseburgers would decrease. D. Demand for cheeseburgers would increase.

D. Demand for cheeseburgers would increase.

Which of the following is a fair summation of the "action axiom"? (Intro) A. Through the process of trial and error, people will take risks in the market to try to solve problems and make corrections over time. B. People only act in groups, so majority rule represents the will of the people. C. Greed is good; greed will meet the need. D. Humans employ means according to values and ideas to achieve ends.

D. Humans employ means according to values and ideas to achieve ends.

The opening chapters of Economics in One Lesson explain how destruction can bring about economic prosperity.How could disasters like hurricanes or wars improve the standard of living of an economy? (E1L chapters 1-3) A. It explains that the window maker would not have received the income from the shopkeeper had the young hoodlum notthrown the brick through the shopkeeper's window. The window maker is therefore worse off without the destruction wrought by the hoodlum. B. War brings with it many innovations in new technologies. These developments could not have come about through more peaceful ways. C. Hurricanes bring with them aneconomic boon to the construction companies and suppliers of the goods that were destroyed as the localities affected by the disaster try to rebuild and recover. D. To quote Bryce Harper, "That's a clown question, bro." The opening chapters make the exact opposite case that the question asserts. Disasters and wars are net negatives for the economy as a whole. What is unseen is what sort of economic development might have taken place had those examples of destruction and death not taken place.

D. To quote Bryce Harper, "That's a clown question, bro." The opening chapters make the exact opposite case that the question asserts. Disasters and wars are net negatives for the economy as a whole. What is unseen is what sort of economic development might have taken place had those examples of destruction and death not taken place.

A deadweight loss can result engaging in either "too much" trade or "too little" trade. (chapter 5) True False

False

A decrease in consumers' income will result in a decrease in the demand curve for inferior goods. (chapter 4) True False

False

A typical market is characterized by having multiple equilibria. (chapter 4) True False

False

Ceteris paribus, a change in the price of a good in a market would result in a shifting of either the entire supply curve or the entire demand curve. A change in price results in a change in demand/supply rather than quantity demanded/quantity supplied. (chapter 4) True False

False

Scarcity is a thing of the past. We live in a post-scarcity society. (Intro) True False

False

There have been many randomized controlled trials (RCTs) that prove beyond a shadow of a doubt that wearing masks (cloth, surgical, or otherwise) prevent the spread of COVID-19. Therefore, there are no tradeoffs to consider when the government imposes a mask mandate. (Article) True False

False

Choose the answer option that best explains the following paradox regarding price gouging: "The only way to guarantee low prices is to allow sellers to charge high prices." Price ceilings do not cause shortages. They prevent greedy sellers from raising their prices too high during times of crisis. If sellers are not allowed to charge high prices, there won't be the necessary market signals that would entice new sellers to enter the market and provide new supply while allocating existing supply to buyers who needed it the most. Sellers who charge high prices would be arrested and prosecuted by local authorities enforcing anti-price-gouging laws, which would signal to other sellers not to increase their prices drastically during natural disasters. If sellers are not allowed to charge high prices, consumers would not know which sellers were looking to exploit them during times of crisis; therefore, consumers might accidentally patronize unvirtuous sellers.

If sellers are not allowed to charge high prices, there won't be the necessary market signals that would entice new sellers to enter the market and provide new supply while allocating existing supply to buyers who needed it the most.

_____ is the process by which a legislator votes to approve one bill in exchange for favorable votes from other members on other bills. Logrolling Rational ignorance Regulatory capture Rent-seeking

Logrolling

Which of the following is NOT one of the primary functions of money? Medium of exchange Unit of account Store of value Must be denominated in dollars

Must be denominated in dollars

What is the role of profits and losses (i.e., negative profits) in a market system? Profits serve as signaling mechanisms that incentivize market actors to marshal resources to their most valuable uses. Profits exist to enrich the capitalist class at the expense of workers. Profits are a signal that suppliers are charging too much for their products. Companies that earn profits should have a tax imposed on them; the role of profits, therefore, is to fund public works through the taxes that are collected.

Profits serve as signaling mechanisms that incentivize market actors to marshal resources to their most valuable uses.

What is the first, most basic lesson of economics? (Intro, Quiz 1 #1) - Prices are determined in markets by the interaction of supply and demand -Value is subjective; there is no such thing as an "objective" value of anything -Scarcity; there is never enough of anything to satisfy all those who want it -As consumption increases, the marginal utility of each additional unit declines

Scarcity; there is never enough of anything to satisfy all those who want it

A change in the productive capacity of an economy over time can be illustrated by shifts in the maximum curve of the PPF. (chapter 2) True False

True

Which of the following is astatement of normative economics? (Intro, chapter 1) -The government should run deficits to cure economic slumps and lower unemployment. -Gas prices will fall if the government reduces certain regulations on the fossil fuel industry. -An increase in the minimum wage will increase the standard of living of all low-wage workers. -There will be no unintended consequences from President Biden's decision to forgive up to $10,000 of student loan debt.

