PPOG 502 Mid-term with Quiz 1 and 2

Question 1 0 out of 3 points

According to Sowell, which of the following would not be a contributor to economic growth?

Selected Answer: Exposure to the knowledge of other cultures.

Question 2 0 out of 3 points

Mises advocated

Selected Answer: a third system, midway between socialism and capitalism, that avoids the
disadvantages of each.

Question 3 3 out of 3 points

Mises, in the assigned reading, says that the only legitimate function is:

Selected Answer: to provide security.

Question 4 3 out of 3 points

High income tax rates:

Selected Answer: tend to discourage work effort and reduce overall production in the economy.

Question 5 3 out of 3 points

Thomas Sowell points out that in 1991, China and India had similar levels of output per person. But ten
years later, China’s output per person was nearly twice that of India. According to Sowell, this was the
result of

Selected Answer: the shift in China toward a more market-oriented economy, relative to India.

Question 6 3 out of 3 points

When property rights to resources are not defined or enforced, the resources

Selected Answer: tend to be overused and underprotected.

Question 7 3 out of 3 points

“Protecting jobs” by imposing tariffs on imported goods is likely to

Selected Answer: cause lost jobs in other industries, particularly export industries.

Question 8 3 out of 3 points

Gwartney et al. says that “just one indicator, __________________, spontaneously carries so much
information that it guides buyers and sellers to make decisions that help both obtain what they want.

Selected Answer: the market price of a commodity

Question 9 3 out of 3 points

When the money supply expands rapidly, the result is most likely to be:

Selected Answer: inflation.

Question 10 3 out of 3 points

Mises says in the assigned reading that, while private businesses cannot operate at a continuing loss,
governments can do so because:

Selected Answer: governments can tax people to make up for the loss.

Question 11 3 out of 3 points

According to Gwartney et al., a special interest group will be most effective in gaining what they want
politically if

Selected Answer: benefits are immediate and easily visible to the voters, but costs are less visible and
mostly in the future.

Question 12 0 out of 3 points

The economic principle that incentives matter is best seen in which of the following statements?

Selected Answer: When there is a lot of pollution, the marginal benefit of reducing pollution is more
likely to outweigh the marginal cost of reducing pollution.

Question 13 3 out of 3 points

Gwartney et al. point out that investment rates in eastern European economies and the Soviet Union
were very high for several decades prior to the collapse of Communism. Despite this investment, these
economies did not enjoy rising living standards because

Selected Answer: political considerations dominated which projects would be funded, so that many
projects were economically wasteful.

Question 14 0 out of 3 points

The primary function of market prices is

Selected Answer: to discourage people from consuming too many goods and services.
Question 15 3 out of 3 points

Which of the following is true about government spending programs intended to stimulate the
economy?

Selected Answer: The funds for the spending must come from higher taxes or borrowing, both of which
tend to reduce private sector employment.

Question 16 3 out of 3 points

According to Sowell, poor countries can best increase their economic growth rates by welcoming

Selected Answer: foreign investment.

Question 17 0 out of 3 points

Profits result from which of the following?

Selected Answer: The consumer’s willingness to pay is higher than the seller’s price.

Question 18 3 out of 3 points

When governments impose price floors, such as a minimum price for milk,

Selected Answer: the volume of trade falls and the gains from exchange are reduced.

Question 19 3 out of 3 points

Adam Smith said that the individual “intends only his own gain, and he is… led by an invisible hand to
promote an end which was not part of his intention.” By this, Smith meant that

Selected Answer: self-interested individuals have an incentive to serve the needs of others in the
marketplace in order to make themselves better off.

Question 20 0 out of 3 points

According to Sowell, which of the following is the most significant reason that developing countries have
lingered in poverty?

