Unit 5

Question 1

A(n) ___ is a contract that permits its owner to buy a specified quantity of stocks of a corporation at a future date, but at the price specified in the contract rather than the stock’s market price at the date of purchase.

Answer 1

Stock option

Question 2

___ are people hired to run a complex enterprise on behalf of the ___, those whose benefit the enterprise is supposed to serve.

Answer 2

Agents; principals

Question 3

___ refers to the tendency of insurance to discourage policyholders from protecting themselves from risk.

Answer 3

Moral hazard

Question 4

___ refers to unproductive activity in the pursuit of economic profit - in other words, undeserved profit in excess of competitive earnings.

Answer 4

Rent seeking

Question 5

A commodity is ___ if someone who does not pay for it can be kept from enjoying it.

Answer 5

Excludable

Question 6

A commodity is ___ if it is used up when someone consumes it.

Answer 6

Depletable

Question 7

A(n) ___ is a commodity characterized by both depletability and excludability.

Answer 7

Private good

Question 8

A(n) ___ is a commodity or service whose benefits are not depleted by an additional user and from which it is generally difficult or impossible to exclude people, even if the people are unwilling to pay for the benefits.

Answer 8

Public good

Question 9

The ___ is the share of an activity’s marginal benefit that is received by the persons who carry out the activity.

Answer 9

Marginal Private Benefit (MPB)

Question 10

The ___ of the personal services is the tendency of the costs and prices of these services to rise persistently faster than those of the average output in the economy.

Answer 10

cost disease

Question 11

The ___ of an activity is the sum of its marginal private benefit plus its incidental benefits (positive or negative) that are received by others, and for which those others do not pay.

Answer 11

Marginal Social Benefit (MSB)

Question 12

The ___ is the share of an activity’s marginal cost that is paid for by the persons who carry out the activity.

Answer 12

Marginal Private Cost (MPC)

Question 13

The ___ is a curve that shows the maximum quantities of outputs it is possible to produce with the available resource quantities and the current state of technological knowledge.

Answer 13

Production possibilities frontier

Question 14

___ are government rules that tell organizations or individuals what processes or raw materials they may use or what products they are permitted to supply or purchase.

Answer 14

Direct controls

Question 15

___ are taxes that polluters are required to pay. The amount they pay depends on what they emit and in what quantities.

Answer 15

Pollution charges (taxes on emissions)

Question 16

___ are licenses issued by government specifying the maximum amount the license holder is allowed to emit. The licenses are restricted to permit a limited amount of emissions in total. Often, they must be purchased from the government or an a special market.

Answer 16

Emissions permits

Question 17

___ occurs when the economic reactions to a tax cause prices and outputs in the economy to change, thereby shifting part of the burden of the tax onto others.

Answer 17

Tax shifting

Question 18

The ___ is an allocation of the burden of the tax to specific individuals or groups.

Answer 18

Incidence of a tax

Question 19

The ___ of a tax to an individual is the amount by which the burden of the tax exceeds the tax that is paid.

Answer 19

Excess burden

Question 20

The ___ to an individual is the amount one would have to be given to be just as well off with the tax as without it.

Answer 20

Burden of a tax

Question 21

The ___ holds that people who derive benefits from a service should pay the taxes that finance it.

Answer 21

Benefits Principle of Taxation

Question 22

The ___ of taxation refers to the idea that people with greater ability to pay taxes should pay higher taxes.

Answer 22

Ability-to-pay Principle

Question 23

___ refers to the notion that differently situated individuals should be taxed differently in a way that society deems to be fair.

Answer 23

Vertical equity

Question 24

___ is the notion that equally situated individuals should be taxed equally.

Answer 24

Horizontal equity

Question 25

___ refers to the system of grants from one level of government to the next.

Answer 25

Fiscal federalism

Question 26

The ___ is levied on the assessed values of taxable properties, such as houses and office buildings.

Answer 26

Property tax

Question 27

The ___ raises funds from the payroll tax and pays Social Security benefits to retirees.

