Deck 23: Microeconomic Policy, Economic Reasoning, and Beyond

Question 1

Courts often estimate the value of human life on the basis of a person's earnings over that person's remaining life span.

Answer 1

True

Question 2

Failure of market outcomes can occur even when the market is functioning properly.

Answer 2

True

Question 3

The positive contribution of politics in the determination of economic policy is that it takes market failures and failures of market outcome into account in formulating policy.

Answer 3

True

Question 4

A Pareto optimal policy improves:

A)the welfare of Pareto.
B)the welfare of more people than it hurts.
C)the welfare of at least 50 percent of the population.
D)everyone's welfare.

Question 5

Economists' suggestions for social policy are determined by subjective value judgments as well as by objective economic analyses.

Question 6

If a policy is Pareto optimal:

A)it will hurt no one.
B)it will hurt less than 50 percent of the population.
C)it will hurt more than 50 percent of the population.
D)some of the losses will exceed the gains.

Question 7

Public choice economists point out that when the government enters into the market, the incentive is to achieve its goal in the least-cost manner.

Question 8

Usually policy makers ask advice from economists whose values are very different from their own.

Question 9

Which of the following is one of the reasons economists sometimes differ in their views on social policy?

A)Economists' subjective value judgments will differ.
B)Most so-called economists have received no formal training.
C)Different models focus on the same aspects of a problem.
D)Empirical evidence is so precise that there is little room for different interpretations.

Question 10

People make decisions every day that reflect a finite (as opposed to infinite)valuation of their own lives.

Question 11

Government intervention may create more problems than it is designed to solve.

Question 12

Pareto optimal policies are almost nonexistent in the real world.

Question 13

Public choice economists use models that focus on economic incentives as applied to politicians.

Question 14

Liberal and conservative economists agree more often on policy prescriptions than most noneconomists think they do.

Question 15

One issue with using lifetime earnings as a proxy for human life is that it treats upper-income jobs and hence individuals in those jobs as more valuable than lower-income individuals.

Question 16

Most economists would agree that each human life is beyond price.

Question 17

Economists deduce the value people place on their own lives by looking at what people will pay to reduce the probability of death.

Question 18

A liberal economist would never recommend that policy makers cut union wages.

Question 19

Which of the following is one of the reasons economists sometimes differ in their views on social policy?

A)Economists' subjective value judgments tend to be very similar.
B)Most so-called economists have received no formal training.
C)Different models focus on different aspects of a problem.
D)Empirical evidence is so precise that there is little room for different interpretations.

Question 20

Using earnings potential in court cases to place a value on human life implies that a person who earns a high income is more valuable than a person who earns a low income.

Question 21

Public choice economists focus on:

A)how the invisible hand achieves harmony and equilibrium through the market.
B)the tensions among social classes.
C)economic incentives faced by politicians.
D)cultural and historical aspects of the market.

Question 22

When Marxist economists look at labor markets, they:

A)capture the same aspects of reality that are captured by other economists.
B)focus on the tensions among social classes and generally see exploitation of workers by capitalists.
C)generally see supply and demand forces leading to equilibrium.
D)see individuals using government to protect their monopolies.

Question 23

Both liberal and conservative economists believe that:

A)people are little influenced by sociological effects.
B)they have nothing in common.
C)economic incentives are important.
D)that people make choices without reasoning.

Question 24

Pareto optimal policies will improve life for:

A)some people while hurting no one.
B)some people while hurting others.
C)at least 75 percent of the population.
D)at least half the population.

Question 25

Economists are trained to be as:

A)subjective as they can be.
B)objective as they can be.
C)deconstructionist as they can be.
D)opinionated as they can be.

Question 26

Economic models generally:

A)focus on all important aspects of economic reality.
B)reflect certain value judgments, since they must focus on certain aspects of economic reality and not on others.
C)do not involve value judgments because they are purely mathematical.
D)are close representations of real-world economic reality.

Question 27

Many economists, both liberal and conservative, were critical of much of the early environmental legislation. An important reason for the economists' critique was that economists:

A)thought the goals of the legislation were wrong.
B)worried that the costs sometimes were greater than the benefits.
C)trusted the market to solve all problems of resource use.
D)worried about fairness of regulations more than noneconomists did.

Question 28

One reason economists have many different views on social policy is that:

A)economic policy is an exact science.
B)policy proposals must be based on precise evidence.
C)policy proposals are based on various models that focus on different aspects of a problem.
D)economic policy cannot involve value judgments.

