Test Bank for Public Finance in Canada 5th Edition

Test Bank for Public Finance in Canada 5th Edition

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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Government growth has been caused by 1)

A) lots of public lands available in the West.
B) inflation.
C) increases in privatization.
D) citizens who want larger government.
Answer: D
Explanation: A)
B)
C)
D)

2) With multiple-peaked preferences, 2)

A) a unique political equilibrium does not exist.
B) a voting paradox emerges.
C) all individuals have a point that is most preferred.
D) all of these answers are correct.
Answer: D
Explanation: A)
B)
C)
D)

3) When each individual has consistent preferences, but those of the community are not 3)
consistent, it is known as
A) logrolling. B) majority rule.
C) a voting paradox. D) agenda manipulation.
Answer: C
Explanation: A)
B)
C)
D)

4) The possibility of multiple-peaked preferences cannot be ruled out. 4)

A) True B) False C) Uncertain
Answer: A
Explanation: A)
B)
C)

1
5) Rent seeking involves 5)
A) citizen groups lobbying elected officials to manipulate government policy.
B) finding reasonable rent rates.
C) price ceilings.
D) price floors.
Answer: A
Explanation: A)
B)
C)
D)

6) Criticism for bureaucrats wanting larger budgets include: 6)

A) causing more inefficiency. B) "empire building".
C) causing salary escalation. D) all of these answers are correct.
Answer: D
Explanation: A)
B)
C)
D)

7) A deadweight loss is never 7)

A) found in democratic economies.
B) found in Canada.
C) found in the real world.
D) found when marginal benefits equal marginal costs.
Answer: D
Explanation: A)
B)
C)
D)

8) Applying economic principles to the analysis of political decision making is public 8)

choice.
A) True B) False C) Uncertain
Answer: A
Explanation: A)
B)
C)

9) In a representative democracy, there are 9)

A) special interests. B) public employees.
C) elected politicians. D) all of these answers are correct.
Answer: D
Explanation: A)
B)
C)
D)

2
10) Special interest groups are a detriment to the political process. 10)
A) True B) False C) Uncertain
Answer: B
Explanation: A)
B)
C)

11) A person prefers large and small levels of national defence to medium-sized levels of 11)
national defence. This person
A) has single-peaked preferences.
B) has multiple-peaked preferences.
C) is not rational.
D) cannot achieve his or her most-preferred outcome.
Answer: B
Explanation: A)
B)
C)
D)

12) Governments grow because low income individuals cannot use the political process to 12)
redistribute income towards themselves.
A) True B) False C) Uncertain
Answer: B
Explanation: A)
B)
C)

13) Logrolling is 13)

A) a system that generally involves double-peaked preferences.
B) a system used often at lumberjack contests.
C) a system that involves the trading of votes.
D) a system that will always lead to worthy projects getting funded.
Answer: C
Explanation: A)
B)
C)
D)

14) Special interest groups are established on the basis of 14)

A) size of income.
B) sources of income.
C) region.
D) all of these answer options are correct.
Answer: D
Explanation: A)
B)
C)
D)

3
15) Controlling the growth of government can be difficult because 15)
A) of strict budgetary rules.
B) of commitments made by past governments.
C) governments do not like increasing taxes.
D) all of these answers are correct.
Answer: B
Explanation: A)
B)
C)
D)

16) In 2015 which country had the highest ratio of government expenditures to GDP? 16)
A) Germany B) United States C) Canada D) France
Answer: D
Explanation: A)
B)
C)
D)

17) Lindahl prices 17)

A) result in efficient levels of public goods provision.
B) result in different prices for the same amount of output.
C) require honest revelation of preferences.
D) cause all of these.
Answer: D
Explanation: A)
B)
C)
D)

18) The Marxist view would say that there is an overproduction of goods by the private 18)
sector.
A) True B) False C) Uncertain
Answer: A
Explanation: A)
B)
C)

19) Which of the following is an example of a special-interest group? 19)

A) Canadian Association of Petroleum Producers
B) Liberal party
C) Department of Transportation
D) all of these answers are correct.
Answer: A
Explanation: A)
B)
C)
D)

4
20) Democratically elected governments easily respond to the public interest. 20)
A) True B) False C) Uncertain
Answer: B
Explanation: A)
B)
C)

21) Under certain assumptions, the actions of elected officials mimic the wishes of the 21)
median voter.
A) True B) False C) Uncertain
Answer: A
Explanation: A)
B)
C)

22) Majority rule voting 22)

A) can only be applied to single issues.
B) requires that rules of order be established.
C) requires a simple majority greater than half the voters.
D) does not occur in democracies.
Answer: C
Explanation: A)
B)
C)
D)

23) The median voter must have preferences that reflect those of all people in the 23)
community.
A) True B) False C) Uncertain
Answer: B
Explanation: A)
B)
C)

24) It is stated that, in democracy, every vote counts. To be a conscientious voter in a 24)
democracy, one should
A) be sure to vote.
B) find out about the positions of the candidates.
C) spend some time learning about the issues.
D) all of these answers are correct.
Answer: D
Explanation: A)
B)
C)
D)

5
 25) Elected politicians care more about winning elections than the ideology of the voters 25)
they represent.
A) True B) False C) Uncertain
Answer: C
Explanation: A)
B)
C)

26) Arrow's impossibility theorem does not cast doubt on the ability of democracies to 26)
function.
A) True B) False C) Uncertain
Answer: B
Explanation: A)
B)
C)

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

27) Suppose that you have two people in an economy, Ms. Hundley and Mr. McKenna, who want to
produce a public good S. Suppose we calculate the Lindahl equilibrium using the method in your
textbook. In this case, the demand curve for Ms. Hundley is S = P1/2. The demand curve for Mr.
McKenna is S = 8/P. If the marginal social cost of the project is 10, what is the Lindahl equilibrium
quantity of S? What are the Lindahl prices?
Answer: Set P1/2 = 8/P. Multiply both sides by P, leaving P3/2 = 8. Therefore, P = 82/3 = 4. At P = 4, S*
= 2. Mr. McKenna pays 4. Ms. Hundley pays 6.

