Deck 2: Theoretical Tools of Public Finance

Question 1

Suppose that Gustavo spends all of his income on DVDs and (legally)downloaded songs.At the optimum,which of the following must be TRUE?

A) Gustavo spends all of his income on songs and none on DVDs if songs are cheaper.
B) Gustavo spends all of his income on DVDs and none on songs if DVDs are cheaper.
C) The marginal utility of the last song downloaded equals the marginal utility of the last DVD purchased.
D) The ratio of the marginal utility of the last song downloaded to the price of the song is equal to the ratio of the marginal utility of the last DVD to the price of the DVD.

Answer 1

The ratio of the marginal utility of the last song downloaded to the price of the song is equal to the ratio of the marginal utility of the last DVD to the price of the DVD.

Question 2

Suppose that you buy a lot of music and that the prices of CDs go up.The substitution effect means that you buy __________ CDs because ___________.

A) fewer; your nominal income has been reduced
B) fewer; your real income has been reduced
C) fewer; you now enjoy music less
D) fewer; CDs are more expensive relative to other goods

Answer 2

fewer; CDs are more expensive relative to other goods

Question 3

Assume a convex utility function with an interior solution in which a consumer chooses some of each good.Which of the following is NOT represented by the slope of the budget constraint?

A) marginal rate of substitution
B) relative price of one good (drawn on horizontal axis)in terms of other good (drawn on vertical axis)
C) relative price of one good (drawn on vertical axis)in terms of other good (drawn on horizontal axis)
D) ratio of the marginal utilities

Answer 3

relative price of one good (drawn on vertical axis)in terms of other good (drawn on horizontal axis)

Question 4

Suppose Tyrone spends his entire income on books and clothing.If the prices of both books and clothing fall by 10%,which of the following statements is TRUE?

A) Tyrone is not able to move to a new indifference curve.
B) The budget constraint shifts outward.
C) The budget constraint becomes flatter (the slope is smaller in absolute value).
D) The budget constraint becomes steeper (the slope is larger in absolute value).

Question 5

Suppose Tim spends his entire income on hot dogs and hamburgers and consumes at least some of both.Now suppose that the price of hot dogs increases while the price of hamburgers remains the same.If Tim is compensated so that his utility is held constant,which of the following must be TRUE?

A) Tim is better off than he was.
B) Tim's utility remains the same.
C) Tim consumes more hamburgers and fewer hot dogs.
D) Tim consumes more hot dogs and fewer hamburgers.

Question 6

Which of the following is NOT consistent with nonsatiated preferences?

A) Maria prefers four hamburgers to three hamburgers.
B) Kevin enjoys the third hamburger more than the fourth hamburger.
C) Lisa prefers five hamburgers to six hamburgers.
D) Ron likes to take home leftover hamburgers for later use.

Question 7

Suppose Jon likes to eat both pizza and hamburgers.As John consumes less pizza and holds steady his consumption of hamburgers,the marginal utility of a piece of pizza _________ and the marginal utility of a hamburger __________.

A) increases; is unchanged
B) increases; increases
C) decreases; decreases
D) decreases; is unchanged

Question 8

Consider three bundles: Bundle A: 1 shirt and 2 hats
Bundle B: 2 shirts and 2 hats
Bundle C: 3 shirts and 1 hat
Which of the following violates the assumption of nonsatiated preferences?

A) Nancy prefers Bundle B to C.
B) Diane prefers Bundle B to A.
C) Steve prefers Bundle C to B.
D) Ryan prefers Bundle A to B.

Question 9

What is the name of the social assistance program that provides cash payments to single parents whose income is below a specified level?

A) Supplemental Nutrition Assistance Program
B) Mainstream Vouchers
C) Emergency Food Assistance Program
D) Temporary Assistance for Needy Families

Question 10

This figure shows a consumer's budget constraint for apples (vertical axis)and oranges (horizontal axis).If the price of oranges increases,how is the budget constraint affected?