Question 29

Mainstream economists focus on:

A)how the invisible hand achieves equilibrium through the market.
B)the tensions among social classes.
C)political restrictions that provide rents to various groups.
D)cultural and historical aspects of the market.

Question 30

When public choice economists look at labor markets, they:

A)capture the same aspects of reality that are captured by other economists.
B)focus on the tensions among social classes and generally see exploitation of workers by capitalists.
C)generally see supply and demand forces leading to equilibrium.
D)see individuals lobbying politicians to protect their monopolies.

Question 31

In discussing government policy regarding foreign trade, an economist stresses the power that big U.S. corporations have over people in poor countries, a power that they can use to exploit the poor. This way of seeing the world is most compatible with:

A)mainstream economics.
B)Marxian economics.
C)public choice economics.
D)right-wing economics.

Question 32

The main reason the usefulness of Pareto optimal policies is limited as a policy guide is that:

A)it is too subjective.
B)it is only objective, and good policy also requires a subjective element.
C)real-world changes in which no one is harmed are rare or nonexistent.
D)real-world changes in which more people are helped than are harmed are rare.

Question 33

The primary problem with estimating elasticity of demand is that:

A)data on the prices firms charge are unavailable.
B)data on the quantities firms sell are unavailable.
C)real-world changes in quantity demanded are the result of changes in price only.
D)real-world changes in quantity demanded are the result of changes in many variables other than price alone.

Question 34

What do economists mean when they say a situation is Pareto optimal?

A)It is fair and equitable.
B)Any change that helps someone will harm someone else.
C)There are no changes that can help anyone.
D)It is a situation produced by market processes.

Question 35

Policy makers with conservative values usually ask for policy recommendations from:

A)"conservative" economists.
B)"liberal" economists.
C)both "liberal" and "conservative" economists.
D)all economists.

Question 36

Two economists are debating whether to remove a tariff on luxury vehicles. They agree that consumers will benefit by $5 billion and that the harm done to domestic businesses and workers will be only $4 billion. One argues that these facts make it obvious that the tariff should be removed. The other disagrees. What would be a likely reason for the second economist to disagree?

A)There is no good reason because the benefits outweigh the costs.
B)He or she is using a different economic model to understand the world.
C)He or she has a different interpretation of the empirical evidence.
D)He or she has different value judgments about the weights that should be put on the benefits and costs.

Question 37

Suppose two economists disagree about whether a particular tax cut is a good policy. The economist supporting the cut believes that it will increase economic growth. The other economist opposes it because he thinks it will have no effect on growth. The source of their disagreement in this case is most likely due to different:

A)value judgments.
B)interpretations of empirical evidence.
C)interpretation of Pareto optimality.
D)levels of coldheartedness.

Question 38

In prisoner-of-war camps during World War II, the prisoners received identical packets of food and supplies. Nonetheless, prisoners traded items from those identical packets because their tastes differed. The initial distribution of packets was:

A)Pareto optimal because the packets were identical.
B)Pareto optimal because there was no fairer system.
C)not Pareto optimal because improvements were possible.
D)not Pareto optimal because improvement was not possible.

Question 39

One reason mainstream economists see the world differently than do noneconomists is that economists tend to stress the importance:

A)that incentives have on choices.
B)of fairness.
C)of power and how it leads to exploitation.
D)of the limited competence of individuals to know what is good for themselves.

Question 40

Which of the following statements is true?

A)Liberal and conservative economists differ less often than laypeople think they do.
B)Conservative economists focus on incentives, and liberal economists do not.
C)Liberal economists focus on individual choice, and conservative economists do not.
D)Most economists discredit individuals' abilities to choose reasonably.

Question 41

Suppose a radar-activated braking system that can help prevent crashes is an option on a new car. It costs $600 and reduces the chance of dying in an auto accident by 1/700. The implicit value placed on life by a person who does not have the system installed is therefore:

A)exactly $600.
B)less than $420,000.
C)at least $420,000.
D)at least $432,000.

Question 42

The U.S. government does not allow toggle switches for power windows in automobiles. The National Highway Traffic Safety Administration found that the regulation will save about two children every three years and have negligible costs because the industry will have plenty of time to incorporate new switches into future vehicles. Evaluating this rule in terms of costs and benefits, an economist most likely would conclude that:

A)it is a good decision because the benefits exceed the costs.
B)it fails because it should take effect immediately, not after four years.
C)it is a bad decision because the chances of a child dying (less than one per year)are so small that they can be ignored.
D)we cannot tell if it is a good decision without knowing the ages of the children who might be saved by the regulation.

