PS1 Economics

PART I – Short Questions
1. 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) Both A and B are correct.
E) None of the answers is correct.
2. Which type of government intervention can be used to lower the price for private
sales or purchases of under-produced goods?
A) public financing of private provision
B) restrictions or mandates of private sale or purchase
C) taxes
D) subsidies
E) public provision
3. Explain what is represented by the slope of the budget line and the slope of the
indifference curve. How does an increase in income affect the slopes? (2-3 sentences)
4. Suppose a study finds that college students who received financial aid have a greater
tendency to graduate than do college students who do not receive financial aid. What is
the identification problem that the authors must solve? If the authors conclude on the
basis of the data that receiving financial aid increases the ability of college students to
graduate, are they correct? What would be the best solution to the identification problem?