Economics Q3 P5 Test

What is behavioral economics?

Provides sophisticated insight into how humans really make decisions; marriage between psychology and economics

What is economics?

The study of scarcity and the use of resources, production of goods and services, growth of production and welfare over time. 

What is bounded rationality?

Suggests that most of us make decisions using intuition or rules of thumb 

What are barriers to entry?

Conditions that keep new businesses either from entering an industry or succeeding in that industry.

What is price discrimination?

The business practice of selling the same good at different prices to different customers (Ex: airlines--> business travelers $$$ vs pleasure travelers $)

What does NASDAQ stand for, and what is it?

National Association of Securities Dealers Automated Quotations; NASDAQ is an electronic stock exchange where investors can buy and sell on an automatic computer network. 

What is the point of communism?

There is no competition between stores because there is no profit as we know it... stores paid the government wage for selling the good

What are externalities?

Economic side effects or by-products that affect an uninvolved third party; can be negative or positive

What is a luxury good?

a product that we buy in increasing quantities as we grow richer (Ex: sports cars, French wine, concern for the government). 

What is the market allocation rule?

Agreements in which competitors divide markets among themselves. Firms will specify a location and customers they want to sell to.

What are incentives?

Benefits or costs of an action that influence people's decisions and behavior

What is a free rider?

Someone who wants others to pay for public goods but plans to use the goods themselves. 

What are Perverse Incentives?

An incentive that has an unintended and undesirable result that is contrary to the intentions of its designers.

What does the Law of Unintended Consequences state?

Actions of people—and especially of government—always have effects that are unanticipated or unintended.

What is the principal agent problem?

A conflict in priorities between the owner of an asset and the person to whom control of the asset has been delegated.

What is the prisoner’s dilemma?

A situation where two parties, separated and unable to communicate, must each choose between cooperating with the other or not.

What is the definition of “creative destruction”?

A concept in economics which since the 1950s is most readily identified with the Austrian-born economist Joseph Schumpeter who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle.

What is the definition of “deadweight loss”?

The difference in production and consumption of any given product or service including government tax

What is a lump-sum tax?

a special way of taxation, based on a fixed amount, rather than on the real circumstance of the taxed entity.

What is the earned income tax credit?

A refundable tax credit for low- to moderate-income working individuals

What is the most crucial role for a government in a market economy?

Dealing with externalities, particularly those in which individuals or firms engage in personal behavior with broader social consequences

What benefits can come from taxing negative externalities?

Taxing a behaviour that creates negative externalities in turn creates good incentives such as limiting the behaviour, raising overall revenue, and creating a larger market for things that fall just outside that new tax

What is the only way that private parties can resolve an externality?

If the relevant property rights are clearly defined and will in turn always lead to the same efficient solution based on who has the right, it is only a matter of who pays who

Why would market economies not work without government intervention?

Without governments implementing rules and enforcing them, market economies would not work as it would allow markets to over inflate so that it is too expensive to live in those economies

What is the best way for a government to regulate markets?

To establish property rights and to circulate a sound currency

What do governments do to eliminate collusion?

Governments enforce antitrust laws that prohibit companies from colluding with each other to eliminate competition

Why do volunteer payment systems not usually work?

Any system of volunteer payments will always fall prey due to free riders

What are the two sides to the argument of whether the government should protect the people from themselves in the market?

On one hand some economists believe that people can make rational decisions and on the other economists believe that they cannot make decisions that will benefit them or anyone else

What do conservatives neglect when saying we should just grow the economy as fast as possible?

They neglect things such as the environment and redistributing income and other public services

Why is it rare to truly have an individual opinion?

Often decisions we make are products of inertia (i.e. if our employer promotes one health insurance, a lot of people will take that one without looking at other offers)

What is regulation?

A rule made and maintained by an authority

What is a typical unintended consequence of increasing the minimum wage?

People may lose their jobs; employers can’t hire as many people.

What is the issue with a Monopoly?

Fixed prices, low quality, and no innovation

What do the private sectors provide differently than the government?

More pay increases, career choices, opportunities, less security, and less comprehensive benefits.

What are the downsides to limiting the amount of production of a singular product?

The quota is met early on and not enough is available later on

How does taxation change the way people act?

The higher the taxes the less incentive to purchase

Does deregulation necessarily increase tax profits?

No

What is the result of lower tax rates?

Less total government revenue

What was the Clinton Plan?

A way for students to borrow money for college and repay the loans with a percentage of their annual income rather than a fixed principal and interest rate

What are health maintenance organizations?

Ddesigned to control costs by changing the incentives. This means they usually only cover care from doctors who are under the HMO or contract with them

What does the Affordable Care Act do?

Provide more access to affordable health insurance, expand the Medicaid program, and support methods that generally lower the cost of healthcare

What is adverse selection?

when sellers have information that buyers don’t have (or vice versa). e.x., when insurance companies cover applicants whose risk is high with a more expensive plan.

What are insurance deductibles?

The amount of money that you pay for health services

Why do healthy people go for high-deductible insurance plans?

High deductibles often mean low monthly premiums that you have to pay. If you won't use all of your deductibles and can pay a reduced rate than most others, you are in a good position

T or F: Information is a minimally important part of economics?

False; information is crucial in eliminating uncertainty and risk, which leads to higher yields

What is rational discrimination?

A defensible yet discriminatory practice used in selection

How do insurance companies combat adverse selection?

By insuring large groups of people who cannot opt in or out. An example of this is insurance companies providing coverage to all members of a corporation. Because they get coverage due to their employment, the insurance company will always make money because there are always employees

How does reputation factor into economics decisions?

Reputation is similar to having information about the organization you do business with. If you know they are reputable, the risk is low

What is Human Capital?

The Knowledge, skills, abilities, and experiences of individuals that contribute to their economic value and potential productivity. It includes both tangible and intangible qualities that people possess, such as education, training, work experience, creativity, problem-solving abilities, and social skills. 

When is a new job created?

When someone creates or discovers a new product, service, or better way of doing something.

Is there a greater correlation between human capital and a nation's wealth or natural resources and a country's wealth?

Yes

When a country increases in human capital, who hands out the towels?

Most likely no one because as human capital increases the amount of menial tasks automated increases.

When NAFTA was enacted why didn’t all of the jobs flee south of the border where wages are lower?

Human capital and productivity

What is productivity?

How much output can be produced with a given set of inputs. Basically Efficiency. 

When productivity increases what also increases?

Profit/Wealth