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Tbbell Document 562download PDF Test Bank For Public Finance and Public Policy 6Th Edition Jonathan Gruber Online Ebook Full Chapter
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Test Bank for Public Finance and Public Policy, 6th Edition, Jonathan Gruber,
2. Which of the following is a system by which individuals report their willingness to pay
for the next incremental unit of a public good and the government charges them that
amount to finance this public good?
A) access pricing
B) voter initiative
C) Lindahl pricing
D) referendum
3. Suppose Dexter and Amy are the only members of a community that is trying to
determine how much of the public good should be produced. Dexter's (inverse) demand
curve is given by P = 50 – 5Q, while Amy's (inverse) demand curve is given by P = 150
– 15Q, where P is price or marginal benefit and Q is the quantity of the good. The
marginal cost of producing the public good is constant at $80. Setting aggregate
marginal benefit equal to marginal cost leads to the conclusion that the efficient quantity
of the public good is equal to:
A) 2.
B) 6.
C) 10.
D) 80.
4. Suppose Dexter and Amy are the only members of a community that is trying to
determine how much of the public good should be produced. Dexter's (inverse) demand
curve is given by P = 50 – 5Q, while Amy's (inverse) demand curve is given by P = 150
– 15Q, where P is price or marginal benefit and Q is the quantity of the good. The
marginal cost of producing the public good is constant at $80. Dexter will vote for the
efficient quantity of the public good if the price to him is:
A) $20.
B) $40.
C) $60.
D) $80.
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5. Suppose Dexter and Amy are the only members of a community that is trying to
determine how much of the public good should be produced. Dexter's (inverse) demand
curve is given by P = 50 – 5Q, while Amy's (inverse) demand curve is given by P = 150
– 15Q, where P is price or marginal benefit and Q is the quantity of the good. The
marginal cost of producing the public good is constant at $80. Amy will vote for the
efficient quantity of the public good if the price to her is:
A) $20.
B) $40.
C) $60.
D) $80.
6. Pam and Kunal are the only members of a community that is trying to determine how
much of the public good should be produced. Suppose that Pam is willing to pay $10 for
the fourth unit of the public good, while Kunal is willing to pay $3 for it. What is the
community's marginal willingness to pay for the fourth unit of the public good?
A) $3
B) $4
C) $10
D) $13
7. Pam and Kunal are the only members of a community that is trying to determine how
much of the public good should be produced. Suppose that Pam is willing to pay $10 for
the fourth unit of the public good and that Kunal is willing to pay $6 for the fourth unit.
The marginal cost of producing the public good is constant at $4. Which of the
following is TRUE?
A) Fewer than four units of the public good should be produced.
B) More than four units of the public good should be produced.
C) Exactly four units of the public good should be produced.
D) The Lindahl equilibrium is established when the price of the public good is $10.
Page 2
9. Which of the following are problems that must be overcome to achieve the Lindahl
solution?
A) Individuals always tell the truth about their willingness to pay.
B) Individuals tend to overreport their valuation of a public good.
C) Individuals tend to underreport their valuation of a public good.
D) The tax system may be inefficient.
10. Which of the following refers to taxing individuals for a public good according to their
valuation of the benefit they receive from the good?
A) efficient-cost taxation
B) benefit taxation
C) median voter taxation
D) mean voter taxation
12. Which of the following are problems that must be overcome to achieve the Lindahl
solution?
A) Individuals tend to overreport their valuation of a public good.
B) Individuals may not know their valuation of a public good.
C) Individual values cannot be aggregated into a social value.
D) Individuals demand larger quantities of a public good when their tax shares
increase.
13. Which of the following is a ballot measure that allows citizens to vote on state laws or
constitutional amendments that have already been passed by the state legislature?
A) recall
B) referendum
C) voter initiative
D) arrow vote
Page 3
14. Which of the following is legislation or a constitutional amendment that citizens place
on the ballot?
A) recall
B) referendum
C) voter initiative
D) arrow vote
15. Which statement about direct democracy in the United States is NOT true?
A) The important feature of a referendum is that it is designed to elicit constituents'
reactions to legislation.
B) At the local level, the town meeting remains an important venue for decision
making in many southern states.
C) Voter initiative is widely used in the United States, especially in West Coast states.
D) Referenda and initiatives are used for all kinds of issues, including but not limited
to election rules, alcohol rules, animal rights, and so on.
17. Which of the following terms defines a preference aggregation mechanism that satisfies
the properties of dominance, transitivity, and independence of irrelevant alternatives?
A) socially efficient
B) socially inefficient
C) inconsistent
D) consistent
Page 4
19. The property of transitivity refers to which of the following?
A) If voters for one choice feel more strongly than do voters who select another
choice, then the aggregation mechanism must be such that the choices are weighted
accordingly.
