ECN 310 Exam 2
Information Problem
Raise transaction costs as one party tends to know more
inequality is lower in Thailand than the Philippines and inequality is higher in Myanmar. Physical capital is more important to production in Thailand, while land is more important to production in Myanmar. According to the theory of democratization, which country is more likely to democratize?
Thailand
Robyn, a neurobiologist, is hired by a pharmaceutical company to examine the effectiveness of a new drug they have planted. The company offers paying them $50,000 for testing and Robyn agrees as this would cover their costs and earn a tidy profit. Once Robyn conducts the test, the company tells Robyn it will only pay them $25,000. This is an example which problem?
The Hold-up problem
T/F: A manager of a firm in a centrally economy would have a strong incentive to meet their plan's target at the end of the month if they were close to the target
True
T/F: In a market used for technical machinery, we would expect someone who used to build similar machinery would be able to find something they could purchase at a price favorable to the seller
True
T/F: Measures of autocracy are not very correlated among think tanks and different academic institution rankings
True
T/F: Non-rival public goods create inefficiencies when everyone acts in self interest
True
T/F: Sales taxes are considered more distortionary on overall economic activity than a value-added tax
True
T/F: The left-right axis in political debates comes from where the politicians sat in the National Assembly following the French Revolution
True
T/F: a benefit of value-added taxes is that they encourage more transactions in the value chain to be recorded when reporting taxes than a sales tax
True
T/F: the arguments for central planning were gaining favor during the Great Depression
True
T/F: we would expect slightly unequal societies where the wealth earn their incomes from physical capital to have democratic regimes
True
T/F: without penalties for absenteeism or shirking, central planning systems to an extent relied on voluntary labor
True
What is the best solution to a hold up problem?
a binding contract enforceable in an accessible, efficient legal system
Collective action problem
a form of cooperation problem when taking some costly actions benefits everyone
what are olson's "roving bandits"
a group using their force moving through the country side to steal from people in the villages
credibility
a party's ability to uphold commitments important for monetary and fiscal policy
How do you calculate tax collected from all transactions with sales tax?
add all total costs and profits, multiply by sales tax
Managers of firms in centrally planned economies would deal with shortage by
all of the above (hiring pushers, substituting inputs, and through the gray markets)
stationary bandits
always steal from the same village, limiting how much they steal because if they take too much at once, they can get less in the future
Adverse selection
an information problem where inferior quality sellers or high-risk buyers cause market imperfections
What are institutions
any form of constraint that human beings devise to shape human interaction building blocks shaping how we interact with each other in social, political or economic settings
common law
arguments rely on precedent or past rulings
According to the theory of democratization, how would you explain that path of democratization in Russia and the US?
both promoted democracy in the US
semi-formal solutions
brand names used to signify quality
The frequency of appeals is less efficient in _____ systems; the way judges rule on cases is more independent in _______
civil law; common law
formal institutions
codified by constitutions, laws, statues, legal precedents and rulings main ones are political, legal, and fiscal
legal institutions
codified laws, statutes, or decrees, can be rooted in religious or moral codes (like the Torah or Quran) split between common and civil law
emerging markets without central bank independence of budgetary discipline will attempt to boost the economy by cutting interest rates and increasing government expenditures before elections show an example of which problem?
commitment problem
The way arguments are presented and decided is more accessible in _______ systems; the way judges rules on cases is less independent in ______ systems
common law; civil law
constitutional (administrative) law
constrain actions of the government
tax that are used to fund the maintenance of a wall for the defense of a town provide a solution to which problem?
cooperation problem
economies with the rule of law have most citizens operate in legal markets and pay taxes, while emerging markets have more citizens operating in illegal markets in part to avoid taxes. This represents an example of which problem
coordination problem
contract enforcement
critical role in solving commitment problems if one party fails to uphold their commitment, they can be taken to court
while welfare economics may suggest it would be better for governments to use markets and set a price, governments may find it advantageous to set a quantity to
decrease monitoring costs
media reporting news only favorable to the government would be unlikely it what form of government?
