Reference for students part 2.docx
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Reference for students part 2.docx
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Referenceforstudentspart2
TRUE/FALSE
1,Totalsurplusisalwaysequaltothesumofconsumersurplusandproducersurplus.
ANS:
F
2,Totalsurplusinamarketdoesnotchangewhenthegovernmentimposesataxonthatmarketbecausethelossofconsumersurplusandproducersurplusisequaltothegainofgovernmentrevenue.
ANS:
F
3,Whenataxisimposedonbuyers,consumersurplusandproducersurplusbothdecrease.
ANS:
T
4,Whenataxisimposedonsellers,producersurplusdecreasesbutconsumersurplusincreases.
ANS:
F
5,Taxesaffectmarketparticipantsbyincreasingthepricepaidbythebuyerandreceivedbytheseller.
ANS:
F
6,Whenagoodistaxed,thetaxrevenuecollectedbythegovernmentequalsthedecreaseinthewelfareofbuyersandsellerscausedbythetax.
ANS:
F
7,Whenataxisimposed,thelossofconsumersurplusandproducersurplusasaresultofthetaxexceedsthetaxrevenuecollectedbythegovernment.
ANS:
T
8,Theelasticitiesofthesupplyanddemandcurvesinthemarketforcigarettesaffecthowmuchataxdistortsthatmarket.
ANS:
T
9,Thedeadweightlossofataxrisesevenmorerapidlythanthesizeofthetax.
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T
10,TheLaffercurveisthecurveshowinghowtaxrevenuevariesasthesizeofthetaxvaries.
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T
11,TheresultofthelargetaxcutsinthefirstReaganAdministrationdemonstratedveryconvincinglythatArthurLafferwascorrectwhenheassertedthatcutsintaxrateswouldincreasetaxrevenue.
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F
12,Themoreelasticaresupplyanddemandinamarket,thegreaterarethedistortionscausedbyataxonthatmarket,andthemorelikelyitisthatataxcutinthatmarketwillraisetaxrevenue.
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T
13,Tradedecisionsarebasedontheprincipleofabsoluteadvantage.
ANS:
F
14,IfArgentinaexportsorangestotherestoftheworld,Argentina'sproducersoforangesareworseoff,andArgentina'sconsumersoforangesarebetteroff,asaresultoftrade.
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F
15,Inprinciple,tradecanmakeanationbetteroff,becausethegainstothewinnersexceedthelossestothelosers.
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T
16,Ifatariffisplacedonwatches,thepriceofbothdomesticandimportedwatcheswillrisebytheamountofthetariff.
ANS:
T
17,Deadweightlossmeasuresthedecreaseintotalsurplusthatresultsfromatarifforquota.
ANS:
T
18,Economistsagreethattradeoughttoberestrictediffreetrademeansthatdomesticjobsmightbelostbecauseofforeigncompetition.
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F
19,GATTisanexampleofasuccessfulunilateralapproachtoachievingfreetrade.
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F
20,Marketssometimesfailtoallocateresourcesefficiently.
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T
21,Buyersandsellersneglecttheexternaleffectsoftheiractionswhendecidinghowmuchtodemandorsupply.
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T
22,Inamarketcharacterizedbyexternalities,themarketequilibriumfailstomaximizethetotalbenefittosocietyasawhole.
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T
23,Inamarketwithpositiveexternalities,themarketequilibriumquantitymaximizesthewelfareofsocietyasawhole.
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F
24,Barkingdogscannotbeconsideredanexternalitybecauseexternalitiesmustbeassociatedwithsomeformofmarketexchange.
ANS:
F
25,Whenadriverentersacrowdedhighwayheincreasesthetraveltimesofallotherdriversonthehighway.Thisisanexampleofanegativeexternality.
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T
26,Thegovernmentcaninternalizeexternalitiesbytaxinggoodsthathavenegativeexternalitiesandsubsidizinggoodsthathavepositiveexternalities.
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T
27,Governmentinterventionintheeconomywiththegoalofpromotingtechnology-producingindustriesisknownaspatentpolicy.
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F
28,Correctivetaxesaremoreefficientthanregulationsforkeepingtheenvironmentclean.
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T
29,Socialwelfarecanbeenhancedbyallowingfirmstotradetheirrightstopollute.
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T
30,Governmentcanbeusedtosolveexternalityproblemsthataretoocostlyforprivatepartiestosolve.
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T
31,AccordingtotheCoasetheorem,theprivatemarketwillneedgovernmentinterventioninordertoreachanefficientoutcome.
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F
32,AccordingtotheCoasetheorem,ifprivatepartiescanbargainwithoutcost,thentheprivatemarketwillsolvetheproblemofexternalities.
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T
33,AccordingtotheCoaseTheorem,individualscanalwaysworkoutamutuallybeneficialagreementtosolvetheproblemsofexternalitiesevenwhenhightransactioncostsareinvolved.
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F
34,ManycharitiesliketheSierraClubareestablishedtodealwithexternalities.
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T
35,Whengoodsareavailablefreeofcharge,themarketforcesthatnormallyallocateresourcesinoureconomyareabsent.
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T
36,Somegoodscanbeclassifiedaseitherpublicgoodsorprivategoodsdependingonthecircumstances.
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T
37,Insomecasesthegovernmentcanmakeeveryonebetteroffbyraisingtaxestopayforcertaingoodsthatthemarketfailstoprovide.
