MULTIPLE CHOICE

1.C The real cost of government goods and services is:

a. money.
b. taxes.
c. the private goods and services foregone.
d. inflation.

2. D If the economy is currently operating on a point on the production possibility curve for government goods
and services versus private goods and services,
a. an annual increase in government goods and services can be obtained without any sacrifice of annual
private goods and services.
b. it will be impossible to increase annual output of government goods and services.
c. a decrease in the annual output of government goods and services will have no effect on the annual output
of private goods and services.
d. a decrease in the annual output of government goods and services will allow an increase in annual output
of private goods and services.

3. A Government goods and services are usually:

a. not rationed by prices.
b. sold in markets.
c. made available to persons according to their willingness and ability to pay. d. financed by revenue obtained
from sales.

4.C Graphically, the budget constraint can be described as:

a. the slope being the different 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

5.D Suppose John 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

6.A Government purchases for consumption and investment:

a. are made to acquire resources necessary to produce government goods and services.
b. are designed to redistribute purchasing power among citizens.
c. have increased in importance as a percent of federal spending since 1959
d. do not withdraw resources from private use.

7.D Transfer payments by the federal government in the United States account for about:
a. 25 percent of federal government expenditures.
b. 10 percent of federal government expenditures.
c. 40 percent of GDP.
d. 60 percent of federal government expenditures.

8.B Total annual expenditures by federal, state, and local governments in the United States in the 1990s
accounted for roughly:
a. 20 percent of annual GDP.
b. 30 percent of annual GDP.
c. 50 percent of annual GDP.
d. 75 percent of annual GDP.

9.A Federal government expenditures in the United States account for about:
a. 23 percent of annual GDP.
b. 33 percent of annual GDP.
c. 43 percent of annual GDP.
d. 53 percent of annual GDP.

10. D About 80 percent of federal receipts are accounted for by:

a. corporate profits taxes.
b. sales taxes.
c. excise taxes.
d. payroll and personal income taxes.

11.B If the economy is operating at full employment and using resources efficiently, then an increase in
spending for homeland security this year will:
a. require that resources be reallocated to hom
eland security services without sacrificing any
alternative goods and services.
b. be possible if resources are reallocated to homeland security services, but it will also mean that
the output of some other goods and services will have to fall.
c. be impossible.
d. be possible only if there is an improvement in technology or more resources made available.

15.C State and local government expenditure in the United States accounts for about:
a. 32 percent of GDP.
b. 22 percent of GDP.
c. 12 percent of GDP.
d. 7 percent of GDP.

15.C Assume a convex utility function with an interior solution in which a cosumer chooses of each good.
Which of the following is not represented by the slope of the budget constraint?
a. marginal rate of substitution
b. relative price of one good (drawn on horizontal axis) in terms of other good (drawn on vertical axis)
c. relative price of one good (drawn on vertical axis) in terms of other good (drawn on horizontal axis)
d. ratio of the marginal utilities

16.D This figure show a consumer’s buget constraints for apples (vertical axis) and oranges (horizontal axis).
If the price of oranges increases, how is the budget constraint (bc) affected?
a. The bc shifts inward
b. the bc does not change.
c. the vertical intercept E decreases and the horizontal intercept F remains the same, making the bc flatter.
d. the vertical intercept E in unchanged and the horizontal intercept F decreases the same, making the bc
steeper.
16.D Suppose that Gustavo spends all of his income on DVDs and (legallly) downloaded songs. At the
optimum, which of the following must be TRUE?

a. Gustavo spends all his income on songs and none on DVD if songs are cheaper
b. Gustavo spends all of his income on DVDs an none on songs if DVDs are cheaper.
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

17.D Which of the following is TRUE when a consumer is maximizing her utility?
a. She consumes where the budget constraint intersects the midpoint of her indifference curve.
b. She consumes hafway between the two intersections of her budget constraint and her indifferent curve.
c. She consumes at the point at which the slope of her indifferent curve is zero.
d. She consumes at the point at which her budget constraint is tangent to her indifference curve.

