Econ Exam 2

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What is free​ riding?

Free riding is benefiting from a good without paying for it.

Which of the following is an example of rent seeking​ behavior?

U.S. sugar firms convinced Congress to impose a quota on imports of sugar.

When are we likely to see private solutions to the problem of​ externalities?

When transaction costs are low. and When the parties involved have information about the externality. and When the number of parties involved is small.

The term tax incidence refers to

the actual division of the burden of a tax between buyers and sellers in a market.

Tax incidence indicates

the actual division of the burden of a tax.

Economic efficiency in a free market occurs when

the sum of consumer surplus and producer surplus is maximized.

Which of the following is the average tax​ rate?

the total tax paid divided by total income

A price ceiling refers to

the upper limit on the price of a good

A monopoly is characterized by all of the following except

there are only a few​ sellers, each selling a unique product.

Both presidents Kennedy and Reagan proposed significant cuts in income taxes because

they believed that the tax cuts would enhance economic efficiency.

A producer or a consumer will internalize an externality because

they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.

The lawsuit the Justice Department brought against Apple regarding the pricing of eminus−books for its iPad is an example of attempts by the government

to keep firms from artificially restricting competition to raise prices.

The presence of a positive externality in a market leads to​ ________.

underproduction of the good

A merger between U.S. Steel and General Motors would be an example of a

vertical merger.

What kind of good? Education in a public school​ (Grades K through​ 12):

A common resource

What kind of good? An​ apple:

A private good

What kind of good? Education in a private school​ (Grades K through​ 12):

A private good

What kind of good? Mail​ delivery:

A private good

What kind of good? A television broadcast of the World​ Series:

A public good

What kind of good? Hiking in a large park​ (no congestion) not surrounded by a​ fence:

A public good

What are Normative Statements?

A value judgement is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence

What kind of good? Hiking in a large park​ (no congestion) surrounded by a​ fence:

A​ quasi-public good

Which of the following best describes the process of regulatory​ capture?

Bank of America encourages the​ FDIC-Federal Deposit Insurance​ Corporation- to make banks with less than​ $50 million of deposits pay a higher percentage into the insurance fund​ "for the protection of​ consumers."

Which of the following statements is false about rent​ seeking?

Because rent seeking redistributes​ society's resources, anyone engaging in such behavior is violating the law.

How does a free market eliminate a shortage?

By letting the price rise

​________ are highly excludable but​ non-rival in consumption.

Club goods

Another crucial principle​ [of tax incidence] is that only people can pay taxes. Businesses and other artificial entities cannot pay​ taxes. true or not?

Correct. The tax is borne by the workers in the form of lower​ wages, the customers in the form of higher​ prices, and the shareholders in the form of lower returns.

Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?

Deadweight loss will increase

Which of the following is​ true?

If production of a good gives rise to a negative​ externality, it can be internalized by taxing the producers of the good.

What is regulatory​ capture?

It is a situation in which a firm being regulated successfully influences the regulatory ​agency's actions to benefit the interests of the​ firm, rather than the public interest.

What is meant by the term​ "rational ignorance"?

It means the lack an economic incentive for voters to become informed about a pending legislation.

Do the people who are legally required to pay a tax always bear the burden of the​ tax?

No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.

​Ordinarily, governments attempt to promote competition in markets. Why do governments use patents to block entry into some markets when this prohibits​ competition?

Patents encourage firms to spend money on research necessary to create new products.

Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the​ activity?

Positive externality

What are positive statements?

Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence.

Why do some consumers tend to favor price controls while others tend to oppose​ them?

Price ceilings generate shortages.​ Consequently, the consumers who obtain the product at a lower price​ win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage

When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?

Quantity demanded

Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?

Quantity demanded will decrease, quantity supplied will increase, and a surplus will result

What is the focus of a​ command-and-control approach to reducing​ pollution?

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

Which is more important in determining the impact of the tax system on economic​ behavior?

The marginal tax rate.

Which of the following tax rates has the greatest effect on​ people's willingness to​ work, save, and​ invest?

The marginal tax rate.

Arnold Harberger was the first economist to estimate the loss of economic efficiency due to market power. Since​ Harberger's findings were​ published, other researchers have studied this same issue. How do the results of these researchers compare to​ Harberger's results?

