Public Policy and Economics Review Questions
Course Introduction
This course explores the intersection of public policy and economics, examining how economic principles and tools inform the design, implementation, and evaluation of government actions. Students will analyze the role of markets and governments in addressing issues such as efficiency, equity, and public goods. Key topics include taxation, government spending, regulation, income distribution, and market failures. Through case studies and real-world examples, the course emphasizes critical thinking and quantitative analysis to understand the economic impacts of various policy choices and the trade-offs involved in public decision-making.
Recommended Textbook
Microeconomics Principles and Policy 12th Edition by
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4555 Verified Questions
4555 Flashcards
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Page 2
William J. Baumol
Chapter 1: What Is Economics
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227 Verified Questions
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Sample Questions
Q1) Opportunity cost is the
A)cost incurred when one fails to take advantage of an opportunity.
B)cost incurred in order to increase the availability of attractive opportunities.
C)cost of the best option forgone as a result of choosing an alternative.
D)drudgery of the undesirable aspects of an option.
Answer: C
Q2) The dramatic increase in the standard of living since the Industrial Revolution
A)means that societies and individuals face no constraints.
B)has not meant unlimited abundance for societies or persons.
C)means that "opportunity cost" is a meaningless concept.
D)has reduced the choices open to persons.
E)has made economics less useful to persons.
Answer: B
Q3) Why might well-educated economists disagree on appropriate public policy in some situations?
Answer: Economists might disagree because of imperfect information,different theories on relevant cause-effect relationships,and because of their different values.
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3
Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) Government is unnecessary in a free enterprise economy such as the United States.
A)True
B)False
Answer: False
Q2) Population density varies little between the fifty states.
A)True
B)False Answer: False
Q3) The personal income tax is the single largest source of revenue for the federal government.
A)True
B)False
Answer: True
Q4) A tax must be progressive if an individual with a higher income pays more dollars in taxes than an individual with a lower income.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Fundamental Economic Problem: Scarcity and Choice
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250 Verified Questions
250 Flashcards
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Sample Questions
Q1) If an economy is operating inefficiently,then
A)the economy can increase production of consumption goods without reducing capital goods.
B)there is always a positive opportunity cost to increasing output. C)output can only be increased through capital investment.
D)output cannot be increased.
Answer: A
Q2) If the U.S.government decides to increase military spending,one opportunity cost will be lower spending on education.
A)True
B)False
Answer: True
Q3) The production possibilities frontier can be used to show a manufacturer's possible combinations of output of two goods.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Supply and Demand: An Initial Look
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308 Verified Questions
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Sample Questions
Q1) Assume that Figure 4-16 shows the supply of steak.An increase in the price of pork will change the supply from
A)S<sub>1</sub> to S<sub>2</sub>.
B)S<sub>2</sub> to S<sub>1</sub>.
C)S<sub>2</sub> to S<sub>3</sub>.
D)S<sub>1</sub> to S<sub>3</sub>.
Q2) Frustrated by the cost and ineffectiveness of the war on drugs,the U.S.government could consider "decriminalization" of the use and sale of cocaine.Critics contend that lower prices will expand drug use and that decriminalization will remove the stigma and danger from arrest associated with drug use,thus further increasing the demand and number of addicts.Which graph in Figure 4-14 best illustrates the critics' case?
A)1
Q3) Even though prices may change frequently,they can be expected to gravitate toward equilibrium.
A)True
B)False
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Page 6
Chapter 5: Consumer Choice: Individual and Market Demand
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202 Verified Questions
202 Flashcards
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Sample Questions
Q1) Marginal utility has a negative slope.This is because of the A)optimal purchase rule.
B)law of increasing costs.
C)law of diminishing marginal utility.
D)marginal rate of substitution.
Q2) If total utility declines as an additional unit of a commodity is purchased,
A)marginal utility must be rising.
B)marginal utility is negative.
C)marginal utility is positive but falling.
D)its price must have risen.
E)marginal utility is zero.
Q3) Given the demand curve in Figure 5-24,explain how consumer's surplus is calculated.
Q4) All decisions involve opportunity cost.
A)True
B)False
Q5) Use consumer indifference curves and budget lines to illustrate the effects of an increase in income for a normal good and an inferior good (use two graphs).Be sure your diagrams are fully and correctly labeled.
Q6) What are the properties of indifference curves? Page 7
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Page 8
Chapter 6: Demand and Elasticity
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207 Flashcards
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Sample Questions
Q1) Historical demand curves are always suspect because their demand curves are likely to have shifted over time.
