2023 P6 Q3 Economics Test

School of the Woods

What is the point of communism and a country that practiced it? 

Communism means no competition in the market, so no competition between stores and no private property. Cuba practiced it.

Fidel Castro in Cuba controlled the market for cigars. Every store was selling cigars at whatever price Fidel Castro said. This meant every shopkeeper selling cigars was paid the government wage for selling cigars and it did not matter how many each person sold. 

Economics involves not only markets and governments, but another big field of study. What is it? Why is it important? 

Brain science is very important in economics because it explores how the brain makes decisions and offers insight into altruism, which can be used to inform economic analysis.

Economics is based on the concept that nothing is “free” in this world. What is the premise of this concept? Give me an example.

Every aspect of human behavior reacts to cost in some way. For example, there is nothing “free” about concert tickets if you have to stand in line for six hours while it is raining to get them. That takes your time, well-being, and physical ability to stand that long which are things you can’t buy back.

What is the basic idea of a network effect? 

The value of some goods rises with the number of other people using them. 

What is price discrimination and how do companies use it?

Price discrimination is selling the same product at different prices to different buyers to maximize profits and sales. Airline companies use this concept frequently.

If you ask the person next to you how much they paid for their flight, chances are they didn’t pay what you did, and maybe it isn't even close. This maximizes profits because some people may be willing to pay $1800 while others may be on a tight budget of $200. 

What do capitalism and communism have in common? 

They both ration goods. Capitalists do it with their prices and the communists did by making people wait in line. 

What is the misconception about sweatshops in poor countries? 

Anti-globalization protesters often try to make the case that developing countries would be better off if we closed the sweatshops. Nike pays an average Vietnamese sweatshop worker $600 a year, which is double the amount of an average Vietnamese worker’s annual income, $300.

When making a decision what mindset do most people use that causes damage in the long run? 

Most people make decisions using intuition or rules of thumb. This leads them to do things that diminish their utility in the long run. 

When looking at economic decisions, you have to branch off from just the original economic theory and look at other social sciences and behavioral economics. 

Who was the economic battle of the twentieth century between? What was it/what happened?

It was a battle between capitalism and communism to see which type of government was most beneficial. Communists in the 20th century controlled their economy by controlling citizens and eventually they destroyed both. The Communist government killed over 100 million people in the 20th century by repression or famine. Capitalism won.

What does EITC stand for?

Earned Income Tax Credit

What are economic incentives?

A monetary motivation to do certain things.

Many countries are incentivized to keep around local animals (even if they are nuisances) for what reason?

Tourism

What are perverse incentives?

An incentive with unintended results that accidentally rewards the wrong behavior.

What is the difference between “green taxes” and “sin taxes”?

Green taxes tax things that hurt the environment. Sin taxes tax “sinful” things like alcohol and gambling.

What is adverse selection?

When there is little to no incentive to get/keep the most talented people working in a given field. This causes them to move over to other fields that they’re proficient in for better incentives.

What are stock options?

A benefit granted to the consumer that allows them to purchase shares in a company at a fixed price, regardless of those shares’ future value.

What is the difference between regressive and progressive taxes?

Regressive taxes fall more heavily on the poor, and progressive taxes fall more heavily on the rich.

What is a “deadweight loss”?

Deadweight losses occur when something is lost and nothing is gained.

What is libertarian paternalism?

Individuals can make errors of judgment, and society should point you to the correct decision.

If a consumer is offered a plan that requires them to complete an annual test or one that they don’t need to do anything for, which will they tend to choose? What is this effect called?

They will choose the one that requires nothing; inertia.

What does the government do with our wealth and taxes?

It redistributes wealth.

How does the government contribute to scientific research?

It funds many nonprofit research facilities, such as NASA.

What is a “free rider?”

A person or company that gets an advantage from paying members of society without contributing. 

What is externality?

It is what happens when the costs of an individual's behavior are different from social costs. 

Why does the government have to step in to fix externalities?

Because the market encourages cutting corners in ways that lead to long-lasting consequences. 

What is an example of an externality?

Smokers do not have to compensate people who are harem by second hand smoke.

How does the government attempt to solve externalities?

Either be taxiing the problem or banning it. 

Can externalities be solved between two parties?

Yes, in certain situations some form of compromise can be made which leaves both parties better off.

What does taxation that discourages productive behavior cause?

Deadweight Loss

How can companies use regulations to their advantage?

To eliminate competition.

Why are individual quotas better than aggregate quotas in fishing?

Aggregate quotas encourage fishermen to catch more fish faster, individual quotas allow a fisherman to catch his fish at any time in the season.

Why are monopolies bad?

They lead to a lack of innovation or companies disregarding consumer needs; no competition.

True or false: The government is a monopoly.

True

What does overregulation do to an economy?

Leads to less competition and less innovation.

What does under regulation do to an economy?

It leads to more competition, more innovation, and more room for errors.

What is a possible benefit of lower taxes?

More investment.

What are the benefits of investing in a college education?

Higher productivity and higher income.

What is it called when a government spends money on things only it will use?

Fiscal Drag

What is adverse selection?

Adverse selection is when a group that is in a negotiation with another group has some information that the other group doesn’t have.

What is the first example shown in the book about adverse selection?

The Hope Scholarship program.

The idea of the program was that people could pay off their student loans based on their future wages so that people with lower-paying jobs could still pay off their student loans in good time. The thing is, the students know which job they’re about to go into much more than the administrators do, so they could determine for themselves whether this program would be more or less expensive than the regular student loans, which caused this program to fail.

Provide the definition of statistical discrimination.

Statistical discrimination is when an individual makes an inference that is defensible based on broad statistical patterns but is either likely to be wrong in the specific case at hand or has a discriminatory effect on some group.

Provide an example of statistical discrimination.

A female might not be hired to work at a corporation because statistically, they are more likely to quit after maternity leave.

When does information become too much information? Provide an economic example.

Information can become too much information when it starts to have harmful results. For example, a company that has all the information on which buyers are more or less likely to return products could discriminate against buyers who are going to return the products. 

Describe the paradox between doctors, patients, and insurance companies in the medical field.

The patient wants as much care as possible, the doctor maximizes and minimizes lawsuits by delivering as much care as possible, and the insurance companies maximize profits by paying for as little care as possible.

Technology has introduced expensive options some of which work or don't work, and it is very costly for insurance companies or patients to prove the right course of treatment.

How do firms screen customers in the insurance business?

Through deductibles.

What separates high wage and low wage jobs?

Skill and availability.

What stops high skilled employees from working low wage jobs?

Pay and incentives.

What is Human Capital? 

The sum total of skills embodied within an individual.

When are jobs created?

Anytime an individual provides a new good or service or finds a better/cheaper way of providing an old one. 

A year of additional schooling for a woman in a low-income country is associated with what?

According to economists, it is associated with a 5-10% reduction in her child’s likelihood of dying in the first five years of life

What constitutes about 75 percent of the wealth of a modern economy?

The stock of education, training, skills, and human health. 

What is the labor fallacy?

The mistaken belief that there is a fixed amount of work to be done in the economy and every new job must come at the expense of a job lost elsewhere.

What is productivity?

It is the efficiency with which we convert inputs into outputs.

What improves our standard of living?

Productivity growth.

True or False: Productivity is a zero-sum game.

False

What is macroeconomy?

It is the study of the economy as a whole.

What is the poverty fallacy?

Developing countries are poor because they have rapid population growth.