Econ Modules 5 - 8 - Flashcards

Q: 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.\"

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The possibility of "government failures" should be evaluated before getting the government involved in addressing "market failures."

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True

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The best solution to water pollution is to make the responsible people clean the water and return it to its natural state.

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False

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Key limitations on the government correcting "market failures" include:

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-Information -Misaligned incentives between the government and citizens -The incentive of the government to tax and spend to help politicians get elected or re-elected.

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Sewage treatment is an example of

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An externality

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The central question in trying to determine whether to involve the government in an economic issue is

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Determining whether or not the government can be relied on to make things better.

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The government can be relied on to efficiently solve problems associated with pollution through (Pigovian) taxes.

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False

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The key problem(s) with externalities is that

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-Private costs do not equal social costs. -Private benefits do not equal social benefits.

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Beginning in the 1950s economists began to investigate incentives within government. They found that:

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One should be cautious in calling on the government to improve economic performance.

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One problem with using taxes to solve economic externalities is that politicians may spend the money on things they like, rather than things their constituents want.

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True

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The point of the video is that the government can seldom enhance economic efficiency.

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False.

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Sam Peltzman's paper, "Toward a More General Theory of Regulation," argued that regulators would reach an equilibrium when

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The marginal benefit to the regulator of providing special treatment to producers equals the marginal cost of angering consumers into voting to remove the regulator.

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If voters lack an economic incentive to become informed about pending legislation, then their preferences become a constraint on legislators voting for rent-seeking legislation.

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False

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Megan McArdle argues that regulatory capture happens for all of the following reasons except

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Regulators want the regulated industry to spend a lot of time and effort on compliance.

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Economists often analyze the interaction of individuals and firms in markets. Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others, a process that is referred to as

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Rent Seeking

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Which of the following statements refers to rent seeking?

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"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."

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The public choice model

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applies economic analysis to government decision making.

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

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

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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

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examples of rent seeking.

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According to public choice theory, policymakers

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are likely to pursue their own self-interest, even if their self-interest conflicts with the public interest.

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Which of the following statements about rent seeking is false?

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

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The video indicated that there is a significant difference between recycling fluorescent lights and plastic bottles.

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True

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The economically efficient amount of recycling will occur if

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Recyclers pay the full cost of picking up recycled products

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Recycling is not an economic problem because there is only so much land that can be used for landfill, and that land is substantially damaged by the creation of garbage dumps.

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False

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It is well-known that the use of landfills effectively destroys the value of land for subsequent use.

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False

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Economics shows that it is inefficient to recycle plastic bottles because they have little value.

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False

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To evaluate recycling, you must consider

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-The demand for recycled products -The incremental costs to society for recycling products -The value of the land used for landfills

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The opportunity cost of using land for a landfill is determined by:

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The value of the land before the landfill was developed, minus the cost of the land after the landfill is full.

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The appropriate charge for trash disposal should be set by

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-The opportunity cost of using the landfill -The cost of the trucks and labor needed to haul trash away

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Recycling is not an economic problem because it involves running out of basic resources that our children might need.

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False

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Recycling is an economic issue because the goods that are recycled, the land for landfills, and the trucks and labor needed for both recycling and trash disposal are all examples of scarce resources.

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True

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Banning smoking in restaurants is clearly economically efficient because passive smoke is harmful.

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False

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W. Kip Viscusi studied tobacco smoking and concluded that

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The external costs and benefits of smoking were about equal, so there wasn't a significant negative externality to smoking.

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A key advantage of assigning property rights to owners of restaurants is that

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Smokers and nonsmokers are likely to be able to eat meals the way they like.

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The social problem of smoking in restaurants because smokers and nonsmokers want to use the air in different ways.

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True

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Restaurant owners have an incentive to

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-Fully account for the value impact of restaurant smoking on nonsmokers. -Fully account for the value of restaurant smoking to smokers. -Take into account how smoking shifts the overall demand curve for restaurant meals.

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The key to solving problems associated with smoking in restaurants is to

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Assign property rights to restaurant owners.

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Smoking in restaurants is generally a bad idea because of the diseases caused by passive smoking.

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False

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The social problem of smoking in restaurants is caused because smokers want to pollute the air, causing harm to people around them.

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False

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The key to Viscusi's findings about the net impact of smoking on healthcare costs is that

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People who smoke need more medical care, but they also (unfortunately) tend to die younger, and that creates an offsetting reduction in health care costs.

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The net effect of smoking in a restaurant is to

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There is no general answer.

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Arrrow's theorem investigates:

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The impossibility of determining the "will of the people" by voting.