B) If one choice is preferred by all voters, then the aggregation mechanism must be
such that this choice is made by society.
C) If choice A is preferred to choice B and choice B is preferred to choice C, then A
must be preferred to C.
D) Choices must satisfy the condition that if one choice is preferred to another, then
the introduction of a third choice will not change that ranking.
20. A voting system characterized by the dominance property, the property of transitivity,
and independence of irrelevant alternatives would lead to:
A) a violation of Arrow's Impossibility Theorem.
B) a dictatorship.
C) inconsistent aggregation of individual preferences.
D) consistent aggregation of individual preferences.
21. The property of the independence of irrelevant alternatives refers to which of the
following?
A) If voters for one choice feel more strongly than do voters for another choice, then
the aggregation mechanism must be such that the choices are weighted
accordingly.
B) If one choice is preferred by all voters, then the aggregation mechanism must be
such that this choice is made by society.
C) If choice A is preferred to choice B and choice B is preferred to choice C, then A
must be preferred to C.
D) Choices must satisfy the condition that if one choice is preferred to another, then
the introduction of a third choice will not change that ranking.
22. How can a voting model avoid the result of Arrow's Impossibility Theorem?
A) impose restrictions on preferences
B) remove the irrational voters
C) prohibit a dictatorship
D) allow individuals to vote according to their personal preferences
23. Which of the following is necessary for the Median Voter Theorem?
A) single-peaked preferences
B) double-peaked preferences
C) identical preferences for all voters
D) unknown preferences.
Page 5
24. Which of the following is TRUE of median voter outcomes?
A) They are socially efficient.
B) They are never socially efficient.
C) They do not reflect the intensity of voters' preferences.
D) They are the same outcomes that would prevail without government intervention.
25. According to the median voter model, which of the following must a politician know in
order to attract the maximum number of votes?
A) the preferences of all voters
B) the preferences of the median voter
C) voters' willingness to pay
D) the issue that is most important to all voters
26. In the town of New Era, Mary, Scott, and Fredo are all running for the same spot on the
village council. New Era residents care only about infrastructure improvements; they
know everything about the candidates' positions on that issue but know nothing about
their positions on policing. Which of the following assumptions of the median voter
model is being violated?
A) full information
B) voter rationality
C) the existence of only two candidates
D) single-dimensional voting
27. Which of the following is NOT true about farm policy in United States?
A) Government support to farmers is in two forms: direct subsidy and price supports.
B) Farmers growing only 20 of 400 types of crops are eligible for these direct
subsidies and price supports.
C) The amount of subsidy increases with the amount of crop produced, so larger farms
benefit more from the subsidies than do small farms.
D) The price supports decrease the average price of food products for American
consumers.
Page 6
28. Suppose a state has two senators; one is a Republican and the other is a Democrat. The
median voter model predicts that:
A) both will vote like members of their own party from other states, which is
consistent with empirical voting records.
B) both will vote like members of their own party from other states, which is
inconsistent with empirical voting records.
C) each will vote the same way as the other, which is consistent with empirical voting
records.
D) each will vote the same way as the other, which is inconsistent with empirical
voting records.
29. The approach that emphasizes that government failures are often minimized by public
finance economists is:
A) the Samuelson school.
B) public choice theory.
C) median voter theory.
D) bureaucratic theory.
30. Suppose you hear that the U.S. Department of Agriculture is more interested in
preserving itself than in achieving its designated mission. That statement is consistent
with:
A) goods being provided more efficiently by the private sector than by the public
sector.
B) government corruption.
C) the political business cycle.
D) size-maximizing bureaucracy.
31. Suppose that a local elected official gives noncompetitive grants to businesses owned by
his relatives. This is consistent with:
A) goods being provided more efficiently by the private sector than by the public
sector.
B) government corruption.
C) size-maximizing bureaucracy.
D) theft.
Page 7
32. The accompanying table shows Tom and Ray's total willingness to pay for different
amounts of public recreational areas (REC), which is measured in acres. The marginal
cost of one acre of recreational area is $1,000.
(a) What is the socially optimal level of recreational areas? Assume you cannot
purchase partial acres. Explain your answer.
(b) What should be the tax burden to Tom and Ray so that their consumer surpluses are
equal? Explain.
33. To Charlie, the marginal benefit (MB) of national defense is MB = 4,500 – 90Q, where
Q measures units of national defense. Sally's marginal benefit is MB = 3,000 – 60Q. The
marginal cost of providing national defense is constant and equal to $2,700. Calculate
the efficient quantity of national defense. Graph aggregate MB and MC to illustrate the
efficient quantity of national defense (label functions and include all relevant values in
the graph). Assume policymakers are able to choose the efficient level of national
defense because they know each voter's marginal benefit function. If tax shares are set
to force each person to pay exactly what they think national defense is worth at the
optimal level, what is Charlie's tax share and what is Sally's tax share?