18.B Supppose Tyrone spends his entire income on books and clothing. If the price of both books and clothing
fall by 10%, which of the following statement is TRUE?
a. Tyrone is not able to move to a new indifferent curve.
b. The budget constraint shifts outward
c. The budget constraint become flatter (the slope is smaller in absolute value)
d. The budget constraint become steeper (the slope is larger in absolute value)

19.C Suppose Tim spends his entire income on hot dogs and humburgers and consumes at least some of
both. Now suppose that the price of hot dogs increases while the price of hamburgers remain the same. If
Tim is compensated so that his utility is held constant, which of the following must be TRUE?
a. Tim is better off than he was
b. Tim’s utility remains the same.
c. Tim consumes more hamburgers and fewer hot dogs
d. Tim consumes more hot dogs and fewer hamburgers
20.B Suppose that you buy a lot of music and that the prices of CDs go up. The income effect means that
you buy………….CDs because……….
a. fewer; your nomimal income has been reduced
b. fewer; your real income has been reduced
c. fewer; you now enjoy music less
d. fewer; CDs are less expensive relative to other goods

21.D Suppose that you buy a lot of music and that the prices of CDs go up. The substitution effect means
that you buy………….CDs because……….
a. fewer; your nomimal income has been reduced
b. fewer; your real income has been reduced
c. fewer; you now enjoy music less
d. fewer; CDs are less expensive relative to other goods
22.D If pasta is an inferior good and if the price of pasta increases, the income effect…….... the quality
demanded, and the substitution effect………the quality demanded.
a. reduces; decreases
b. increases; increases
c. reduces; increases
d. increases; decreases

23.C Suppose under TANF, your state provides an income gurantee of $5000 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 rae is:
a. $0 per hour.
b. $4 per hour.
c. $6 per hour.
d. $10 per hour.

24.C Under TANF, your state provides an income gurantee of $5000 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 is the
benefit reduced if the recipient works 300 hours per year?
a. $3000 c. $1200
b. $1800 d. $600

25.A Suppose that a 5% rise in the price of apples does not cause the quantity demand to change. The
elasticity of demand for apples would then be:
a. 0 c. -2
b. -1 d. infinitely large.

26.A 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 c. -1.33
b. -1 d. -2

27.A If the efficient output of a good is produced each week, then the:
a. marginal social benefit of the good equals its marginal social cost each week. b. marginal social benefit of
the good is at a maximum.
c. total social benefit of the good is at a maximum.
d. total social benefit of the good equals its total social cost.

28.C If the marginal social benefit of a good exceeds the marginal social cost at the current monthly output,
then:
a. it will be possible to make buyers of the good better off without harming sellers of the good.
b. it will be possible to make sellers of the good better off without harming buyers of the good.
c. either (a) or (b)
d. a reduction in monthly output will be required for efficiency.

29.C The marginal social cost of bread exceeds the marginal social benefit at the current weekly output.
Therefore,
a. the marginal net benefit of bread is positive.
b. the output of bread is efficient.
c. a reduction in weekly output of bread is necessary to achieve efficiency.
d. an increase in weekly output of bread is necessary to achieve efficiency.

30.B The total social benefit of automobiles equals the total social cost at current annual output. Then it
follows that:
a. the annual output of automobiles is efficient.
b. the annual output of automobiles exceeds the efficient amount.
c. less than the efficient annual output of automobiles is produced.
d. it is not possible to make buyers of automobiles better off without harming sellers.
e. both (a) and (d)

31.D Eggs are sold in a perfectly competitive market. No persons other than the buyers and sellers of eggs
are affected in any way when eggs are traded in the market. Then it follows that:
a. the price of eggs equals the marginal social cost of eggs.
b. the price of eggs equals the marginal social benefit of eggs.
c. the price of eggs exceeds the marginal social benefit of eggs.
d. both (a) and (b)

