TEST BANK - Public Economics PDF

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Chapter 1 Test Questions Multiple Choice 1. A mixed economy is one in which a. both industrial and service sectors are important. b. both labor and capital contribute significantly to production. *c. both government and private firms play important economic roles. d. a centralized government controls economic activity and produces some military goods and some consumer goods. 2. Mercantilists believed that the government should *a. promote trade. b. own the means of production. c. follow a policy of laissez-faire. d. establish trade unions.

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3. The policy of laissez-faire was a. suggested by Karl Marx. *b. promoted by John Stuart Mill. c. invented by Lyndon Johnson. d. attacked by Adam Smith. 4. Which of the following is not a statement dealing with positive economics? a. Price supports lead to excess supply. b. The welfare system makes certain benefits available only to unmarried parents. c. Capitalism is associated with free markets. *d. Rent controls work best when rents are adjusted periodically. 5. An economic model tries to a. include in detail all known features of some part of the economy. b. show how a perfect economy would work. *c. reflect the important features of some part of the real economy. d. derive appropriate values for attacking a problem. 6. Which of the following is not a normative statement? a. The military budget should increase at the same rate as GNP. b. The government should play a limited economic role, ensuring that private contracts are enforced. *c. Integrated schooling has increased the level of literacy among minority groups. d. A tax on imported oil should be used to reduce the government deficit. 7. Economics is the study of scarcity. Public sector economics is the study of a. how to keep the public from being hurt by scarcities. b. how to keep the government sector as small as possible. *c. the government’s role in economic activity. d. how to raise revenues to finance public spending when public funds are scarce. 8. The invisible hand refers to *a. the coordination of activities through prices in a decentralized competitive economy. b. the safety net ready to catch people who fall under the poverty line. c. government intrusion in private affairs. d. the link between the “fingers” of government: federal, state, and local. 9. Which is not a difference between public and private enterprises?

a. Only government has compulsory power to finance operations with tax dollars. b. Government can seize property needed for operations. c. Leadership of government enterprises ultimately derives power from the electoral process. *d. Public enterprises are run without any regard for market conditions.

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10. A production possibilities curve shows *a. the combinations of goods an economy can produce, given its resources. b. the time lag between planning a product and completing its production. c. society’s preferred output mix as a function of market prices. d. the profit government could earn from alternative public enterprises. 11. Which of the following questions is much more important in public economics than in other areas of economics? a. What should be produced? *b. How should decisions be made? c. To whom are goods distributed? d. How should goods be produced? 12. A difference between normative and positive analysis is that a. only normative analysis is relevant for choosing among policy options. b. positive analysis deals with facts and cannot be a source of disagreement. *c. positive analysis is descriptive whereas normative analysis is evaluative. d. normative analysis is ignored by economists because they have no expertise in making value judgments. 13. Controlled experiments are most useful in scientific inquiry when they can a. be consistent with most competing theories. *b. contradict all competing theories but one. c. replicate entirely the complexity of the real world. d. take advantage of unique circumstances that do not allow the experiment to be repeated.

True or False 14. There have been few major changes in views concerning the responsibility of government during the past 50 years. (F) 15. Adam Smith argued that the government should take an active role in promoting trade and industry. (F)

16. The mercantilists argued that the profit motive led firms to produce, as if by an invisible hand, what was most desired in the best possible way. (F) 17. Changes in technology will alter the production possibilities schedule. (T)

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18. Privatization is the process by which governments sell public enterprises to the private sector. (T) 19. Government can always improve the private market through public intervention. (F) 20. Economists only disagree about their values, and never about how the economy behaves. (F) 21. Positive statements are those about which all economists agree.

