3 Government Microeconomic Interventions

Which benefit is most likely to result from a rise in the minimum price of labour (wage rate)?

• a reduction in costs of production

• a reduction in income inequality

• a reduction in the level of unemployment

• a reduction in the rate of inflation

Which statement about transfer payments is correct?

• Transfer payments are intended to reward productive economic activity.

• Transfer payments are only financed by government.

• Transfer payments may result in a disincentive to work.

• Transfer payments will include the sales of new cars.

What is the major problem associated with a government directly providing the correct amount of a public good?

• competition from private producers

• estimation of demand

• increased trade diversion

• rivalry in consumption

A government wishes to raise the incomes of farmers without raising the price of food to consumers. Which policy should it use?

• a maximum price below the market price for food

• a minimum price below the market price for food

• a payment of a subsidy to farmers to produce food

• a release of government food stocks onto the market

Money is paid by the government to an unemployed worker in the form of a benefit. Why is this called a transfer payment?

• The payment is from taxes paid by employed workers.

• The payment is made from government savings not current income.

• The payment is made without the production of goods and services taking place.

• The payment must be spent as directed by the government.

What describes a regressive tax?

• low income earners pay a higher proportion of their income in tax than high income earners

• marginal tax rates exceed average tax rates

• the cost of collecting the tax exceeds the revenue raised

• the marginal rate of tax is higher for high income earners than for low income earners

A government is concerned that foreign-owned companies are responsible for a high proportion of the economy’s output. Therefore it nationalises timber extraction, which is controlled by a foreign-owned company. What benefit will the economy gain from the change in ownership?

• forestry workers will become the new owners

• profits will no longer be sent abroad to foreign shareholders

• social costs arising from forestry will be eliminated

• the market for timber will become more competitive

Which statement about maximum and minimum prices is correct?

• With an effective maximum price for a product, a shortage will develop.

• With an effective maximum price for a product, the market price will rise.

• With an effective minimum price for a product, rationing will be necessary.

• With an effective minimum price for a product, the market price will fall.

The diagram shows the effect on the market for a product of the introduction of a government subsidy.

What is the result of the payment of the subsidy?

• Consumer surplus increases.

• The price to the consumer halves.

• The subsidy provides over half of producer income.

• Total consumer expenditure on the product increases.

Why are the pensions paid to retired citizens an example of a transfer payment?

• Retired citizens pay no tax on their pensions.

• Retired citizens produce no output for their pensions.

• Retired citizens save some of their pensions.

• Retired citizens spend all of their pensions.