A)True
B)False
Q2) In Figure 6-4,total expenditure ____ as price falls from P = 12 to P = 10.
A)falls
B)stays constant
C)rises
D)rises by more than $12
Q3) In an attempt to raise sales,Hannah cut prices in her bookstore by 20 percent.If the dollar value of her sales remained constant,that indicates
A)old customers bought no more books.
B)no new customers bought books.
C)the quantity of books sold increased 20 percent.
D)the demand curve is vertical.
Q4) Perfectly elastic demand curves are vertical.
A)True
B)False
Q5) What are the main determinants of demand elasticity? Explain their importance.
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Chapter 7: Production,Inputs,and Cost: Building Blocks for Supply Analysis
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215 Flashcards
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Sample Questions
Q1) Figure 7-11 shows an average cost curve with points on it that correspond to three quantity levels.Which of the following statements must be wrong?
A)The firm's technology may show increasing marginal returns as production increases from A to B.
B)The firm may have positive fixed costs.
C)As production expands from A to B to C, the firm may become increasingly difficult to manage efficiently.
D)The firm's average fixed cost may rise as production increases from B to C.
Q2) The marginal revenue product of an hour of labor used in steel production is equal to
A)its marginal physical product times the hourly wage rate.
B)its marginal physical product times the price of steel.
C)the hourly wage rate.
D)its marginal physical product divided by the price of steel.
Q3) The expansion path of product indifference curves shows the cost-minimizing combination of inputs.
A)True
B)False
Q4) How long is the long run?
Page 10
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Chapter 8: Output,Price,and Profit: The Importance of Marginal Analysis
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Sample Questions
Q1) Which graph in Figure 8-1 shows a typical firm's total revenue and total cost curves?
A)(a)
B)(b)
C)(c)
D)(d)
Q2) The federal government,in order to fund expanded health care,imposes a lump-sum tax on all business property.Profit-maximizing firms that stay in business will respond by
A)raising prices to pay the tax.
B)cutting output to reduce costs.
C)lowering prices to stimulate demand.
D)doing nothing.
Q3) Define the following terms completely and concisely.
a.marginal revenue
b.average revenue
c.optimal decision
d.satisficing
e.marginal profit
Q4) What is the value of marginal profit at the profit-maximizing output?
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Chapter
The Tail That Wags the Dog
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Sample Questions
Q1) An investor will diversify his portfolio to reduce risk.
A)True
B)False
Q2) A company's annual payment to stockholders is called the
A)dividend.
B)kickback.
C)plowback.
D)retained earnings.
Q3) Why are bonds risky to a corporation?
Q4) Stock prices can be described as "random walks" if there is no relationship between one day's prices and the following day's prices.
A)True
B)False
Q5) If stocks are more risky than bonds,why would a rational investor ever buy stocks?
Q6) If corporations have their choice,they will prefer to invest using A)revenue from the sale of stocks.
B)revenue from the sale of bonds.
C)plowback.
D)money borrowed from the bank.
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Chapter 10: The Firm and the Industry Under Perfect Competition
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206 Verified Questions
206 Flashcards
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Sample Questions
Q1) In a long-run equilibrium in a perfectly competitive market,the average firm earns positive economic profits.
A)True
B)False
Q2) In the long run,any firm may enter or leave a perfectly competitive market.
A)True
B)False
Q3) It pays the firm to produce only if total variable costs exceed total revenue.
A)True
B)False
Q4) If the profit-maximizing firm depicted in Figure 10-1 is perfectly competitive,how much output should it produce?
A)A
B)B
C)C
D)D
Q5) In long-run equilibrium in perfect competition,every firm is producing at minimum average cost.
A)True
B)False
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Chapter 11: Monopoly
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204 Flashcards
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Sample Questions
Q1) A monopolist maximizes profits by producing where which of the following occur?
A)MC = P
B)AC = P
C)MC = MR
D)AC = AR
Q2) Firms that engage in price discrimination
A)will earn less profit than those that do not discriminate.
B)will earn more profit than those that do not discriminate.
C)are biased against certain buyers in the market.
D)will always produce less output than firms that do not discriminate.
Q3) Since the Red Cross supplies 95 percent of the blood in the United States,it can be considered a monopolist.Assume that it,in fact,operates like a monopolist.The Red Cross currently charges hospitals and other users $21 for a pint of blood.In order to increase the supply of blood,the government offers the Red Cross a $10 million,lump-sum subsidy.How much more blood supply will the subsidy generate?