(F)

22. Normative economics entails value judgments regarding the desirability of alternative policy options. (T)

Chapter 2

Test Questions Multiple Choice 1. In the United States, production by federal, state, and local government a. is banned under the Constitution (except for printing money). b. exceeds the levels in Western Europe through U.S. nationalization of private enterprises. c. never competes directly with private firms. *d. can include electricity, education, and garbage collection. 2. A federal structure is one in which government a. is mostly conducted at a national level. b. is run by both elected and appointed officials. *c. divides power among national, state, and local jurisdictions. d. divides power among judicial, legislative, and executive branches. 3. The number of local governmental entities in the United States is roughly a. 850. b. 8,500. *c. 85,000. d. 850,000. 4. Which of the following is not primarily under the jurisdiction of the federal government? a. National defense *b. Education c. Regulation of interstate commerce d. The post office 5. In the United States, the most expensive set of direct subsidies goes to a. banks and credit unions. *b. agriculture. c. near-bankrupt corporations. d. textiles. 6. The value of annual total government purchases is approximately a. zero. b. $100 million. c. $2.0 billion. *d. $5.0 trillion.

7. Import quotas are, in effect, subsidies for domestic a. producers paid by foreign producers. *b. producers paid by domestic consumers. c. governments paid by foreign producers. d. consumers paid by the domestic government.

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8. A tax expenditure is *a. revenue forgone through special provisions in the tax code. b. the hidden cost of resources devoted to tax compliance. c. money paid to corporations that declare negative net income. d. revenue forgone through tax evasion. 9. Public expenditures in the United States are roughly a. 10 percent of GDP. b. one-quarter of GDP. *c. 40 percent of GDP. d. one-half of GDP. 10. The rapid growth in government expenditures in the last 45 years is largely accounted for by a. defense spending. b. agricultural subsidies. c. public assistance. *d. social insurance. 11. A tax that has played a decreasingly important role in raising federal revenues since the 1920s is the a. payroll tax. *b. corporation income tax. c. personal income tax. d. property tax. 12. Which is not a significant source of revenue for state and local government? *a. Payroll taxes b. Income taxes c. Sales taxes d. Property taxes 13. The Constitution forbids the federal government from levying a. import taxes. *b. export taxes. c. head (or “capitation”) taxes. d. uniform taxes. 14. A capital account for the government would show

*a. its assets and financial liabilities. b. the cumulative effect of budget deficits. c. whether the government was operating at a profit. d. the cumulative effect of trade deficits.

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15. Which of the following would not reduce the budget deficit or would not increase the budget surplus? a. Raising income taxes *b. Switching from direct expenditures to tax expenditures c. Selling the Library of Congress d. Cutting social security payments 16. In Western economies, which of the following industries is least likely to be operated or controlled by government? *a. Agriculture b. Broadcasting c. Railroads d. Telecommunications 17. Federal employment, as a percentage of all employment, began to decline in the 1970s. To know whether this signaled a philosophical move toward smaller government, what additional information would you want? a. How state and local government employment changed b. How much of the federal decline in employment was due to the postVietnam reduction in military personnel c. Whether federal employment rose in absolute numbers *d. All of the above 18. Including the armed forces, public employees represent what percentage of total employment? *a. Between 10 and 20 percent b. Between 20 and 30 percent c. Between 30 and 40 percent d. Over 40 percent 19. Constant dollars a. represent a conservative monetary policy. *b. are an accounting invention to remove the effects of inflation from comparisons over time. c. reflect the changing value of the dollar over time under a constant rate of inflation. d. represent a liberal monetary policy.