A) The budget constraint shifts inward.
B) The budget constraint does not change.
C) The vertical intercept E decreases and the horizontal intercept F remains the same,making the budget constraint flatter.
D) The vertical intercept E is unchanged and the horizontal intercept F decreases,making the budget constraint steeper.

Question 11

_____ tools refer to the set of tools designed to analyze data and answer questions raised by theoretical analysis.

A) Efficiency
B) Empirical
C) Theoretical
D) Abstract

Question 12

Consider three bundles: Bundle A: 2 DVDs and 3 CDs
Bundle B: 3 DVDs and 1 CD
Bundle C: 1 DVD and 3 CDs
Which of the following violates the assumption of nonsatiated preferences?

A) Bart prefers Bundle C to B and Bundle A to C.
B) Mona prefers Bundle C to B and is indifferent between Bundles A and B.
C) Don prefers Bundle A to C and is indifferent between Bundles B and C.
D) Patty prefers Bundle A to C and Bundle B to C

Question 13

Under TANF your state provides an income guarantee of $5,000 and a benefit reduction rate of 40%.The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour.By how much is the benefit reduced if the recipient works 300 hours per year?

A) $3,000
B) $1,800
C) $1,200
D) $600

Question 14

Suppose under TANF your state provides an income guarantee of $5,000 and a benefit reduction rate of 40%.The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour.If the recipient works 300 hours per year,the effective take-home wage rate is:

A) $0 per hour.
B) $4 per hour.
C) $6 per hour.
D) $10 per hour.

Question 15

Which of the following is TRUE when a consumer is maximizing her utility?

A) She consumes where the budget constraint intersects the midpoint of her indifference curve.
B) She consumes halfway between the two intersections of her budget constraint and indifference curve.
C) She consumes at the point at which the slope of her indifference curve is zero.
D) She consumes at the point at which her budget constraint is tangent to her indifference curve.

Question 16

Consider three bundles: Bundle A: 2 hamburgers and 1 soda
Bundle B: 2 hamburgers and 2 sodas
Bundle C: 1 hamburger and 1 soda
Which of the following does NOT violate the assumption of nonsatiated preferences?

A) Laura prefers Bundles B and C to Bundle A.
B) Mike prefers Bundle B to Bundle A and Bundle C to Bundle B.
C) Robin is indifferent between Bundle A and Bundle C.
D) Julio prefers Bundles A and B to Bundle C.

Question 17

Graphically,the budget constraint can be described as:

A) the slope being the difference between the prices of the goods.
B) the slope being the sum of the prices of the goods.
C) a downward sloping line.
D) the slope being the product of the prices of the goods.

Question 18

_____ tools refer to the set of tools designed to understand the mechanics behind economic decision making.

A) Efficiency
B) Empirical
C) Theoretical
D) Data

Question 19

If pasta is an inferior good and if the price of pasta increases,the income effect _________ the quantity demanded,and the substitution effect __________ the quantity demanded.

A) reduces; decreases
B) increases; increases
C) reduces; increases
D) increases; decreases

Question 20

Suppose that you buy a lot of music and that the prices of CDs go up.The income effect means that you buy __________ CDs because ___________.

A) fewer; your nominal income has been reduced
B) fewer; your real income has been reduced
C) fewer; you now enjoy music less
D) fewer; CDs are less expensive relative to other goods

Question 21

The First Fundamental Theorem of Welfare Economics states that:

A) the competitive equilibrium,where supply equals demand,can always be achieved through government intervention.
B) social efficiency can be achieved if and only if government intervenes in the economy.
C) the competitive equilibrium,where supply equals demand,maximizes social efficiency.
D) social efficiency cannot be achieved in any competitive equilibrium.

Question 22

Consumer surplus is highest when the demand curve is __________; producer surplus is greatest when the supply curve is _________.

