MindTap Direct from text HW Chapter 1 – Flashcards
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Governments may intervene in a market economy in order to a) protect property rights. b) correct a market failure due to externalities. c) achieve a more equal distribution of income. d) All of the above.
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d In addition, although the invisible hand can often guide market participants to a desirable market outcome, sometimes government intervention is necessary to correct for market failures. This term refers to a situation in which the market on its own will fail to produce an efficient allocation of resources. One example of a market failure is an externality; this occurs when one person's action inadvertently affects another person's well-being. Finally, the efficient outcome attained by the invisible hand doesn't necessarily result in equality among its participants. Depending on your political philosophy, this disparity in economic well-being may lead you to believe that government intervention is necessary. See Section: Principle 7: Governments Can Sometimes Improve Market Outcomes.
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If a nation has high and persistent inflation, the most likely explanation is
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the central bank creating excessive amounts of money. The usual suspect in cases of large or persistent inflation is growth in the quantity of money. When a government's central bank creates large quantities of money, the value of that money falls, causing prices to rise and resulting in inflation. See Section: Principle 9: Prices Rise When the Government Prints Too Much Money.
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The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, you (should/ Should not) Correct go ahead and do so. The most you should pay to complete development is ($5million/$3million.)
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Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $1 million, whereas the expected additional benefit of the new product is $3 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should go ahead and finish the product. In fact, your company should be willing to pay up to $3 million to finish development since that is the marginal benefit from doing so. See Section: Principle 3: Rational People Think at the Margin.
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The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he receives in Social Security benefits is typically reduced. The provision of Social Security gives people the incentive to save (more/less) while working. Moreover, the reduction in benefits associated with higher earnings gives people the incentive to (work/not work) past age 65.
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The provision of Social Security benefits lowers an individual's incentive to save for retirement because it provides income to retired individuals once they've reached age 65. This means that even if an individual hasn't been saving for retirement while working, he can still count on Social Security benefits to support himself through the retirement years. Moreover, because a person gets fewer after-tax Social Security benefits the greater his earnings are, there is also an incentive not to work (or not work as much) once he has hit the retirement age of 65. See Section: Principle 4: People Respond to Incentives.
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A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only 2 years of benefits. This change gives people the incentive to find a job (less/more) quickly than if welfare benefits lasted forever. The loss of benefits after 2 years will result in the distribution of income becoming (more/less) equal. In addition, the economy will be (less/more) efficient because of the change in working incentives.
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If welfare benefits lasted forever, there would be little incentive to find work once unemployed. However, by only lasting for 2 years, there is a greater incentive for people to find work before the 2 years are up at which point they would receive no financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient given the increased incentive for the unemployed to find work and contribute to the nation's output. See Section: Principle 4: People Respond to Incentives.
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