Chapter 3 Test Questions Multiple Choice 1. In Adam Smith’s work, the invisible hand is a metaphor for a. self-interest. b. the profit motive. c. government enforcement of contracts. *d. coordination through market prices. 2. The first fundamental theorem of welfare economics states: a. Pareto improvements lead to increased competition. *b. Competitive markets lead to a Pareto efficient allocation. c. No one can be made better off without someone is being made worse off. d. Competitive markets lead to externalities and information problems. 3. The second theorem of welfare economics states that any particular point on the utilities possibility frontier can be reached if the government will *a. redistribute income properly to begin with. b. leave the competitive system alone. c. equalize people’s marginal rates of substitution. d. adopt a utilitarian social welfare function. 4. The theorems on welfare economics do not imply which statement about the usefulness of social planners in a competitive economy? a. They cannot increase efficiency. *b. They cannot decrease equity. c. They can choose among Pareto optima by redistributing resources initially. d. If they only care about efficiency, they should find new jobs. 5. Which is not a true comparison between the concepts of Pareto improvement and Pareto efficiency? a. Pareto improvement refers to a reallocation while Pareto efficiency refers to an allocation itself. b. The existence of a potential Pareto improvement implies that the economy is Pareto inefficient. *c. A Pareto improvement must lead to a Pareto efficient allocation. d. A movement from one Pareto efficient point to another is never a Pareto improvement.

6. The marginal rate of substitution is the slope of a. a budget line. b. a utility possibilities curve. *c. an indifference curve. d. a production possibilities curve.

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7. The marginal rate of transformation is the slope of a. a budget line. b. a utility possibilities curve. c. an indifference curve. *d. a production possibilities curve. 8. Efficiency requires that, in equilibrium, a. everyone chooses to work. b. for every person, the marginal rate of substitution between two goods equals his or her marginal ability to transform one into the other. *c. for any two goods, the marginal rate of substitution equals the marginal rate of transformation. d. markets are competitive. 9. Which is not a basic condition for Pareto efficiency? a. Product mix efficiency *b. Government efficiency c. Exchange efficiency d. Production efficiency 10. Exchange efficiency, as demonstrated in an Edgeworth-Bowley Box, requires that for any two goods, *a. their marginal rates of substitution are equal for all consumers. b. their lines cross at the equilibrium. c. their indifference curves face the same direction. d. not all resources are consumed. True or False 11. A resource allocation is a Pareto improvement if at least one person is made better off and no one is made worse off. (T) 12. The Pareto principle states that economists should help the central planner control the economy so everyone is made better off. (F) 13. Consumer sovereignty means that consumers can demand anything they want and the government will deliver it for them. (F) 14. An indifference curve between guns and butter gives those combinations of guns and butter among which an individual is indifferent. (T) 15. Each individual’s preferences are represented by a single indifference curve. (F)

16. Changes in taste will alter an individual’s indifference curve.

(T)

17. Market efficiency requires an equilibrium where the marginal benefit exceeds the marginal cost. (F) 18. The marginal rate of transformation reveals how many of one good can be gained by producing 1 unit less of another good. (T)

Chapter 4

Test Questions Multiple Choice 1. Increasing returns to scale or declining average cost cause market failure because a. one firm makes infinite profit. b. there is no such thing as a big enough firm. *c. there is a tendency for such markets to become monopolized. d. marginal rates of transformation tend toward zero. 2. The welfare loss from monopoly can be seen from the difference in equilibrium between a. marginal revenue and marginal benefit. b. marginal revenue and marginal cost. *c. marginal cost and marginal benefit. d. supply and demand. 3. Which is not necessarily true of a public good? a. It costs nothing to let an additional person consume it. b. It costs a lot to keep an additional person from consuming it. *c. It is supplied by the public sector. d. It can be a negative thing, that is, a “public bad.” 4. Charging a toll on a crowded bridge can *a. help to correct a negative externality. b. be a positive externality, because people do not wait so long once there is a toll. c. interfere with competitive efficiency. d. be a public good, since my paying the toll does not keep you from paying the toll as well. 5. The market failure referred to as incomplete markets is the failure of a. all people to demand all goods. b. some goods to be demanded because their competitive prices are too high. c. some goods to be provided because their prices are too low. *d. some goods to be provided even though benefits would exceed costs. 6. Adverse selection is the phenomenon where a. people select the wrong indifference curve.