A)about 500,000 pints
B)somewhere between 100,000 and 500,000, depending on demand elasticity
C)somewhere between 100,000 and 500,000, depending on the elasticity of supply
D)zero
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Page 14
Chapter 12: Between Competition and Monopoly
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Sample Questions
Q1) A firm now produces its sales-maximizing level of output.If the firm increased its output by one unit,its marginal revenue would become
A)negative.
B)smaller but still positive.
C)larger but still negative.
D)larger but still positive.
Q2) An oligopoly is a market structure in which a few large firms dominate the sale of a single product.
A)True
B)False
Q3) The theory of the kinked demand curve is that
A)although the firm sells a differentiated product, too many competitors exist to make it worthwhile speculating on responses to the firm's behavior.
B)freedom of entry will reduce profits to zero.
C)a firm's competitors will follow it in a price decrease but not follow it in a price increase.
D)firms are all seeking the position of joint profit maximization.
Q4) Monopolistic competition tends to lead firms to have wasted capacity.Why?
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Page 15
Chapter 13: Limiting Market Power: Regulation and Antitrust
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152 Verified Questions
152 Flashcards
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Sample Questions
Q1) Market power allows firms to raise prices significantly above the competitive level.
A)True
B)False
Q2) In highly contestable markets,increases in concentration will enhance market power.
A)True
B)False
Q3) Antitrust laws prohibit undesirable business practices by firms holding monopoly power.
A)True
B)False
Q4) Universal service may require making a service available in small communities where the limited scale of operations may make costs extremely high.
A)True
B)False
Q5) All large firms have monopoly power.
A)True
B)False
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Page 16
Chapter 14: The Case for Free Markets I: the Price System
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219 Verified Questions
219 Flashcards
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Sample Questions
Q1) Economics can decide
A)the appropriate trade-off between fairness and efficiency.
B)which pricing arrangements are fair and which are unfair.
C)whether a pricing decision will impose heavy inefficiency costs on society.
D)All of the above are correct.
Q2) In a competitive market economy,a resource in short supply will be allocated
A)so that each firm gets enough to keep producing some portion of its output.
B)according to how much each firm purchased before the shortage.
C)to those firms that can make the most profitable use of it.
D)by government fiat.
Q3) Which type of economic system will produce the highest degree of allocative efficiency?
A)a perfectly competitive market system
B)a purely command economic system
C)a market system with limited price controls and price ceilings
D)a command system with limited market activity for non-essentials
Q4) For a rational consumer,the consumer's surplus will never be a negative number.
A)True
B)False
Q5) What makes production-planning a daunting task for central planners?
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Chapter 15: The Shortcomings of Free Markets
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Sample Questions
Q1) The market's contribution to the general welfare has been its A)stimulation of growth in productivity.
B)yield of an abundance of consumers' goods.
C)contribution to human longevity.
D)All of the above are correct.
Q2) If the price of a commodity is above marginal cost,then the economy will tend to A)overproduce the item.
B)underproduce the item.
C)produce the optimal amount of the item.
D)overproduce and underproduce the item cyclically.
Q3) Pleasure boaters enjoy the use of waterways,but sometimes run into problems and need rescue.Coast Guard boats,supported by tax revenue,are often used for rescue.Is it likely that there will be an efficient amount of boating and rescuing?
Q4) Electric utilities have trumpeted nuclear power for years,advocating it as lower in production costs than other alternatives.Yet,society has resisted heavy reliance on nuclear power.Explain the source of the disagreement and suggest which side (utilities or society)is correct.
Q5) Give an appropriate remedy for correcting excessive pollution and note any difficulties in implementing it.
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Chapter 16: The Markets Prime Achievement: Innovation and Growth
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Sample Questions
Q1) All of the following are features of innovation that magnify its contribution to GDP growth,except
A)that many innovations create cumulative changes.
B)the benefits of innovation are captured entirely by the individual/firm funding the innovation.
C)that innovation has a public goods property.
D)innovations act like an accelerator.
Q2) A successful process innovation can be expected to lead to
A)an upward shift of the MC and AC curves which will lower output and raise the price of the product.
B)an upward shift of the MC and AC curves which will raise output and lower the price of the product.
C)a downward shift of the MC and AC curves which will lower output and raise the price of the product.
D)a downward shift of the MC and AC curves which will raise output and lower the price of the product.
E)a downward shift of the MC and AC curves which will leave unchanged the output and price of the product.
Q3) Do free markets spend enough on R&D activities? Explain your answer.
Page 19
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Chapter 17: Externalities, the Environment, and Natural Resources
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217 Flashcards
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Sample Questions
Q1) Direct controls are considered inefficient because all firms are forced to pay the same costs.
A)True
B)False
Q2) Which of the following is most likely to reduce the consumption of an exhaustible natural resource?