Question 43

A government airline safety regulation reduces the probability of a fatal airline crash by 0.005. If the costs associated with each airplane crash are equal to $600 million and the costs of performing more frequent safety inspections equal $4 million, the regulation is:

A)cost-effective because the marginal cost is $4 million and the marginal benefit is $600 million.
B)not cost-effective because the marginal cost is $4 million and the marginal benefit is $1 million.
C)cost-effective because the marginal cost is $3 million and the marginal benefit is $4 million.
D)not cost-effective because the marginal cost is $4 million and the marginal benefit is $3 million.

Question 44

Most economists agree that the best way to evaluate policy is to:

A)learn if the policy can be determined through a democratic political process, not simply imposed by a bureaucracy.
B)determine whether the public thought that the government had done all it could do to solve the problem.
C)know whether the intentions behind the policy were good intentions.
D)compare the actual benefits of the policy with the actual costs.

Question 45

Suppose a radar-activated braking system that can help prevent crashes is an option on a new car. It costs $600 and reduces the chance of dying in an auto accident by 1/700. The implicit value placed on life by a person who has the system installed is therefore:

A)exactly $600.
B)less than $420,000.
C)at least $420,000.
D)at least $432,000.

Question 46

The cost/benefit approach that economists agree on requires an economist to determine a quantitative cost and benefit for:

A)only tangible items.
B)everything but life.
C)everything, including life.
D)everything, including life but not potential lives.

Question 47

A government airline safety regulation reduces the probability of a fatal airline crash by 0.005. If the costs associated with each airplane crash are equal to $600 million, the regulation has an expected marginal benefit of at least:

A)$600,000.
B)$1,000,000.
C)$2,000,000.
D)$3,000,000.

Question 48

Basing decisions on marginal cost and marginal benefit means that people should:

A)take no chances.
B)make only Pareto optimal choices.
C)weigh the costs and benefits and make the choice that provides the highest net benefit.
D)weigh the costs and benefits and make the choice that provides the highest net cost.

Question 49

If a person would buy equipment with safety features that cost $100 extra and those features reduce the chance of having a fatal accident by 1/500, the person is implicitly valuing his or her life at a minimum of:

A)$5.
B)$5,000.
C)$50,000.
D)$500,000.

Question 50

Which of the following statements is true?

A)People regard human life as priceless when making choices involving risk.
B)Only economists behave as if life has a finite value.
C)Economists calculate the value of life on the basis of the cost of dying.
D)People make decisions every day that reflect the valuations they place on their own lives.

Question 51

A person will pay $1,000 (and not more)extra for a bigger car that he or she feels is safer. This car will reduce the chance of dying in an automobile accident by 1/550. That means that the buyer is implicitly valuing his or her life at roughly:

A)$5,500.
B)$55,000.
C)$550,000.
D)$5,500,000.

Question 52

A government policy maker is trying to decide which of four methods of reducing highway noise in a residential area should be implemented. She is looking at these four options: $$\begin{array} { | c | c | c | } \hline \text { Plan } & \text { Benefits } & \text { Custs } \\\hline \text { A } & \$ 500,000 & \$ 490,000 \\\hline \text { B } & \$ 550,000 & \$ 530,000 \\\hline \text { C } & \$ 570,000 & \$ 540,000 \\\hline \text { D } & \$ 600,000 & \$ 580,000 \\\hline\end{array}$$ If she uses the cost/benefit logic of economics, which plan will she propose?

A)Plan A
B)Plan B
C)Plan C
D)Plan D

Question 53

Direct shipment of wine to individuals is illegal. Some wineries want the law revoked. They argue that the ability to ship directly to consumers helps small wineries and that shipping bans unfairly protect home-state wineries, raising prices to consumers. Others argue that the bans allow states to collect tax revenues and to keep wine from being sold to minors. What would most economists say about whether this ban should stay or be eliminated?

A)Because there would be people harmed, lifting the ban would not be Pareto optimal. Therefore, eliminating the ban is a bad policy.
B)Economists would argue that competition is good and the ban prevents competition. Therefore, the ban should be lifted.
C)Lifting the ban would make taxes less equitable. Therefore, the ban should remain.
D)There are benefits to lifting the ban but also costs, and unless we know these costs and benefits, we cannot decide.

