Question 1

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

This side-effect of the drug business is an externality, which is a cost or benefit that is not reflected in the market price of a good or service. The increase in crime is a negative externality that arises from the efforts to stem the flow of illegal drugs into the United States.

Question 2

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 issue of reducing taxes on high-income individuals is related to the equality-efficiency trade-off, which suggests that policies aimed at increasing equality (such as higher tax rates on the rich) can have negative effects on efficiency (such as reducing incentives to work and invest). The tax reform act of 1981 was an attempt to address this trade-off by reducing taxes on high-income individuals in order to encourage growth and investment.

Question 3

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, reflecting a prioritization of efficiency over equality. This can be seen in policies such as the minimal regulation of labor markets, the weakening of labor unions, and the focus on increasing productivity through technological advances.

Question 4

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

Accepted Answer

Rent control is a policy that places a legal limit on how much landlords can charge for apartments. This can lead to a decrease in rents as landlords are unable to charge higher prices. However, since the limit on rents is often set below the market rate, this can create a shortage of apartments as landlords are unwilling to supply apartments at the lower price. Therefore, the result is likely to be a decrease in rents with a shortage of apartments.

Question 5

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.

Question 6

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 7

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 justify the increasing gap between the rich and the poor on the grounds that it is an undesirable consequence of greater efficiency. This means that as the economy becomes more efficient, some people or groups may benefit more than others, leading to a widening income gap. The goal is not to promote inequality as a desirable end in itself, but rather to strive for efficiency while minimizing the negative impact on income distribution.

Question 8

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

Accepted Answer

The issue of noise from aircraft landings and takeoffs causing annoyance to residents is an example of an externality, where the economic activity (aviation) is affecting those who are not directly involved in the transaction (residents).

Question 9

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

Accepted Answer

The answer of An article in a recent economics periodical...

Question 10

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 adding additional students is zero since there are empty seats in all classrooms. This is an example of considering the additional (marginal) cost and benefit of a decision.

Question 11

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

This scenario illustrates the equality-efficiency trade-off, which suggests that in order to achieve greater equality in incomes, society must sacrifice economic efficiency, and vice versa. By allowing farmers to sell their goods directly to consumers and keep the profits, the government was promoting economic efficiency, but this led to inequalities in income distribution, creating resentment among the workers. When the government stopped this practice, it aimed to achieve greater equality, but at the cost of economic efficiency, resulting in a decline in cash income and shortages of fresh vegetables.

Question 12

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

Accepted Answer

Negative externalities, such as pollution or traffic congestion, are one of the main examples of undesirable side effects of the operation of the market mechanism. These externalities occur when the market fails to take into account the costs that are imposed on society as a whole by economic activities. In this case, the market may lead to overproduction or overconsumption of goods and services that generate negative externalities, resulting in societal costs that are not reflected in the prices paid by producers and consumers.

Question 13

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 situation described in the passage is an example of an externality - a cost or benefit that is not reflected in the market price of a good or service. The construction of the Aswan Dam provided benefits to the Egyptian people in the form of arable land and electricity, but it also had unintended negative consequences on Egypt's cultural heritage (including the pyramids). The erosion of the pyramids is a cost that is not reflected in the market price of the dam, and therefore is an externality.

Question 14

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

Accepted Answer

The trade-off between total output and equality of income distribution means that policies designed to equalize distribution may require redistributing resources away from producers, which could reduce their incentives to produce, invest and innovate, and lead to lower levels of output. Similarly, policies intended to expand output, such as promoting market competition or providing incentives for investment, may widen the income gap between the skilled and unskilled, or between capital owners and labor, leading to greater income inequality. Thus, there is no one-size-fits-all solution to the trade-off between output and distribution, and policymakers may need to prioritize their goals and consider the costs and benefits of various policy options.

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

The airline should charge a stand-by passenger more than the marginal cost of $100 to cover additional costs incurred by the airline for the additional passenger. However, charging the full fare of $500 may not be the best strategy as it could discourage potential stand-by passengers from buying the ticket. Therefore, the airline should charge a stand-by passenger more than $100, but less than the full fare of $500 to fill the empty seats and maximize profit.

Question 16

An externality is defined as

Accepted Answer

An externality is a cost or benefit that affects parties external to a transaction, and are not reflected in prices. For example, pollution from a factory imposes a cost on society that is not reflected in the price of the goods that the factory produces. This can lead to inefficient allocation of resources, as the true cost of producing the goods is not being taken into account.

Question 17

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 economic problem illustrated in this example is that of externalities, which are costs or benefits incurred by individuals or groups other than those who caused or received them. The factory is causing negative externalities by polluting the river and harming the downstream community, leading to higher healthcare costs and lower quality of life. This highlights the need for policy interventions, such as regulations or taxes, to internalize the social costs of pollution and prevent harm to innocent parties.

Question 18

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 is an example of a negative externality - a cost imposed on an uninvolved third party (in this case, the damage to the ozone layer and its impact on human health) that is not reflected in the market price of the product in question (refrigerants containing chlorofluorocarbons). Banning the use of these substances would lead to a market distortion and potential economic consequences, which is why it is a difficult decision for the government. Economists study externalities and their impacts on market efficiency and social welfare.

Question 19

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 control is primarily justified on the grounds of equality, as it seeks to protect low- to moderate-income families from rising housing costs and potential eviction. It aims to create a more level playing field between landlords and tenants. The other options listed are not directly relevant to rent control.

Question 20

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

Accepted Answer

Efforts to reduce the unemployment rate can lead to an increase in the inflation rate in the short run. This is because when more people find employment, there is an increase in demand for goods and services, which can push up prices. Additionally, companies may need to pay higher wages to hire and retain workers, which can also contribute to inflation.

Quiz 1: What Is Economics