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To establish Arrow's theorem you need to

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-Consider who would win when you vote in various ways -Show that the outcome depends on the order in which things are compared

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The video showed that

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-When you have three or more people and three or more choices, the winner can depend strictly on the order in which things are considered. -Voting mechanisms can generate circular outcomes, so the "will of the people" cannot be determined by voting.

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Economists investigate voting mechanisms because:

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Voting systems are just another method for allocating resources.

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Arrow's impossibility theorem shows that political outcomes often critically depend on the order in which things are considered.

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True

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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?

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

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

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a price floor.

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The government of Lithasia has decided to set a minimum price for certain agricultural products in order to safeguard the interests of farmers. This is an example of a ________.

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price floor

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A price ceiling refers to ________.

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the upper limit on the price of a good

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A price floor is the ________.

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lower limit on the price of a good

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A rent control is an example of a ________.

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price ceiling.

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Business leaders often say that there is a "shortage" of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. For example, an AP article entitled "New York farmers fear a shortage of skilled workers," pointing out that a special U.S. visa program, the H-2A program, "allows employers to hire foreign workers temporarily if they show that they were not able to find U.S. workers for the jobs." (Source: Thompson, Carolyn. May 13, 2008. N.Y. farmers fear a shortage of skilled workers Associated Press.) How do unregulated markets cure a "labor shortage" when there are no immigrants to boost the labor supply?

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Let the price of labor increase.

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In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?

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Meterville

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

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Quantity demanded.

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In New York City, about 1 million apartments are subject to rent control by the local government. Rent control

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puts a legal limit on the rent that landlords can charge for an apartment.

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A gallon of milk costs $4 in Bonland. If the government fixes the price at $3.50, ________.

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a shortage of milk will occur in the market

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How does a free market eliminate a shortage?

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By letting the price rise

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A price ceiling is a legally determined maximum price that sellers may charge.

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True.

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Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?

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There was no price control on gasoline at the time.

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Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods? Choose one from each pair:

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Retired people.

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To affect the market outcome, a price ceiling

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must be set below the equilibrium price.

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In order to be binding, a price ceiling

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must lie below the free market equilibrium price.

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Rent control is an example of a price ceiling.

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True

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With an increase in the demand for a good, if prices are not allowed to increase:

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there will be no incentive for firms to increase the quantity supplied of the good.

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In a city with rent-controlled apartments, all of the following are true except

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landlords have an incentive to rent more apartments than they would without rent control.

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Rent control is an example of

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a price ceiling.

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A price ceiling is a legally determined maximum price that sellers may charge.

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True

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In New York City, about 1 million apartments are subject to rent control by the local government. Rent control

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puts a legal limit on the rent that landlords can charge for an apartment.

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If a tax is imposed on a good,________.

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the equilibrium quantity of the good in the market falls

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The division of the burden of a tax between buyers and sellers in a market is called tax allocation.

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False; Tax Incidence

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If the sellers of a good are taxed for each unit sold, ________.

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a smaller quantity of the good is sold

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When the government taxes a good or service, it

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affects the market equilibrium for that good or service.

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The incidence of a tax depends on whether the government collects the tax from buyers or sellers.

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False

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

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False

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The incidence of a per-unit tax on a good is identical for buyers and sellers of the good if:

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the buyers and sellers of the good are equally sensitive to price changes.

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

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True

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For a given supply curve, how does the elasticity of demand affect the burden of a tax imposed on a product?

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The excess burden of the tax will be greater when the demand is more elastic than when it is less elastic.

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The demand curve for pizza in Foodieland is vertical. If a tax is imposed on each pizza bought, ________.

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the burden of the tax will fall entirely on the buyers

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Suppose the government imposes an 8 percent sales tax on clothing items and the tax is levied on sellers. Who pays for the tax in this situation? (Assume that the demand curve is downward sloping and that the supply curve is upward sloping.)

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The tax will be borne partly by consumers and partly by sellers.

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The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the

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demand curve for imported champagne is vertical.

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The person or firm that pays a tax bears the burden of the tax.

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False

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The deadweight loss of taxation on a good is higher if ________.

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the demand or the supply of the good is relatively price elastic

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If the production of a good involves negative externalities, ________.

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the optimal price of the good is higher than the price charged in the market

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Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

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the social cost of production

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When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society.

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True

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When there is a negative externality, the competitive output is greater than the economically efficient output level.

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True

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If there is pollution in producing a product, then the market equilibrium price

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is too low and equilibrium quantity is too high.

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A negative externality exists if

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the marginal social cost of producing a good or service exceeds the private cost.

