Public Finance and Public Policy Seventh Edition©️2022 Jonathan Gruber test bank

Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 1 Multiple Choice 1. An early response to the Covid-19 pandemic was the $2.2 trillion CARES Act signed into law that included: a. funding for broadband infrastructure, renter's assistance, and food security for low-income households only. b. a mandate for individuals who could not afford health insurance to purchase it or pay a penalty. c. direct payments to American households, unemployment benefits, and payroll protection for small businesses. d. a bailout plan to U.S. automakers to address impending cash shortage, the risk of bankruptcy, and massive job losses. ANSWER: c 2. The goal of public finance is to: a. understand the proper role of corporations in the economy. b. understand the proper role of the government in the economy. c. determine the best way to increase government's role in the economy. d. determine the best way to decrease government's role in the economy. ANSWER: b 3. The goal of public economics, or public finance, is to answer which question? a. How might the government intervene in the economy, and what are the likely effects? b. Why do profit-maximizing firms attempt to set marginal revenue equal to marginal cost? c. How are the terms of trade determined when countries choose to engage in international trade? d. What are the goals and tools of macroeconomic policy? ANSWER: a 4. Government intervenes in a market economy to: a. create externalities. b. prevent competition. c. enhance economic efficiency. d. achieve perfect income equality. ANSWER: c 5. Suppose Juan values a slice of pizza at $1.50, but the pizza shop is unwilling to sell a slice of pizza for less than $2.00. These values imply that: a. it is efficient for the shop to sell a slice of pizza to Juan for $1.50. b. it is efficient for the shop to sell a slice of pizza to Juan for $2.00. c. the shop needs to produce more efficiently in order to lower the price. d. it is not efficient for the shop to sell a slice of pizza to Juan. ANSWER: d Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 2 6. Suppose Ali values a slice of pizza at $1.50, but the pizza shop is unwilling to sell a slice of pizza for less than $1.00. These values imply that it is efficient for the shop to sell a slice of pizza to Ali for any price: a. greater than or equal to $1.50. b. greater than or equal to $1.00 and less than or equal to $1.50. c. less than or equal to $1.00. d. less than or equal to $1.00 and greater than or equal to $1.50. ANSWER: b 7. Suppose a student values a textbook at $50, and the publisher is unwilling to sell the textbook at a price lower than $30. What price will lead to an efficient transaction between the student and publisher? a. a price of $0 b. any price greater than $0 and less than $30 c. any price greater than or equal to $30 and less than or equal to $50 d. any price greater than $50 ANSWER: c 8. Suppose a consumer values a certain 19-inch television set at $150, and the seller is unwilling to sell the set for less than $200. These values imply that: a. it is efficient for the seller to charge a price of $0. b. it is efficient for the seller to charge any price greater than $0 and less than $150. c. it is efficient for the seller to charge any price greater than or equal to $150 and less than or equal to $200. d. it is not efficient for a transaction to take place. ANSWER: d 9. Suppose someone argues that the proper role of government is to increase the size of the pie. Which justification for government intervention in the economy is this person referring to? a. increasing equality in the economy b. promoting social justice c. improving efficiency d. preventing competition ANSWER: c 10. Suppose the government proposes a program that will transfer income from one group to another. The goal of this government intervention in the marketplace is BEST characterized as: a. redistribution. b. increasing market efficiency. c. correcting a market failure. d. achieving competitive equilibrium. ANSWER: a 11. If the competitive equilibrium does not lead to the efficiency-maximizing outcome, then government Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 3 intervention: a. will increase efficiency. b. will reduce efficiency. c. may increase or decrease efficiency. d. will not affect efficiency. ANSWER: c 12. Suppose government proposes taxing Peter to pay Paul. The goal of this intervention could be BEST characterized as an attempt to achieve: a. redistribution. b. efficiency. c. market failure. d. competitive equilibrium. ANSWER: a 13. The equity–efficiency trade-off means that obtaining _____ in equality may also lead to a(n) _____ in the so-called size of the pie. a. no change; decrease b. no change; increase c. a decrease; decrease d. an increase; decrease ANSWER: d 14. Suppose the government taxes the rich to distribute money to the poor. Which of these is an example of an efficiency loss? a. Rich people take home less of the money from their jobs because of the tax. b. Rich people don't work as hard because of the tax. c. Poor people are better off because of the redistribution. d. Poor people work just as hard because they still need to make ends meet. ANSWER: b 15. An intervention in which government establishes a federally funded health care service for everyone and pays doctors and medical practitioners directly is called: a. private provision with public financing. b. restriction or mandate of private sale or purchase. c. subsidy. d. public provision. ANSWER: d 16. Both the federal and state governments collect fees for each gallon of gasoline sold. This is an example of which type of government intervention? a. restriction of private sale or purchase Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 4 b. taxation c. a subsidy d. public provision ANSWER: b 17. Which type of government intervention can be used to lower the price for private sales or purchases of underproduced goods? a. public financing of private provision b. restrictions or mandates of private sale or purchase c. taxes d. subsidies ANSWER: d 18. Veterans receive health benefits directly through hospitals owned and operated by the Veterans Health Administration. This is an example of: a. public financing of private provision. b. restriction or mandate of private sale or purchase. c. a subsidy. d. public provision. ANSWER: d 19. The Medicare insurance program in the United States reimburses hospitals and doctors for providing health care services to older adults This is an example of: a. public financing of private provision. b. restriction or mandate of private sale or purchase. c. a tax. d. a subsidy. ANSWER: a 20. Public schools in the United States are operated by the government. This is an example of: a. public financing of private provision. b. restriction or mandate of private sale or purchase. c. a subsidy. d. public provision. ANSWER: d 21. The government has passed many school accountability measures that reward schools if their students score highly on standardized tests. Suppose schools respond by manipulating the set of test takers to increase average scores. This outcome is an example of a(n): a. intended effect. b. direct effect. c. indirect effect. Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 5 d. desired outcome. ANSWER: c 22. The government has passed many school accountability measures that reward schools if their students score highly on standardized tests. Suppose schools respond by more efficiently teaching their students. This outcome is an example of an: a. intended, direct effect. b. intended, indirect effect. c. unintended, direct effect. d. unintended, indirect effect. ANSWER: a 23. Suppose that because the government increases the minimum wage, employees who were earning the minimum wage get a pay increase. This is an example of an: a. intended, direct effect. b. intended, indirect effect. c. unintended, direct effect. d. unintended, indirect effect. ANSWER: a 24. Which of these might be a direct effect of providing free health care for those without insurance? a. Those who were without private health insurance are now better off. b. Those with private health insurance may drop their coverage. c. Those without health insurance may purchase private health insurance. d. Those eligible for free health insurance are not aware of the benefit. ANSWER: a 25. Which of these is the government agency that uses empirical economics to achieve its mission of providing Congress with objective, nonpartisan analyses necessary for economic and budget decisions? a. National Bureau of Economic Research b. Office of Management and Budget c. Antitrust Division of the Department of Justice d. Congressional Budget Office ANSWER: d 26. Suppose that because the government increases the minimum wage, employers choose to hire fewer workers. This is an example of a(n): a. intended effect. b. direct effect. c. indirect effect. d. desired outcome. ANSWER: c Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 6 27. The government offers unemployment benefits to workers who have lost their jobs and not yet found new ones. Which of these is an example of an indirect, unintended effect of the government intervention? a. Recipients reduce their job search activities. b. Recipients can still afford to pay health insurance premiums. c. Recipients are at less risk for falling into poverty. d. Potential recipients choose not to file for benefits. ANSWER: a 28. Which of these might be an indirect, unintended effect of providing income support to those without jobs? a. Those without jobs are made better off. b. Those without jobs are made worse off. c. People without jobs now search for and acquire jobs. d. People without jobs no longer search for and acquire jobs. ANSWER: d 29. How governments should intervene is a _____ question, and why governments intervene in the way they do is a _____ question. a. normative; normative b. positive; negative c. normative; positive d. positive; normative ANSWER: c 30. If government revenues exceed government spending, the difference is called the: a. cash flow deficit. b. cash flow surplus. c. debt. d. budget. ANSWER: b 31. The accumulation of past deficits over time is measured by the: a. cash flow deficit. b. cash flow surplus. c. debt. d. budget. ANSWER: c 32. The current federal debt of the United States is _____ of the gross domestic product. a. less than 15% b. approximately 30% Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 7 c. approximately 60% d. over 100% ANSWER: d 33. National defense is a classic example of what economists call: a. a public good. b. entitlement spending. c. social insurance. d. a private service. ANSWER: a 34. Which of these correctly depicts the changes in the sources of federal, state, and local receipts in the past 50 years? a. Income taxes are now a larger share of federal receipts. b. Property taxes are now a larger share of state and local receipts. c. Corporate and excise taxes are now a smaller share of federal receipts. d. Sales taxes constitute the exact same share of state and local receipts. ANSWER: c 35. By 2010, approximately _____ of the non-elderly U.S. population did not have health insurance. a. 5% b. 15.5% c. 18.5% d. 25% ANSWER: c 36. The state government collects $400 billion in tax revenue during the current fiscal year and spends all of it. The government is running a: a. cash flow deficit. b. cash flow surplus. c. debt. d. balanced budget. ANSWER: d 37. The state government collects $400 billion in tax revenue during the current fiscal year and spends nearly $390 billion. The government is running a: a. cash flow deficit. b. cash flow surplus. c. debt. d. balanced budget. ANSWER: b Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 8 38. During the second quarter of 2020, the GDP: a. fell by about 312%. b. rose by about 10%. c. fell by about 10%. d. remained constant. ANSWER: a 39. The state government collects $400 billion in tax revenue during the current fiscal year and spends $415 billion. The government is running a: a. cash flow deficit. b. cash flow surplus. c. debt. d. balanced budget. ANSWER: a 40. The state government collects $400 billion in tax revenue during the current fiscal year and spends $415 billion. Which of these is TRUE? a. The government is running a cash flow surplus. b. The national debt will decrease by about $15 billion. c. The government will cut taxes to cover this shortfall. d. The national debt will increase. ANSWER: d 41. The state government collects $405 billion in tax revenue during the current fiscal year and is running a cash flow surplus. Which of these is TRUE? a. Government spending is greater than or equal to $405 billion. b. The national debt is less than $405 billion. c. The government will cut taxes because it is running a surplus. d. Government spending is less than $405 billion. ANSWER: d 42. Which was the first state to issue a stay-at-home order on March 19, 2020? a. New York b. California c. Florida d. Michigan ANSWER: a 43. Which of these BEST describes the debates over how the government should respond to the unprecedented economic dislocation caused by the pandemic? a. Both parties favored no restrictions on individuals and businesses. Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 9 b. Both parties favored active and large government fiscal responses. c. One party favored fewer restrictions, while the other favored active intervention. d. Both parties opposed active and small government fiscal responses. ANSWER: c 44. Which of these BEST describes the debates in Congress over provisions of the CARES Act? a. Both Republicans and Democrats favored mandates for masks for schools and businesses. b. Democrats favored loans to businesses, while Republicans favored benefits for unemployed individuals. c. Democrats favored protecting businesses from the legal liabilities of Covid-19, while Republicans prioritized funding for state and local government. d. Democrats favored expansions in benefits for unemployed individuals, while Republicans favored loans to businesses. ANSWER: d 45. By April 2020, what percentage of working papers distributed through the National Bureau of Economic Research were Covid related? a. 18.5 b. 90 c. 2 d. 23.58 ANSWER: d 46. Early working papers distributed through the National Bureau of Economic Research show that: a. provision of the CARES Acts led to much higher consumption. b. the Paycheck Protection Program (PPP) saved many jobs. c. unemployment insurance expansions deter workers from returning to work. d. government interventions to limit economic activity had a large effect. ANSWER: a Essay 47. Does taxing the wealthy to give benefits to the poor increase social welfare? Explain. ANSWER: It depends. Taxing the rich to give benefits to the poor may decrease efficiency. For example, it may reduce rich people's incentive to work, which would reduce the total size of the economic pie. In addition, raising money through taxes is not free. There is typically an administrative cost of doing so, which reduces the size of the economic pie. However, taxing the wealthy to give benefits to the poor would increase equity, which may be valued by society in and of itself. Consequently, the answer to this question about social welfare depends on how the society values the efficiency–equity trade-off. 48. Suppose the White House could appoint the lead officials at the Congressional Budget Office (CBO). How could this change affect the level of budget deficits? Explain. Name: Class: Date: Chapter 1 Copyright Macmillan Learning. Powered by Cognero. Page 10 ANSWER: It is possible that the analysts at the CBO would be pressured to make particularly rosy budget predictions of the cost of legislation supported by the administration. Those predictions could help pass that legislation either because politicians believed the estimates or because they were unsure about the true costs. The result could easily be an increase in budget deficits. 