Questions and Answers of Economics Principles and Policy

6. What is the tax incidence of an excise tax when demand is highly inelastic? Highly elastic? What effect does the elasticity of supply have on the incidence of an excise tax? What is the efficiency
4. Distinguish between the benefits-received and the abilityto-pay principles of taxation. Which philosophy is more evident in our present tax structure? Justify your answer. To which principle of
3. What is the most important source of revenue and the major type of expenditure at the Federal level? At the state level? At the local level? LO1
1. Use a circular flow diagram to show how the allocation of resources and the distribution of income are affected by each of the following government actions. LO1a. The construction of a new high
4. Demonstrate how the distribution of income between rich and poor is affected by government taxes, transfers, and spending.
3. Explain the principles relating to tax shifting, tax incidence, and the efficiency losses caused by taxes.
2. Summarize the different philosophies regarding the distribution of a nation’s tax burden.
1. Identify the main categories of government spending and the main sources of government revenue.
4. Eric and Kyle are fishermen with different equipment and, as a result, different costs for catching fish. Eric’s costs for catching fish are $1000 per ton for the first five tons and then $2500
12. LAST WORD The figure in the Last Word section shows that a 10-fold increase in a country’s GDP per person is associated with about a 20-point increase in EPI. On the other hand, GDP per person
11. Aquaculture is the growing of fish, shrimp, and other seafood in enclosed cages or ponds. The cages and ponds not only keep the seafood from swimming away but also provide aquaculturists with
9. ADVANCED ANALYSIS User cost is equal to the present value of future profits in the model presented in Figure 15.7 . Will the optimal quantity to mine in the present year increase or decrease if
8. ADVANCED ANALYSIS Suppose that a government wants to reduce its economy’s dependence on coal and decides as a result to tax coal mining companies $1 per ton for every ton of coal that they mine.
7. If the current market price rises, does current extraction increase or decrease? What if the future market price rises? Do these changes in current extraction help to ensure that the resource is
6. Recall the model of nonrenewable resource extraction presented in Figure 15.7 . Suppose that a technological breakthrough means that extraction costs will fall in the future(but not in the
4. Suppose that you hear two people arguing about energy.One says that we are running out of energy. The other counters that we are running out of cheap energy. Explain which person is correct and
3. Resource consumption per person in the United States is either flat or falling, depending on the resource. Yet living standards are rising because of technological improvements that allow more
2. Demographers have been surprised that total fertility rates have fallen below 2.0, especially because most people in most countries tell pollsters that they would like to have at least two
1. Describe Thomas Malthus’s theory of human reproduction.Does it make sense for some species—say, bacteria or rabbits?What do you think makes humans different? LO1
5. Relate how to use property rights to prevent deforestation and species extinction.
4. Show how the profit motive can encourage resource conservation.
3. Discuss why running out of oil would not mean running out of energy.
2. Describe why using a mix of energy sources is efficient, even if some of them are quite costly.
1. Explain why falling birthrates mean that we are not likely to run out of natural resources.
13. What is the combined rent, interest, and profit share of the income earned by Americans in a typical year if proprietors’income is included within the labor (wage) share? LO5
12. Why is the distinction between insurable and uninsurable risks significant for the theory of profit? Carefully evaluate:“All economic profit can be traced to either uncertainty or the desire to
10. Historically, usury laws that put below-equilibrium ceilings on interest rates have been used by some states to make credit available to poor people who could not otherwise afford to borrow.
9. Distinguish between nominal and real interest rates. Which is more relevant in making investment and R&D decisions?If the nominal interest rate is 12 percent and the inflation rate is 8 percent,
8. What are the major economic functions of the interest rate?How might the fact that many businesses finance their investment activities internally affect the efficiency with which the interest rate
6. Why is the supply of loanable funds upsloping? Why is the demand for loanable funds downsloping? Explain the equilibrium interest rate. List some factors that might cause it to change. LO2
4. How does Henry George’s proposal for a single tax on land relate to the elasticity of the supply of land? Why are there so few remaining advocates of George’s proposal? LO3
1. How does the economist’s use of the term “rent” differ from everyday usage? Explain: “Though rent need not be paid by society to make land available, rental payments are useful in guiding
5,. List the share of U.S. earnings received by each of the factors of production.
4. Relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses.
3. Demonstrate how interest rates relate to the timevalue of money and vary based on risk, maturity, loan size, and taxability.
2. Describe the loanable funds theory of interest rates.
Explain the nature of economic rent and how it is determined.
Suppose that a delivery company currently uses one employee per vehicle to deliver packages. Each driver delivers 50 packages per day, and the firm charges $20 per package for delivery. LO7a. What is
Union wages are on average about 15 percent higher than nonunion wages in comparable jobs. Restrictive union work rules, output losses from strikes, and labor misallocation from the union wage
Collective bargaining determines the terms of union work agreements, which typically cover (a) union status and managerial prerogatives; (b) wages, hours, and working conditions;(c) control over job
2. Union membership has declined as a percentage of the labor force and in absolute numbers in recent decades. Some of the key causes are structural changes such as the shift from manufacturing
1. About 8 million of the 15.3 million union members in 2009 belonged to unions affiliated with the AFL-CIO; another 6 million belonged to 7 unions loosely federated under the name Change to Win. The
By how much does the monoposonist reduce wages below the competitive wage? By how much does the monopsonist reduce employment below the competitive level?
Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker (so that the second worker must be paid$9, the third $12,
Complete the following labor supply table for a firm hiring labor competitively: LO2a. Show graphically the labor supply and marginal resource (labor) cost curves for this firm. Are the curves the
What is meant by investment in human capital? Use this concept to explain ( a ) wage differentials and ( b ) the long-run rise of real-wage rates in the United States. LO5
Have you ever worked for the minimum wage? If so, for how long? Would you favor increasing the minimum wage by a dollar? By two dollars? By five dollars? Explain your reasoning. LO5
Why is a firm in a purely competitive labor market a wage taker? What would happen if it decided to pay less than the going market wage rate? LO2
Explain why the general level of wages is high in the United States and other industrially advanced countries. What is the single most important factor underlying the long-run increase in average
A rightward shift of the labor supply curve in graph (a) would shift curve:a. d 5 mrp leftward in graph (b).b. d 5 mrp rightward in graph (b).c. s 5 MRC upward in graph (b).d. s 5 MRC downward in
In employing five workers, the firm represented in graph (b):a. has a total wage cost of $6000.b. is adhering to the general principle of undertaking all actions for which the marginal benefit
This firm’s labor demand curve d in graph (b) slopes downward because:a. the law of diminishing marginal utility applies.b. the law of diminishing returns applies.c. the firm must lower its price
The supply-of-labor curve S slopes upward in graph (a) because:a. the law of diminishing marginal utility applies.b. the law of diminishing returns applies.c. workers can afford to “buy” more
(Appendix) Relate who belongs to U.S. unions, the basics of collective bargaining, and the economic effects of unions.
Identify the types, benefits, and costs of “pay-forperformance”plans.
List the major causes of wage differentials.
Discuss how unions increase wage rates and how minimum wage laws affect labor markets.
Demonstrate how monopsony (a market with a single employer) can reduce wages below competitive levels.
Show how wage rates and employment levels are determined in competitive labor markets.
Explain why labor productivity and real hourly compensation track so closely over time.