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Which of the following conditions holds in an economically efficient competitive market equilibrium?

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There are no positive and no negative external effects from consumption and production.

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If negative externalities are present in a market, ________.

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the quantity supplied in the market is larger than the socially optimal level

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A market demand curve reflects the

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private benefits of consuming a product.

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What is a "social cost" of production?

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the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product

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

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A positive externality

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If the social benefit of consuming a good or a service exceeds the private benefit

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a positive externality exists.

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A positive externality ________.

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gives rise to external benefits

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

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an underproduction of the good.

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Which of the following is an example of a positive externality?

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planting trees along a sidewalk which add beauty and create shade

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Which of the following gives rise to a positive externality?

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Consumption of a drug to cure a communicable disease

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The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community. This is an example of a ________.

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positive externality

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Which of the following would result in a positive externality?

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Medical research results in a cure for malaria.

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Which of the following describes how a positive externality affects a competitive market?

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The externality causes a difference between the private benefit from consumption and the social benefit.

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When there is a positive externality

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the social benefit received by consumers is greater than the private benefit.

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Which of the following is an implication of the Coase Theorem?

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Government intervention is not always necessary to solve externality problems.

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The Coase theorem states that

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

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Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain then, according to the Coase theorem

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an efficient solution can be reached regardless of the initial assignment of property rights.

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The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

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transactions costs.

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Private solutions to the problem of externalities are most likely when

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transactions costs are low and the number of bargaining parties is small.

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For the Coase theorem to work there must be clear assignment of property rights.

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True

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Private solutions to externalities are most effective if ________.

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transaction costs associated with bargaining are low

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The Coase Theorem states that ________.

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negotiation between economic agents leads to an efficient allocation of resources

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If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered

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transactions costs.

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If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set

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equal to the marginal external cost at the economically efficient level of pollution.

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When the federal government orders firms to use particular methods to reduce pollution, it is said to be using

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command-and-control policies.

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Government imposed quantitative limits on the amount of pollution firms are allowed to produce is an example of

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a command-and-control approach to pollution reduction.

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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.

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command and control approach

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Which of the following is true?

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

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Consider the following methods of pollution reduction: a. the government sets a target for maximum emissions b. the government mandates the installation of specific pollution abatement equipment c. the government imposes a per unit tax on the good that creates pollution d. the government gives firms a tax rebate for every unit of pollution abated Which of the above is an example of a command-and-control approach to reducing pollution?

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a and b only

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A carbon tax which is designed to reduce pollution is an example of a

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market-based policy.

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The U.S. government has frequently used a "command-and-control" approach in dealing with pollution. Which of the following describes this approach?

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

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A Pigouvian tax is a tax designed to ________.

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induce producers generating negative externalities to reduce production

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Policies that mandate the installation of specific pollution control devices are called

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command-and-control policies.

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If a good is excludable, ________.

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people can be prevented from using the good

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Which of the following is an example of a product that is nonexcludable and rivalrous?

answer

free concert (with limited seating) in a park

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Public goods are ________ in consumption.

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non-excludable and non-rival

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A public good is a good that is both rival and excludable.

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False

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The free rider problem refers to a situation in which

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people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay.

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A product is considered to be rivalrous if

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your consumption of the product reduces the quantity available for others to consume.

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A quasi-public good differs from a public good in that unlike a public good, it is possible to keep those who do not pay for the quasi-public good from enjoying the benefits of the good.

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True

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A quasi-public good is similar to a public good in that one person's consumption of the quasi-public good does not reduce the amount available for everyone else.

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True

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A good is non-rival in consumption if ________.

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one person's use of the good does not preclude consumption by others

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The free-rider problem exists for goods that are ________.

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non - excludable

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The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

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True

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How does the construction of a market demand curve for a private good differ from that for a public good?

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The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good.

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For-profit producers will produce only private goods because

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buyers will be willing to pay for the goods since the benefits are excludable.

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Private producers have no incentive to provide public goods because

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once produced, it will not be possible to exclude those who do not pay for the good.

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One difference between the demand for a private good and that for a public good is that

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with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity.

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Haiti was once a heavily forested country. Today, 80 percent of Haiti's forests have been cut down, primarily to be burned to create charcoal. The reduction in the number of trees has lead to devastating floods when it rains heavily. This is an example of

answer

the tragedy of the commons.

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

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non-excludable but rival

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Overfishing leading to a rapid depletion of the stock of fish is an example of ________.

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the tragedy of the commons

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Which of the following exemplifies the tragedy of the commons?