49. Are all of the indirect effects of government intervention in the economy unintended effects? Explain. ANSWER: In many cases, indirect effects of government intervention are unintended. For example, if the government offers a plan to the uninsured in order to make sure that everyone can afford health insurance, an indirect result of that policy might be that the insured drop their insurance. Such an effect is indirect because it resulted from a change in behavior induced by the policy, and in this case, the effect is also unintended. In contrast, however, many government interventions are intended to change people's behavior. For example, government may institute fines for traffic infractions like speeding. To the extent that these fines reduce speeding, that policy has an indirect effect that is also an intended effect. 50. Suppose someone says that a relatively small percentage of Americans own a large percentage of total assets and therefore that the government should redistribute wealth to those less fortunate. Which part of that statement is normative, and which part is positive, if any? Explain. ANSWER: Pointing out the facts about the income or wealth distribution is a purely positive statement since it is describing how things are. Stating that the government should do something in response is a normative statement, however, since it is saying how things should be as opposed to how they are. Consequently, the first part of the statement is positive, and the second part is normative. 51. Were the government responses to the Covid-19 pandemic primarily lessons from economics? ANSWER: Government responses to the Covid-19 pandemic were primarily driven by the political process and the preferences of those in charge of the government rather than by lessons derived from economics. For instance, when the Republicans were in control of Congress, government provisions to address the effect of the pandemic prioritized business funding and no money for state and local government. On the contrary, when Democrats gained control of the presidency and Congress, the provisions favored unemployment insurance and funding for local governments. Thus, the political process, rather than economics, had the final word on how governments do what they do. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 1 Multiple Choice 1. What is the name of the social assistance program that provides cash payments to single parents whose income is below a specified level? a. Supplemental Nutrition Assistance Program b. Mainstream Vouchers c. Emergency Food Assistance Program d. Temporary Assistance for Needy Families ANSWER: d 2. _____ tools refer to the set of tools designed to understand the mechanics behind economic decision making. a. Efficiency b. Empirical c. Theoretical d. Data ANSWER: c 3. _____ tools refer to the set of tools designed to analyze data and answer questions raised by theoretical analysis. a. Efficiency b. Empirical c. Theoretical d. Abstract ANSWER: b 4. Which is NOT consistent with non–satiated preferences? a. Maria prefers four hamburgers to three hamburgers. b. Kevin enjoys the third hamburger more than the fourth hamburger. c. Lisa prefers five hamburgers to six hamburgers. d. Ron likes to take home leftover hamburgers for later use. ANSWER: c 5. Consider three bundles: Bundle A: 2 hamburgers and 1 soda Bundle B: 2 hamburgers and 2 sodas Bundle C: 1 hamburger and 1 soda Which does NOT violate the assumption of non–satiated preferences? a. Laura prefers bundles B and C to bundle A. b. Mike prefers bundle B to bundle A and bundle C to bundle B. c. Robin is indifferent between bundle A and bundle C. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 2 d. Julio prefers bundles A and B to bundle C. ANSWER: d 6. Consider three bundles: Bundle A: 2 DVDs and 3 CDs Bundle B: 3 DVDs and 1 CD Bundle C: 1 DVD and 3 CDs Which violates the assumption of non–satiated preferences? a. Bart is indifferent between bundles C and B and prefers bundle A to C. b. Mona prefers bundle C to B and is indifferent between bundles A and B. c. Don prefers bundle A to C and is indifferent between bundles B and C. d. Patty prefers bundle A to C and bundle B to C. ANSWER: b 7. Consider three bundles: Bundle A: 1 shirt and 2 hats Bundle B: 2 shirts and 2 hats Bundle C: 3 shirts and 1 hat Which violates the assumption of non–satiated preferences? a. Nancy prefers bundle B to C. b. Diane prefers bundle B to A. c. Steve prefers bundle C to B. d. Ryan prefers bundle A to B. ANSWER: d 8. Graphically, the budget constraint can be described as: a. the slope being the difference between the prices of the goods. b. the slope being the sum of the prices of the goods. c. a downward-sloping line. d. the slope being the product of the prices of the goods. ANSWER: c 9. Suppose Jon likes to eat both pizza and hamburgers. As John consumes less pizza and holds steady his consumption of hamburgers, the marginal utility of a piece of pizza _____, and the marginal utility of a hamburger _____. a. increases; is unchanged b. increases; increases c. decreases; decreases d. decreases; is unchanged ANSWER: a Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 3 10. Assume a convex utility function in which a consumer chooses some of each good. Which is NOT represented by the slope of the budget constraint at optimal consumption? a. the marginal rate of substitution of the two goods b. the relative price of the good drawn on horizontal axis in terms of the other good drawn on vertical axis c. the relative price of the good drawn on vertical axis in terms of the other good drawn on horizontal axis d. the ratio of the marginal utility of the good on the horizontal axis to the marginal utility of the good on the vertical axis ANSWER: c 11. The marginal rate of substitution measures: a. the increase in utility from an additional unit of income. b. the slope of the budget constraint. c. the relative rate of trade-off between two goods. d. the relative price of two goods. ANSWER: c 12. This figure shows a consumer's budget constraint for apples (vertical axis) and oranges (horizontal axis). If the price of oranges increases, how is the budget constraint affected? a. The budget constraint shifts inward. b. The budget constraint does not change. c. The vertical intercept E decreases, and the horizontal intercept F remains the same, making the budget constraint flatter. d. The vertical intercept E is unchanged, and the horizontal intercept F decreases, making the budget constraint steeper. ANSWER: d 13. Suppose that Gustavo spends all of his income on DVDs and (legally) downloaded songs. At the optimum, which of these must be TRUE? a. Gustavo spends all of his income on songs and none on DVDs if songs are cheaper. b. Gustavo spends all of his income on DVDs and none on songs if DVDs are cheaper. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 4 c. The marginal utility of the last song downloaded equals the marginal utility of the last DVD purchased. d. The ratio of the marginal utility of the last song downloaded to the price of the song is equal to the ratio of the marginal utility of the last DVD to the price of the DVD. ANSWER: d 14. Which is TRUE when a consumer is maximizing their utility? a. They consume where the budget constraint intersects the midpoint of their indifference curve. b. They consume halfway between the two intersections of their budget constraint and indifference curve. c. They consume at the point at which the slope of their indifference curve is zero. d. They consume at the point at which their budget constraint is tangent to their indifference curve. ANSWER: d 15. Like all rational consumers, Shana wants to maximize her utility. This means that she will consume at her _____ indifference curve subject to her budget constraint. a. highest b. most efficient c. lowest d. steepest ANSWER: a 16. The slope of an indifference curve is always: a. less than one. b. positive. c. negative. d. greater than one. ANSWER: c 17. Suppose Tyrone spends his entire income on books and clothing. If the prices of both books and clothing fall by 10%, which statement is TRUE? a. Tyrone is not able to move to a new indifference curve. b. The budget constraint shifts outward. c. The budget constraint becomes flatter, that is, the slope is smaller in absolute value. d. The budget constraint becomes steeper, that is, the slope is larger in absolute value. ANSWER: b 18. Suppose Tim spends his entire income on hot dogs and hamburgers and consumes at least some of both. Now suppose that the price of hot dogs increases and the price of hamburgers remains the same. If Tim is compensated so that his utility is held constant, which statement must be TRUE? Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 5 a. Tim is better off than he was. b. Tim's utility decreases. c. Tim consumes more hamburgers and fewer hot dogs. d. Tim consumes more hot dogs and fewer hamburgers. ANSWER: c 19. A utility function describes the relationship between _____ by the individual and utility. a. goods consumed b. income earned c. goods produced d. financial investments ANSWER: a 20. Suppose that you buy a lot of music and that the prices of CDs go up. The income effect means that you buy fewer CDs because: a. your nominal income has fallen. b. your real income has fallen. c. you now enjoy music less. d. CDs are less expensive relative to other goods. ANSWER: b 21. Suppose that you buy a lot of music and that the prices of CDs go up. The substitution effect means that you buy fewer CDs because: a. your nominal income has fallen. b. your real income has fallen. c. you now enjoy music less. d. CDs are more expensive relative to other goods. ANSWER: d 22. If pasta is an inferior good and if the price of pasta increases, the income effect _____ the quantity demanded, and the substitution effect _____ the quantity demanded. a. reduces; reduces b. increases; increases c. reduces; reduces d. increases; reduces ANSWER: d 23. Economists define marginal analysis as: a. the cost of any purchase that is the next best alternative use of that money. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 6 b. the consideration of the costs and benefits of an additional unit of consumption or production. c. the set of tools that allows you to analyze data and answer the questions that are raised by theoretical analysis. d. the net gains to society from all trades that are made in a particular market. ANSWER: b 24. Suppose that under Temporary Assistance for Needy Families, your state provides an income guarantee of $5,000 and a benefit reduction rate of 40%. The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour. If the recipient works 300 hours per year, the effective take-home wage rate is: a. $0 per hour. b. $4 per hour. c. $6 per hour. d. $10 per hour. ANSWER: c 25. Under Temporary Assistance for Needy Families, your state provides an income guarantee of $5,000 and a benefit reduction rate of 40%. The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour. By how much does the benefit fall if the recipient works 300 hours per year? a. $3,000 b. $1,800 c. $1,200 d. $600 ANSWER: c 26. Suppose that a 5% rise in the price of apples does not cause the quantity demanded to change. The elasticity of demand for apples would then be: a. 0. b. −1. c. −2. d. infinitely large. ANSWER: a 27. Suppose that a 50% increase in the price of a good causes a 25% reduction in the quantity demanded. The elasticity of demand is: a. −0.5. b. −1. c. −1.33. d. −2. ANSWER: a Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 7 28. When production exhibits diminishing marginal productivity: a. unskilled workers are less productive than skilled workers. b. output must increase with each additional unit of the input used in production. c. increasing the amount of one input used means more of another input must be used. d. adding additional inputs may still cause output to increase. ANSWER: d 29. Consumer surplus is highest when the demand curve is _____; producer surplus is greatest when the supply curve is _____. a. elastic; elastic b. inelastic; inelastic c. perfectly elastic; perfectly inelastic d. inelastic; elastic ANSWER: b 30. For a given supply curve, consumer surplus is greater when the demand curve is more _____; producer surplus is greater when the demand curve is more _____. a. elastic; elastic b. inelastic; inelastic c. perfectly elastic; perfectly inelastic d. inelastic; elastic ANSWER: d 31. In the accompanying figure, area _____ is consumer surplus, whereas area _____ is producer surplus. a. A; D b. A + B; C + D c. D; A d. B; C ANSWER: d Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 8 32. We define consumer surplus as: a. the area under the demand curve and above the price of the good. b. the area above the supply curve and below the price of the good. c. the intersection of the supply curve and the demand curve. d. the difference between the price charged by sellers and the price paid by buyers. ANSWER: a 33. We define producer surplus as: a. the area under the demand curve and above the price of the good. b. the area above the supply curve and below the price of the good. c. the intersection of the supply curve and the demand curve. d. the difference between the price charged by sellers and the price paid by buyers. ANSWER: b 34. The First Fundamental Theorem of Welfare Economics states that: a. the competitive equilibrium, where supply equals demand, is achieved whenever the government intervenes. b. social efficiency can be achieved if and only if government intervenes in the economy. c. the competitive equilibrium, where supply equals demand, maximizes social efficiency. d. social efficiency cannot be achieved in any competitive equilibrium. ANSWER: c 35. Suppose voters choose to increase their state's minimum wage to $20 per hour. The accompanying figure shows the market for unskilled labor in that state after the change. Area(s) _____ is the total consumer surplus after this change, while area(s) _____ is the deadweight loss. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 9 a. A; C + E b. A + B + C; F c. B + C; H d. A + B; C + E ANSWER: a 36. Suppose voters choose to increase their state's minimum wage to $20 per hour from $15 per hour. The accompanying figure shows the market for unskilled labor in that state after the change. Area _____ is the total worker surplus after this change. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 10 a. B + D b. B + D + J c. B + C d. D + E + J ANSWER: b 37. A utilitarian social welfare function implies that: a. the well-being of the worst-off member is maximized. b. income redistribution reduces social welfare. c. everyone in society has the same marginal utility. d. no redistribution should occur. Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 11 ANSWER: c 38. Which statement does a Rawlsian social welfare function imply? a. The well-being of the worst-off member is maximized. b. The sum of individual utilities is maximized. c. The marginal utility of everyone in society is equal. d. No redistribution should occur. ANSWER: a 39. Which BEST explains the view that nothing matters except that individuals have met a basic level of need for goods, such as housing or medical care, and that once they have met this basic level, income distribution is irrelevant? a. First Fundamental Theorem of Welfare Economics b. utilitarian social welfare function c. Rawlsian social welfare function d. commodity egalitarianism ANSWER: d 40. The Rawlsian social welfare function SW = min(U1, U2, . . , UN) is equivalent to a utilitarian social welfare function when which conditions are met? a. Individuals are identical and redistribution does not have efficiency costs. b. Redistribution does not have efficiency costs and capital is constant. c. Capital is constant and all basic needs are met. d. All basic needs are met and individuals are identical. ANSWER: a 41. Cutting Temporary Assistance for Needy Families (TANF) benefits would _____ social efficiency and _____ equity in society. a. increase; increase b. decrease; decrease c. increase; would not change d. increase; decrease ANSWER: d 42. Florence can work up to 2,000 hours per year at a wage of $12 per hour. What is the slope of her budget constraint? a. −0.08 b. −10 c. −12 d. −2,000 Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 12 ANSWER: c 43. Florence can work up to 2,000 hours and earn $22,000 annually. What is the slope of her budget constraint? a. −0.09 b. −10 c. −11 d. −12 ANSWER: c 44. Suppose that under Temporary Assistance for Needy Families (TANF), your state provides an income guarantee of $5,000. The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour. Assume the recipient works 300 hours per year and the effective take-home wage rate is $6. What is the benefit reduction rate? a. 0% b. 1.7% c. 40% d. 60% ANSWER: c 45. Suppose that under Temporary Assistance for Needy Families (TANF), your state provides an income guarantee of $5,000. The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour. Assume the recipient works 300 hours per year and the effective take-home wage rate is $7.50. What is the benefit reduction rate? a. 0% b. 25% c. 75% d. 100% ANSWER: b 46. What happens to the labor supply curve of single parents when Temporary Assistance for Needy Families (TANF) benefits are introduced? a. It shifts to the right. b. There is movement downward along the curve. c. It shifts to the left. d. There is movement upward along the curve. ANSWER: c 47. When Temporary Assistance for Needy Families (TANF) benefits are introduced, the labor supply curve of single parents _____, and social efficiency _____. a. shifts to the left; increases Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 13 b. shifts to the right; increases c. shifts to the right; decreases d. shifts to the left; decreases ANSWER: d 48. When Temporary Assistance for Needy Families (TANF) benefits are reduced, the labor supply curve of single parents _____, and social efficiency _____. a. shifts to the right; increases b. is not affected; decreases c. shifts to the right; decreases d. shifts to the left; decreases ANSWER: a 49. What happens to the labor supply curve of single parents when the government reduces Temporary Assistance for Needy Families (TANF) benefits? a. It shifts to the right. b. There is movement downward along the curve. c. It shifts to the left. d. There is movement upward along the curve. ANSWER: a 50. Moira's utility function is given by U = 110 × ln(C) + 55 × ln(L), where C is consumption (in dollars) per year and L is hours of leisure per year. Moira can make $18 per hour and can work up to 2,000 hours per year. Which correctly represents her budget constraint? a. C = 18 × L b. C = 110 × ln(C) + 55 × ln(L) c. C = 18 × (2,000 − L) d. C = (2,000 − L) ANSWER: c 51. Moira's utility function is given by U = 110 × ln(C) + 55 × ln(L), where C is consumption (in dollars) per year and L is hours of leisure per year. Moira can make $10 per hour and can work up to 2,000 hours per year. Which correctly represents the utility maximization problem and budget constraint? a. Max U = 100 × ln(C) + 50 × ln(L) subject to C = 10 × L b. Max U = 110 × ln(C) + 55 × ln(L) subject to C = 10 × (2,000 − L) c. Max U = 100 × ln(C) + 55 × ln(L) subject to C = 15 × (2,000 − L) d. Max U = 100 × 10 × (2,000 − L) subject to C = (2,000 − L) ANSWER: b Essay Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 14 52. Carefully explain the principle of diminishing marginal utility using a relevant example. ANSWER: The principle of diminishing marginal utility suggests that the consumption of each additional unit of a good makes an individual less happy than the consumption of the previous unit. Consider the example of concerts. There is one particular heavy metal band you want to see, so you buy tickets to all four of the Headbanger concerts in your area. You get the highest marginal utility from the first concert, less from the next, and so on. 53. Assume that both air travel and travel by car are normal goods and you spend a fixed amount of income on both goods. Suppose that when the price of crude oil goes up by 30%, the price per mile of air travel goes up by 10% and the price per mile traveled by car goes up by 20%. Explain how the increase in the price of crude oil affects air travel and travel by car in terms of the income effect, the substitution effect, and the overall (net) effect. ANSWER: If the price of oil goes up, your real income falls because your income can buy less of both air and car travel. Consequently, the income effect will reduce your travel by air and by car because they are both normal goods. However, because the price of car travel has increased more than the price of air travel, air travel is now a more attractive option. Therefore, the substitution effect of the increase in the price of oil is to increase the amount of air travel you do and decrease the amount of car travel you do. The net effect on car travel is clear: You will drive less. However, the net effect on air travel depends on the relative magnitude of the income and substitution effects. 54. Explain what is represented by the slope of the budget line and the slope of the indifference curve. How does an increase in income affect the slopes? ANSWER: The slope of the budget constraint is the ratio of the prices of the two goods. This is the rate at which the market allows you to trade off one good for another. The slope of the indifference curve is the marginal rate of substitution, which is the rate at which the consumer wants to trade off one good for another. An increase in income does not change the slope of either because the ratio of prices has not changed (the slope of the budget constraint) and the consumer's preference for trading off one good for the other has not changed (the slope of the indifference curve). 55. Suppose you receive a raise from $10 to $20. Explain how both income and substitution effects would affect your labor supply at the new and higher wage. What will be the effect overall? ANSWER: At the higher wage, you will have a higher income. The income effect means that you'll consume more of every normal good, including leisure. That is, the income effect means you'll work less. The substitution effect results because leisure is now more expensive than it was before your wage was increased. Before, an hour of leisure costs you only $10, and now it costs you $20. Consequently, the substitution effect means that you'll work more because leisure is more expensive. Whether you ultimately work more or less has to do with which effect is bigger. 