34. Suppose that there are 1,000 voters in your city. A total of 400 are willing to pay up to
$25 each for the construction of a park, and the other 600 are willing to pay only $10.
The construction of the park will cost $12,000. Someone proposes a vote on whether to
tax each citizen $12 in order to finance the park.
(a) What will be the result according to the median voter model? Is this result socially
efficient? Explain.
(b) What if instead of being willing to pay up to $25 each, the 400 residents were
willing to pay up to $50 each?
Page 8
35. Suppose that three candidates are running for the same office. The only issues the
population cares about are policing and criminal rehabilitation programs. There are three
types of voters: the first group wants relatively little policing and lots of rehab; the
second group wants medium amounts of both; the third group wants lots of policing and
little rehab. The candidate with the highest number of votes wins, and the politicians
care only about winning rather than about their personal ideology. Analyze how useful
the median voter model will be in this case, specifically focusing on the number of
issues in the race and the number of candidates who are running. What problems, if any,
would these two things cause in terms of the median voter theory?
36. There is an election with three candidates: Lady Left (LL), Carrie Central (CC), and
Robert Right (RR). The following are the outcomes in various two- and three-way races:
CC, 100%; RR, 0%
LL, 0%; CC, 100%
RR, 51%; LL, 49%
RR, 35%; LL, 33%; CC, 32%
The voting system is such that first there is a three-way race. Then, if none of the three
candidates wins more than 50% of the votes, there is a two-way runoff election between
the two candidates who won the most votes.
37. Discuss the recent experiences of the U.S. defense industry in contracting out without
competitive bidding. Are they successful ventures? What might be the fundamental
problem in these contracts?
Page 9
Answer Key
1. B
2. C
3. B
4. A
5. C
6. D
7. B
8. C
9. C
10. B
11. D
12. B
13. B
14. C
15. B
16. B
17. D
18. B
19. C
20. D
21. D
22. A
23. A
24. C
25. B
26. C
27. D
28. D
29. B
30. D
31. B
32. (a) The first acre costs $1,000 and gives total benefits of $3,000, so it should be
purchased. The marginal social benefit of the second acre is $1,800, so it too should be
purchased. The marginal social benefit of the third acre is $1,500 ($800 + $700), so it
too should be purchased. The marginal social benefit of the fourth acre is $1,100 ($500
+ $600), so it also should be purchased. The fifth unit has a marginal social benefit of
$600, so it should not be purchased. Consequently, four acres should be allocated to
public recreational areas.
(b) Since the cost of four acres is $4,000, total tax receipts must be $4,000. The total
social benefit of three acres of recreational areas is $7,400 – $4,000 = $3,400. If you
want to make the consumer surplus of Tom equal to that of Ray, you must charge Tom a
tax of (4,300 – 1,700) = $2,600 and Ray a tax of (3,100 – 1,700) = $1,400, so each
would receive a consumer surplus of $1,700.
Page 10
Test Bank for Public Finance and Public Policy, 6th Edition, Jonathan Gruber,
33.
The efficient quantity is 32 units of national defense. Plugging this quantity into Charlie
and Sally’s MB function shows that Charlie values the 32nd unit at $1,620, which is
60% of the cost, so Charlie’s tax share should be 60 percent. Sally should bear the
remaining 40 percent of the tax for national defense.
34. (a) The median voter in this case is willing to pay at most $10. Consequently, any
proposal for the park that will cost that voter more than $10, including the proposal of
the $12 tax, will fail. However, the residents' total willingness to pay is 400 × $25 + 600
× 10 = $16,000, which exceeds the cost of the park. Consequently, the socially efficient
outcome is to construct the park, and so the median voter outcome is socially inefficient.
(b) The answer would not change, since the median voter did not change.
35. The median voter model assumes that there are only two candidates. In this election
there are three. Consequently, using the median voter model will be problematic, since
there is no stable equilibrium along the line of preferences. The number of issues is not
problematic, however, and does not violate the assumption of single-dimensional voting
in the median voter model. Since the voter preferences are exactly correlated between
these two issues, the election is essentially a one-dimensional election.
36. Everyone prefers Carrie Central to either of the other candidates. However, the current
voting system is inconsistent, since Robert Right will win the runoff election against
Lady Left. Indeed, the preferred candidate did not even make it to the runoff election!
37. Contracting out is much more likely to deliver efficiency gains if candidate contractors
compete to deliver cost savings or quality gains to the government in a competitive
bidding. Unfortunately, a large portion of defense industry contracts are
noncompetitive, including the failed contracts of Wackenhut Corporation, DHB
Industries, and Applied Energetics.
Page 11
— Magdalenani!
Herttua: Jo.
Silfverhjelm: Kansalaisena.