A)a decrease in monopoly control of the market for the resource
B)government tax policies that give tax breaks to entrepreneurs who search for new reserves of the resource
C)implementation of a price ceiling for the resource below its equilibrium price
D)government macroeconomic policies that lower the interest rate on bonds
Q3) Who of the following has been prominently accused of acting on the basis of the "edifice complex?"
A)the Environmental Protection Agency?
B)A. C. Pigou
C)the Army Corps of Engineers
D)environmental activists
Q4) Why do polluting firms overproduce? Use a completely and correctly labeled graph to illustrate your answer.
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Chapter 18: Taxation and Resource Allocation
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219 Verified Questions
219 Flashcards
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Sample Questions
Q1) No tax can lead the economy to higher levels of efficiency.
A)True
B)False
Q2) "Those most able should pay the highest taxes" reflects the A)ability-to-pay principle.
B)concept of horizontal equity.
C)idea of fiscal federalism.
D)benefits principle.
Q3) Taxes are either
A)regressive, proportional, or degressive.
B)regressive, proportional, or progressive.
C)degressive, proportional, or progressive.
D)regressive, progressive, or degressive.
Q4) The largest single source of revenue for the federal government is the
A)corporate income tax.
B)federal excise tax.
C)personal income tax.
D)Social Security tax.
Q5) How is state and local government funded and how does such funding differ from federal government funding?
21
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Chapter 19: Pricing the Factors of Production
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Sample Questions
Q1) Explain what is meant by "derived demand" as it relates to factors of production.
Q2) Which of the following is usually a durable good?
A)a unit of labor
B)the interest rate
C)a depletable resource
D)a capital good
Q3) How can bonuses to exceptional employees be considered economic rents?
Q4) The quantity demanded of an input normally rises as its price rises.
A)True
B)False
Q5) The demand curve for a factor is that part of the MRP where marginal product is A)rising.
B)falling.
C)positive.
D)negative.
Q6) Explain how to derive the demand for an input.
Q7) The demand curve for any input is the MP curve.
A)True
B)False
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Chapter 20: Labor and Entrepreneurship: The Human Inputs
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Sample Questions
Q1) The substitution effect of a wage increase
A)probably leads most workers to want to work more.
B)certainly leads all workers to want to work more.
C)probably leads most workers to want to work less.
D)certainly leads most firms to want to employ more workers.
Q2) Which of the following observations concerning labor cost patterns over the last century is true?
A)Average real wages started rising after 1973.
B)Hourly compensation rates have fallen dramatically.
C)Compensation growth slowed markedly.
D)Average hours worked per week have increased by almost 50 percent.
Q3) Recent studies suggest that a rise in the minimum wage results in a substantial cut in the demand for teen labor.
A)True
B)False
Q4) A decision to supply labor or not to supply it is also a decision to
A)earn the highest possible wage.
B)demand or forgo a certain amount of leisure.
C)be as productive as possible.
D)join the union.
Page 23
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Chapter 21: Poverty, Inequality, and Discrimination
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Sample Questions
Q1) Generally speaking,markets do a(n)____ job of reconciling the demands of fairness and efficiency.
A)excellent
B)above-average
C)average
D)poor
Q2) In the Santa Rita silver mines in Arizona in 1870,Mexican miners received about $12 per month while "American" miners received $70.Although the wages of both groups tended to rise over time,the gap persisted until at least 1910.Mexican and American miners did the same work and were equally productive.Economists call this pay differential
A)prejudicial differentials.
B)compensating differentials.
C)economic discrimination.
D)Lorenz discrimination.
Q3) In Figure 21-1,the optimal amount of equality lies only between which points?
A)A and B
B)C and D
C)D and E
D)B and E
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Chapter 22: International Trade and Comparative Advantage
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Sample Questions
Q1) Trade occurs only when a country has an absolute advantage and not just a comparative advantage over another country.
A)True
B)False
Q2) The U.S.government uses export subsidies extensively to stimulate exports.
A)True
B)False
Q3) The United States can produce 1,000 shoes if it specializes in shoe production.Alternatively,it can produce 500 shirts.Taiwan can produce 500 shoes or 200 shirts.Explain which country will specialize in shoe production and which in shirt production.What are the possible terms of trade?
Q4) Some nations that seek to produce all of their own needs face the problem that A)people don't want a wide variety of choices when buying. B)some industries are too small to be efficient. C)other countries may want to buy from them.
D)All of the above are true.
Q5) The U.S.Constitution prevents tariffs on trade between the individual states.
A)True
B)False
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