Chapter 5 & 6 (TEST 1)

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in a market economy the governments power to coerce can:

reduce private-sector risk and increase economic efficiency

How does governments power to coerce behavior tend to reduce private-sector risk?

By enforcing contracts and discouraging illegal behavior that threatens private property

Weak government enforcement of contracts and laws tends to

discourage economic activity by encourgaing private-sector coercion such as blackmail and extortion

The government of Southland wants to improve resource allocation in the country. Which of the following actions by the Southlad government is most likely to accomplish this?

Taking polluters and subsidizing firms that are creating significan positive externalities

Information problems create inefficient outcomes in:

both private and public sectors

the many layers of the federal government in the U.S

lead to economic inefficiencies because of difficulty aggregating and conveying information

In what way, if any, does the invisible hand affect government resource allocation?

It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses

Government officials tend to make

inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs

as it relates to corporations, the principal-agent problem is that:

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals)

as it relates to the political process, the principal-agent problem results from the:

inconsistency between voters’ interest in programs and politicians’ interest in reelection

the idea of government failure includes all of the following except:

extensive positive externalities from public and quasi-public goods.

suppose American winemakers convince the federal government to issue a directive to serve only domestically produced wine at government functions. This would be an example of:

rent-seeking behavior

government’s unfunded liabilites

result from the political bias toward immediate benefits and deferred costs

chronic budget deficits can be attributed to

voters wanting government prohrams but not wanting to pay taxes

monetary stimulus is only helpful to an economy

that is in recession

when a nation is in a debt crisis, the government’s level of debt is so high that

the government is unable to find willing lenders so it can continue borrowing

in a sporting goods store you can buy the equipment you want and forgo the rest. but in an election you "buy" the entire range of the candidate’s positions, including some you may not agree with. This difference:

reflects limited and bundled choices in the public sector

which of the following would be the best example of regulatory capture?

executives from the Ford, General Motors and Chrysler companies write the rules regulating automobile safety and fuel requirements


eliminates regulatory capture and can improve outcomes by increasing competition

Under what circumstances would government loan guarantees be socially beneficial

when the guarantees promote production of goods otherwise under produced by the private sector

which of the following will tend to socialize losses and privatize gains

government guarantees to private investors that they will get their money back even if the company fails

what is the main problem with government guarantees that socialize losses and privatize gains

they encourage overly risky investments by insulating private investors from any losses

political corruption occurs whenever:

government officials use unlawful misdirection of governmental resources of their own personal gain

individual accountability within the government bureaucracy

tends to be lacking because of civil service protections and the complexity of government

as it relates to owners and managers the principal-agent problem results from the

separation of corporate ownership and control

which of the following impacts would economists expect to result from chronic budget deficits

government control of an inefficiently large share of the economy’s resources

a government using fiscal policy in an attempt to stimulate the economy would do which of the following

raise government spending

when congressional representatives vote on an appropriations bill, they must vote yea or nay taking the bad with the good. This statement best reflects the:

concept of limited and bundled choices

senator A agrees to vote for senator K’s state project in exchange for senator K voting for senator A’s state project. This is an example of:


which of the following is a key difference between the economic activities of government and those of private firms

government has the legal right to force people to do things; private firms do not

which of the following is an activity of government that is not an activity of private firms

enforcing involuntary transactions

he governments ability to coerce can enhance economic efficiency by:

correcting market failures

which of the following is a source government failure?

the enormous size and scope of government

in corporation, owners are …. and managers are….


in representative democracy, voters are … and politicians are….


factors that impede the attainment of economic efficiency in the public sector are called:

government failures

a special-interest issue is one whose passage yields

large economic gains to a small number of people and small economic losses to a large number of people

the political tendency to favor spending priorities with immediate benefits but deferred costs results in:

chronic budget deficits, misdirection of stabilization policy and unfunded liabilities (all of these)

the U.S. federal governments largest unfunded liability is:

social security

government changes in interest rates to regulate the economy are part of

monetary policy

the price elasticity of demand coefficient measures

buyer responsiveness to price changes

the demand for a product is inelastic with respect to price if

consumers are largely unresponsive to a per unit price change

if the price elasticity of demand for a product is 2.5 then a price cut from $2.00 to $1.80 will

increase the quantity demanded by about 25 percent

if the demand for product X is inelastic a 4 percent increase in the price of X will

decrease he quantity of X demanded by less than 4%

if a firm can sell 3000 units of product A at $10 per unit and 5000 at $8 then

the price elasticity of demand is 2.25

most demand curves are relatively elastic in the upper-left portion because the original price:

from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small

the price elasticity of demand of a straight-line demand curve is

elastic in high-price ranges and inelastic in low-price ranges

if the demand for bacon is relatively elastic, a 10% decline in the price of bacon will

increase the amount demanded by more than 10%

the price of product X is reduced from $100 to $90 and as a result the quantity demanded increases from 50 to 60 units. Therefore demand for X in this price range

is elastic

if quantity demanded is completely unresponsive to price changes demand is

perfectly inelastic

a firm can sell as much as it wants at a constant price. Demand is thus

perfectly elastic

when the percentage change in price is greater than the resulting percentage change in quantity demanded

an increase in price will increase total revenue

which of the following statements is not correct

in the range of prices in which demand is elastic, total rev will diminish as price decreases

in which of the following instances will total revenue decline

price rises and demand is elastic

if a firm finds that it can sell $13000 worth of a product when its price is $5 per unit and $11000 worth of it when its price is $6 then

the demand for the product is elastic in the $6-$5 price range

gigantic state university raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is

relatively elastic

other things the same if a price change causes total revenue to change in the opposite direction demand is

relatively elastic

if the price elasticity of demand for a product is unity a decrease in price will

increase the quantity demanded but total revenue will be unchanged

in which of the following cases will total revenue increase

price rises and demand is inelastic

the total revenue test for elasticity

does not apply to supply because price and total revenue always move together

the state legislature has cut gigantic state university appropriations GSU’s board of regents decided to increase tuition and fees to compensate for the loss of revenue

demand for education at GSU is inelastic

which of the following is correct

id demand I elastic a decrease in price will increase total revenue

we would expect

the demand for Coca-Cola to be more elastic than the demand for soft drinks in general

price elasticity of demand is generally

greater in the long run than in the short run

the demand for luxury good whose purchase would exhaust a big portion of ones income is

relatively price elastic

the supply of product X is elastic if the price of X rises by

5% and quantity supplied rises by 7%

it takes a considerable amount of time to increase the production of pork. This implies that

the short-run supply curve for pork is less elastic than the long-run supply curve for pork

supply curves tend to be

more elastic in the long run because there is time for firms to enter or leave the industry

the price elasticity of supply measures how

responsive the quantity supplied of X is to changes in the price of X

the main determinant of elasticity of supply is the:

amount of time the producer has to adjust inputs in response to a price change

studies show that the demand for gasoline is

price inelastic in both short and long run

the formula for cross elasticity of demand is percentage change in

quantity demanded of X/percentage change in price of Y

cross elasticity of demand measure how sensitive purchases of a specific product are to changes in

the price of some other product

which type of goods is most adversely affected by recessions

goods for which the income elasticity coefficient is relatively high and positive

the basic formula for the price elasticity of demand coefficient is

percentage change in quantity demanded/percentage change in price

which of the following is not characteristic of the demand for commodity that is elastic

the elasticity coefficient is less than one

a perfectly inelastic demand schedule

can be represented by a line parallel to the vertical axis

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