AP Micro Unit 6 Review

If a negative externality emerges, what may happen to marginal social cost?

• Marginal social cost is put off onto consumers.

• The supply curve does not represent marginal social cost.

• Government intervention will help establish MSC = MEC.

• MSC = MPC

Answer explanation

Choice B is the best answer because marginal

social cost (MSC) refers to the total cost to society producing one more unit in an economy. The total cost does not just reflect the cost to the producer but to the external environment.

If a positive externality emerges, what may happen to the demand curve?

• MEB is not represented.

• MEC is represented.

• MSC is represented.

• Marginal private benefits are not represented.

Answer explanation

If a positive externality is produced, a person who does not consume or work on the product benefits from it nonetheless. This is known as a marginal external benefit (MEB). The demand curve would not reflect MEB, unless the government intervened and internalized it.

How may the government intervene to move the demand curve from D1 to D2?

• Give a subsidy to buyers

• Tax buyers

• Influence the business making the good to stop production

• Increase the money supply

Answer explanation

The graph represents a shift of the demand curve to the right. Eliminate any answer that would lessen or weaken consumers’ purchasing power. Choice A is the best choice because a government subsidy decreases the impact on people’s wallets. This would shift the demand curve to the right.

Establishing a direct control on producers will

• shift the supply curve from S1 to S2

• shift the supply curve from S2 to S3

• have no effect on the supply curve

• create a new demand curve

Answer explanation

Through regulation, the government may impose restrictions on producers, such as a tax. The graph illustrates a leftward shift of the supply curve. Therefore, eliminate any answer that incorporates a rightward shift of the supply curve. Choice A is the best answer.

The idea that taxes and a person’s income should vary directly is known as

• the marginal propensity to consume

• the marginal propensity to save

• the free-rider problem

• the ability to pay principle of taxation

Answer explanation

An ability to pay tax is also known as a

progressive tax: tax rates should vary according to one’s ability to pay them. If a person or company earns a higher income, then that person or company should pay more taxes than those who make less.

All of the following are examples of compensating differential EXCEPT

• a teaching assistant earning less than a sanitation worker

• a worker with 15 years’ experience making more than a worker with 2 years’ experience in the same field

• an airline pilot earning less than a neurologist

• a principal earning more than a substitute teacher

Answer explanation

Compensating differential refers to the

measurement between the unpleasantness of a job and wage. Choice B is the best answer because it refers to the characteristics of the worker, not the characteristics of the job.

Industrialized nations often produce negative externalities in the form of pollution. What is a possible solution to fix this negative externality?

• A tax on consumers

• A government subsidy for consumers

• A government subsidy for producers

• A tax on producers

Answer explanation

Since a negative externality in the form of

pollution emerged, a government intervention would focus on the producers of the pollution. Any choice that refers to a government intervention on the part of consumers may be eliminated. Choice C is incorrect because it would decrease costs for producers and may lead to an increase in production. Choice D is the best answer because a tax on producers would increase costs and result in a decrease in production and hopefully pollution.

Last year Anna earned $50,000 in gross income and paid $10,000 in taxes. She recently received a promotion. So next year she will earn $75,000 in gross income and pay $15,000 in taxes. This increase in taxes is a result of

• a regressive tax

• a progressive tax

• a proportional tax

• an ability to pay tax

Answer explanation

A proportional tax is a tax where the same

proportion of income is paid in taxes regardless of income level. Anna received a raise in salary, but she still paid 20% of her income in taxes.

Nation A has a high Gini ratio. You can conclude that Nation A

• has a highly unequal distribution of income

• has a more equal distribution of income

• has no unequal distribution of income

• is allocating its resources in full efficiency

Answer explanation

A Gini ratio is a measure of income inequality. If

the Gini ratio is closer to zero, income distribution is more equal. If the Gini ratio is closer to 1, income distribution is more unequal. Choice A is the best answer because this illustrates the definition of a Gini ratio.

The diagram represents

• the percentage of income tax families pay in the United States

• the percentage of families paying a regressive tax on their incomes

• the percentage of families paying a flat tax on their incomes

• the distribution of income among families in the United States

Answer explanation

The diagram is called a Lorenz curve: a graph

that illustrates how a nation’s income is distributed throughout a nation’s households.