Micro Final

Joe earns $10,000 in income and pays $1,000 in taxes while Jack earns $30,000 and pays $4,000 in taxes. The structure of this tax is: -progressive. -proportional. -regressive. -a head tax.

progressive

take a larger share of higher incomes as tax

progressive taxes

In general, a nation can enjoy a higher standard of living by ______ than by being self sufficient. -increasing its versatility -avoiding trade with other nations -specialization and trading -taxing imported goods

specialization and trading

One way sellers can credibly signal that they have a high-quality product is to: -sell very little of their product in order to create scarcity. -spend a lot of money on advertising. -lower their marginal cost of production. -simply tell buyers more about their product.

spend a lot of money on advertising.

If a society's consumption possibilities are identical to its production possibilities that society has: -a closed economy. -an open economy. -a two-person economy. -a free trade policy.

a closed economy

Technological advances that increase the marginal product of labor will lead to: -a decrease in the demand for labor because the firm won't need as many workers. -an increase in the demand for labor because workers will be more productive. -no change in demand for labor because the demand for labor depends on the wage. -a decrease in the supply of labor because fewer workers can get the job done.

an increase in the demand for labor because workers will be more productive.

When buyers and sellers are not equally informed about the characteristics of the goods and services offered for sale, information is said to be: -costly-to-fake. -asymmetric. -credible. -symmetric.

asymmetric

The country Happy Land claims that it is producing everything its citizens consume. This situation is called: -a closed economy. -an open economy. -protectionism. -autarky.

autarky

If Tim insures his car against theft, it will: -decrease the likelihood that his car will be stolen. -have no effect on the likelihood that his car will be stolen. -increase his incentive to prevent his car from being stolen. -decrease his incentive to prevent his car from being stolen.

decrease his incentive to prevent his car from being stolen.

Suppose it is observed that the equilibrium wage and employment level have both risen in a competitive labor market. One can infer that the: -supply of labor has increased. -demand for labor has decreased. -demand for labor has increased. -supply of labor has decreased.

demand for labor has increased.

occurs because insurance tends to be purchased more by those who are more costly for companies to insure

Adverse Selection

occurs when either the buyer or seller is better informed about the goods in the market

Asymmetric information

if people can negotiate the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problem caused by externalities

Coarse Theorem

a rival good that is non-excludable

Common good

Which one of the following policies mitigates the negative effects of moral hazard? -Mandatory car insurance for car owners -Lowering everyone's insurance premium -Increasing everyone's insurance premium -Insurance policies with large deductibles

Insurance policies with large deductibles

the additional output a firm gets by employing one additional unit of labor

Marginal Product of Labor (MP)

the tendency of people to expend less effort protecting insured goods

Moral Hazard

we can all enjoy more goods and services when each country produces according to its comparative advantage, and then trades with other countries

Principle of Comparative Advantage

Why is there often resistance to free trade? -Free trade does not benefit the economy as a whole. -Specific groups may be hurt by free trade. -Free trade does not benefit the global economy. -Free trade usually hurts consumers.

Specific groups may be hurt by free trade.

uses group characteristics to infer individual characteristics

Statistical discrimination

_______ on output can help get to socially optimal level when there is positive externality

Subsidy

_______ on output can help get to socially optimal level when there is negative externality

Tax

What party normally gets burdened with the law?

The party with the lowest cost

What party usually makes the adjustment to the externality?

The party with the lowest cost

the tendency for a resource that has no price to be used until its marginal benefit falls to zero

Tragedy of the Commons

the dollar value of the additional output a firm gets by employing one additional unit of labor

Value of Marginal Product of Labor (VMP)

In a competitive market, VMP=

Wage

On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music really annoying. In this case, Stan's saxophone playing generates: -a negative externality -a positive externality -neither -both

both

Adam Smith's invisible hand only leads to an efficient outcome when: -buyers are fully informed about all relevant aspects of a product and the market in which it is traded. -buyers collect information up to the point at which the marginal cost of having more information equals the marginal benefit of having more information. -buyers have more information about the product being traded than do sellers. -buyers have less information about the product being traded than do sellers.

buyers are fully informed about all relevant aspects of a product and the market in which it is traded.

The Coarse theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, then they: -can always arrive at efficient solutions to the problems caused by externalities. -will never arrive at efficient solutions to the problems caused by externalities. -will never perform activities that generate negative externalities. -will always perform activities that generate positive externalities.

can always arrive at efficient solutions to the problems caused by externalities.

When there are externalities, actions are taken to:

capture the surplus

economy that doesn't trade with the rest of the world

closed economy

a good that is to some degree non-rival but excludable

collective good

In a competitive labor market, if a firm pays a worker less than that worker's VMP, then in the long run: -the firm will earn positive economic profits. -competing firms will hire the worker away. -the worker will have no incentive to work hard. -the supply of workers will fall.

competing firms will hire the worker away.

If the labor market for doctors is perfectly competitive, then an increase in the demand for doctors is likely to cause: -doctors' wages to increase. -the working conditions of doctors to deteriorate. -a persistent shortage of doctors. -the supply of doctors to fall.

doctors' wages to increase.

