Question 1

In the United States, the fact that the gap between the rich and the poor has been increasing is often justified by economists on the grounds that greater

Accepted Answer

Economists often argue that greater efficiency can lead to inequality, but it is not desirable in and of itself. In other words, inequality is seen as an undesirable consequence of greater efficiency, rather than something that is desirable or necessary for efficiency to be achieved. Therefore, the correct choice is D.

Question 2

Rent control is usually justified on the grounds that it protects moderate- to low-income families from the burden of rapidly rising rents and from eviction if they are unable to pay.It also prevents landlords from reaping windfalls as property values rise.Opponents note that rent controls usually lead to a reduced supply of rental housing and shortages.The proponents of rent controls support them primarily on the grounds of

Accepted Answer

Rent controls are usually motivated by the goal of promoting greater equality and fairness, by protecting low- to moderate-income renters from rapidly rising rents and the risk of eviction. While opponents argue that rent controls can lead to reduced supply and higher shortages, proponents focus on the social benefits of ensuring affordable housing for vulnerable groups. Thus, rent controls are primarily based on equity considerations rather than efficiency or externalities. The "cost disease of services" argument, which is related to the phenomenon of rising costs in labor-intensive sectors such as healthcare, education or housing, is not directly relevant to the justification for rent controls.

Question 3

Because there is a trade-off between total output and equality of income distribution,

Accepted Answer

Policies designed to equalize income distribution, such as progressive taxation or income redistribution programs, may reduce the incentives for individuals to work hard and invest in businesses, leading to a decrease in overall productivity and output. In contrast, policies that foster economic growth and expansion, such as investment in education and infrastructure or tax cuts for businesses, may result in greater inequality in the short run but may ultimately benefit the economy as a whole by creating new jobs and increasing overall prosperity. Therefore, while there may be a tension between output and equality, promoting equality at the expense of output is not necessarily the optimal solution.

Question 4

If a government enacts a rent control to protect apartment tenants, the result is likely going to be

Accepted Answer

When a rent control is put in place, it limits the price that landlords can charge for rent. This can result in a decrease in rents, but can also create a shortage of available apartments as landlords may not be as incentivized to rent out their units due to the limited price they can charge. Therefore, the most likely outcome is a decrease in rents with a shortage of apartments.

Question 5

Which of the following is an example of an undesirable side effect of the operation of the market mechanism?

Accepted Answer

Negative externalities refer to the unintended costs that affect third parties as a result of economic activity. These can include pollution, congestion, or noise, among others. These side effects arise as a result of the market mechanism and are considered undesirable because they lead to market inefficiencies and suboptimal outcomes from a societal perspective.

Question 6

An article in a recent economics periodical asks the question: "Is low inflation worth it?
" By "it," the article probably means

Accepted Answer

Low inflation is often associated with higher unemployment due to the trade-off described by the Phillips Curve, which suggests that reducing inflation may lead to increased unemployment.

Question 7

In terms of the competing claims of equality and efficiency, in the United States we have

Accepted Answer

The United States has chosen greater wage inequality for lower unemployment, prioritizing efficiency over equality. This is reflected in policies such as minimum wage laws, which set a floor for wages but do not guarantee equal pay for all workers. The focus on efficiency has also led to a shift towards more flexible and non-traditional forms of work, such as part-time and gig work, which may offer lower pay and fewer benefits but also create more job opportunities.

Question 8

In 1980, in order to stimulate agricultural production, Fidel Castro allowed Cuban farmers to sell their goods directly to consumers and keep whatever profit they made.Some farmers were earning $50,000 per year, compared with the average worker income of $2,400.The workers resented this.Castro denounced the farmers as "capitalist gangsters" and closed the free markets.Cuban cash income declined five percent and fresh vegetables were in short supply.This illustrates the economic concept of the

Accepted Answer

The scenario described in the passage illustrates the equality-efficiency trade-off. While opening up free markets in agriculture led to greater efficiency and higher profits for farmers, it also created inequality and resentment among workers. When Castro shut down the free markets, it was an attempt to restore equality but at the cost of reducing efficiency and creating shortages of fresh vegetables. This trade-off is a common economic phenomenon, where policies that promote equality often come at the expense of efficiency, and vice versa.

Question 9

In Egypt, in 1970, the Aswan Dam was completed.By preventing the annual flood of the Nile (thereby providing millions of acres of arable land) and by providing electricity, the dam was expected to raise the living standard of the Egyptian people-and it has.However, it has also led to a rise in the water table which causes Egypt's limestone structures, including the pyramids, to absorb more salt water and to suffer serious erosion from crystallized salts.Combined with air pollution and traffic vibration, this erosion is turning the pyramids to dust.Economists analyze this type of problem with the concept of

Accepted Answer

The Aswan Dam causing erosion and damage to the pyramids is an example of a negative externality, where the actions of one party (building the dam) have a negative impact on another party (the preservation of the pyramids).