32. A Diamonds are sold by a monopoly firm that maximizes profits. Then it follows that:
a. the marginal social benefit of diamonds exceeds its marginal social cost.
b. the marginal social cost of diamonds exceeds its marginal social benefit.
c. the price of diamonds equals its marginal social cost.
d. the price of diamonds exceeds its marginal social benefit.
e. both (c) and (d)

33.D Points on a utility possibility curve represent:

a. a given distribution of well-being between two persons.
b. an efficient allocation of resources.
c. the maximum well-being of any one person, given the resources available and the well-being of another
person.
d. all of the above

34.B If efficiency has been attained,

a. It will be possible to make any one person better off without harming another.
b. it will not be possible to make any one person better off without harming another.
c. perfect competition must exist.
d. the opportunity cost of any change in resource use must be zero.

35.C A move from an inefficient resource allocation to an efficient one:

a. will always be unanimously approved, even if gainers do not compensate losers.
b. will be unanimously opposed.
c. will be unanimously approved if gainers compensate losers.
d. can never result in losers.

36.B The extra benefit on one more unit of a good or service is its:
a. marginal cost.
b. marginal benefit.
c. total benefit.
d. total cost.

37.E If the efficient output of computers is achieved this year, then market price of computers is equal to:
a. the marginal social benefit of computers.
b. the marginal social cost of computers.
c. the total social cost of computers.
d. the total social benefit of computers.
e. both (a) and (b)
38.C Suppose the efficient output currently prevails in the market for ice cream. A tax on ice cream
consumption will:
a. allow efficiency to continue to prevail in the market.
b. result in more than the efficient output in the market.
c. result in less than the efficient output in the market.
d. cause the marginal social cost of ice cream to exceed its marginal social benefit at the market equilibrium
output.

39.B If a government desires to increase production beyond the current competitively determined efficient
level, the government should:
a. tax the good.
b. subsidize the good at a price higher than its current price.
c. set the price below its current price.
d. impose a fixed fee whenever the good is purchased.

40.D When production is said to be characterized by diminishing marginal productivity:

a. unskilled workers are less productive than silled workers.
b. output must increase with each additional unit of input used in production.
c. increasing the amount of one input used means more of another input must be used.
d. adding additional inputs my still cause output to increase.

41.B 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 eslatic; perfectly inelastic
d. inelastic; elastic

42.D In the accompanying figure, consumer surplus is given by are……., while producer surplus is given by
area…….

43.C 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.

44.A Cutting TANF benefits would……social efficiency and…….equity in society.

a. increase; increase
b. decrease; decrease
c. increase; would not change
d. increase; increase
45.C If the competitive equilibrium does not lead to the efficiency-maximizing outcome, then government
intervention:
a. will increase efficiency.
b. will reduce efficiency.
c. may increase or decrease efficiency.
d. will not affect efficiency.

46.A 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.

47.D The equity–efficiency trade-off means that the result of obtaining __________ in equality is also to
obtain __________ in the so-called size of the pie.
a. no change; a decrease
b. no change; an increase
c. a decrease; a decrease
d. an increase; a decrease

48.B Suppose the government taxes the rich to distribute money to the poor. Which of the following 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.

49.D 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.

50.B 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
b. taxation
c. subsidy
d. public provision
T/F
1. The efficient annual output of any given good is attained if that good is made available in amounts up to
the point at which the total social benefit of the good equals the total social cost.
FALSE: The efficient annual output of any given good is attained if that good is made available in amounts
up to the point at which the social marginal benefit of the good equals the social marginal cost.

2. If the marginal social benefit of smoke detectors exceeds its marginal social cost, then additional net gains
are possible from an increased annual smoke detector production.
TRUE: A positive externality is created when the marginal social benefit of smoke detectors surpasses the
marginal social cost of installing them. This is due to the fact that any quantity of inflow or benefit that exceeds
the amount of expense always results in good news. This means that the people and the consumers of the
smoke detectors have more social benefits than the marginal social cost in the market.

