Question 1

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 situation in Cuba illustrates the concept of the equality-efficiency trade-off, which refers to the trade-off between allocating resources equally among individuals and maximizing the efficiency of resource allocation. By allowing farmers to sell their goods directly to consumers and make a profit, the government was promoting efficiency in agricultural production. However, this led to inequality in income distribution and caused resentment among other workers. When the government closed the free markets to address this inequality, it resulted in a decline in overall income and shortage of certain goods, demonstrating the trade-off between equality and efficiency. The other concepts listed are not relevant to this situation.

Question 2

An externality is defined as

Accepted Answer

An externality is a cost or benefit that affects parties who did not choose to incur that cost or benefit. It is a social cost or benefit that affects parties external to a transaction. For example, pollution from a factory affects not only the factory but also the surrounding community, which did not choose to incur the cost of pollution.

Question 3

If a government enacts a price floor on agricultural products to protect wheat farmers, the result is likely going to be

Accepted Answer

A price floor set above the equilibrium price causes an increase in price and results in a surplus of the product, in this case, wheat, because the quantity supplied exceeds the quantity demanded at the higher price.

Question 4

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 5

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

Accepted Answer

In the short run, efforts to reduce the unemployment rate, such as increasing government spending or lowering interest rates, can stimulate demand and lead to an increase in the inflation rate. This is because as more people are employed and have more income, they tend to spend more, driving up prices for goods and services. However, in the long run, the relationship between unemployment and inflation depends on various factors and can be more complex.

Question 6

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

The justification for rent control is primarily based on equality, as it aims to protect moderate- to low-income families from rapidly rising rents and eviction.

Question 7

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

Accepted Answer

The statement suggests that there is a trade-off between total output and equality of income distribution, meaning that policies designed to equalize distribution may come at the expense of the size of output. Therefore, the best choice is E.

Question 8

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

Accepted Answer

The United States has historically prioritized efficiency and economic growth over equality concerns, leading to policies that support wage inequality in order to maintain lower levels of unemployment. This approach has been evident in the country's tax policies, its declining labor union participation rate, and its relatively weak minimum wage laws. These policies have resulted in a widening income gap between high and low earners, and a higher prevalence of low-wage jobs, but have also helped keep unemployment rates low.

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

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 reduction of taxes on high-income individuals was likely driven by the belief that high tax rates created a disincentive for them to work and invest. This demonstrates the trade-off between equality (higher taxes on the wealthy) and efficiency (lower taxes to encourage work and investment).

Question 11

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

The problem described in the scenario is an example of an externality, which is a cost or benefit that affects a party who did not choose to incur that cost or benefit. In this case, the use of chlorofluorocarbons has external effects on the ozone layer and human health, but the industry responsible for using them does not bear the full cost of these effects. This is a classic example of a market failure, and economists often study how to address externalities through policies like taxes or regulations.

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 refer to costs of production or consumption that are not reflected in the market price. For example, pollution from a factory may harm the health of nearby residents, but the cost of the health damage is not paid by the factory and is not reflected in the price of the product. This is an undesirable side effect because it results in a misallocation of resources and can lead to negative impacts on society and the environment.

Question 13

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's discharge of toxic wastewater into the river represents a negative externality, where the well-being of the downstream community is adversely affected without compensation. Externalities are a market failure and represent an economic problem as they result in a misallocation of resources and welfare losses.

Question 14

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 is an example of an externality - the Aswan Dam has provided benefits to the people of Egypt, but it has also caused harm to the country's cultural heritage (the pyramids) through increased erosion, which is an unintended consequence of the dam's construction. This harm is not reflected in the market price of the dam's benefits, and so it is a negative externality.

Question 15

If a voluntary trade takes place,

Accepted Answer

In a voluntary trade, both parties engage in the transaction because they believe that they will benefit from it. Otherwise, they would not agree to the trade. Therefore, it is expected that both parties will benefit from the transaction.

Question 16

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 17

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

Accepted Answer

Rent control places a legal limit on the amount a landlord can charge for rent. This may seem like good news for tenants, but it often leads to a shortage of apartments as landlords have less incentive to create new housing or maintain existing housing. Existing tenants may also cling on to their apartments for longer than they actually need them which brings down the overall supply. With a decrease in supply of rental units, the demand for the remaining units will likely be high, leading to a shortage of apartments. However, the limit on rent will cause rents to decrease on existing units. So, the most likely outcome of rent control is a decrease in rents with a shortage of apartments.

Question 18

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

Accepted Answer

The complaint about noise from aircraft landings and takeoffs represents a negative externality, which is a cost imposed on people who are not directly involved in the production or consumption of the good or service (in this case, the airport and airline industry). The economic analysis of this situation would involve exploring the potential solutions to this externality, such as noise abatement technology or setting limits on aircraft noise levels.

Question 19

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

The statement suggests that economists justify the increasing gap between the rich and the poor by arguing that it is an undesirable consequence of greater efficiency. This means that D is the best choice. A, B, and C are incorrect because they suggest that inequality is either necessary or desirable, which is not supported by the statement. E is also incorrect because it suggests that efficiency should be achieved at any cost, which is not mentioned in the statement.

Question 20

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 is an example of a negative externality, as the increase in price of illegal drugs has a negative impact on society. The increase in crime is an unintended consequence of the interdiction efforts.

Quiz 1: What Is Economics?