The other researchers reached conclusions similar to​ Harberger's; namely, the loss of economic efficiency due to market power is about 1 percent of the value of production in the United States.

Which of the following leads to the tragedy of the​ commons?

The use of common pool resources above the socially optimal level

Why do most economists favor tradable emissions allowances to the​ command-and-control approach to​ pollution?

Tradable emissions allowances eliminate pollution at lower cost than the​ command-and-control approach.

Is there an economically efficient amount of​ crime?

Yes. The economically efficient amount of crime is where the marginal social benefit equals the marginal social cost.

Rent control is an example

a price ceilin

Which term refers to a legally established minimum price that firms may charge?

a price floor

A Pigovian tax is

a tax to bring about an efficient level of output in the presence of externalities.

The Coase Theorem states that

if transaction costs are​ low, private bargaining will result in an efficient solution to the problem of externalities.

The Coase Theorem suggests​ that:

if transaction costs are​ low, private bargaining will result in an efficient solution to the problem of externalities.

private bargaining will tend to be limited​ when:

all parties are not willing to accept a reasonable solution

Collusion is

an agreement among firms to charge the same price or otherwise not to compete.

The public choice model

applies economic analysis to government decision making.

Some individuals seek to use government action to make themselves better off at the expense of others. The actions of these individuals

are examples of rent seeking.

According to public choice​ theory, policymakers

are likely to pursue their own selfminus−​interest, even if their selfminus−interest conflicts with the public interest

The public choice model assumes that government policymakers

are likely to pursue their own self−​interests, even if their self−interests conflict with the public interest.

When members of Congress vote to pass new​ legislation, they will

fail to consistently represent the underlying preferences of voters.

Why is a typical person likely to gather more information when buying a new car than when voting for a member of​ Congress?

because buying a new car affects a person more immediately and personally compared to voting for a member of Congress. In the​ latter, a​ person's vote is only one of many voters and​ therefore, not likely to have a large impact on the outcome.

The De Beers​ Company, one of the longest−lived ​monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned​ diamonds?

because previously owned diamonds would be a close substitute to newly mined diamonds and therefore reduce De​ Beers' market power

The parties involved in an externality have an incentive to reach an efficient solution because

both parties become better off when an efficient solution is reached.

A Pigovian tax is a government tax intended to

bring about an efficient level of output in the presence of externalities.

A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a​ ________ to solve an externality.

command and control approach

When the demand for a product is less elastic than​ supply, _______________ pay the majority of the tax on a product​

consumers

when supply for a product is more elastic than the​ demand, _____________ pay the majority of the tax on the product.

consumers

A corrective subsidy induces the​ ________ to the socially optimal level.

consumers of a positive externality to increase the quantity consumed

By imposing a tax on toilet​ paper, the government will cause

consumers to internalize the externality causing the equilibrium quantity of toilet paper consumed to decrease.

A price ceiling...

does not increase the amount of the product that consumers buy because it creates a shortage.

Which of the following is not an example of​ rent-seeking behavior?

engaging in aggressive advertising that slams a​ competitor's product

Financial contributions to the campaigns of members of​ Congress, state​ legislators, and other elected officials by firms that seek special interest legislation that make the firms better off are

examples of rent seeking.

Private goods

excludable, rival

Network externalities

exist when the usefulness of a product increases with the number of consumers who use it.

An individual producer or a consumer​ "internalizes an​ externality" when

in their own decisions they take into account the external effects of their actions.

A public franchise

is a government designation that a private firm is the only legal producer of a good or service.

Compared to perfect​ competition, the consumer surplus in a monopoly

is lower because price is higher and output is lower.

A price floor is the ________.

lower limit on the price of a good

The median voter model implies that

many people will be dissatisfied with the amount of spending on government funded projects.

Economists played a key role in the development of merger guidelines by the Department of Justice and the Federal Trade Commission in 1982. These guidelines have three main parts. What are these​ parts?

market​ definition; measure of​ concentration; merger standards

The voting paradox suggests that the​ "voting market", as represented by elections

may often lead to an inefficient outcome in representing consumer preferences compared to the private market for goods and services.

