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Econ 20 Exam 2: Use this solution set to the second midterm if question number 1

started with "If the government was able to tax away…"

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Answer

If there were no profits, there would be fewer incentives to start new businesses.

Welfare Reform law of 1996 limtied the amount of time anyone could receive welfare to 2 years

consecutively or 5 years over their lifetime.

Taxes are the way government overcomes the free rider problem.

All of the statements listed concerning the official poverty rate are correct.

Most poor households do have major appliances like washers and dryers; they have more

appliances and consumer goods than most middle class households had in 1970; more than half own

cars but most do not own a cell phone. Most poor families will own a cell phone within the next 10

years (my prediction).

Wage differentials are accounted for by all of these factors.

The EITC lifts people out of poverty without changing official poverty rates because in calculating the

poverty level of income, the government only considers income, not transfers or taxes or in-kind

goods or services.

Levitt, in the reading from Freakonomics, found that some gang members would like to be janitors.

TANF requires recipients to work.

Most federal assistance to the poor is in the form of cash payments (social security, disability,

welfare-type payments).

The mantra should be: start saving as soon as you can. That way compound interest will have the

most time to work its magic.

Gary Becker was the first to theorize and explain the economic model of criminal behavior.

Two are not true: The percent of population classified as poor has not risen steadily over the past 40

years. Also, a lower percent of the elderly are poor today compared to 40 years ago.

The equimarginal principle means that resources should be allocated so the the last dollar of

spending on each program produces the same incremental amount of benefits.

A negative income tax was proposed by President Nixon, but it was never implemented.

The highest incidence of poverty of those listed is female-headed families with children living at

home.

The war on drugs has focussed on cutting back supply.

Economic losses provide valuable information about goods and services that people do not want so

they help guide resource allocation away from something.The cost of resources used in crime prevention are equal to their opportunity cost; what they are

worth in the next best use.

The 1996 welfare reform law established TANF.

When firms earn profits, all of the factors listed will occur.

Poverty, defined by the government, is a certain amount of income, so it is an absolute measure of

poverty.

Ireland's per capita GDP has grown significantly over the past 15 years and now exceeds England's.

European unemployment benefits are higher than in the U.S.

Government regulation of the airline industry prevented new firms from entering the industry.

Just because Frank owns the grocery store does not mean he has lower costs than others. He could

have rented out the building and earned rent on it.

The marginal social benefit is zero, if there are no additional benefits.

I accepted either the dollars spent on illegal drugs or the suffering experienced by crime victims.

The programs listed are in kind assistance to poor people.

Econ 20 Exam 2: Use this solution set to the second midterm if question number 1

started with "If the government was able to tax away…"

A valid reason that raising the minimum wage would not provide much help to poor people is that

most people earning the minimum wage are not poor.

Most people who are poor are poor because they own resources that are not worth much (especially

their human capital).

Black household income is far below White household income.

Moral hazard occurs when insurance gives people an incentive to do something they otherwise would

not do, like planting flammable shrubs near their house.

The additional benefits are $100,000 and the additional costs are $150,000, so this was not a good

use of the city's budget.

The cost to society of the crime is the opportunity cost to the criminal, what he could have produced

by working.

Someone who benefits from a group's project by getting a good grade without doing any of the work

is a free rider.

Like much economic reasoning, do things until the benefits are equal to the costs.

The economic analysis of crime is best used to explain crimes such as drug dealing.

The only reason that is not true is that the US has had weak economic growth in the long term.

Profits and losses show where capacity should be expanded and contracted.

Over the past 50-100 years, economic growth has resulted in the share of the average household

budget devoted to food and lcothing falling.

National defense is a public good that is collectively consumed.

The EITC is not only available to illegal immigrants. All of the other statements are true.

Free Riding is when those who don't pay get the benefits of consuming the good or service.

The poverty level of income is calculated as three times the cost of food, courtesy of Mollie

Orshandky.

Frank has earned an accounting profit of $200,000 - $80,000 - $40,000 = $80,000. This is more than

he was earning in his previous job so he is earning more than his opportunity cost and therefore

earning economic profits. Other entrepreneurs will enter this industry.

The police department should hire 1 police officer and 2 police cars. The total benefits of the

$40,000 spent will equal $90,000 + $86,000 + $60,000 = $236,000 and the total spending will be

$40,000.

The Lorenz Curve change will signify a less equal distribution of income.