28) Consider the following net benefits (measured in billions of dollars) that will result from the passage
of two legislative bills, X and Y:

(a) Identify the logrolling opportunity present in this situation.

(b) Identify the potential gains to voters.
(c) Explain why logrolling is or is not efficiency enhancing.
Answer: (a) On their own, neither issue X nor Y will pass. Both will be voted down by votes of 2-1. If
person A trades a vote with B, then both issues will pass by 2-1 votes.
(b) With both issues passed, overall utility for person A is 3. For person B, overall utility is 4.
For person C, overall utility is -5.
(c) With issue X passed, society is benefited because it had a total benefit to society of 3.
Logrolling also allowed issue Y to pass, though it shouldn't have since its total benefit to
society is -1.

6
29) Special interest groups are not always perceived to add positively to society. Discuss why this may
be so.
Answer: Often small groups of people form groups that have political influence when the majority of
society does not receive the benefits of the legislated action. This can cause resentment and
sometimes lead to economically inefficient levels of production.

30) In the Canadian federal election of 2015, voter turnout was the highest since 1993. What are
possible explanations for this?
Answer: Voters have become more aware of the issues and, therefore, more inclined to participate in
the political process. Elections Canada launched initiatives towards getting under-represented
groups to vote, including students. The long election campaign and the close polling results
may have increased awareness of the issues and elicited more interest in exercising the right to
vote.

31) Consider the figure below. If the equation for the demand curve were P = 10 - Q and MC constant at
4,

(a) Find the competitive level of output and price.

(b) Find the marginal revenue and derive the rent seeking cartel's output and price.
(c) How much rent is being raised?
Answer: (a) Set Demand = Supply, 10 - Q = 4, then Q* = 6 and P* = 4.
(b) TR = P * Q = (10 - Q) * Q, MR = dTR/dQ = 10 - 2Q, then set MR = MC, 10 - 2Q = 4, Qc
= 3 and Pc = 7.
(c) Total rent = (Pc - P*) × Qc = 3 × 3 = 9.

7
32) Suppose there were three candidates running for office: Dewey, Cheatum, and Howe. Suppose a
majority of voters preferred Cheatum to Dewey. Does this mean that a majority of voters preferred
Howe to Dewey?
Answer: Suppose there are three voters. The following example illustrates the counter-example. Each
voter ranks the candidates in order of preference. Cheatum beats Dewey, but Dewey beats
Howe.

33) What should be the priority of politicians? Should they be mainly concerned with conveying and
voting the wishes of the people that they represent? Should they be mainly concerned with standing
for positions that they feel strongly about? Should they be mainly concerned with securing
reelection?
Answer: All three issues are valid and must be dealt with in conjunction. The people that elected them
as representatives expect to have their voices heard in a democracy. In addition, the people
who elect a politician have to be able to trust their representatives' judgment on some issues.
A politician not in office can have no impact, so reelection has to be a concern.

8
Answer Key
Testname: C7

1) D
2) D
3) C
4) A
5) A
6) D
7) D
8) A
9) D
10) B
11) B
12) B
13) C
14) D
15) B
16) D
17) D
18) A
19) A
20) B
21) A
22) C
23) B
24) D
25) C
26) B
27) Set P1/2 = 8/P. Multiply both sides by P, leaving P3/2 = 8. Therefore, P = 82/3 = 4. At P = 4, S* = 2. Mr.
McKenna pays 4. Ms. Hundley pays 6.
28) (a) On their own, neither issue X nor Y will pass. Both will be voted down by votes of 2-1. If person A
trades a vote with B, then both issues will pass by 2-1 votes.
(b) With both issues passed, overall utility for person A is 3. For person B, overall utility is 4. For person C,
overall utility is -5.
(c) With issue X passed, society is benefited because it had a total benefit to society of 3. Logrolling also
allowed issue Y to pass, though it shouldn't have since its total benefit to society is -1.
29) Often small groups of people form groups that have political influence when the majority of society does
not receive the benefits of the legislated action. This can cause resentment and sometimes lead to
economically inefficient levels of production.
30) Voters have become more aware of the issues and, therefore, more inclined to participate in the political
process. Elections Canada launched initiatives towards getting under-represented groups to vote, including
students. The long election campaign and the close polling results may have increased awareness of the
issues and elicited more interest in exercising the right to vote.
31) (a) Set Demand = Supply, 10 - Q = 4, then Q* = 6 and P* = 4.
(b) TR = P * Q = (10 - Q) * Q, MR = dTR/dQ = 10 - 2Q, then set MR = MC, 10 - 2Q = 4, Qc = 3 and Pc =
7.
(c) Total rent = (Pc - P*) × Qc = 3 × 3 = 9.

9
Test Bank for Public Finance in Canada 5th Edition

Answer Key
Testname: C7

32) Suppose there are three voters. The following example illustrates the counter-example. Each voter ranks
the candidates in order of preference. Cheatum beats Dewey, but Dewey beats Howe.

33) All three issues are valid and must be dealt with in conjunction. The people that elected them as
representatives expect to have their voices heard in a democracy. In addition, the people who elect a
politician have to be able to trust their representatives' judgment on some issues. A politician not in office
can have no impact, so reelection has to be a concern.

10

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