In a​ sense, consumers in a market might be​ "paying" a Pigovian tax even if the government​ hasn't imposed an explicit tax if there are

negative externalities in that market so that consumers are experiencing an external cost.

Traffic congestion is an example of a​ ________.

negative externality (too little roads)

The Arrow impossibility theorem states that

no system of voting can be devised that will always consistently represent the underlying preferences of voters.

Public goods

non excludable, non rival

Common resources

non excludable, rival

Quasi - public goods

non rival, excludable

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire

other firms are free to produce chemically identical drugs. Competition reduces the profits that had been earned by the firms that received patents.

One result of the public choice model is that most economists believe that

policymakers may have incentives to intervene in the economy in ways that do not promote economic efficiency.

The social cost of producing a good that generates negative externalities is the sum of the​ ________.

private cost and external costs of production

Imposing price controls on goods would make them hard to find because

producers would not want to supply as much as they did before the price controls.

Governments grant patents to encourage

research and development on new products.

When the government imposes price floors or price​ ceilings,

some people​ win, some people​ lose, and there is a loss of economic efficiency.

A Herfindahlminus−Hirschman Index is calculated by

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

One reason patent protection is vitally important to pharmaceutical firms is

the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process.

At what level must a Pigovian tax be set to achieve​ efficiency? A Pigovian tax must be set equal to

the cost of the externality.

What are the sources of externalities and market​ failure?

the difficulty of enforcing property rights in certain countries and incomplete property rights

A price ceiling does NOT lead to a deadweight loss if ________.

the equilibrium market price lies below the price ceiling

If a natural monopoly regulatory commission sets a price where marginal cost is equal to demand

the firm would incur a loss.

A marginal tax rate is

the fraction of each additional dollar of income that must be paid in​ taxes, while the average tax rate is the total tax paid divided by total income.

What do economists mean by​ "an economically efficient level of​ pollution"? The economically efficient level of pollution is that amount where

the marginal cost of pollution reduction equals the marginal benefit of pollution reduction.

When a Pigouvian tax is​ imposed, ________.

the marginal private cost curve shifts upward

How is free riding related to the tendency of a public good to create market​ failure? Free riding results in

the market producing a quantity of public goods that is inefficiently low because they are non excludable.

One important difference between the political process and the market process is that

the political process results in collective actions in which everyone is obliged to participate while in the market process individuals are free to participate or not.

A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments

will be better off if he does not get caught because that amount will be above the equilibrium. and will be worse off if he gets caught.

Someone who will be moving to Lowell next year and who intends to rent an apartment after the rent control

will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling. and will be worse off if they are unable to find an apartment to rent.

Someone currently renting an apartment in Lowell after the government has placed a rent control

will be better off if they keep their apartment because rent is lower due to the price ceiling. and will be worse off if they lose their apartment.

A landlord who intends to abide by the rent control law

will be worse off because he will be receiving less rent.

Which of the following statements refers to rent​ seeking?

​"Laws passed by the federal government often provide benefits for a small number of individuals. These​ individuals, in​ turn, have an incentive to contribute to the campaigns of politicians who pass these​ laws."

Example of a normative statement

​"Rent controls, government farm​ programs, and other price ceilings and price floors are​ bad."

Consider an industry that is made up of six firms with the following market​ shares: Firm A minus− ​50%, Firm B minus− ​20%, Firms C and D minus− ​10% each, and Firms E and F minus− ​5% each. What is the value of the Herfindahlminus−Hirschman Index and how will the industry be​ categorized?

​3,150; highly concentrated

Which two factors make regulating mergers​ complicated?

​First, it is not always clear what market firms are in.​ Second, the newly merged firm might be more efficient than the merging firms were individually.

​Peet's Coffee and Teas produces some flavorful varieties of​ Peet's brand coffee. Is​ Peet's a​ monopoly?

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

Does it matter whether buyers or sellers are legally responsible for paying a​ tax?

​No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.

When there are many people involved in attempting to reach an​ agreement, the transactions costs are often​ _______ than the net benefits from reducing an externality. In such​ cases, a private solution to an externality problem​ _______ feasible.

​higher; is not

The tragedy of the commons occur because some goods are​ ________ in consumption.

​non-excludable but rival


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