A) elastic; elastic
B) inelastic; inelastic
C) perfectly elastic; perfectly inelastic
D) inelastic; elastic

Question 23

Suppose you receive a raise from $10 to $20.Explain how both the income and substitution effects would affect your labor supply at the new and higher wage.What will be the effect overall?

Question 24

In the accompanying figure,consumer surplus is given by area _______,while producer surplus is given by area ______.

A) A; D
B) A + B; C + D
C) D; A
D) B; C

Question 25

A utilitarian social welfare function implies that:

A) the well-being of the worst-off member is maximized.
B) income redistribution reduces social welfare.
C) everyone in society has the same marginal utility.
D) no redistribution should occur.

Question 26

Which of the following best explains the view that nothing matters except that individuals have met a basic level of need for goods,such as housing or medical care,and that once they have met this basic level,income distribution is irrelevant?

A) First Fundamental Theorem of Welfare Economics
B) utilitarian social welfare function
C) Rawlsian social welfare function
D) commodity egalitarianism

Question 27

Consumer surplus can be defined as the difference between:

A) the demand curve and the price of the good.
B) the supply curve and the price of the good.
C) the supply curve and the demand curve.
D) the price charged by sellers and the price paid by buyers.

Question 28

Assume that both air travel and travel by car are normal goods and you spend a fixed amount of income on both goods.Suppose that when the price of crude oil goes up by 30%,the price per mile of air travel goes up by 10% and the price per mile traveled by car goes up by 20%.Explain how the increase in the price of crude oil affects air travel and travel by car in terms of the income effect,the substitution effect,and the overall (net)effect.

Question 29

A Rawlsian social welfare function implies which of the following?

A) The well-being of the worst-off member is maximized.
B) The sum of individual utilities is maximized.
C) The marginal utility of everyone in society is equal.
D) No redistribution should occur.

Question 30

Cutting TANF benefits would __________ social efficiency and __________ equity in society.

A) increase; increase
B) decrease; decrease
C) increase; would not change
D) increase; decrease

Question 31

Suppose that a 5% rise in the price of apples does not cause the quantity demanded to change.The elasticity of demand for apples would then be:

A)0)
B) -1.
C) -2.
D) infinitely large.

Question 32

Producer surplus can be defined as the difference between:

A) the demand curve and the price of the good.
B) the supply curve and the price of the good.
C) the supply curve and the demand curve.
D) the price charged by sellers and the price paid by buyers.

Question 33

Suppose voters choose to increase their state's minimum wage to $6 per hour from $3 per hour.The accompanying figure shows the market for unskilled labor in that state after the change.Area(s)_____ is the total consumer surplus after this change,while area(s)_____ is the deadweight loss.

A) A; C + E
B) A + B + C; F
C) B + C; H
D) A + B; C + E

Question 34

Suppose that a 50% increase in the price of a good causes a 25% reduction in the quantity demanded.The elasticity of demand is:

A) -0.5.
B) -1.
C) -1.33.
D) -2.

Question 35

When production is said to be characterized by diminishing marginal productivity:

A) unskilled workers are less productive than skilled workers.
B) output must increase with each additional unit of the input used in production.
C) increasing the amount of one input used means more of another input must be used.
D) adding additional inputs may still cause output to increase.

Question 36

Consumer surplus is greater than producer surplus when the demand curve is __________; producer surplus is greater than consumer surplus when the demand curve is _________.

A) elastic; elastic
B) inelastic; inelastic
C) perfectly elastic; perfectly inelastic
D) inelastic; elastic

Question 37

Suppose voters choose to increase their state's minimum wage to $6 per hour from $5 per hour.The accompanying figure shows the market for unskilled labor in that state after the change.Area(s)_____ is the total producer surplus after this change.

A) B + D
B) B + D + J
C) B + C
D) D + E + J

Question 38

Explain what is represented by the slope of the budget line and the slope of the indifference curve.How does an increase in income affect the slopes?

Question 39

Carefully explain the principle of diminishing marginal utility using a relevant example.