Alex just got a new car. Because Alex obtained full-coverage car insurance, Alex will have an incentive to ______ because of ______. -drive more cautiously than if he didn't have insurance; moral hazard -drive more cautiously than if he didn't have insurance; adverse selection -drive less cautiously than if he didn't have insurance; adverse selection -drive less cautiously than if he didn't have insurance; moral hazard

drive less cautiously than if he didn't have insurance; moral hazard

fair gamble

expected value of zero

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

external benefit (positive externality)

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

external cost (negative externality)

the name given to an external cost or benefit of an activity

externality

Protectionism is the view that: -a country's free trade agreements should be enforced. -free trade is harmful and should be restricted. -a country can best defend itself against foreign attack if it opens itself to trade. -free trade agreements best protect a nation's economic interests.

free trade is harmful and should be restricted.

when non-payers can't be excluded from consuming a good

free-rider problem

The United States imports garments from third world countries. This means that if the U.S. economy were closed, the domestic price of goods would be _____ the world price of garments. -less than -greater than -equal to -close to

greater than

If all taxpayers pay the same dollar amount, the tax is termed a: -proportional tax. -progressive tax. -head tax. -per unit tax.

head tax

tax that collects same amount from every taxpayer

head tax

statistical discrimination occurs when: -individuals are judged solely on the basis of their personal characteristics. -individuals are judged on the basis of the groups to which they belong. -firms have perfect information about each potential buyer. -statistics are used to make employment decisions.

individuals are judged on the basis of the groups to which they belong.

How are externalities corrected if negotiations are not costless?

laws can be put in place

If a country is a net importer of a good, domestic suppliers will supply _____ of that good after it opens itself to international trade. -more -the same amount -none -less

less

With external benefits are markets likely to provide more or less than socially optimal?

less than

With external costs are markets likely to provide more or less than socially optimal

more than

If the price of a good in a closed economy is greater than the world price, then if the country opens its markets to world trade the country will be a ______ of that good. -net importer -net exporter -importer and exporter -producer

net importer

a type of good that is difficult or costly to exclude non-payers from consuming

non-excludable good

a type of good whose consumption by one person does not diminish its availability to others

non-rival good

A swing at a popular, unfenced public park is: -nonrival. -nonexcludable. -a collective good. -a pure public good.

nonexcludable

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

nonrival

The value of marginal product curve is downward sloping because: -firms must lower price to sell more. -at lower wages, only less qualified workers are available. -of the law of diminishing returns. -profits decline as more workers are hired.

of the law of diminishing returns.

The essential cause of the tragedy of the commons is the fact that: -it can be difficult to solve the free-rider problem. -one person's use of a commonly held resource imposes an external cost on others. -when a resource has no price, it leads to a positional externality. -governments may not tax activities that generate negative externalities.

one person's use of a commonly held resource imposes an external cost on others.

Citizens can consume more of everything in a(n): -autarky. -closed economy. -open economy. -economy with many citizens.

open economy

economy that trades with other countries

open economy

equilibrium equals

optimal amount

negative externalities result in

overproduction

risk-neutral person

person would except fair gamble

risk-adverse person

person would refuse a fair gamble

better-than-fair gamble

positive expected value

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

positive externality

a good where non-payers can easily be excluded ad each unit consumed by one person means one less unit available for others

private good

requires all taxpayers to pay the same proportion of their incomes in taxes

proportional income tax

If all taxpayers pay the same percentage of their income in taxes, the tax is termed a(n): -proportional tax. -progressive tax. -head tax. -per unit tax.

proportional tax

the view that free trade is injurious and should be restricted

protectionism

both non-rival and non-excludable good

public good

Legal limit on the quantity of a good that may be imported

quota

has a tax rate that varies inversely with income

regressive tax

If taxpayers pay a smaller fraction of their income in taxes as their incomes rise, the tax is ______ and if taxpayers pay a larger fraction of their income in taxes as their income rise, the tax is ______. -regressive; progressive -progressive; regressive -proportional; progressive -regressive; proportional

regressive; progressive

If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity. -taxing; banning -subsidizing; banning -subsidizing; taxing -publicizing; taxing

subsidizing; taxing

Expected value of gamble =

sum of possible outcomes x their probability

There is 5 percent average tax on imported goods in the United States. This tax is known as a(n) ________. -income tax -sales tax -tariff -quota

tariff

tax imposed on an imported good

tariff

The optimal amount of information to acquire before making a purchase is: -zero. -as much as possible. -the amount such that the total cost of acquiring information equals the total benefit. -the amount such that the marginal cost of acquiring information equals the marginal benefit.

the amount such that the marginal cost of acquiring information equals the marginal benefit.

a proportional tax results in: -a larger percentage of income going to taxes as income rises. -a smaller percentage of income going to taxes as income rises. -the same dollar amount going to taxes for all taxpayers. -the same percentage of income going to taxes for all taxpayers.

the same percentage of income going to taxes for all taxpayers.

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

there is a negative externality associated with this good

What do externalities do to the economic efficiency?

they reduce economic efficiency

positive externalities result in

underproduction