56. Suppose that the market demand curve is given by Q = 100 − P and the market supply curve is given by Q = 3P. (a) What is the deadweight loss that would result if the government were to institute a price cap of 20 in this market? (b) What is the deadweight loss that would result if the government were to institute a price cap of 30 in this market? Name: Class: Date: Chapter 2 Copyright Macmillan Learning. Powered by Cognero. Page 15 ANSWER: (a) The market equilibrium with no government intervention is P = 25 and Q = 75. If the price is capped at 20, only 60 units are produced. The social surplus from the last 15 units produced is $150 (at a price of $20, 40 units are demanded, so the height of the deadweight triangle is 20, and half of 20 × 15 is 150). Because these units are no longer being produced, that means that the deadweight loss is $150. (b) Because the price in market equilibrium (25) is less than 30, this price cap doesn't affect the market at all. Therefore, there is no deadweight loss. 57. Let Jane's utility function be given by: U = 100 × ln(C) + 50 × ln(L) where C is consumption (in dollars) per year and L is hours of leisure per year. Jane can make $15 per hour and can work up to 2,000 hours per year. (a) Set up the maximization problem, showing the budget constraint. (b) How many hours will Jane want to work per year? ANSWER: (a) The problem is as follows: Max U = 100 × ln(C) + 50 × ln(L) subject to C = 15 × (2,000 − L) The budget constraint simply states that consumption must be equal to $15 per hour × hours worked. Since hours worked is simply 2,000 − L, we write it that way so that everything is in terms of L. (b) Substituting the budget constraint into the utility function, we get U = 100 × ln(30,000 − 15L) + 50 ln(L) Taking the derivative of U with respect to L and setting it equal to zero, we get 100/(30,000 − 15L) × (−15) + 50/L = 0 1,500/(30,000 − 15L) = 50/L After cross multiplying, we get 1,500L = 50 × (30,000 − 15L) 1,500L = 1,500,000 − 750L 2,250L = 1,500,000 L = 666.67 Labor = 2,000 − L Labor = 2,000 − 666.67 Labor = 1,333.33 So, Jane will work 1,333.33 hours per year. Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 1 Multiple Choice 1. What term denotes the use of data and statistical methodologies to measure the impact of government policy on individuals and markets? a. constrained utility maximization b. empirical public finance c. welfare economics d. a balanced budget requirement ANSWER: b 2. Two economic variables that move together are: a. correlated. b. uncorrelated. c. causal. d. casual. ANSWER: a 3. Two economic variables are _____ if movement of one causes the other to move. a. correlated b. uncorrelated c. causally related d. casually related ANSWER: c 4. Banou observes that two variables move together. She wants to determine whether a movement of one variable causes the movement of the other. In other words, she must solve: a. the social efficiency maximization problem. b. the social welfare maximization problem. c. the identification problem. d. the model misspecification problem. ANSWER: c 5. Which is definitely TRUE if two measures, A and B, are correlated? a. A causes B, or B causes A. b. A third factor causes both A and B. c. There is no causation between A and B. d. It is possible that there is a causal relationship between A and B. ANSWER: d 6. Ideally, policy makers should rely on studies that show _____, not just _____. a. permanent relationships; trends b. causal relationships; correlations Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 2 c. trends; isolated variables d. correlations; causal relationships ANSWER: b 7. Which of these is NOT a potential problem with randomized trials? a. Treatment and control groups tend to be very different. b. Such experiments can raise ethical concerns. c. Participants may differ from the underlying population. d. Some individuals may leave the experiment before it is complete. ANSWER: a 8. Suppose that, using a large data set, a statistician perform a cross-sectional regression analysis that indicates that a 7% increase in wages leads to a 5% reduction in employment, whereas the true effect is -2%. The difference of 3% represents which of these? a. measurement error b. bias c. small-sample error d. a difference-in-difference estimation ANSWER: b 9. Which would would be the BEST approach to determine whether exercise improves academic performance? a. compare the academic achievements of the athletes who play on the school’s teams and nonathletes who do not participate in sporting events over a period of time. b. collect testimonials from professors who have observed many students, both athletes and nonathletes, over the years and are therefore well-placed to have insights on this issue c. randomly assign participants to two groups, one that undertakes regular exercise and one that does not, and compare the course grades of members of the two groups after a period of time has elapsed d. randomly assign participants to two groups, one that undertakes regular exercise and one that does not, and compare the results of IQ tests administered to members of the two groups after a period of time has elapsed ANSWER: c 10. Which of these is NOT true? a. Randomized trials generate observational data used to estimate the causal effects of particular treatments. b. Researchers use observational data in time series analysis. c. Researchers use observational data in cross-sectional regression analysis. d. Randomized trials generate experimental data used to estimate the causal effects of particular treatments. ANSWER: a 11. Suppose a researcher who wants to examine the effect of job training on work efficacy randomly enrolls Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 3 half of new workers at an assembly plant in a job training program. The people who receive the training form the _____ group; the people who do not receive training form the _____ group. a. control; treatment b. treatment; treatment c. treatment; control d. control; control ANSWER: c 12. Any difference between treatment and control groups that is correlated with, but not caused by, the treatment is called: a. measurement error. b. bias. c. small-sample error. d. difference-in-difference estimation. ANSWER: b 13. Randomized trials: a. cannot effectively establish causation. b. can be very expensive. c. avoid ethical problems. d. are the least expensive way to test a hypothesis. ANSWER: b 14. Suppose that to examine the effect of the TANF program on labor supply, researchers were to explore how labor supply by poor households has changed over the past 20 years and then compare that change with changes in the income guarantee over time. This would be an example of: a. time series analysis. b. cross-sectional regression analysis. c. a randomized trial. d. a quasi-experiment. ANSWER: a 15. Which of these would be the MOST useful source of time series variation with which to identify the effect of income guarantees on labor supply? a. an abrupt increase in the income guarantee over a short time b. a steady increase in the income guarantee over a long time c. no change in the income guarantee over time d. an expansion of the Earned Income Tax Credit ANSWER: a 16. Suppose that to determine how non-labor income affects labor supply, Dalibor gives everyone born on an even-numbered day in August 1979 $1,000 per year and observes how they change their labor supply compared Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 4 to people born on odd-numbered days in August 1979. This approach is which of these? a. time series analysis b. cross-sectional regression analysis c. a randomized trial d. a quasi-experiment ANSWER: c 17. Suppose a researcher were to estimate the effect of public smoking bans by observing rates of smoking across states over a time period in which some of those states adopt smoking bans. This study takes which approach? a. time series analysis b. cross-sectional regression analysis c. a randomized trial d. a quasi-experiment ANSWER: d 18. Which of these is a TRUE statement? a. Control variables used in cross-sectional regression analysis typically remove all bias. b. Attrition of volunteers in randomized trials rarely occurs. c. Randomized trials are typically expensive. d. Randomized trials do not have causal implications. ANSWER: c 19. Suppose an empirical researcher estimates the effect of drug use on high school dropout rates by examining how the two variables changed over the 1980s and 1990s. This empirical approach can BEST be characterized as: a. a time series analysis. b. a cross-sectional regression analysis. c. structural modeling. d. a quasi-experiment. ANSWER: a 20. Which of these is a potential problem with time series analysis? a. Time series analysis cannot effectively establish causation. b. Time series analysis trials can be very expensive. c. Time series analysis is subject to ethical problems. d. Time series analysis cannot establish causation when one variable is slow-moving. ANSWER: d 21. A statistical method used to assess the relationship between two variables while holding other factors constant is called: a. time series analysis. Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 5 b. cross-sectional regression analysis. c. a randomized trial. d. a quasi-experiment. ANSWER: b 22. Which of these statements is TRUE? a. Cross-sectional regression analysis cannot account for factors that vary between the treatment and control groups. b. Cross-sectional regression analysis yields only qualitative, not quantitative, conclusions about relationships between variables. c. Since tastes and preferences cannot be easily measured, empirical researchers need not concern themselves with these. d. Cross-sectional regression analysis assesses the relationship between two variables while holding other factors constant. ANSWER: d 23. Suppose an empirical researcher estimates the effect of parental divorce on children's high school graduation in 2017 by comparing children whose parents divorced with children whose parents remained married, controlling for other observable characteristics. The researcher's approach is BEST characterized as: a. time series analysis. b. cross-sectional regression analysis. c. a quasi-experiment. d. a random trial. ANSWER: b 24. Suppose an empirical researcher estimates the effect of HMO membership on health care costs by comparing costs with membership across various states last year. The researcher's approach is BEST characterized as: a. time series analysis. b. cross-sectional regression analysis. c. a quasi-experiment. d. a random trial. ANSWER: b 25. Which of these statements is TRUE? a. Control variables used in cross-sectional regression analysis typically remove all bias. b. Attrition of volunteers in randomized trials is rare. c. Randomized trials are typically inexpensive. d. Cross-sectional analysis may involve comparing many individuals at one point in time. ANSWER: d 26. Suppose an empirical researcher wants to analyze the impact of restricting HMO membership on insurance Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 6 rates among workers. The researcher notices that one state passed a law restricting HMO membership and that an otherwise similar state did not pass such a law. Which empirical approach would be BEST suited to this analysis? a. time series analysis b. cross-sectional regression analysis c. a quasi-experiment d. a random trial ANSWER: c 27. Suppose that one state establishes a job-training program for all high school dropouts. Which empirical approach would be BEST suited to estimating the effect of the job-training program on earnings? a. time series analysis b. cross-sectional regression analysis c. structural modeling d. a quasi-experiment ANSWER: d 28. Suppose that a state were to cut the welfare guarantee from $6,000 to $3,000 between 2017 and 2019. Furthermore, suppose that hours of work per year among single parents rose from 900 to 1,200 hours per year. Using the time series approach, what is the effect of the reduction for the average single parent? a. −300 hours per year b. 300 hours per year c. 900 hours per year d. 1,200 hours per year ANSWER: b 29. Suppose a state were to cut the welfare guarantee by 30% between 2016 and 2018. Furthermore, suppose that hours of work per year among single parents rose by 20%. Use the time series estimate of the effect to determine the elasticity of total hours worked with respect to benefits. a. −0.67 b. 0.67 c. −1 d. 1 ANSWER: a 30. Suppose a state were to cut the welfare guarantee from $6,000 to $3,000 between 2016 and 2018. Additionally, suppose that hours of work per year among single parents rose from 900 to 1,200. Which of these, if true, would give a researcher greater confidence that a time series estimate of the effect of the reduction in the welfare guarantee on labor supply is unbiased? a. Single parents in that state in 2012 were very different from single parents in 2014. b. There was no period of substantial economic growth or decline between 2012 and 2014. c. The welfare guarantee was cut only for a portion of single parents. Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 7 d. Other factors besides welfare benefits also help determine how many hours a single parent works ANSWER: b 31. Suppose 15 states pass laws limiting trial lawyer compensation, while the remaining 35 states pass no such laws. Additionally, suppose that the value of malpractice suits goes from an average of $2.4 billion to $2.8 billion in the 15 states that pass laws limiting trial lawyer compensation and from $2.3 billion to $2.6 billion in the remaining 35 states around the time that the laws are passed. What is the difference-in-difference estimator of the effect of these laws on the value of malpractice suits? a. $0 b. $0.1 billion c. $0.3 billion d. $0.4 billion ANSWER: b 32. Which of these is TRUE concerning structural estimates? a. The researcher does not need more information than a researcher who estimates reduced form estimates only. b. The researcher cannot impose assumptions on the functional form of utility. c. The researcher must use a randomized study. d. The variables in the study cannot be correlated with each other. ANSWER: a 33. Suppose one study uses data on prices and cigarette smoking behavior to estimate the overall effect of cigarette-price changes on smoking, while another uses the same data to decompose the effect into income and substitution effects. The first study provides _____ estimates; the second provides _____ estimates. a. reduced form; reduced form b. structural; structural c. quasi-experiment; randomized d. reduced form; structural ANSWER: d 34. Randomized trials and quasi-experiments: a. cannot distinguish causality from correlation without making unrealistic assumptions. b. cannot find the effect of a particular treatment. c. often cannot tell us why outcomes change with a given intervention. d. are designed only to identify the consequences of a given intervention. ANSWER: c 35. Suppose an economist estimates underlying features of utility functions. What type of empirical analysis would this researcher MOST likely engage in? a. time series analysis b. cross-sectional regression analysis Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 8 c. structural modeling d. a quasi-experiment ANSWER: c 36. The difference-in-difference estimator is used in: a. time series analysis. b. cross-sectional regression analysis. c. structural modeling. d. quasi-experiments. ANSWER: d 37. R2 is a measure of: a. the statistical significance of a regression. b. how well a regression model fits the underlying data. c. the statistical significance of a given coefficient. d. how well a structural model explains the differences between treatment and control groups. ANSWER: b 38. Which of these interpretations did the Harvard administrator draw regarding SAT prep courses and SAT performance? a. SAT prep courses worsen preparation for SATs. b. Those who are of lower test-taking ability take preparation courses