Exam I review

Question 1

3 solutions to externalities

Answer 1

1. place a tax
2. sell permits (cap and trade)
3. command and control

Question 2

allocative efficiency

Answer 2

where one individual cannot improve their position without hurting the other (MRSx=MRSy)

Question 3

envy free allocation

Answer 3

where both individuals are content with what they receive (MRSx=MRSy)

Question 4

where’s the point that we know we are producing efficiently?

Answer 4

MRTSx = MRTSy

-every firm faces the same relative cost of inputs

Question 5

three criteria for efficient allocations and perfectly competitive markets

Answer 5

1. MRSi = MRSj
   - forces every consumer to face same relative cost of goods
2. MRTSa = MRTSb
   - requires that producers face the same relative cost for inputs
3. MRT = MRSi
   - requires that the preferences of an individual consumer be the same as that of society

Question 6

externality

Answer 6

something you do that causes a benefit or harm to someone else as a byproduct

Question 7

methods for reducing pollution

Answer 7

1. reduce total output
2. change the mix of inputs
3. change the technology

Question 8

methods for allocating pollution

Answer 8

1. force firms to cut pollution by a certain, fixed percentage
2. force firms to both spend a certain marginal cost to reach pollution reduction goal

Question 9

Distribution of federal expenditures in 1960 and 2010 for healthcare

Answer 9

3% and 25%

Question 10

Distribution of federal expenditures in 1960 and 2010 for net interest

Answer 10

10% and 8%

Question 11

Distribution of federal expenditures in 1960 and 2010 for unemployment and disability

Answer 11

9% and 9%

Question 12

Distribution of federal expenditures in 1960 and 2010 for social security

Answer 12

13% and 16%

Question 13

Distribution of federal expenditures in 1960 and 2010 for education, welfare, and housing

Answer 13

4% and 11%

Question 14

Distribution of federal expenditures in 1960 and 2010 for national defense

Answer 14

49% and 19%

Question 15

the distribution of federal revenues in 1960 and 2010 for income taxes

Answer 15

44% and 42%

Question 16

the distribution of federal revenues in 1960 and 2010 for social insurance contributions

Answer 16

17% and 35%

Question 17

the distribution of federal revenues in 1960 and 2010 for corporate taxes

Answer 17

23% and 13%

Question 18

the distribution of federal revenues in 1960 and 2010 for excise taxes

Answer 18

13% and 3%

Question 19

substitution effect

Answer 19

the impact that a change in the price of a good has on the quantity demanded of that good, which is due to the resulting change in relative prices

Question 20

income effect

Answer 20

the impact that the change in a price of a good has on the quantity demanded of that good due strictly to the resulting change in real income (or purchasing power)