*b. charging a higher insurance premium to cover the costs of risk actually leads to the situation in which only the most risky buy the insurance, and this causes that market to fail. c. information is withheld from the government so it cannot make the necessary selection of the correct amount of public good to produce. d. it is not possible to have a Pareto improvement, no matter how the government selects the initial distribution of income.

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7. The provision of merit goods does not reflect a. a respect for government paternalism. b. the presence of a social welfare function. c. a dissatisfaction with the outcomes of consumer behavior. *d. a respect for consumer sovereignty. 8. A strictly positive approach to economic analysis would *a. describe the likely consequences of government policy. b. accept only social welfare functions that weighed everyone equally. c. fail to capture the effects of providing merit goods. d. overlook negative externalities. 9. Examples of government intervention to correct the imperfect information market failure do not include a. requiring disclosure of information about food labeling. b. providing information about weather. *c. revealing demand curves in competitive markets. d. financing research and development. True or False 10. To fix a complementary markets problem, the only solution for the government is to create the missing market. (F) 11. The only type of externality that causes a market failure is a negative externality. (F) 12. Examples of incomplete markets include insurance against flood damage or health insurance for the elderly. (T) 13. High and prolonged unemployment in the economy is always seen as an efficient equilibrium where there are just too few jobs. (F) 14. A belief that government should compel individuals to consume certain goods is associated with libertarianism. (F) 15. Natural monopolies cannot be regulated by the government.

(F)

Chapter 5 Test Questions Multiple Choice 1. A good is termed a “collective consumption good” if each unit produced can be consumed by all members of society (in contrast to, say, a hamburger which if eaten by one person cannot be eaten by anyone else). What is the relationship between a pure public good and a collective consumption good? *a. All public goods are collective consumption goods. b. All collective consumption goods are public goods. c. Some public goods are collective consumption goods and some are not. d. Collective consumption goods are never public goods but they are often publicly provided. 2. The free rider problem refers to people who a. will only consume a public good if it is free. b. for efficiency’s sake, should be allowed to consume public goods (such as mass transit) even if they do not pay. *c. will not voluntarily pay for a public good even though they would benefit from its provision. d. are not willing to pay for a public good because they lack information about its potential benefits.

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3. Which is not true of a public good? a. Excluding people from consuming it is not generally desirable. *b. Public provision will assure an efficient quantity is produced. c. Private provision will lead to too low a level of provision. d. Excluding people from consuming it is not generally feasible. 4. Efficient private provision of pure public goods is difficult because a. too much will be demanded as each consumer is forced to buy his or her own units of the public good. b. too little will be demanded because private provision leads to higher marginal costs than public provision. c. too much will be produced as firms compete with each other for the public’s dollars. *d. too little will be demanded as, individually, consumers choose not to pay the full cost of units of the good. 5. If a private good is publicly provided at a zero price, it a. becomes a public good because everyone can consume as much as desired and no one is excluded. *b. will be overconsumed as marginal benefits are driven to zero. c. will be underconsumed because marginal benefits are zero. d. will be consumed to the point where marginal benefits equal marginal costs of production. 6. Which of the following is not a rationing device for publicly provided private goods? a. Queuing b. Setting a positive price c. Uniform provision *d. Free riding 7. An impure public good is a good a. that is not considered unanimously to serve the public interest. *b. that to some degree has a characteristic of a private good. c. whose provision is inefficient because of free riders. d. that is both publicly and privately provided. 8. Demand curves for public goods are found by *a. adding individuals’ demand curves vertically.

b. adding individuals’ costs from their demand curves and summing vertically. c. majority voting only. d. adding individuals’ demand curves and subtracting out those individuals who will be free riders.

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9. Of the four goods listed below, which bears the least resemblance to a pure public good? a. A radio broadcast b. An outdoor concert c. A recital *d. A record album 10. Which of the following is not a global public good? a. Global environment b. Global health c. Global knowledge *d. Global business e. Global security 11. A decentralized economy has trouble providing an efficient level of public goods because a. the government must prod...