3. Monopoly power causes losses in efficiency because the marginal social benefit of output exceeds its
marginal social cost at the monopoly output.
TRUE: If the price is higher than the MC, then the marginal benefit to society is greater than the marginal
cost to society of producing additional units, and a greater quantity should be produced. However, in the case
of a monopoly, where the price is always higher than the MC, instead of producing more quantities, a
monopoly will produce less output. Thus, they do not produce enough output to be allocatively efficient.

4. Government regulations that require airlines to serve routes for which the maximum price that passengers
are willing to pay for a trip fall short of the minimum price that sellers are willing to accept are likely to cause
losses in efficiency.
TRUE: When the airline companies are being forced by the government to serve routes where they have to
lower the fares for the satisfaction of the passengers, this is going to cause losses in efficiency. Serving these
routes means that the airline companies are incurring tremendous losses, and the only way for them to
recover these losses is to eventually increase the fares on the routes which bring guaranteed profitability for
them. Thus, in the end, there will still be plenty of passengers who will get frustrated due to the increasing
fares which the airline companies are forced to do as the consequence of following government regulations.

5. Points lying below a utility curve are efficient.

FALSE: Any point below and to the left of the indifference curve would produce a lower level of utility; any
point above and to the right of the indifference curve would produce a higher level of utility.

6. Government programs can achieve efficiency when the gains to gainers from those policies exceed the
losses to those who bear the costs.
TRUE: This statement is true, under the principle of cost – benefit, the benefit to those earn it must higher
than the losses to those bear the costs, if not the program will result in a loss.

7. If the marginal social cost of beer production exceeds its marginal social benefit, then more than the
efficient amount of beer is being produced.
TRUE: By using the efficient graph we find that when MSC > MSB the additional net gains from allocating
more resources to produce more beer will not be possible.

8. Efficient outcomes are often viewed as inequitable.

TRUE: Efficiency and equity are two separate issues which is called equity–efficiency trade-off.

9. If it is not possible to make someone better off without harming another, then resource allocation is efficient.
TRUE: Pareto Optimizing: Pareto efficiency, or Pareto optimality, is an economic state where resources
cannot be reallocated to make one individual better off without making at least one individual worse off.

10. Compensation criteria are used to argue that changes in resource allocation should be made if the gains
to some groups outweigh the losses to others, even though compensation for losses is not actually made.
TRUE: In welfare economics, compensation criteria or the compensation principle is known as a rule of
decision for selecting between two alternative states. Two states will be compared; if one state provides an
improvement for one part but causes deterioration in the state of the other, it will be chosen if the winner can
compensate the loser’ losses until they situation is at least as good as in the initial situation. However, this
compensation may not necessarily occur.

11. All points on a utility possibility curve are efficient but differ in terms of the distribution of well-being.
TRUE: The utility possibilities curve represents all allocations that are efficient and shows the level of
satisfaction that each person achieves when they have traded to an efficient outcome, on the contract curve.
12. A tax on a product shifts the demand curve.
TRUE: Since the tax increases the price of the product, the demand for it will decrease and is presented by
a downward shift in the demand curve by the same amount of tax.

13. A government subsidized price for a commodity that is higher than the market driven price results in
oversupply relative to the efficient allocation. TRUE.

14. When comparing the allocation of two goods relative to two consumers with individual utility functions,
multiple points of Pareto efficiency can exist.
TRUE: Pareto efficiency, also referred to as allocative efficiency, occurs when resources are so allocated
that it is not possible to make anyone better off without making someone else worse off. When there is Pareto
efficient, there is no Pareto improvement possible. Increasing the output of one good would decrease the
output of the other good. Therefore, every point on the PPF frontier is Pareto efficient.

15. On average, persons in the United States devote more of their annual budgets to taxes than they do to
food. TRUE.

16. A universally observed function of government is the establishment of property rights.

TRUE: The government establishes laws concerning property. More specifically, ownership of property
depends upon legal recognition of ownership rights. The government establishes and enforces property
ownership rights through a formalized system for recording and disclosure that puts others on notice of those
rights.

