Question 1

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 examples of undesirable side effects of the market mechanism. These are unintended costs imposed on society as a whole as a result of market transactions, and are not reflected in the prices of goods and services. As a result, the market mechanism does not fully take into account the societal costs of production and consumption, leading to market failures. Comparative advantages, abstractions, and productivity growth are not examples of unwanted side effects of the market mechanism.

Question 2

Since a trade-off exists 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 trying to increase one may come at the cost of reducing the other. Therefore, policies designed to equalize income distribution may have negative effects on the size of total output. This implies that greater equality of distribution does not necessarily result in higher levels of output, which rules out option A. Option B is also incorrect, as the statement suggests that greater output may come at the cost of less equal distribution. Options C and D are extreme and incorrect.

Question 3

There are possible policies that could significantly reduce income inequality but opponents argue that such policies would be likely to lead to

Accepted Answer

Opponents of policies aimed at reducing income inequality often argue that such measures could lead to higher unemployment due to increased costs for businesses, which may result in job cuts or reduced hiring.

Question 4

The US Navy determines that the navigation system on its submarines, which use low-frequency radio waves, is reducing the population of humpback whales.The is an example of

Accepted Answer

The situation described here is an externality, which occurs when the actions of one party have an unintended impact on third parties who are not involved in the transaction. In this case, the Navy's use of low-frequency radio waves is harming the humpback whale population, which is not a party to the Navy's operations.

Question 5

In 1981, the US government passed a law that significantly lowered tax rates on high-income individuals.The premise was that high tax rates deter high-income individuals from working and investing, reducing the growth of the economy.This is an example of

Accepted Answer

The 1981 tax law reflects the balance between efficiency and equality, which is the essence of the equality-efficiency trade-off. The government believed that by lowering tax rates on high-income individuals, they would be incentivized to work and invest more, which would lead to economic growth. However, this policy also resulted in increased income inequality.

Question 6

Over the last 40 years, the gap between the rich and the poor in the United States has been increasing.Economists have justified this outcome by noting that

Accepted Answer

Economists have often argued that achieving greater efficiency is only possible when there is a greater inequality of income and wealth, as this motivates the people to work harder and invest their resources wisely. They argue that this ensures that there are enough resources available for economic growth and development, which benefits everyone in the long run. Therefore, inequality is seen as a necessary consequence of achieving greater efficiency, and not a policy outcome by itself.

Question 7

There is an inverse relationship between inflation and unemployment in the short run and this can be seen as an

Accepted Answer

The inverse relationship between inflation and unemployment is a key concept in macroeconomic policy choices. It is often referred to as the Phillips curve and policymakers use this relationship to implement policies to stabilize the economy. For example, if inflation is high and unemployment is low, the central bank may increase interest rates to reduce inflation, which would increase unemployment in the short run, and vice versa. This is not an example of the other options listed.

Question 8

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 scenario represents a classic example of externalities, which are costs or benefits that arise from economic activities that are not reflected in market prices. In this case, the use of chlorofluorocarbons has a negative externality (the destruction of the ozone layer) that is not accounted for by the market price of refrigerators and air conditioners. The government has to intervene to limit the use of these substances because the producer and consumer of the product don't face the full social cost of their actions.

Question 9

Suppose that interdiction efforts have stemmed the flow of illegal drugs into the United States.If there is no change in demand, this leads to higher prices for these substances.The result is an increase in crime as users attempt to maintain their now more expensive habits.Economists would call this effect

Accepted Answer

This is an example of a negative externality - the interdiction efforts meant to decrease drug use have unintentionally led to an increase in crime, which imposes costs on society that are not reflected in the price of the drug itself.

Question 10

A recent article about the US economy asked, "What is the price of low inflation?" In this context, the price is likely to be measured by

Accepted Answer

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

Question 11

The rationale for rent control is 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 supported on the grounds of equality, as it aims to protect moderate- to low-income families from rapidly rising rents and eviction. It does not have much to do with efficiency, externalities, or cost disease of services. However, opponents argue that rent control can lead to reduced supply of rental housing and shortages.

Question 12

An externality is defined as

Accepted Answer

An externality is an economic concept referring to a cost or benefit incurred by a third party not involved in a transaction. These external costs or benefits can be positive or negative and affect parties external to a transaction. For example, pollution emitted by a factory can negatively impact the health of neighboring residents, who are not involved in the transaction between the factory and its customers. The external cost incurred by the residents is an example of a negative externality.

Question 13

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 5 percent and fresh vegetables were in short supply.This illustrates the economic concept of the

Accepted Answer

The situation in Cuba illustrates the equality-efficiency trade-off, where efforts to increase equality (in this case, limiting the income gap between farmers and other workers) can lead to decreased efficiency in the economy (such as shortages of important goods like fresh vegetables).

Question 14

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 15

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 16

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 scenario illustrates a negative externality, where the factory's actions impose costs on the downstream community that are not reflected in the production costs of the factory. The factory is not taking into account the full cost of its production, which results in the residents of the downstream community suffering negative health effects.

Question 17

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 18

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, which involves weighing the costs and benefits of producing or providing one more unit of a good or service. In this case, the cost of adding one more student is zero since there are empty seats, so it makes sense to consider adding more students.

Question 19

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

Accepted Answer

The situation described is a classic example of a negative externality, where the cost of the noise pollution is being imposed on those who are not involved in the production or consumption of the air travel. Economic analysis of externalities would consider the trade-offs between the costs and benefits of the airport's operations to society as a whole.

Question 20

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 negative impact of the Aswan Dam on Egypt's historical structures such as the pyramids is an example of an externality. An externality is an unintended consequence of an economic activity that affects third parties who are not part of the transaction. In this case, the benefits of the dam (increased arable land and electricity) are enjoyed by the people of Egypt, but the negative impact on the pyramids is not factored into the decision-making process.

Quiz 1: What Is Economics