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Economics 401

Terms in this set (58)

Does the Utilitarian social welfare function satisfy Pareto Efficiency? Yes or No?
No
Does the Utilitarian social welfare function satisfy the Kaldor-Hicks criterion? Yes or No?
Yes
Does the Rawlsian social welfare function satisfy Pareto Efficiency? Yes or No?
No
Does the Rawlsian social welfare function satisfy the Kaldor-Hicks criterion?
No
A tax based on income has no efficiency cost. True or False?
False
A Utilitarian social welfare function always implies that full redistribution is optimal. True or False?
False
If governments could use individualized lump-sum taxes, then there would be no equity-efficiency trade-off. True or False?
True
If SUVs produce a negative externality, taxing the buyers of SUVs would shift
A) The private supply curve to the right
B) The private supply curve to the left
C) The private demand curve to the right
D) The private demand curve to the left
D) The private demand curve to the left
The Coase Theorem is less relevant for
A) Externalities affecting many individuals
B) Externalities where property rights can be assigned
C) Externalities affecting a small number of individuals
A) Externalities affecting many individuals
Why is it better to tax a firm's emission and not its output?
A) Creates a change in consumer behaviour
B) Results in higher tax revenue
C) Provides an incentive to invest in cleaner production technology
C) Provides an incentive to invest in cleaner production technology
Academic research suggests that people are more supportive of redistribution if
A) They think that luck determines income
B) People put in effort but are still poor
C) The lower their own position in the income distribution
D) All of the above
D) All of the above
To maximize total welfare, one must equate _____ with ______
A) total social benefit; total social cost
B) marginal social benefit; total social cost
C) marginal private benefit; total social cost
D) social marginal benefit; social marginal cost
D) social marginal benefit; social marginal cost
Which factor is likely to prevent private market forces from providing the optimal amount of a public good?
A) Non-satiated preferences
B) Large differences among individuals in their demand for the public good
C) The free rider problem
D) Little or no differences among individuals in their demand for the public good
C) The free rider problem
Suppose that the (external) damage done by pollution is known to be MD=300+5Q, and the (private) cost and benefit are given by MC=100+2Q and MB=850-2Q. What is the optimal quantity?
50
Suppose that the (external) damage done by pollution is known to be MD=300+5Q, and the (private) cost and benefit are given by MC=100+2Q and MB=850-2Q. What is the tax to achieve the optimal quantity?
550
Suppose that Petra and Oliver must split 200 peanut bags between them. Petra's utility function is Up = √Cp and Oliver's utility function is Uo = 1/2 √Co where Cp and Co are the number of peanut bags Petra and Oliver consume, respectively. How much utility will Petra and Oliver receive if the peanut bags are split evenly between them?
Utility of Petra is 10 and utility of Oliver is 5
Suppose that Petra and Oliver must split 200 peanut bags between them. Petra's utility function is Up = √Cp and Oliver's utility function is Uo = 1/2 √Co where Cp and Co are the number of peanut bags Petra and Oliver consume, respectively. If the social welfare function is W=Up+Uo, then what distribution of peanut bags between Petra and Oliver maximizes social welfare?
Petra gets 160 peanut bags and Oliver gets 40 peanut bags
Conditional on means-testing a welfare program, there is no advantage to further imposing categorical restrictions. True, False, or Uncertain?
False, further imposing categorical eligibility restrictions can improve targeting of benefits to the most deserving individuals
The purpose of an ordeal mechanism is to separate those who truly need assistance from those who can support themselves. True, False, Uncertain?
True, if the ordeal is more costly to less needy individuals than to needy individuals, it will improve target efficiency
If the benefits of a project exceed its cost, then realizing this project will be a Pareto Improvement. True, False, Uncertain?
Uncertain
A policy can be Pareto improving without satisfying the Kaldor-Hicks criterion. True, False, Uncertain?
False
Discuss two reasons why the Coasian theorem will not solve many of the externality problems we face.
Too many agents making it difficult to assign property rights and high transaction costs.
An actuarially fair premium is set equal to the insurer's expected payout, assuming no administrative costs or profits. True, False, Uncertain?
True. actuarially fair is when the price of the premium is equal to the expected payout.
If government intervenes in the market for health insurance in order to address the adverse selection problem, everyone will always be better off as a result. True, False, Uncertain?
False, not always. Low-risk individuals could be worse off because they likely have to pay a premium that is higher than their actuarially fair premium.