Question 54

Suppose a person can play the lottery for $1.00. His chance of winning $25 million is 1 in 50 million. If there are no other costs or benefits involved, the logic of cost/benefit analysis says:

A)he should play the lottery.
B)he should not play the lottery.
C)he should play only if he does not have a self-control problem with gambling.
D)there is not enough information to decide whether he should play.

Question 55

Performing cost/benefit analysis involves:

A)quantifying the costs and benefits associated with a given activity and deeming the activity worthwhile only if the costs exceed the benefits.
B)quantifying the costs and benefits associated with a given activity and deeming the activity worthwhile only if the benefits exceed the costs.
C)only those activities that provide an explicit monetary loss and gain.
D)only those activities that provide an implicit monetary loss and gain.

Question 56

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. It is expected that 180 deaths will occur if the gas tank location is not redesigned. Failure to redesign the gas tank location therefore implies that the automobile company is implicitly valuing human life at:

A)exactly $500,000.
B)more than $736,889.
C)less than $736,889.
D)more than $1,000,000.

Question 57

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. It is expected that 180 deaths will occur if the gas tank location is not redesigned. If a human life can be valued at $500,000, the expected benefit of redesigning the location of the gas tank is:

A)$90,000,000.
B)$900,000,000.
C)$5,500,000.
D)$550,000,000.

Question 58

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. The automobile company places a value on life of $500,000. To justify redesigning the location of the gas tank, the number of deaths expected to occur if the gas tank location is not redesigned would have to be at least:

A)1.
B)100.
C)175.
D)275.

Question 59

Assume that running in a marathon increases a person's risk of dying from almost negligible to about 1 in 50,000. If people know this risk and still choose to run marathons, economists would most likely conclude that people:

A)are irrational.
B)place no value on their lives.
C)place a finite value on their lives.
D)have self-control problems.

Question 60

A proposal to build a dam on a wild river may look like a good idea from the cost/benefit study done by the Army Corps of Engineers, but an analysis done by the Sierra Club might suggest that the dam would be a complete waste of money. Differences in cost/benefit studies such as this are expected because:

A)at least one side is definitely making mistakes in the analysis.
B)at least one side is trying to deceive the public.
C)cost/benefit studies describe what people want to happen, not what will actually happen.
D)items that do not have market prices, such as the environment, are very difficult to value objectively.

Question 61

A proposal to build a dam on a wild river may look like a good idea from the cost/benefit study done by the Army Corps of Engineers, but an analysis done by the Sierra Club might suggest that the dam would be a complete waste of money. When different groups give us radically different cost/benefit results:

A)we have an example of how cost/benefit analysis does not work as a way of forming policy.
B)the studies may still be useful if we can see the underlying assumptions and estimates of each group.
C)we should realize that sometimes it is best to trust in the political process rather than try to use an economic approach.
D)we should conclude that the best way to decide who is telling the truth is to find which group has the best intentions.

Question 62

The long-run market solution to a wage that is so low that workers cannot survive is:

A)the reallocation of property rights, reducing the wage of some but increasing the wage for those earning a below-subsistence wage.
B)the reallocation of scarce resources to those who need it the most.
C)the starvation of some low-wage workers until the supply of labor shifts to the left and the wage for survivors increases to above subsistence.
D)government intervention into the market to establish a minimum wage so that all workers earn at least a subsistence wage.

Question 63

If resources are allocated efficiently in a market economy:

A)the way final goods and services are distributed does not matter to society.
B)the outcome may not be socially desirable if distributional issues are also important.
C)the outcome will always be socially desirable.
D)each person's utility is maximized, and so the result is Pareto optimal.

Question 64

Failure of market outcomes occurs when:

A)there are market failures such as externalities.
B)there are no market failures but the market is not achieving society's goals.
C)the market outcome is not efficient.
D)the market outcome is not Pareto optimal.

Question 65

When workers earn below-subsistence wages in a free market economy, some workers will starve. As a result, the supply of labor curve will shift:

A)rightward, causing the wage to fall further.
B)rightward, causing the wage to rise.
C)leftward, causing the wage to fall further.
D)leftward, causing the wage to rise.

Question 66

When society achieves economic efficiency, it is:

A)maximizing producer surplus but not consumer surplus.
B)maximizing consumer surplus but not producer surplus.
C)producing a specified amount of output at the highest possible cost.
D)producing a specified amount of output at the lowest possible cost.

