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Economics Dr. Sauer

Homework #2 (40 points) For questions 1 30 (30 points), please indicate your answers on a scantron sheet. It is okay to work on your homework in groups, but each person must submit answers individually. For questions 31-33 (10 points), you may tear off that sheet to hand in. 1. True or False. Government inefficiency cannot be explained by using the theory of incentives. 2. Under what situations should the government be involved in providing goods or services that society values? a. When the good or service is otherwise provided by foreign firms. b. When the good or service is cheap to provide. c. When there is a compelling reason to believe the private sector will fail at providing the good or service. d. When the private sector cant figure out how to produce the good or service. 3. The private sector allocates resources according to ______ while the government sector allocates resources according to ______. a. scarcity and prices; political considerations. b. political considerations; scarcity and prices. c. scarcity and prices; supply and demand. d. political considerations; supply and demand. 4. True or False. All regulations, even good ones, have costs. 5. True or False. On the question of the optimal size of a government, economics has a clear answer. 6. Which of the following is NOT true with respect to taxes? a. exert a fiscal drag on the economy. b. often cause deadweight loss for society. c. often cause the economy to grow. d. often cause people and firms to change their behaviors. 7. Many people mistakenly believe that cutting taxes will result in more income for the government. This is called the a. Laffer Curve Paradox. b. Tax-cuts-increase-revenues Fallacy. c. Taxing-Spending Enigma. d. Puzzle of the Budget. 8. Which of the following are costs or problems associated with government regulations? a. They can create perverse incentives or unintended consequences. b. They can end up limiting competition (e.g. requiring higher standards for new firms). c. They can be pushed for by people who arent directly involved in the situation (e.g. people in the US who want to save the rainforest in other nations). d. Either all of the above or none of the above. 9. True or False. Economists would agree that all regulations are bad. 10. Which of the following is NOT part of the economic framework for thinking about government and the economy? a. Government has the potential to enhance the productive capacity of the economy, which makes us better off. b. Some government activity shrinks the size of the pie but still may be socially desirable. c. Sometimes government involvement in the economy is purely destructive. d. There is an optimal size for the government. 11. True or False. Information asymmetry is a common problem in todays society. 12. Asymmetric information is a situation where a. all parties have the same access to the relevant information. b. parties have different access to the relevant information. c. private parties have the same access to government information. d. the government releases the information.

13. What does branding have to do with information asymmetry? a. Branding is a way for the firm to reveal information to a customer. b. Branding is a way for the firm to engage in price discrimination. c. Branding is a way for the firm to reduce adverse selection. d. Branding is a way for the firm to increase productivity. 14. True or False. The reason your insurance company offers you a choice in deductible is to get you to reveal some information about the probability youll be making an insurance claim. 15. True or False. The market for health care doesnt suffer from information asymmetry any more than any other market does. 16. Which of the following situations suffers the LEAST from adverse selection? a. the Hope Scholarship program. b. the market for big screen televisions. c. the market for used cars. d. the market for health care. 17. True or False. In many cases, consumers and firms create their own mechanisms for solving information problems. 18. Which of the following is NOT a part of the information problem at the heart of health care? a. doctors seek to maximize income and minimize lawsuits. b. insurance companies seek to maximize profits by pay as little as possible for claims. c. the right medical course of action is very clearly defined. d. Either all of the above or none of the above. 19. True or False. The reason McDonalds is so successful is that theyve created the highest quality product. 20. True or False. It is fairly simple to reform healthcare in way that will both increase access and increase affordability. 21. Which of the following is NOT encompassed in the concept of human capital? a. your new i-pad b. the skills you learned in college c. the experience you learned on the job d. your natural ability to put people at ease 22. True or False. The sole benefit of human capital is a higher paycheck. 23. Which of the following is a factor that could be the cause of the rising income inequality in the US? a. lack of union bargaining power b. rich workers choosing to work fewer hours c. a gap in the level of human capital d. bureaucratic pay scales 24. The problem that fundamentally underlies poverty is a lack of a. natural resources b. physical capital c. human capital d. population 25. True or False. If productivity grows at 1% per year, it will take 72 years for the standard of living to double. 26. True or False. Human capital is important for productivity but not for societys standard of living. 27. The Lump of Labor fallacy implies a. there are more workers than jobs. b. a new job can be created without destroying an existing one. c. there is a fixed amount of work to be done in an economy. d. there are more jobs than workers. 28. True or False. The wage rate for a particular occupation reflects the value to society of that occupation.

29. Which of the following correctly describes a viewpoint in the debate on the importance of the income gap? a. As long as the standard of living is rising in general, it is okay that there is some income inequality. b. The income gap can grow infinitely large without much impact on society. c. The income gap sends the signal that if a person works hard and invests in human capital, they wont be rewarded anyway. d. What individuals really care about is their absolute wealth, so the income gap might be a source of discontent. 30. Productivity is NOT affected by a. the political party in charge of the government. b. social factors (like discrimination). c. the legal, regulatory and tax structure. d. physical capital.

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31. In 2004, Canadas economy was worth $900 billion. Its government took in $150 billion in revenues and spent $144 billion. In 2004, South Koreas economy was worth $600 billion. Its government took in $150 billion in revenues and spent $155 billion. Calculate each nations government deficit or surplus. Canada:

South Korea:

32. Chose a branded product (e.g. well-known national brand or even a local restaurant). Think about the commercials or ads youve seen for it and check out its website. If you have purchased this good or service before, recall that experience as well. Analyze the message that you think the company is trying to send with their brand (what are they trying to signal to customers?). How does their branding help to overcome the information asymmetry?

33. You have $500 in your savings account. Your savings account pays you interest of 0.9% annually. How long will it take to double your $500?