Question 1

"I believe that consumer sovereignty is a good thing." This person believes that:

Accepted Answer

A)  people are often manipulated by advertisers. 
B)  businesses should produce for people's needs, not for profits. 
C)  people often have self-control problems. 
D)  businesses should produce what people want.

Question 2

One issue with using lifetime earnings as a proxy for human life is that it treats upper-income jobs and hence individuals in those jobs as more valuable than lower-income individuals.

Accepted Answer

A) True 
 B)False

Question 3

The group of economists that has stressed the idea of government failure is:

Accepted Answer

A)  mainstream economists. 
B)  Pre-Marxian economists. 
C)  public choice economists. 
D)  neo-Keynesian economists.

Question 4

Most economists agree that the best way to evaluate policy is to:

Accepted Answer

A)  learn if the policy can be determined through a democratic political process, not simply imposed by a bureaucracy. 
B)  determine whether the public thought that the government had done all it could do to solve the problem. 
C)  know whether the intentions behind the policy were good intentions. 
D)  compare the actual benefits of the policy with the actual costs.

Question 5

To use cost/benefit analysis to decide whether to attend college, a prospective student must take into account all of the following except the:

Accepted Answer

A)  income which will have to be forgone during the years when the student is attending classes rather than working. 
B)  difference between expected lifetime earnings with a college degree and expected lifetime earnings without a college degree. 
C)  basic entertainment expenses during the time spent in college that the student would have spent even if not attending college. 
D)  additional expenses incurred while attending college, such as tuition and books.

Question 6

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. It is expected that 180 deaths will occur if the gas tank location is not redesigned. If a human life can be valued at $500,000, the expected benefit of redesigning the location of the gas tank is:

Accepted Answer

A)  $90,000,000. 
B)  $900,000,000. 
C)  $5,500,000. 
D)  $550,000,000.

Question 7

A key assumption of public choice economics is that government officials are:

Accepted Answer

A)  not rational. 
B)  not influenced by incentives. 
C)  rational and respond to incentives. 
D)  trying to do only what is best for society.

Question 8

Which of the following is one of the reasons economists sometimes differ in their views on social policy?

Accepted Answer

A)  Economists' subjective value judgments tend to be very similar. 
B)  Most so-called economists have received no formal training. 
C)  Different models focus on different aspects of a problem. 
D)  Empirical evidence is so precise that there is little room for different interpretations.

Question 9

If individuals' demand in the marketplace does not reflect their true welfare:

Accepted Answer

A)  total surplus will be maximized. 
B)  consumer surplus will be negative. 
C)  the market result will still be efficient. 
D)  the market result will be inefficient.

Question 10

Basing decisions on marginal cost and marginal benefit means that people should:

Accepted Answer

A)  take no chances. 
B)  make only Pareto optimal choices. 
C)  weigh the costs and benefits and make the choice that provides the highest net benefit. 
D)  weigh the costs and benefits and make the choice that provides the highest net cost.

Question 11

A proposal to build a dam on a wild river may look like a good idea from the cost/benefit study done by the Army Corps of Engineers, but an analysis done by the Sierra Club might suggest that the dam would be a complete waste of money. When different groups give us radically different cost/benefit results:

Accepted Answer

A)  we have an example of how cost/benefit analysis does not work as a way of forming policy. 
B)  the studies may still be useful if we can see the underlying assumptions and estimates of each group. 
C)  we should realize that sometimes it is best to trust in the political process rather than try to use an economic approach. 
D)  we should conclude that the best way to decide who is telling the truth is to find which group has the best intentions.

Question 12

A government policy maker is trying to decide which of four methods of reducing highway noise in a residential area should be implemented. She is looking at these four options: $\begin{array} { | c | c | c | } 
\hline \text { Plan } & \text { Benefits } & \text { Custs } \
\hline \text { A } & \$ 500,000 & \$ 490,000 \
\hline \text { B } & \$ 550,000 & \$ 530,000 \
\hline \text { C } & \$ 570,000 & \$ 540,000 \
\hline \text { D } & \$ 600,000 & \$ 580,000 \
\hline
\end{array}$ If she uses the cost/benefit logic of economics, which plan will she propose?

Accepted Answer

A)  Plan A 
B)  Plan B 
C)  Plan C 
D)  Plan D

Question 13

Most economists believe that:

Accepted Answer

A)  government cannot correct failures of market outcome. 
B)  a government policy designed to correct the failure of a market outcome is always more desirable than living with the failure. 
C)  a policy decision must weigh the costs of market failure against the costs of government failure. 
D)  it is always better to change the price structure by subsidizing goods than to openly give money to individuals to achieve distributional goals.

Question 14

"I recognize that the market is effective at getting resources to their most valued uses, but I also recognize that the market can produce results that are grossly unfair." This speaker is implying:

Accepted Answer

A)  both market failure and failure of market outcome. 
B)  market failure but not failure of market outcome. 
C)  failure of market outcome but not market failure. 
D)  neither market failure nor failure of market outcome.

Question 15

Courts often estimate the value of human life on the basis of a person's earnings over that person's remaining life span.

Accepted Answer

A) True 
 B)False

Question 16

U.S. government laws limit the importation of sugar into the United States. As a result, the U.S. price of sugar is about three times as high as the world price of sugar. U.S. sugar producers strongly support these rules. How would most economists explain this policy?

Accepted Answer

A)  It is an example of a form of sin tax intended to help people with a self-control problem involving sweets. 
B)  It illustrates the public choice view that small gains concentrated to a few producers can be more important politically than large losses spread over many consumers. 
C)  The policy is a way of solving an income distribution problem; it redistributes from the rich to the poor. 
D)  It is an example of the government using cost/benefit analysis to correct a market failure.

Question 17

When public choice economists look at labor markets, they:

Accepted Answer

A)  capture the same aspects of reality that are captured by other economists. 
B)  focus on the tensions among social classes and generally see exploitation of workers by capitalists. 
C)  generally see supply and demand forces leading to equilibrium. 
D)  see individuals lobbying politicians to protect their monopolies.

Question 18

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. It is expected that 180 deaths will occur if the gas tank location is not redesigned. Failure to redesign the gas tank location therefore implies that the automobile company is implicitly valuing human life at:

Accepted Answer

A)  exactly $500,000. 
B)  more than $736,889. 
C)  less than $736,889. 
D)  more than $1,000,000.

Question 19

Which of the following is not an example of a failure of market outcome?

Accepted Answer

A)  Income is not distributed in a way society wants. 
B)  Emission of pollutants is producing acid rain and killing wildlife. 
C)  Addicts continue to use heroin even though they would be better off without it. 
D)  A person with a gun offers you your life for your money.

Question 20

Public choice economists believe that:

Accepted Answer

A)  incentives encourage government to achieve its goal in the least-cost manner. 
B)  incentives encourage government to provide a policy that its voting constituency likes. 
C)  government is not subject to the laws of supply and demand. 
D)  government does not weigh the costs and benefits of various programs.

Exam 23: Microeconomic Policy, Economic Reasoning, and Beyond