Question 67

The most likely reason politicians don't appear to economists to look at policy issues in a cost/benefit framework is that:

A)politicians are not economists.
B)politicians don't make rational decisions.
C)the marginal costs and marginal benefits facing the politician are not necessarily the ones facing society.
D)politicians are focusing on the long-run effects of policies rather than the short-run effects.

Question 68

Why are the poor given little weight in the measure of consumer surplus?

A)The poor don't tend to vote.
B)Many of the poor receive welfare payments.
C)The poor don't produce many goods.
D)The poor have little income.

Question 69

How do the concepts of market failure and failure of market outcome relate to the concept of economic efficiency?

A)Market failure means the economy is not economically efficient; failure of market outcome could happen even if the economy is economically efficient.
B)Failure of market outcome means the economy is not economically efficient; market failure could happen even if the economy is economically efficient.
C)Both market failure and failure of market outcome mean that the economy is not economically efficient.
D)Both market failure and failure of market outcome could happen even if the economy is economically efficient.

Question 70

"I recognize that the market is effective at getting resources to their most valued uses, but I also recognize that the market can produce results that are grossly unfair." This speaker is implying:

A)both market failure and failure of market outcome.
B)market failure but not failure of market outcome.
C)failure of market outcome but not market failure.
D)neither market failure nor failure of market outcome.

Question 71

Which of the following is not an example of a failure of market outcome?

A)Income is not distributed in a way society wants.
B)Emission of pollutants is producing acid rain and killing wildlife.
C)Addicts continue to use heroin even though they would be better off without it.
D)A person with a gun offers you your life for your money.

Question 72

What is one reason the United States produces luxury cars such as the Chevy Corvette but still does not provide health care for all individuals?

A)Income is highly unequally distributed in the United States.
B)Government manages the health care system.
C)Total surplus in the United States is too low.
D)Providing health care for all individuals is always inefficient.

Question 73

To use cost/benefit analysis to decide whether to attend college, a prospective student must take into account all of the following except the:

A)income which will have to be forgone during the years when the student is attending classes rather than working.
B)difference between expected lifetime earnings with a college degree and expected lifetime earnings without a college degree.
C)basic entertainment expenses during the time spent in college that the student would have spent even if not attending college.
D)additional expenses incurred while attending college, such as tuition and books.

Question 74

When an economy achieves economic efficiency, it:

A)is below a Pareto optimal position.
B)is at a Pareto optimal position.
C)is beyond a Pareto optimal position.
D)may or may not be at a Pareto optimal position.

Question 75

In Europe, government regulations discourage consumer credit. "It's to protect the consumer from himself," says Jacques Zeegers, secretary general to the Belgian Banking Association. As far as Mr. Zeegers is concerned, the government should worry that there is a failure caused by:

A)distributional issues.
B)rationality problems of individuals.
C)violations of inalienable rights.
D)economic efficiency.

Question 76

How do the concepts of market failure and failure of market outcome relate to the concept of Pareto optimality?

A)Market failure is judged by the criteria of Pareto optimality; failure of market outcome rejects Pareto optimality as the sole criterion.
B)Failure of market outcome is judged by the criteria of Pareto optimality; market failure rejects Pareto optimality as the sole criterion.
C)Both market failure and failure of market outcome are judged by the criteria of Pareto optimality.
D)Both market failure and failure of market outcome reject the criteria of Pareto optimality for another criterion.

Question 77

Market equilibrium maximizes the sum of:

A)total cost and total benefit.
B)consumer surplus and producer surplus.
C)marginal cost and marginal benefit.
D)excess demand and excess supply.

Question 78

Which of the following generalizations is derived from the economist's framework?

A)Politicians always take too long to enact regulations because they must wait for economic advisors to perform a cost/benefit analysis.
B)Policies that relieve immediate suffering often have the best long-run consequences.
C)Sound policies often are prevented by individuals' self-interest-seeking activities.
D)Government regulations have the same impact whether they are designed on the basis of cost/benefit analysis or were developed as a reaction to real-world events.

Question 79

Which of the following best exemplifies a failure of market outcome?

A)Secondhand smoke can put the health of children at risk.
B)Consumers often don't know as much about the car they are buying than the person selling the car does.
C)Adults with emphysema find it difficult to quit smoking even though they know that smoking worsens their health and they want a long life.
D)Some people can enjoy the use of a public park without paying for it.

Question 80

When a purely competitive market is in equilibrium:

A)marginal cost equals marginal benefit.
B)total cost equals total benefit.
C)average cost equals average benefit.
D)the sum of marginal cost and marginal benefit is maximized.