The government should run deficits to cure economic slumps and lower unemployment.

Rent-seeking is illegal because... the only way to get a government official to change the rules to help your industry is to bribe them. it is illegal for the government to do things that are economically inefficient. it is illegal for government officials to rent out government owned property for their own private gain. The premise of the question is false. Rent-seeking is perfectly legal since it works through the normal process of petitioning our elected leaders to do things which are themselves legal.

The premise of the question is false. Rent-seeking is perfectly legal since it works through the normal process of petitioning our elected leaders to do things which are themselves legal.

Although economists might disagree with each other regarding values, they often agree on methodology and analysis, and there are many topics and issues on which many economists tend to agree with each other (at least in terms of the analysis of the issue in question if not a particular normative policy). (Article) True False

True

An economy that shows a high degree of generalization in production will be more productive and enjoy a higher standard of living than an economy that shows a high degree of specialization in production. Both economies would still engage in a high degree of generalization in consumption. (chapter 2, chapter 5) True False

True

For a 2-person, 2-good economy in which one worker has an absolute advantage in the production of both goods, it will still be true in all cases that the less productive worker will still have a comparative advantage in producing something. (chapter 2) True False

True

In order for a person to be able to purchase goods and services (i.e., act as consumers) in a market, he must first produce a good or service (i.e., act as a supplier) in another market. In other words, the value of goods and services that he can purchase is equal to the value of what he supplies in other markets. Therefore, production must always precede consumption. (chapter 5) True False

True

The defining characteristic that distinguishes a governmental entity from a firm is the fact that the government has a monopoly on the legitimate, legal use of physical force in a given territory. While consumers have a choice to veto potential transactions with private firms, they do not have that same ability with transactions involving governments. (chapter 4) True False

True

The Selick (2003) article "There's No Such Thing as a Nonprofit Organization" states the following: "[I]n fact, every single employee of a nonprofit institution is actually a 'profit center' in himself." Is that statement true? Why/why not? True. Employees of nonprofits still incur personal expenses in order to work, which they seek to minimize, while they seek to maximize their personal income, which results in their personal profit. True. Employees of nonprofits are more altruistically inclined than employees of for-profit organizations, so they view their personal profit as being tied up with the success or failure of the organization. False. Employees of nonprofits face no incentives to maximize their personal income since the managers of the nonprofits have personal stakes in minimizing the organization's expenses. False. Employees of nonprofits on average earn less than their private-sector counterparts, which shows how much more dedicated they are to the mission of their organizations.

True. Employees of nonprofits still incur personal expenses in order to work, which they seek to minimize, while they seek to maximize their personal income, which results in their personal profit.

9) The Rothbard (1956) article Demonstrated Preference begins with the following: "Human action is the use of means to arrive at preferred ends. Such action contrasts to the observed behavior of stones and planets, for it implies purpose on the part of the actor." What can we deduce about the preferences of a person who chooses to spend two hours at a concert rather than a movie? a. That person places going to the concert higher in his value scale/preference order than going to the movie. b. That person places going to the movie higher in his value scale/preference than going to the concert. c. That person enjoys going to the concert three times as much as he enjoys going to the movie. d. That person enjoys going to the movie three times as much as he enjoys going to the concert.

a. That person places going to the concert higher in his value scale/preference order than going to the movie.

7) A government policy that attempts to internalize an externality can be generally described as... a. a policy which introduces a cost (or foregone gain) that would be realized by a decision maker who generates an externality. b. a policy which completely bans an activity that generates an externality. c. a policy which mandates the exact level of an activity that decision makers must engage in. d. None of the above.

a. a policy which introduces a cost (or foregone gain) that would be realized by a decision maker who generates an externality.

4) The law of _____ means that the additional value that a person gets from consuming an additional unit of a good decreases as the person consumes more of it. (ch. 1) a. diminishing marginal utility b. scarcity c. unintended consequences d. Demand

a. diminishing marginal utility

Three primary functions of government in the economy:

allocation function, distribution function, and stabilization function

Ceteris paribus,a decrease in income will result in an increase in demand for... an inferior good. a normal good. a complementary good. a substitute good.

an inferior good.

The Condorcet paradox... is not a paradox at all; people who make rational decisions in their private life will make rational decisions in their political decisions was named after a German economist who first discovered that only a government can produce public goods due to the free-rider problem arises when voters are confronted with a series of pairwise votes on three or more issues, and the overall winner of the vote can cycle based on who was placed in the runoff election first proves that majority voting always leads to a socially rational outcome where we can declare that the winner of the election represents the "will of the people"

arises when voters are confronted with a series of pairwise votes on three or more issues, and the overall winner of the vote can cycle based on who was placed in the runoff election first

stabilization function

attempts by government to minimize fluctuations in overall macroeconomic activity.

