econ final

what makes up investments

1.gross investment: new capital added to cap stock =net investment + deprication 2.net investment: change in the level of cap stock 3.depriciation

What are the costs and benefits of redistribution?

Benefit: Redistribution can move money to those who benefit more from it. Cost: Moving that money is costly

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock?

Lowers it, because the user cost of capital is now higher

_____ program benefits are available only to those whose incomes meet a poverty standard, and _____ program benefits are available to anyone who experiences specified negative outcomes.

Means-tested social safety net; social insurance

the equity-efficiency tradeoff in relation to income redistribution programs?

More equal incomes may come at the cost of lower average incomes.

The standard by which economists measure the efficiency of an equilibrium is:

Pareto optimality

How has the U.S. poverty rate varied over the past 40 years?

The rate has been relatively stable.

The loanable funds market is the market for:

funds used to buy, rent, or build capital.

regressive tax is

tax where additional income earned is taxed at lower rates as additional income is earned.

Which of the following poverty standards uses a measure of relative poverty?

the bottom 10% of household incomes

You will increase capacity as long as

the expected marginal product of capital is greater than or equal to the user cost of capital.

The user cost of capital is given by the following formula, where pK is the real price of capital goods, d is the depreciation rate, and r is the expected real interest rate.

uc = (r + d)pK

The efficiency problem that results from market power is that the market:

underproduces

Regressive tax:

A tax where those with less income tend to pay a higher share of their income in taxes

With regard to income redistribution, what is the trade-off between efficiency and equality?

Redistributing incomes reduces work incentives, leading to lower average income and other costs associated with redistribution.

economically efficient outcomes

hold the possibility of making everyone better off.

common criticism of focus on economic efficiency as a measure of welfare

-A situation can be economically efficient but also considered to be unfair. -Economic efficiency is based only on results and not on process. -The assumption that willingness to pay measures marginal benefit ignores ability to pay.

characteristics of social insurance programs?

-Benefit eligibility is based on experiencing specified bad outcomes. -Employers and workers pay for social insurance programs. -Benefits are based on past earnings.

government failure

-Elected officials are more concerned about reelection than efficiency. -Government leaders are focused on enriching themselves. -Regulators act in the interest of the industries they regulate.

sources of social inefficiencies

-Externalities:An externality is a cost of benefit that is not taken into account by the individual firm or consumer that causes it; externalities can be positive or negative. -Market power:firms may not be price-takers. If a firm is large relative to the market, then we say it has market power and it can use its monopoly power to act strategically to restrict output, raise prices, and increase profits. -Incomplete markets: Credit markets: it is not possible to borrow against future earnings to finance underage education The markets of (quasi) public goods: roads, bridges, -Asymmetric information:A used car salesman has full information on any defects of the car. Firms do not know the characteristics of the workers they hire Search and matching in the labor market -Factor immobility:Occupational immobility - skills in one sector not employable in another sector Geographic immobility - workers needed in NYC but available in Miami -Distorting taxes:Tax payment depends on the actions of the person being taxed the tax drives a "wedge" between the willingness to substitute and the technological ability to substitute. -Government regulations:Bureaucracy, quotas, fees,... -Irrationality

key reasons that the government provides in-kind benefits rather than cash benefits?

-Giving goods rather than cash prevents recipients from making bad choices. -Taxpayers may care more about reducing homelessness or hunger than what will make the recipient happiest. -An in-kind benefit like child care is a complement to work, which provides some incentive for recipients to provide for themselves rather than rely on the safety net.

social insurance

-Government-provided insurance against bad outcomes such as unemployment, illness, disability, or outliving your savings. - Risks you like to insure against -job loss=unemployment insurance -benefits based on bad outcomes and your past earnings -people pay into programs -social security

incidents of poverty in us

-People of color are more likely than others to experience poverty. -Children and single moms are most likely to be in poverty. -Most people in poverty will spend much of their lives in poverty, but most people will spend some time in poverty during their lifetime.

Social safety net:

-The cash assistance, goods, and services provided by the government to better the lives of those at the bottom of the income distribution. -means tested:: Eligibility is based on income and sometimes wealth

how do policies affect welfare

-The efficiency criterion is an objective welfare criterion that favors the outcome that yields the most economic surplus. -economic surplus -economic efficiency -efficient outcome -Efficient outcomes won't make everyone happy

the social insurance programs meet what criteria

-They provide benefits to everyone, both rich and poor. -The benefits are based on certain bad outcomes. -People pay into social insurance programs.

Goods market equilibrium, implies

-aggregate supply=aggegate demand - Desired Savings = Desired Investment -Supply of funds = Demand for funds

deprication

-decline in capital due to aging, accident -capital used up/ lost during production process

positive analysis

-describes what is happening, explaining why something happens,or predicting what will happen.

