Economics Chapter on Competition and Inequality

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Questions and Answers

What does it imply for a firm in a perfectly competitive market if it has no market power?

It can set prices above the market price.

It is able to influence the market demand curve significantly.

It must restrict its output to maintain a higher price.

It would lose all its customers if it attempted to increase price above the prevailing market price. (correct)

What shape does the demand curve take for a firm in a perfectly competitive market?

Horizontal. (correct)

Downward sloping.

Upward sloping.

Vertical.

If 'Area (i)' in the Lorenz Curve graph is equal to 0.21, 'Area (ii)' is equal to 0.10, and 'Area (iii)' is equal to 0.19, what would be the Gini Coefficient for Country X?

0.10

0.59 (correct)

0.76

0.21

In a perfectly competitive market, what must a firm do to increase output sold?

Decrease its price to sell more output. Signup and view all the answers

Which of the following statements about market power in perfect competition is true?

Firms must accept the market price as given and cannot determine their price. Signup and view all the answers

What does a Lorenz curve that bows down far from the line of income equality indicate?

The inequality of the distribution of income is greater Signup and view all the answers

What is the term used for refraining from acquiring knowledge when the supposed cost of educating oneself exceeds the expected benefits?

Rational ignorance Signup and view all the answers

In the graph illustrating 'Marginal Private Benefits' and 'Marginal Social Costs', what implication can be drawn about Good X?

It generates a negative externality Signup and view all the answers

What does it imply if the Lorenz Curve for the U.S. lies completely below that of Switzerland?

Incomes are distributed more equally in Switzerland than in the U.S. Signup and view all the answers

Which option best describes the potential economic implications if Good X is found to generate a negative externality?

Overconsumption of the good Signup and view all the answers

Which of the following best describes logrolling in economic terms?

An agreement between parties to support each other's projects Signup and view all the answers

What aspect of Cam's work as a graduate assistant contributes to his economic status?

The value of the assistant services he provides Signup and view all the answers

What represents 'moral hazard' in economic contexts?

The tendency to take more risks when protected from the consequences Signup and view all the answers

What can be inferred about the income inequality in a society with a Lorenz curve that closely aligns with the line of income equality?

The society has a very low level of income inequality Signup and view all the answers

What is a source of government failure often encountered in economic discussions?

Inadequate information Signup and view all the answers

Net Exports refer to the difference between a country's total exports and total imports. If a country has exports of € 12,154 million and imports of € 12,616 million, what are the Net Exports for this country?

€ – 462 million Signup and view all the answers

What does a negative value of Net Exports indicate about a country's economy?

It has a trade deficit. Signup and view all the answers

If a country has total exports of € 20,000 million and total imports of € 18,500 million, which of the following values represents the Net Exports?

€ 1,500 million Signup and view all the answers

Which component is NOT included when calculating Gross Domestic Product (GDP) via the expenditure approach?

Income from abroad Signup and view all the answers

Which of the following is a correct interpretation of Net Exports when the value is negative?

The country is importing more than it exports. Signup and view all the answers

What is the phase of the business cycle where economic activity is at its highest point?

Peak Signup and view all the answers

If nominal GDP is $48,000 million and the money supply is $8,000 million, what is the velocity of money?

6 Signup and view all the answers

Which period represents a recession based on the options given?

February 2017 through July 2020 Signup and view all the answers

What is the misery index if the unemployment rate is 6% and the inflation rate is 2%?

8 Signup and view all the answers

During which phase of the business cycle do economic contractions occur?

Recession Signup and view all the answers

If a country experiences declining GDP for consecutive quarters, what term describes the economic condition?

Recession Signup and view all the answers

Which option correctly defines the Trough in the business cycle?

The lowest point before recovery Signup and view all the answers

Which economic measure is used to determine the overall health through unemployment and inflation?

Misery Index Signup and view all the answers

Study Notes

Perfect Competition

A firm in a perfectly competitive market has no market power.
The firm faces a horizontal demand curve for its output.
Increasing prices above the prevailing market price causes a loss of customers.

Lorenz Curve and Gini Coefficient

The Lorenz curve illustrates the distribution of income in a country.
The Gini coefficient measures income inequality.

Rational Ignorance

Rational ignorance is refraining from obtaining knowledge due to the cost exceeding the expected benefits.

Government Failure

Government failure is the inefficiency or failure of government to perform its functions properly.
One source of government failure is the distribution of income.
A Lorenz curve that bows down, far away from the line of income equality, suggests a greater inequality in income distribution.

Externalities

An externality is a cost or benefit that affects a third party not involved in the transaction.
Positive externalities benefit third parties (e.g., education).
Negative externalities harm third parties (e.g., pollution).

Economic Activity and Recession

A recession is a period of significant decline in economic activity.
A trough is the lowest point in a business cycle.
A peak is the highest point in a business cycle.
A recession is characterized by a decline in real GDP over two consecutive quarters.

Velocity of Money

Velocity of money is the average number of times a dollar is spent in a year.
Velocity of money can be calculated as nominal GDP divided by the money supply.

Unemployment Rate and Inflation

The misery index is a measure of economic well-being, calculated by adding the inflation rate and the unemployment rate.

Net Exports

Net exports are the difference between a country's exports and imports.
A negative net export indicates a trade deficit, where imports exceed exports.
A positive net export indicates a trade surplus, where exports exceed imports.

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Description

Explore key concepts in economics with this quiz that covers perfect competition, the Lorenz curve, Gini coefficient, and rational ignorance. Understand government failure and the role of externalities in market transactions. Test your knowledge on income distribution and market dynamics.