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The Malaysian tapir, distinguished for its unusual coloration, is a target for poachers who hunt it for its tough and leathery hide.

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Which of the following is an example of a common resource?

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elephants in the wild

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The "tragedy of the commons" refers to the phenomenon where

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people overuse a common resource.

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A tragedy of the commons occurs when a resource is

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rival and non-excludable.

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

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The use of common pool resources above the socially optimal level

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Which of the following is an example of a common resource?

answer

sea otters in the coastal waters of the Pacific Ocean

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In England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was

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the area of pasture was nonexcludable and the consumption of the grass was rival.

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Governments grant patents to

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compensate firms for research and development costs.

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What is the difference between a public franchise and a public enterprise?

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A public franchise grants a firm the right to be the sole legal provider of a good or service. A public enterprise refers to a service that is provided directly to consumers through the government.

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For which of the following firms is patent protection of vital importance?

answer

pharmaceutical firms

question

In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole Foods and Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and Lunardi's close at 9 pm. Which of the following statements is true?

answer

Safeway has a monopoly at midnight but not during the day.

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In 2011, Microsoft filed a complaint with the European Commission accusing Google of taking steps to monopolize the Internet search engine business. Microsoft's primary complaint was that

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Google was using its dominant position as an Internet search engine to exclude competitors.

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A monopolist faces

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a downward-sloping demand curve.

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Few firms in the United States are monopolies because

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when a firm earns profits, other firms will enter its market.

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What type of protection does U.S. law grant the creator of a book, film or piece of music?

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A copyright, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death.

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A public franchise

answer

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

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Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

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Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

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Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit maximizing outputs?

answer

Marginal revenue is less than price.

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If a monopolist's price is $50 per unit and its marginal cost is $25, then

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Not enough information is given to say what the firm should do to maximize profit

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Because a monopoly's demand curve is the same as the market demand curve for its product

answer

the monopoly must lower its price to sell more of its product.

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To maximize profit a monopolist will produce where

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marginal revenue is equal to marginal cost.

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Compared to perfect competition, the consumer surplus in a monopoly

answer

is lower because price is higher and output is lower.

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The most profitable price for a monopolist is

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the price for which marginal revenue equals marginal cost.

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Relative to a perfectly competitive market, a monopoly results in

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a gain in producer surplus less than the loss in consumer surplus.

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A market economy benefits from market power

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if firms with market power do research and development with the profits earned.

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Economic efficiency in a free market occurs when

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the sum of consumer surplus and producer surplus is maximized.

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The Sherman Act prohibited

answer

collusive price agreements among rival sellers.

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Suppose an industry is made up of 25 firms, all with equal market share. The four-firm concentration ratio of this industry is

answer

16%

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The first important federal law passed to regulate monopolies in the United States was the

answer

Sherman Act

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A Herfindahl-Hirschman Index is calculated by

answer

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

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A possible advantage of a horizontal merger for the economy is that

answer

the merged firm might reap economies of scale which could translate into lower prices.

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In the United States, government policies with respect to monopolies and collusion are embodied in

answer

antitrust laws.

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A horizontal merger

answer

is a merger between firms in the same industry.

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Natural monopolies in the United States are generally regulated by

answer

local or state regulatory commissions.

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Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. If the income tax rate for the fourth household is higher than the income tax rate for the second household, it can be inferred that the government follows a ________ income tax system.

answer

Progressive

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The average tax rate is calculated as

answer

total tax paid divided by total income.

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Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. Which family pays the highest percentage of its income as tax if income taxes collected by the local government are regressive in nature?

answer

The First Household.

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Mr. Smith pays $20,000 annually as tax. If his annual income is $100,000, what is his average tax?

answer

20%

question

Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. If the fourth household pays the lowest percentage of its income as tax, it can be inferred that the government follows a ________ tax system.

answer

Regressive.

question

A study by the Congressional Budget Office (CBO) regarding the corporate income tax included the following statement: "A corporation may write its check to the Internal Revenue Service for payment of the corporate income tax, but the money must come from somewhere..." The comments that followed this statement argued that

answer

corporations pass on some of the burden of the tax to investors in the company, to workers, and to consumers.

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Which of the following is true of a progressive tax system?

answer

High income households pay a higher percentage of their income as taxes.

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A proportional tax is a tax for which people with lower incomes

answer

pay the same percentage of their incomes in tax as do people with higher incomes.

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One reason governments impose taxes is to ________.

answer

redistribute funds via transfer payments

question

In a ________ tax system, the marginal tax rate declines with income.

answer

Regressive

Econ Modules 5 – 8 – Flashcards

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