4) Which of the following is part of the Coasian Solution to the problem of externalities? a. Clearly and fully define property rights. b. Make individuals pay compensation if they infringe upon the property rights of others. c. Allow parties to negotiate with one another regarding infringements on property rights caused by externalities. d. All of the above.

b. Make individuals pay compensation if they infringe upon the property rights of others.

2) Which of the following is a statement of positive economics? (ch. 1) a. The federal minimum wage should be eliminated completely. b. The federal minimum wage is currently $2,000 per hour for all industries. c. The federal minimum wage should be increased to $15 per hour. d. The federal minimum wage should only apply to heavily populated

b. The federal minimum wage is currently $2,000 per hour for all industries.

3) The Cost-Benefit principle states that... (ch. 1) a. scarcity is a universal phenomenon that arises because resources are limited. b. a person should undertake an action if and only if the marginal benefit of the action is greater than the marginal cost of the action. c. if the marginal benefit of an activity increases, then a rational decision maker will engage in more of the activity. d. having more of one thing usually means getting by with less of something else.

b. a person should undertake an action if and only if the marginal benefit of the action is greater than the marginal cost of the action.

3) A good is rival if... a. consumption by one person does not diminish the quantity/quality of consumption by others. b. consumption by one person diminishes the quantity/quality of consumption by others. c. it is difficult (or very costly) to prevent consumption by those who do not pay for the good. d. it is easy (or relatively costless) to prevent consumption by those who do not pay for the good.

b. consumption by one person diminishes the quantity/quality of consumption by others.

A market failure can be described as a situation in which... a. a single seller of a good has no control over the price of the good. b. the free-market outcome results in a deadweight loss. c. government intervention leads to a greater deadweight loss than the free-market outcome. d. government imposes progressive taxes in order to redistribute income.

b. the free-market outcome results in a deadweight loss.

6) When economists speak of "land" as a factor of production, they are referring... (ch. 2) a. only to the unexploited surface of the earth that can be farmed or built upon. b. to both the surface of the earth and all natural resources on it or beneath it. It is a synonym for unexploited natural resources. c. to the single most important resource used in modern economies. d. to the only resource an economy needs to produce goods and services.

b. to both the surface of the earth and all natural resources on it or beneath it. It is a synonym for unexploited natural resources.

Consider a market for apples. If there is an excess supply of apples at a price of $5 per bushel, the equilibrium price must be... above $5 per bushel exactly equal to $5 per bushel below $5 per bushel Not enough information

below $5 per bushel

8) Which of the following is an example of a negative externality? a. A farmer's cattle operation is fouling his own pond where he gets irrigation water for his corn crop. b. Customers of McDonalds gain weight from eating too much unhealthy food. c. A nightclub opens near a residential neighborhood. The neighborhood suffers from noise at late hours, but it is not compensated by the club owner. d. Construction company owners have a higher injury rate for workers than retail companies. The higher injury rate is, therefore, a negative externality for construction workers.

c. A nightclub opens near a residential neighborhood. The neighborhood suffers from noise at late hours, but it is not compensated by the club owner.

9) Which of the following is an example of a positive externality? a. A power plant produces electricity for its customers who get a benefit from having lights in their houses. b. A factory hires an engineering firm to help it reduce its fuel consumption in order to save money. In the process, the engineering firm earns higher profits. c. An outdoor concert venue frequently hosts rock concerts that can be heard at a nearby public park. The venue is not otherwise disturbing any residents in the area. d. Engineers working for Tide detergent invent a new cleaner. Tide's customers get much better-looking clothes that don't need to be replaced as often.

c. An outdoor concert venue frequently hosts rock concerts that can be heard at a nearby public park. The venue is not otherwise disturbing any residents in the area.

10) The Manne (2014) article All Education Is For-Profit Education states the following: "[T]here is a significant difference in these two forms of organization (i.e., for-profit and non-profit enterprises) that neither Hansmann nor Shireman acknowledges." What is that significant difference? ECON 1000 - Fall 2022 - Quiz 1 - Answer Key a. Property rights in the assets and stream of income of a for-profit organization exist, but they are not transferable; property rights in the assets and stream of income of a nonprofit organization do not exist at all. b. The managers of a for-profit organization are incentivized to maximize their own personal wealth and total compensation; the managers of nonprofit organizations are much more altruistically inclined and, thus, are incentivized to maximize revenue for their organizations. c. Property rights in the assets and stream of income of the nonprofit organizations are not transferable; property rights in the assets and stream of income of a for- profit organization are transferable. d. Nonprofit organizations are, always and everywhere, better than for-profit organizations. This fact is especially true in the world of education.

c. Property rights in the assets and stream of income of the nonprofit organizations are not transferable; property rights in the assets and stream of income of a for- profit organization are transferable.