Answer 27

Social Security System

Question 28

A(n) ___ is a sum of money that may be subtracted before the taxpayer computes taxable income.

Answer 28

Tax deduction

Question 29

A particular source of income is ___ if income from that source is not taxable.

Answer 29

Tax exempt

Question 30

A(n) ___ is a special provision in the tax code that reduces taxation below normal rates (perhaps to zero) if certain conditions are met.

Answer 30

tax loophole

Question 31

The ___ is a tax levied on the income of an individual or a family, typically with a progressive rate structure.

Answer 31

Personal income tax

Question 32

___ are taxes levied on specific economic activities.

Answer 32

Indirect taxes

Question 33

___ are taxes levied directly on people.

Answer 33

Direct taxes

Question 34

The ___ is the fraction of each additional dollar of income that is paid in taxes.

Answer 34

Marginal tax rate

Question 35

The ___ is the ratio of taxes to income

Answer 35

average tax rate

Question 36

A(n) ___ is one in which the average tax rate falls as income rises.

Answer 36

regressive tax

Question 37

A(n) ___ is one in which the average tax rate is the same at all income levels.

Answer 37

Proportional tax

Question 38

A(n) ___ is one in which the average tax rate paid by an individual rises as income rises.

Answer 38

Progressive tax

Question 39

A(n) ___ is a tax levied on the purchase of some specific good or service.

Answer 39

excise tax

Question 40

The ___ is a tax levied on the profits of corporations, after all expenditures on wages, interest, rent, and purchases of other inputs are deducted.

Answer 40

Corporate income tax

Question 41

The ___ is a tax levied on the earnings from work. In the United States, the tax starts at the first dollar earned and ends at an upper limit that increases each year.

Answer 41

payroll tax

Question 42

The ___ of an input is the money value of the additional sales that a firm obtains by selling the marginal physical product of that input.

Answer 42

marginal revenu product (MRP)

Question 43

The ___ of an input is the increase in output that results from a one-unit increase in the use of the input, holding the amounts of all other inputs constant.

Answer 43

marginal physical product (MPP)

Question 44

___ is the act of starting new firms, introducing new products and technological innovations, and in general, taking the risks that are necessary to seek out business opportunities.

Answer 44

Entrepreneurship

Question 45

___ are the broad categories - land, labor, capital, exhaustible natural resources, and entrepreneurship - into which we classify the economy’s different productive inputs.

Answer 45

Factors of production

Question 46

___ is land that is just on the borderline of being used - that is, any land the use of which would be unprofitable if the farmer had to pay even a penny of rent.

Answer 46

Marginal land

Question 47

___ is the portion of the earnings of a factor of production that exceeds the minimum amount necessary to induce that factor to be supplied.

Answer 47

Economic rent

Question 48

___ is the payment for the use of funds employed in the production of capital; it is measured as the percent per year of the value of the funds tied up in the capital.

Answer 48

Interest

Question 49

___ is the flow of resources into the production of new capital. It is the labor, steel, and other inputs devoted to the construction of factories, warehouses, railroads, and other pieces of capital during some period of time.

Answer 49

Investment

Question 50

___ refers to an inventory (stock) of plant, equipment, and other (generally durable) productive resources held by a business firm, an individual, or some other organization.

Answer 50

Capital

Question 51

The ___ for an input is the demand for the input by producers as determined by the demand for the final product that the input is used to produce.

Answer 51

derived demand

Question 52

The process that has been invented for making the magnitudes of payments at different dates comparable to one another is called ___.

Answer 52

discounting, or computing the present value

Question 53

___ is taking the next step, the act of putting the new idea into practical use.

Answer 53

Innovation

Question 54

___ is the act of generating an idea for a new product or a new method for making an old product.

Answer 54

Invention

Question 55

___ is the total revenue of a firm minus all of its costs, including the interest payments and opportunity costs of the capital it obtains from its investors.

Answer 55

Economic profit