democracy
informal institutions
depend on social norms or convention (customs, taboo tradition or culture), and are not written into law
labor law
determine hiring, firing, and safety standards
fiscal institutions
determine how tax revenues are raised for the government to fund public services (like defense, education, healthcare)
formal solutions
disclosure rules inform buyers of an asset's past history, license or certification requirements, warranties that guarantee service or maintenance of a product, or return policies
which of the following describe the marginal product of labor of additional workers for a firm manager that was very close to meeting their plan's target production in a centrally planned economy?
given a plan fulfillment bonus, the marginal product of labor is increasing for each additional worker
a health insurance company will offer lower rates for customers who wear fitness trackers as a way to address which problem?
information problem
civil law
legal arguments are built on consistency with statutory law
Hayek's critique of a central planning was that any central planner would always fail to solve the
local knowledge problem
the functionalist fallacy
mistakes an object's function as the cause for its existence
The use of accusatorial method in common law courtrooms is ______ efficient than civil law courtrooms
more
more rule of law = ______ GDP per capita
more
What happens where there is absence of a price system?
no indicator of scarcity to either reduce demand or encourage technological progress to conserve
Which of the following is more common in autocracies
none of the above
cooperation problem
occur when two parties individually following self interest end up in an inferior equilibrium where had they cooperated they could have achieved a better equilibrium
What benefit do the use of juries in common-law cases present?
operate in a decentralized maner
transaction costs
prevent otherwise welfare enhancing trades from occurring, reduced economic development by limiting specialization, market size, and innovation
Hold-up Problem
raise transaction costs when one party makes a transaction specific investment and then the other party wants to change terms
commitment problem
raise transaction costs when one party undertakes a costly action and then the other party reneges or fails to follow through with agreement
informal solutions
relational contracting describers a long-term trading network maintained regardless of price to ensure quality for buyers and payment for sellers
financial law
shapes equity and debt markets, say how firms can make equity, who can buy stock
commercial law
shapes trade and exchange, buying and selling across markets
Developed economics tend to have the rule of law where most citizens operate in legal markets and pay taxes, while emerging markets have more citizens operating in illegal markets in part to avoid taxes. This represents which problem?
the Coordination problem
City officials in Santiago, Chile are trying to determine how to provide and allocate clean water to the city's residents. The city officials believe that demand for clean water is very price sensitive, while the supply of clean water is not very price sensitive. To minimize any potential social welfare loss from planning errors:
the city officials should set a price for clean water that they believe will reach equilibrium quantity since there is a small loss from over-producing
City officials in Dar es Salaam, Tanzania are trying to determine how to provide and allocate police services. The city officials believe that demand for police services is not very price sensitive, while the supply of police services is very price sensitive. to minimize any potential social welfare loss from planning errors:
the city officials should set a quantity of police services that they believe will reach the equilibrium price since there is a small loss from under-producing
What is the local knowledge problem?
the head planner does not know the local place's needs or wants, and does not know what is best
T/F: Autocrats that expect to hold power for a long time are like Olson's roving bandits
true
T/F: Taxing income earned from capital is considered one of the most equitable ways to raise revenue but mobility constraints make it hard to tax income on capital
true
T/F: emerging markets governments collect more in trade taxes than their developed economy counterparts
true
vertical integration
when a firm buys its supplier to ensure quality or delivery.
Coordination problem
when agents could all coordinate on a specific action and each agent chooses depending on the other's choices
time inconsistency
when both parties optimal choices change over time
what is the success indicator problem?
when managers distort decisions to ensure successful plan completion
Consider the following series of transactions: a farmer produces some cotton worth $5, the weaver buys the cotton to produce some fine thread worth $10, a manufacturer buys the thread to produce sweatshirts worth $15, a printing company buys the sweatshirts to print "UPSTATE OF MIND" on them and sell for $60. What is amount of tax collected from the transactions described to produce each sweatshirt with the printed phrase when there is a 20% value-added tax?
