Microeconomics Exam Test – Flashcards
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Welfare Economics
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The study of how the allocation of resources affects economic well-being
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Which of the Ten Principles of Economics does welfare economics explain most fully?
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Markets are usually a good way to organize economic activity.
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Willingness to Pay
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The maximum amount a consumer will pay for a product/service
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Consumer surplus
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Amount a consumer is willing to pay minus the amount the consumer actually pays
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To fully understand how taxes affect economic well-being, we must
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Compare the reduced welfare of buyers and sellers to the amount of revenue the government raises
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To fully understand how taxes affect economic well-being, we must compare the
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Decrease in total surplus to the increase in revenue raised by the government
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What happens to the total surplus in a market when the government imposes a tax?
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Total surplus decreases
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If a tax shifts the supply curve downward, we can infer that the tax was levied on
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We cannot infer anything because the shift described is not consistent with a tax
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The term market failure refers to
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A market that fails to allocate resources efficiently
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Research into new technologies
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Provides positive externalities because it creates knowledge others can use
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If a product creates a positive externality, what is the relationship between the equilibrium quantity and the socially optimal quantity?
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The equilibrium quantity is less than the socially optimal quantity
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Relying on voluntary compliance to deal with negative externalities
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Is not an effective method to reduce externalities
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Excludability/Rival A cheeseburger is
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Excludable and rival in competition
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If a local government puts in a public fireworks display, it is
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A public good
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An overcrowded beach is an example of
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A tragedy of the commons
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One of the least regulated common resources today is
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The ocean
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The government finances the budget deficit by
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Borrowing from the public
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An efficient tax system is one that imposes small
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Deadweight losses and administrative burdens
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When interest income from savings is taxed
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People will save less than they would without the tax
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Tax avoidance is _____ Tax evasion is ______
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Legal, illegal
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Lump-sum tax imposes a minimal administrative burden on tax payers for what reasons
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Everyone can easily compute the amount of tax owed There is no benefit to hiring an accountant to do your taxes Everyone owes the same amount of tax, regardless of earnings
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The benefits principle is used to justify
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Taxes such as gasoline taxes
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Vertical equity in taxation refers to the idea that people
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In unequal conditions should be treated differently
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Elastic/inelastic Smaller dead weight loss
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Inelastic (both supply & demand)
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Marginal tax rate
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Extra taxes paid in additional dollars of income
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Average tax rate
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Total tax rate / total income
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Benefits principle
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Those who benefit, pay
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Vertical equity
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Greater ability to pay, greater proportion of taxes
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Horizontal equity
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All households w/ similar ability to pay, pay similar amounts
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Social cost
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Private cost + external cost
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Negative externality graph
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Optimal level of production is greater than equilibrium quantity
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Positive externality graph
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Optimal level of production is less than equilibrium quantity
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Social value
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External benefit
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Private solutions to externalities
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Moral code/social sanction Charity Coase theorem Public policy solutions
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Coase theorem
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If there are property rights, if there are a small number of people are impacted, and if transaction costs are low, then bargaining can solve the externality
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Public policy solutions
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Regulation (command/control) Market based solution
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Market-based solutions
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Corrective taxes and subsidies Tradeable pollution permits
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Private goods
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Excludable and rival in consumption
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Public goods
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Non-excludable and non-rival in competition
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Common resources
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Non-excludable and rival in consumption
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Excludable
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We can prevent someone from consuming the good
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Rival in consumption
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One person's consumption does decrease another person's ability to consume
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No way to use demand analysis to determine willingness to pay
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Public goods
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Free rider problem
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Public goods
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Tragedy of the commons
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Common resources The depletion of a shared resource by individuals, acting independently and rationally according to each one's self-interest
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Elasticity greater than 1
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Elastic
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Elasticity less than 1
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Inelastic
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Equation for elasticity
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[(Q2-Q1)/Q average]/[(P1-P2)/P averagr]
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Cross elasticity of demand
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% change in Qa/% change in Pb + substitute - complement
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Income elasticity
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% change Qa/% change income + normal good - inferior good
