Page 111 - Economics

CONFIRMING PAGES

PART ONE
82
Introduction to Economics and the Economy
Study Questions
1. Distinguish between the functional distribution and per- lem as it relates to public goods? Is U.S. border patrol a
sonal distribution of income. Which is being referred to in public good or a private good? Why? How about satellite
each of the following statements? “The combined share of TV? Explain.
wage income and proprietary income has remained remark- 10. KEY QUESTION Draw a production possibilities curve with
ably stable at about 80 percent since the Second World public goods on the vertical axis and private goods on the hor-
War.” “The relative income of the richest households is izontal axis. Assuming the economy is initially operating on the
higher today than in 1970.” curve, indicate how the production of public goods might be
2. KEY QUESTION Assume that the five residents of Econoville increased. How might the output of public goods be increased
receive incomes of $50, $75, $125, $250, and $500. Present if the economy is initially operating at a point inside the curve?
the resulting distribution of income as a graph similar to 11. Use the distinction between the characteristics of private
Figure 4.2. Compare the incomes of the lowest fifth and the and public goods to determine whether the following should
highest fifth of the income receivers. be produced through the market system or provided by
3. Distinguish between a plant, a firm, and an industry. Con- government: (a) French fries, (b) airport screening, (c) court
trast a vertically integrated firm, a horizontally integrated systems, (d) mail delivery, and (e) medical care. State why
firm, and a conglomerate. Cite an example of a horizontally you answered as you did in each case.
integrated firm from which you have recently made a 12. Use the circular flow diagram to show how each of the
purchase. following government actions simultaneously affects the
4. KEY QUESTION What are the three major legal forms of allocation of resources and the distribution of income:
business organization? Which form is the most prevalent in a. The construction of a new high school.
terms of numbers? Why do you think that is so? Which b. A 2-percentage-point reduction of the corporate
form is dominant in terms of total sales? What major advan- income tax.
tages of this form of business organization gave rise to its c. An expansion of preschool programs for disadvantaged
dominance? children.
d. The levying of an excise tax on polluters.
5. What is the principal-agent problem as it relates to manag-
ers and stockholders? How did firms try to solve it in the 13. What do economists mean when they say government pur-
1990s? In what way did the “solution” backfire on some chases are “exhaustive” expenditures whereas government
firms? transfer payments are “nonexhaustive” expenditures? Cite
an example of a government purchase and a government
6. Identify and briefly describe the main economic functions
of government. What function do you think is the most transfer payment.
controversial? Explain why. 14. What is the most important source of revenue and the ma-
jor type of expenditure at the Federal level? At the state
7. What divergences arise between equilibrium output and ef-
ficient output when (a) negative externalities and (b) positive level? At the local level?
externalities are present? How might government correct 15. KEY QUESTION Suppose in Fiscalville there is no tax on
these divergences? Cite an example (other than the text the first $10,000 of income, but a 20 percent tax on
examples) of an external cost and an external benefit. earnings between $10,000 and $20,000 and a 30 percent
tax on income between $20,000 and $30,000. Any income
8. Explain why zoning laws, which allow certain land uses only
in specific locations, might be justified in dealing with a above $30,000 is taxed at 40 percent. If your income is
problem of negative externalities. Explain why tax breaks to $50,000, how much will you pay in taxes? Determine your
businesses that set up in areas of high unemployment might marginal and average tax rates. Is this a progressive tax?
be justified in view of positive externalities. Explain why ex- Explain.
cise taxes on beer might be justified in dealing with a prob- 16. LAST WORD What do economists mean when they refer to
lem of external costs. Social Security as a pay-as-you-go plan? What is the Social
Security trust fund? What is the nature of the long-run fis-
9. KEY QUESTION What are the two characteristics of public
goods? Explain the significance of each for public provision cal imbalance in the Social Security retirement system?
as opposed to private provision. What is the free-rider prob- What are the broad options for addressing this problem?

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