17. The total share of GDP accounted for by government spending in the United States has declined
significantly since 1980.
FALSE: In general, from 1930 to 2008, federal government spending as a share of GDP has grown from less
than 3% to 21%. Since 1980, the spending proportion has fluctuated, not declined significantly.

18. In 1929, the federal government spent more than was spent by state and local governments.
FALSE: In the 1920s, the federal government limited itself to spending only on national defense, foreign
relations, judicial functions, and the postal service. State and local governments were responsible for
education, police, roads, sanitation, welfare, health, hospitals, and so on. Furthermore, the state and local
governments funded their spending largely from their own sources. Less than 1% of state and local revenues
at the time came from federal government grants.

19. Since 1930, the percent of GDP devoted to government expenditures has more than tripled.
TRUE: In the 1930s, the Great Depression occurred, and the US overcame it with a new program called New
Deal. This program included Social Security, the SEC, and the Federal Deposit Insurance Corporation.
Hence, the main reason for the increase in government expenditure is the expansion of public funding for
protection, healthcare and education. According to a study about Government Spending (2016), from 1930
to 2012, in the US, government expenditure increased from 12.1% to 35.6% of GDP.

20. The costs imposed by government regulations on business firms are included in budget data on
government expenditures.
FALSE: Government expenditures include government consumption spending, government investment and
transfer payment. And the sources of the spending are tax collections and government borrowing. Hence,
the costs imposed by regulations on business firms are not included.

21. Government consumption does not require resources to be reallocated from private to government use.
FALSE: If the resources of the economy are fully employed, government must free up resources from the
production of private goods and make them available for producing public and quasi-public goods. It does so
by reducing private demand for them.
22. Since 1959, the percent of federal government expenditures devoted to transfers has increased by more
than 50 percent.
TRUE: During the 1960s, the US paid attention to the increasing public programs for the citizens so there
was a large percentage of government expenditures devoted to transfers. And the benefits were delivered
by direct payments to individuals, which include social insurance, public assistance, health, education and
other social welfare.

23. Transfer payments, including Social Security and welfare and medical assistance, account for nearly 60
percent of federal government expenditures. TRUE.

24. Interest on the federal government’s debt accounts for about 20 percent of federal government
expenditure. FALSE: Currently, according to the US Treasury Fiscal Data, the interest on the federal
government's debt accounts for less than 20% of federal spending.

25. Federal grants-in-aid to state and local governments finance about 20 percent of annual spending by
these governments. TRUE: Figure 1.8 page 51

26. The federal government allocates about 10 percent of its budget to Social Security.
FALSE: Social Security is the largest social insurance program in the United States and the largest single
expenditure item of the federal government. Not surprisingly, this program has major implications for the
standard of living of the elderly, as well as for the non-elderly who pay the taxes to support this program.

27. State and local governments in the United States spend a bit more than one-third of their budgets on
education.
TRUE: In the United States, education is the single largest expenditure item for state and local governments:
they spend 28% of their budgets to provide their citizens with this service. The provision of education, an
impure public good, is one of the most important governmental functions in the United States and around the
world. Because of external returns, market failures, or redistribution, governments have traditionally decided
to be the majority providers of educational services.

28. Sales taxes account for about 22 percent of state and local government revenue in the United States.
TRUE.

29. The federal government obtains about half of its revenue annually from retail sales taxes.
FALSE: The primary sources of revenue for the U.S. government are individual and corporate taxes, and
taxes that are dedicated to funding Social Security, and Medicare. This revenue is used to fund a variety of
goods, programs, and services to support the American public and pay interest incurred from borrowing.

30. State governments do not fund any part of Medicaid.

FALSE: Medicaid, like unemployment insurance (UI), is a program that is federally mandated but
administered by the states. The program is financed by matching grants from the federal government, paid
out of general revenues.