Consider a small landscaping company run by Mr. Viemeister.He is considering increasing his firm’s capacity. If he adds one more worker, the firm’s total monthly revenue will increase from
Suppose that a monopoly firm finds that its MR is $50 for the first unit sold each day, $49 for the second unit sold each day, $48 for the third unit sold each day, and so on.Further suppose that the
Suppose that marginal product tripled while product price fell by one-half in Table 12.1 . What would be the new MRP values in Table 12.1 ? What would be the net impact on the location of the
A delivery company is considering adding another vehicle to its delivery fleet, all the vehicles of which are rented for$100 per day. Assume that the additional vehicle would be capable of delivering
LAST WORD Explain the economics of the substitution of ATMs for human tellers. Some banks are beginning to assess transaction fees when customers use human tellers rather than ATMs. What are these
Florida citrus growers say that the recent crackdown on illegal immigration is increasing the market wage rates necessary to get their oranges picked. Some are turning to$100,000 to $300,000
In each of the following four cases, MRP L and MRP C refer to the marginal revenue products of labor and capital, respectively, and P L and P C refer to their prices. Indicate in each case whether
Suppose the productivity of capital and labor are as shown in the table on the next page. The output of these resources sells in a purely competitive market for $1 per unit. Both capital and labor
What factors determine the elasticity of resource demand?What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used to produce
In 2009 General Motors (GM) announced that it would reduce employment by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource
At the bottom of the page, complete the labor demand table for a firm that is hiring labor competitively and selling its product in a competitive market. LO2a. How many workers will the firm hire if
What is the significance of resource pricing? Explain how the factors determining resource demand differ from those determining product demand. Explain the meaning and significance of the fact that
Determine how a competitive firm selects its optimal combination of resources.
Discuss the determinants of elasticity of resource demand.
List the factors that increase or decrease resource demand.
Convey how the marginal revenue productivity of a resource relates to a firm’s demand for that resource.
Explain the significance of resource pricing.
Show how technological advance enhances productive efficiency and allocative efficiency.
Discuss the role of market structure in promoting technological advance.
Relate why firms can benefit from their innovation even though rivals have an incentive to imitate it.
Summarize how a firm determines its optimal amount of research and development (R&D).
Explain how entrepreneurs and other innovators further technological advance.
Differentiate between an invention, an innovation, and technological diffusion.
Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible(believable). Look back at Figure 11.3 in the chapter (not in this appendix).
Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 11.3 in the chapter (not in this appendix). Suppose that if one firm sets a low price while the other sets a
ADVANCED Suppose you are playing a game in which you and one other person each pick a number between 1 and 100, with the person closest to some randomly selected number between 1 and 100 winning the
3. Refer to the payoff matrix below. LO8Assuming this is a sequential game with no collusion, what is the outcome if Firm A moves first to build a new type of commercial aircraft? Explain why
2. Refer to the payoff matrix in question 8 at the end of this chapter. First, assume this is a one-time game. Explain how the $60/$57 outcome might be achieved through a credible threat. Next,
1. Is the game shown by Figure 11.3 in the chapter (not this appendix)a zero-sum game or is it a positive-sum game? How can you tell? Are there dominant strategies in this game? If so, what are they?
3. Suppose that an oligopolistically competitive restaurant is currently serving 230 meals per day (the output where MR 5 MC). At that output level, ATC per meal is $10 and consumers are willing to
2. Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that
1. Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 23%, 22%, 18%, 12%, 11%, 8%, and 6%. What is the
13. LAST WORD What firm dominates the U.S. beer industry?What demand and supply factors have contributed to“fewness” in this industry?
12. ADVANCED ANALYSIS Construct a game-theory matrix involving two firms and their decisions on high versus low advertising budgets and the effects of each on profits. Show a circumstance in which
11. Why is there so much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? Why might it be excessive at times? LO7
10. Why might price collusion occur in oligopolistic industries?Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate as to why price leadership
9. What assumptions about a rival’s response to price changes underlie the kinked-demand curve for oligopolists? Why is there a gap in the oligopolists’ marginal-revenue curve?How does the
8. Explain the general meaning of the profit payoff matrix at the top of the next column for oligopolists X and Y. All profit figures are in thousands. LO4a. Use the payoff matrix to explain the
7. Answer the following questions, which relate to measures of concentration: LO3a. What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of
6. Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition? LO3

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