What is the first, most basic lesson of economics? (ch. 1) a. Prices are determined in markets by the interaction of supply and demand b. Value is subjective; there is no such thing as an "objective" value of anything c. Scarcity - there is never enough of anything to satisfy all those who want it d. As consumption of a good increases, the marginal utility of each additional unit declines

c. Scarcity - there is never enough of anything to satisfy all those who want it

6) A movie playing at a local movie theater is an example of an activity that is... a. non-excludable b. rival c. non-rival d. More than one (perhaps all) of the above answers is correct.

c. non-rival

When economists refer to allocative efficiency in the government, they are referring to the need of the government to... change the distribution of final goods to particular groups of people. choose the right things to produce allocate the right government agency to the task chosen. allocate the production of military goods to supportive congressional districts.

choose the right things to produce

10) The _____ function of government can be described as government production of goods or regulation of business, aimed at getting the right mix of products produced, each in the ideal quantity and at the ideal quality. a. Distribution b. Stabilization c. Taxation d. Allocation

d. Allocation

2) Which of the following is a common example of a market failure? a. Pricing by firms with market power. b. Market provision of private goods. c. Market provision of a good which generates an externality. d. More than one (perhaps all) of the above answers are correct.

d. More than one (perhaps all) of the above answers are correct.

5) Person A has a(n) _____ in the production of a good if that person can produce more of the good than Person B with the same amount of inputs. (ch. 2) a. tradeoff b. opportunity cost c. comparative advantage d. absolute advantage

d. absolute advantage

7) A production possibilities frontier... (ch. 2) a. shows that tradeoffs are never required except when an economy is operating inefficiently. b. shows that there is no economic cost due to moving from one point on the curve to another point. c. illustrates a "free lunch" by moving from one spot on the maximum curve of the frontier to another one. d. can illustrate an opportunity cost by moving from one point on the maximum curve to another, thus representing a reduction of the production of one good in order to increase the production of the other good.

d. can illustrate an opportunity cost by moving from one point on the maximum curve to another, thus representing a reduction of the production of one good in order to increase the production of the other good.

Assume goods X and Y are complements of each other. Therefore, if the price of good X were to increase, the equilibrium price of good Y would _____, and the equilibrium quantity of good Y would _____. increase; increase increase; decrease decrease; increase decrease; decrease

decrease; decrease

distribution function

government policies aimed at changing the final distribution of goods/services across consumers, usually with the intention of realizing a "fairer" apportionment of consumption/income/wealth.

allocation function

government production of goods or regulation of business, aimed at improving the allocative efficiency of the economy (i.e., getting the "right mix" of products produced, each in the "ideal quantity" and at the "ideal quality").

free rider problem

if a public good were supplied in a free market, the amount traded would be less than the efficient quantity, since many people would attempt to enjoy the benefits of units purchased by others, while not purchasing any units themselves

monopoly

market structure in which there is one single seller of a unique good with no close substitutes. The "polar opposite" of "perfect competition." The demand curve facing a monopolist is the market demand curve. They can choose any price/quantity combination along the market demand curve.

Market provision

of a good for which there is an externality is inefficient: Negative externality => free markets provide more than the optimal amount (i.e., too much) of the good Positive externality => free markets provide less than the optimal amount (i.e., not enough) of the good

A government agency can be said to suffer from regulatory capture when... private businessmen influence the decisions of that agency to such a degree that the agency protects the interests of the firms and not the public. government regulators from one federal agency displace the regulators of another federal agency - e.g., the Environmental Protection Agency claims jurisdiction from the Department of Agriculture when farm pesticides are being regulated. government regulators from one federal agency displace the regulators of a state-level agency - e.g., the federal Dept. of Transportation claims jurisdiction from the Georgia Dept. of Transportation whenever interstate highways are regulated. federal courts mandate that an agency change its rules or regulations to conform with federal law.

private businessmen influence the decisions of that agency to such a degree that the agency protects the interests of the firms and not the public.

marginal costs of production

the amount by which production costs change as the firm's quantity of output is increased by a unit

marginal revenue

the amount by which revenue changes as the firm's quantity of output is increased by a unit

profit

the difference between revenues and costs of production

When economists refer to productive efficiency in government, they are referring to... the fact that the government is much more efficient than private firms since it does not have to make a profit. the fact that government agencies have a well-known ability to produce goods at lower costs than do private firms. the government producing whatever it has chosen to produce at the lowest cost in resources. the government choosing the right things to produce, which is way more important than whether the goods produced are at the lowest possible cost.

the government producing whatever it has chosen to produce at the lowest cost in resources.