to try to catch up. c. Nervous people take prep courses because they perform poorly on standardized exams. d. Students do not study for the SATs. ANSWER: a 39. Opponents of minimum wage laws argue that higher wages lead to unemployment. They believe higher minimum wages and unemployment are: a. randomly correlated. b. uncorrelated. c. causally related. d. casually related. ANSWER: c 40. What does the regression model, HOURSi =  + TANFi + i, suggest about the relationship between welfare and hours of work? a. Welfare impacts hours. b. Hours and welfare have no relationship. c. Hours impacts welfare. d. Hours and welfare are perfectly correlated. ANSWER: a Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 9 41. Which component in the regression model, HOURSi =  + TANFi + i, is constant? a. HOURS b.  c.  d. TANF ANSWER: b 42. Which component in the regression model, HOURSi =  + TANFi + i, is the slope coefficient? a. HOURS b.  c.  d. TANF ANSWER: c 43. Consider the regression estimates below for the model, HOURSi =  + TANFi + i Estimates Constant 1,325 (11) TANF benefits (1,000s) −167 (8) According to the estimates, how many hours will an individual work if they receive no welfare benefits? a. 8 b. 11 c. 167 d. 1,325 ANSWER: d 44. Consider the regression estimates below for the model, HOURSi =  + TANFi + i Estimates Constant 1,325 (11) TANF benefits (1,000s) −167 (8) According to the estimates, what is the expected impact of a $1,000 increase in welfare benefits? a. The number of hours worked falls by about 13. b. The number of hours worked falls by 1,325. c. The number of hours worked falls by 167. d. The number of hours worked falls by 1,670 Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 10 ANSWER: c 45. Consider the regression estimates below for the model, HOURSi =  + TANFi + i Estimates Constant 1,325 (11) TANF benefits (1,000s) −167 (8) Which of these is the standard error of the slope coefficient? a. 8 b. 11 c. 167 d. 1,325 ANSWER: a 46. Consider the regression estimates below for the model, HOURSi =  + TANFi + i Estimates Constant 1,560 (15) TANF benefits (1,000s) −183 (11) According to the estimates, how many hours will an individual work if they receive no welfare benefits? a. 15 b. 11 c. 183 d. 1,560 ANSWER: d 47. Consider the regression estimates below for the model, HOURSi =  + TANFi + i Estimates Constant 1,560 (15) TANF benefits (1,000s) −183 (11) According to the estimates, what is the expected impact of a $1,000 increase in welfare benefits? a. The number of hours worked falls by about 15. b. The number of hours worked falls by 1,560. c. The number of hours worked falls by 183. Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 11 d. The number of hours worked falls by 1,830. ANSWER: c 48. Which of these was a major problem of the Indonesian Raskin program, which provides subsidized rice to households in the bottom 25% of the income distribution? a. Eligible households were receiving too much rice. b. Ineligible households were receiving too little rice. c. Eligible households were receiving too little rice. d. It was impossible to tell the difference between eligible and ineligible households. ANSWER: c 49. Which of these was thought to prevent eligible households in the Indonesian Raskin program from receiving the quantity of rice to which they were entitled? a. Family sizes were too small in eligible households. b. Eligible households lived too far away from distribution sites. c. Households did not really know if they were eligible. d. There was a shortage of rice in the program. ANSWER: c 50. From 2014 to 2018, youth cigarette consumption declined by about 29%. Which of these MOST likely caused this decline? a. The settlement of a series of expensive lawsuits against the tobacco industry by many states. b. A shift in smoking habits from traditional cigarettes to e-cigarettes. c. A price war in the tobacco industry, leading to a drop in real cigarette prices. d. An increased appreciation of the health risks associated with smoking. ANSWER: b 51. What is the MOST fundamental issue facing economists who do empirical work in public finance? a. finding market equilibrium quantities b. finding market equilibrium prices c. disentangling causality from correlation d. designing graphical representations of economic problems ANSWER: c 52. Which of these scenarios illustrates the identification problem? a. Anuman observes a negative correlation between malnutrition and the length of time women breastfeed children in developed countries but a positive correlation in less developed countries. b. The data obtained on breast-feeding and malnutrition comes from a random sample of infants from unknown communities; Anuman therefore cannot identify the subject of his study. c. Anuman shows that infants who are in the poorest health breastfeed the longest, and the government, mistaking correlation for causation, enacts a policy based on the assumption that longer breastfeeding is bad for children. Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 12 d. Anuman observes a positive correlation between malnutrition and the length of time women breastfeed children, but does not know which variable is causing this pattern. ANSWER: d 53. An economist wants to determine whether cognitive-behavioral therapy reduces substance abuse. Ten students volunteer to participate in a randomized trial in which those with a birthday on an even day receive the therapy, and those with a birthday on an odd day do not. Of the following individuals, who is part of the control group? a. a person whose birthday is on the first day of April b. a person whose birthday is on the last day of April c. no control group in this scenario d. a person whose birthday is on April 2 ANSWER: a 54. An economist wants to determine whether cognitive-behavioral therapy reduces substance abuse. Ten students volunteer to participate in a randomized trial in which participants with birthdays on even days receive the therapy, and those with birthdays on odd days do not. Of the following individuals, who is part of the treatment group? a. a person whose birthday is on January 2 b. a person whose birthday is on the first day of January c. no treatment group in this scenario d. a person whose birthday is on January 30 ANSWER: b 55. Which of these descriptions of the relationship between the employment rate and cash welfare benefits is stated in elasticity form? a. A reduction of $1,000 in welfare results in a 10% increase in employment. b. A reduction of $1,000 in welfare increases employment by 1,000 workers. c. A 20% reduction in welfare benefits results in a 10% increase in employment. d. A 20% reduction in welfare benefits increases employment by 1,000 workers. ANSWER: c 56. Suppose Abraham performs a randomized trial to evaluate the causal relationship between classroom intervention and academic performance by students. Ten private elementary schools volunteer to take part in the experiment, and Abraham randomly assign five of them to the treatment group and five to the control group. What is one problem with the results obtained from this experiment? a. The results only measure the correlation but not causation between the treatment and academic performance. b. Randomization does not solve the problem of inherent differences between the treatment and control groups. c. Randomized trial results are only valid for medical experiments, not social experiments. d. The results may only be valid for the ten private schools that participate in the experiment. ANSWER: d Name: Class: Date: Chapter 3 Copyright Macmillan Learning. Powered by Cognero. Page 13 57. To measure the impact of education on earnings, Sieghild performs a regression analysis that includes parents' education and family income as control variables. Which of these is the de