Other Factors That Impact Investment

-expectations -corporate taxes -lending standards and cash revenues

competitive markets result in

-goods going to the consumers who will receive the highest marginal benefit from the good. -the largest possible economic surplus. -goods produced at the lowest possible marginal cost

a means-tested social safety net program in the United States?

-household income below 10,000 a year -earned income tax credit -medicaid -housing assistance -welfare -SNAP -SSI

shifts in the supply of loanable funds

-personal savings change -the budget surplus or deficit shifts government saving -global shocks shift foreign saving

normative analysis

-prescribes what should happen, which involves value JUDGMENT

cost of the redistribution of income?

-reduced incentive to work and earn -tax avoidance and fraud -adimistrative costs

loanable funds market

-savers supply funds -investors demand funds -price that clears the market is real interest rate

Shifts of the Demand for Loanable Funds

-tech advances -expectations -corporate taxes -lending standards and cash revenues

Equality versus Efficiency

-tradeoffs --Efforts to equalize the distribution of income can raise total well-being. - But tax and redistribution programs are costly because they distort incentives, thereby reducing work effort.

costs of redistribution

1. administrative costs. 2. higher taxes, which reduce the incentive to work. 3. benefit reductions, which reduce the incentive to work. 4. tax avoidance, evasion, and fraud.

types of investments

1.business investment: spending by businesses on new capital assets 2.inventories: spending on accumulated raw materials, work-in progress, and unsold good 3.housing investments: spending on building or improving housing

Potential Pareto Improvement

: a change is a Potential Pareto Improvement if, with an appropriate redistribution of resources, it can make at least one agent better off without making any other agents worse off

pareto optimality

: a feasible allocation is Pareto Optimal (also referred to as Pareto Efficient) if there is no other feasible allocation that can make at least one agent better off without making any other agents worse off.

economic surplus

=marginal benefit-marginal cost -the area between the supply curve and the demand curve to the left of quantity sold. -consumer surplus plus producer surplus. -the most economically efficient option yeilds most surplus

Progressive tax:

A tax where those with more income tend to pay a higher share of their income in taxes -federal income taxes are progressive Income taxes: Taxes collected on all income, regardless of its source.

second welfare theorem

Any Pareto optimum can be supported as a competitive equilibrium with an appropriate redistribution of resources.

welfare

In policy analysis we refer to welfare as the level of utility/well-being of agent(s)

fairness and redistribution

Your sense of fairness is likely shaped by many different intuitions: 1. equality of outcomes. 2. equality of opportunity. 3. fair processes. 4. what you deserve. 5. veil of ignorance. 6. power and class differences.

pareto improvment

a change is a Pareto Improvement if it makes at least one agent better off without making any other agents worse off.

The first theorem of welfare economics states that:

a competitive equilibrium may be Pareto efficient. all competitive equilibria are Pareto efficient.

Efficient production occurs when:

a given level of output is produced at the lowest possible cost.

future value is

amount that your money will grow into by a future date as a result of earning interest.

Some safety net programs provide specific goods rather than income or tax breaks. This type of program benefit is known as:

an in-kind transfer

Improved economic efficiency:

could improve the equity of benefits if the gains are appropriately distributed

The percent of each extra dollar of earned income that an income transfer recipient loses to higher taxes and lower government benefits is called the recipient's:

effective marginal tax rate

Government programs that are "means-tested" require:

eligibility to be based on income and sometimes on wealth.

The user cost of capital is the:

extra cost associated with using one more machine next year.

impact of interest rates, deprication rate

higher interest rates increase the user cost of capital and decrease the desired level of capital

A technological improvement will

increase the desired capital stock.

The borrowers in the loanable funds market are:

investors

From an economic perspective, the outcome that yields the greatest economic surplus is the:

most efficient outcome

The relationship between efficiency and equality is _____ when incomes are redistributed.

negative

An income level below which a family is defined to be in poverty is known as the:

poverty line

One should invest in an opportunity if the:

present value of the benefits exceeds the present value of the costs.

Which of the following problems occurs when some participants in a market have information that other participants in the market do not have?

private information

A system where high-income households pay a higher share of their income in taxes than those with lower incomes is known as a:

progressive tax system.

Social safety nets, social insurance programs, and progressive tax systems are all types of income _____ programs that have the impact of moving income distribution _____ equality.

redistribution, closer to

Crowding out is the:

reduction in private investment due to a rise in government spending.

If a poverty line is set at a third of the median household income in a country, the poverty line is based on a _____ poverty standard.

relative