$12
Consider the following series of transactions: Andy operates a taco truck and buys beef for $1, taco shells for $0.25, and cheese for $0.25. They sell each taco for $3. What is amount of tax collected from all transactions described to produce each taco with a 10% sales tax?
.45
3 incentive problems of the ratchet effect
1) a principal and an agent are in a repeated relationship 2) there is asymmetric information about productivity 3) the principal cannot commit to an incentive scheme
Democratic features
1) competitive multiparty elections 2) rule of law 3) protection of civil liberties such as speech, religion, movement, and assembly
Autocracies feature:
1) no parties or one party with unfair elections 2) rule by law 3) no (minimal) civil liberties protected
Consider an economy with three individuals: one person A has income $20, one person B has income $100, and one person C has $480. A, B, and C each have a vote in determining a tax rate on individual income that funds a universal equal transfer to each individual with distortionary losses from tax and transfer. What would be the equilibrium tax rate?
50%
Taxes that are used to fund the maintenance local roads that everyone drives on is an example of a solution to which problem?
Cooperation Problem
Inequality is higher in Venezuela than the US and inequality in Cuba is somewhat lower. Human capital is more important for the economy of Cuba, while oil provides most of the wealth in Venezuela. According to Acemoglu and Robinson's theory of democratization, which of the countries is likely to democratize?
Cuba
T/F we would expect highly unequal economies where the rich own plenty of land to have democratic regimes
False
T/F: Democratization is more likely to occur when the middle class is a relatively small part of society
False
T/F: Economics development measures differ greatly between common and civil law countries with a similar risk of expropriation from consulting firms
False
T/F: Governments that have always paid back their debts are not rewarded by markets with lower interest rates for this credibility
False
T/F: In a market for lemons (used cars of suspect value), we would expect that someone with great expertise in cars would be unable to find a car they could purchase to fix-up at a price favorable to the seller
False
T/F: Laws will be strictly adhered to when they conflict with culture and tradition
False
T/F: Measures of autocracy are uncorrelatedd
False
T/F: Taxing income earned from land ownership is considered one of the most efficient and political economy constraints make it easy to tax income on land heavily.
False
T/F: The arguments for central planning were losing favor based on experience of the Soviet Union and the US in the 1930s
False
T/F: The left-right axis in political debates comes from where senators sat in the senate following the American Revolution
False
T/F: The shops throughout the soviet union were filled with stocked shelves of quality items
False
T/F: The soft-budget constraints faced by firms under socialist systems provided a strong incentive to improve efficiency
False
T/F: Transactions costs do not limit the amount of economic activity in many emerging markets
False
T/F: a manager of a firm in a centrally planned economy would not have a strong incentive to meet their plan's target at the end of the month if they were close to the target
False
T/F: citizens in emerging markets seldom ignore or break laws that go against cultural beliefs
False
T/F: the demographic institutions transplanted by European settlers in Australia, Canada, New Zealand, and the US were designed to increase economic growth
False
T/F: written arguments in civil law systems makes the legal system more accessible to members of society
False
The ratchet effect provided managers under central planning with a strong incentive to produce beyond their target
False
Which of the following describes the marginal product of labor of additional workers for a firm manager that was very close to meeting their plan's target production in centrally planned economies?
Given a plan fulfillment bonus, when close to the production target, the marginal product of labor is increasing for each additional worker
A car insurance company will offer lower rates for customers who place a speed tracker in their car as a way to address which problem?
Information problem
Friedrich von Hayek's critique of central planning was that any central planner would always fail to solve which problem?
Local Knowledge problem
Duverger's law from political science describing how majoritarian voting systems creates a center-left party and a center-right party who both compete for swing voters is a result of
Median voter theorem
what is the solution to to a cooperation problem?
Nash equilibrium
Which politician represents Olson's stationary bandits?
Paul Kagame who has been either the president of VP of Rwanda for the last 3 decades