Question 10

An externality is defined as

Accepted Answer

Externality is a cost or benefit that affects parties external to a transaction. It is not directly accounted for in the cost or benefit of the production or consumption of a good or service. It can be positive or negative and can occur through production or consumption activities. Example of negative externality is pollution caused by a factory, which affects the health and well-being of people living in the surrounding area who are not involved directly with the production process.

Question 11

When residents surrounding an airport complain about noise from aircraft landings and takeoffs, the relevant economic analysis is that of

Accepted Answer

The complaints about noise from aircraft landings and takeoffs represent a negative externality, meaning that the noise imposes costs on individuals who did not choose to be affected by the airport's activity. Economic analysis of externalities includes examining ways to internalize the cost of the negative externality, such as implementing noise abatement measures or imposing fees/taxes on the airport to compensate those affected by the noise.

Question 12

In contrast to the United States, the European Union has chosen

Accepted Answer

The European Union has generally opted for policies that result in less wage inequality compared to the United States, but these policies often come with higher unemployment rates. This is due to a variety of factors, including stronger labor protections and social safety nets in many EU countries, which can make it more costly for employers to hire and fire workers.

Question 13

The 1981 tax reform act reduced taxes on high-income individuals.Many economists believed that high tax rates would deter high-income individuals from working and investing, thus slowing the growth of income.This illustrates the issue of

Accepted Answer

The 1981 tax reform act reducing taxes on high-income individuals is an example of the trade-off between equality and efficiency. The reduction in taxes was aimed at increasing incentives for high-income individuals to work and invest, which could lead to greater efficiency and economic growth, but it also widened income inequality.

Question 14

When a teacher in a private school points out to her high school principal that since there are empty seats in all classrooms, the cost of additional students is really zero, she is using the

Accepted Answer

The teacher is using the principle of marginal analysis by pointing out that the cost of additional students is zero since there are already empty seats in the classrooms. Marginal analysis looks at the cost and benefit of adding or subtracting one unit of something, in this case, students.

Question 15

If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and the marginal cost per passenger is $100, then it will be profitable for the airline to

Accepted Answer

If the airline charges a stand-by passenger less than $100, it will not cover the marginal cost per passenger and therefore will operate at a loss. Charging more than $500 would not make sense since it is already the full price of a ticket. However, charging a stand-by passenger more than $100 would provide additional revenue that could contribute to the profitability of the flight. Therefore, the best choice is to charge a stand-by passenger more than $100.

Question 16

The use of chlorofluorocarbons in refrigerators and air conditioners is alleged to cause the destruction of the ozone layer that surrounds the earth.This layer protects humans from ultraviolet radiation, which causes skin cancer.Industry has been prohibited from using these substances in aerosol cans, but the government has been reluctant to ban their use altogether because of the serious economic consequences.Economists analyze such problems and refer to them as

Accepted Answer

This problem involves externalities, which are costs or benefits that affect people who are not directly involved in the activity that produces them. In this case, the use of chlorofluorocarbons by industry has a negative externality on the environment and human health, which is not reflected in the costs of production or consumption. The government may need to intervene to internalize these costs and prevent market failure. The other choices do not accurately describe the nature of the problem.

Question 17

When interdiction efforts manage to stem the flow of illegal drugs into the United States, assuming no change in demand, the price of these substances rises.This price increase leads to more crime as addicts attempt to maintain their now more-expensive habits.Economists call this side-effect of the drug business

Accepted Answer

The side-effect described is an externality, which is an unintended consequence of an economic activity that affects someone not involved in the activity. In this case, the rise in drug prices affects not only drug users but also the broader society through increased crime.

Question 18

In the short run, efforts to reduce the unemployment rate are likely to cause

Accepted Answer

When efforts are made to reduce unemployment, additional demand is created in the economy. This increase in demand can lead to an increase in prices, causing inflation to rise. Therefore, reducing unemployment in the short run, can cause an increase in the inflation rate.

Question 19

A large factory pours its toxic wastewater into a nearby river, and as a result, the residents of a downstream community experience high rates of illness and birth defects.The economic problem illustrated by this example is

Accepted Answer

The factory is causing a negative externality, as the cost of their actions is being imposed on the downstream community in the form of illness and birth defects. This is an example of market failure, as the factory is not taking into account the full social cost of their actions.

Question 20

Because there is a trade-off between inflation and unemployment in the short run,

Accepted Answer

The trade-off between inflation and unemployment in the short run is described by the Phillips Curve, which suggests that lower inflation is often associated with higher unemployment. This is because measures to reduce inflation typically slow down the economy, which can lead to higher unemployment rates.

Quiz 1: What Is Economics