Optimal health insurance plans should provide generous insurance for unpredictable/large events and little insurance for predictable/minor events. True, False, Uncertain?
True, moral hazard is likely to be larger for predictable events and individuals can self insure against minor events. it is difficult and not optimal to self-insure against large and unpredictable events.
List two examples of moral hazard in health insurance.
1. Individuals go to the doctor more often.
2. Doctors overprescrible procedures.
How governments should intervene is a positive question, and why governments intervene in the way they do is a normative question. True, False, Uncertain?
False, it is exactly the opposite. A positive question asks ''how things are?'' A normative question asks ''how things should be?''
Positive production externalities lead to under production of a good. True or False?
True, with a positive production externality, the social marginal cost of producing is lower than the private marginal cost. Thus, firms produce too little.
The more risk averse people are, the higher is the risk premium they are willing to pay. True of False?
True, the more risk averse an individual, the higher is the risk premium they are willing to pay above the actuarially fair premium.
The further away the Lorenz curve is from the 45-degree line, the lower is the Gini coefficient. True or False?
False, the further away the Lorenz curve is from the 45-degree line, the higher is income inequality, which results in a higher Gini coefficient.
Why is a randomized trial the ''gold standard'' for solving the identification problem?
If participants assignment to the treatment group and the control group is random and the groups are large enough, then the two groups will have the same average characteristics. Thus, any difference in an outcome variable must be a consequence of the treatment.
What do we mean when we say correlation does not imply causality?
Correlation merely means that two events tend to occur together; causality means that one event causes the other. Correlation can occur without causation (in either direction) when a third event causes both of the other events.
Lee is a rational consumer with complete health insurance. He will use medical care up to the point at which his marginal benefit is zero. True, False, Uncertain?
True, the equilibrium is where marginal cost=marginal benefit. With complete health insurance, the marginal cost is equal to 0.
The government is deciding between two health insurance plans. Plan 1 has coinsurance rate of 50%. Plan 2 has a $5000 deductible after which the coinsurance rate is 0%. Which of these two plans is preferable from a welfare perspective?
Plan 2 because optimal health insurance should offer little insurance for small, predictable events and generous insurance for costly, unpredictable events.
Skill based technological change implies that technological progress reduces income inequality. True, False, or Uncertain?
False, exactly the opposite is true. With skill based technological change, technological innovations increase wages of high skilled more relative to low skilled, widening the income gap.
Name two reasons why the government may prefer in-kind transfers over cash transfers to the poor.
1. asymmetric information
2. Paternalism
If moral hazard effects are large, then private insurance is preferable to social insurance. True, False, or Uncertain?
False, moral hazard effects affect private and social insurance equally. Because of such effects, it is not desirable to provide full insurance and that's true for both private and social insurance.
Pareto Improvement
An allocation of resources is Pareto efficient if no one can be made better off without making someone worse off
Kaldor-Hicks
A government should bring about a change in social states if the gains to the winners exceed the losses to the losers.
What is a public good?
non-rival and non-excludable
If MD is relatively flat is a tax or cap and trade system preferred?
Tax system
If MD is relatively steep is a tax or cap and trade system preferred?
Cap and trade system
Correlation
Two economic variables are correlated if they move together
Causality
Two economic variable are causally related if the movement of one causes the movement of the other
The assured income for the Severely Handicapped (AISH) is what kind of program
Means-tested and categorical program
A reason for the increase in income inequality is
1. Globalization
2. Technological change
3. Reductions in top-income marginal tax rates
All else equal, giving benefits in cash is a Pareto-Improvement compared to giving benefits in-kind. True or False?
True
The welfare wall of social assistance benefits create an efficiency cost to society.
True.
Means tested programs are
programs where access is restricted by income and assets
Categorical programs are
Programs that access is restricted by personal characteristics (kids, marital status, age)
Private Marginal Cost (PMC)
The direct cost to producers of producing an additional unit of a good
Social Marginal Benefit (SMB)
The PMC plus any cost (or benefit) associated with the production of the good that are imposed on others that producers do not pay (or receive)
Private Marginal Benefit (PMB)
The direct benefit to consumers of consuming an additional unit of a good
Social Marginal Benefit (SMB)
The PMB plus any benefits (or costs( associated with the consumption of the good that accrue to others but that consumers do not receive (or pay)
Example of a negative production externality SMC>PMC
Firm polluting river
Example of a positive production externality SMC<PMC
Beehives
Example of a positive consumption externality SMB>PMB
Vaccines
Examples of a negative consumption externality SMB<PMB
Smoking
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