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T
38,Oneperson'suseofcommonresourcesdoesnotreducetheenjoymentotherpeoplereceivefromtheresource.
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F
39,TheaverageAmericanpaysahigherpercentofhisincomeintaxestodaythanhewouldhaveinthelate18thcentury.
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T
40,Individualincometaxesandsocialinsurancetaxesgeneratethehighesttaxrevenueforthefederalgovernment.
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T
41,Abudgetsurplusoccurswhengovernmentreceiptsfallshortofgovernmentspending.
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F
42,Abudgetdeficitoccurswhengovernmentreceiptsexceedgovernmentspending.
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F
43,IntheUnitedStates,allfamiliespaythesameproportionoftheirincomeintaxes.
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F
44,Deadweightlossesarisebecauseataxcausessomeindividualstochangetheirbehavior.
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T
45,Taxevasionislegal,buttaxavoidanceisillegal.
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F
46,Antipovertyprogramsfundedbytaxesonthewealthyaresometimesadvocatedonthebasisofthebenefitsprinciple.
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T
47,Horizontalequityreferstoataxsysteminwhichindividualswithsimilarincomespaysimilartaxes.
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T
48,Inaregressivetaxsystem,itisimpossibleforindividualswithhigherincomestopaymoreintaxesthanindividualswithlowerincomes.
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F
49,Forafirmoperatinginaperfectlycompetitiveindustry,totalrevenue,marginalrevenue,andaveragerevenueareallequal.
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F
50,Inacompetitivemarket,firmsareunabletodifferentiatetheirproductfromthatofotherproducers.
ANS:
T
51,Afirmiscurrentlyproducing100unitsofoutputperday.Themanagerreportstotheownerthatproducingthe100thunitcoststhefirm$5.Thefirmcansellthe100thunitfor$5.Thefirmshouldcontinuetoproduce100unitsinordertomaximizeitsprofits(orminimizeitslosses).
ANS:
T
52,Afirmiscurrentlyproducing100unitsofoutputperday.Themanagerreportstotheownerthatproducingthe100thunitcoststhefirm$5.Thefirmcansellthe100thunitfor$4.75.Thefirmshouldcontinuetoproduce100unitsinordertomaximizeitsprofits(orminimizeitslosses).
ANS:
F
53,Inmakingashort-runprofit-maximizingproductiondecision,thefirmmustconsiderbothfixedandvariablecost.
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F
54,Inthelongrun,whenpriceisgreaterthanaveragetotalcost,somefirmsinacompetitivemarketwillchoosetoenterthemarket.
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T
55,Thelong-runsupplycurveinacompetitivemarketismoreelasticthantheshort-runsupplycurve.
ANS:
T
SHORTANSWER
2,JohnhasbeeninthehabitofmowingWilla'slawneachweekfor$20.John'sopportunitycostis$15,andWillawouldbewillingtopay$25tohaveherlawnmowed.WhatisthemaximumtaxthegovernmentcanimposeonlawnmowingwithoutdiscouragingJohnandWillafromcontinuingtheirmutuallybeneficialarrangement?
ANS:
Ifthetaxislessthan$10,therewillexistapriceatwhichbothJohnandWillawillstillbenefitfromthelawn-mowingarrangement.Ifthetaxis$10,apricecanbesetwhichwillleaveJohnandWillaneitherbetteroffnorworseofffromthelawn-mowingarrangement.Ifthetaxisgreaterthan$10,allpossiblepriceswillleaveatleastoneofthepartiesworseofffromthelawn-mowingarrangement.
4,Howdoesanimportquotadifferfromanequivalenttariff?
ANS:
Boththeimportquotaandthetariffraisethedomesticpriceofthegood,reducethewelfareofdomesticconsumers,increasethewelfareofdomesticproducers,andcausedeadweightlosses.Theonlydifferencefortheeconomyisthatthetariffraisesrevenueforthegovernment,whiletheimportquotacreatessurplusforlicenseholders.
5,Characterizethetwodifferentapproachesanationcantaketoachievefreetrade.Doesoneapproachhaveanadvantageovertheother?
ANS:
Aunilateralapproachiswhenacountryremovesitstraderestrictionsonitsown.Amultilateralapproachiswhenacountryremovesitstraderestrictionswhileothercountriesdothesame.Amultilateralapproachhastwoadvantages.Thefirstisthatithasthepotentialtoresultinfreertradebecauseitcanreducetraderestrictionsabroadaswellasathome.Ifinternationalnegotiationsfail,however,theresultcouldbemorerestrictedtradethanunderaunilateralapproach.Also,themultilateralapproachmayhaveapoliticaladvantageandcansometimeswinpoliticalsupportwhenaunilateralreductioncannot.
7,TheCoasetheoremsuggeststhatefficientsolutionstoexternalitiescanbedeterminedthroughbargaining.Underwhatcircumstanceswillprivatebargainingfailtoproduceasolution?
ANS:
Privatepartiesmayfailtobargaintoanefficientsolutionunderavarietyofcircumstances.First,thetransactioncostsofbargainingmaybesohighthatoneorbothofthepartiesdecidesnottobargain.Second,thebargainingmaynottakeplaceifoneorbothofthepartiesbelievesthattheagreementcannotbeenforced.Third,oneorbothofthepartiesmaytrytoholdoutforabetterdeal,inwhichcasethebargainingprocessbreaksdown.Fourth,iftherearealargenumberofpartiesta
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