Selected Answer: Their policymakers are bribed by multinational corporations into reducing trade
barriers, leaving their economy open to devastating foreign competition

Question 21 3 out of 3 points

According to Mises, efforts to control prices during the French Revolution

Selected Answer: failed despite guillotining of those who charged more than the maximum price.
Question 22 0 out of 3 points

Setting maximum prices tends to:

Selected Answer: increase economic output as raw materials and labor can be found at reduced cost.

Question 23 3 out of 3 points

According to Gwartney et al., various “doomsday” forecasts predicting resource exhaustion have tended
to be wrong because

Selected Answer: privately owned resources are both discovered and conserved by owners hoping to
maintain income far into the future.

Question 24 3 out of 3 points

If the equilibrium price of gasoline is $4 and the price at this moment is $3, then the result will be

Selected Answer: a shortage.

Question 25 3 out of 3 points

Mises said, “when the government interferes with the market, it is more and more driven towards
___________.”

Selected Answer: socialism.

Question 26 4 out of 4 points

In what sense do market prices act like an “invisible hand”?

Selected Answer:

According to Sowell, The “invisible hand” of market prices directs buyers and sellers toward activities
that promote the general welfare. The foundational idea (from Adam Smith) is that large-scale
government intervention and regulation of the economy is neither necessary nor beneficial.
Furthermore, prices are not generated from a general price structure; instead, they are set by the actors
themselves.

Ref: Gwartney, James D.. Common Sense Economics: What Everyone Should Know About Wealth and
Prosperity (p. 3). St. Martin's Press.

Question 27 4 out of 4 points

Suppose a city tries to address the rising cost of housing by imposing rent controls. Will this make
housing more readily available? Explain.
Selected Answer:

Rent Controls do not make housing more readily available, only supply can create a more readily and
price managed market. If rents are established at less than their equilibrium levels, the quantity
demanded will necessarily exceed the amount supplied. According to Sowell, “in terms of units produced
and sold, it makes little difference whether price controls push prices up or force them down; both will
reduce the volume of trade and the gains from production and exchange” (p. 65).

Ref: Gwartney, James D.. Common Sense Economics: What Everyone Should Know About Wealth and
Prosperity St. Martin's Press.

Question 28 4 out of 4 points

The Food and Drug Administration’s regulations require that new drugs be subjected to a costly testing
process by the administration to determine if they are safe and effective before releasing the drugs to
the public. Describe the opportunity costs of this drug testing. Could the testing result in lives lost?

Selected Answer:

According to a 2014 study by the Tufts Center for the Study of Drug Development (TCSDD), the cost of
developing a new drug, from research and development (R&D) to marketing approval, is approximately
$2.9 billion[1]. According the Gary Palgon the drug development return on investment (ROI) is declining,
pharmaceutical companies are under pressure to either improve their success rates or reduce their cost
of failure. One option that companies are leveraging is to form public and private groups to share in the
research and development costs and also to increase their success rates. Another way some
pharmaceutical companies are reducing their drug development costs is by finding and eliminating
inefficiencies in their R&D and data management processes. Gwartney, et al would analyze this
functionality under the filter of the “invisible hand”. The author’s write, “Self-interest directed by the
invisible hand of market prices will provide them with an incentive to seek out the best combination of
resources and the most cost-effective production methods (pp. 38-39).

Reference

Gwartney, James D.. Common Sense Economics: What Everyone Should Know About Wealth and
Prosperity. St. Martin's Press. Kindle Edition.

Palgon, Gary. "What Is The Cost Of Drug Development? | Liaison Technologies". Liaison Technologies.
Last modified 2017. Accessed February 26, 2018. https://www.liaison.com/blog/2017/05/02/cost-drug-
development/.

"Tufts CSDD R&D Cost Study Now Published | Tufts Center For The Study Of Drug Development".
Csdd.Tufts.Edu. Last modified 2018. Accessed February 26, 2018.
http://csdd.tufts.edu/news/complete_story/tufts_csdd_rd_cost_study_now_published.
[1] "Tufts CSDD R&D Cost Study Now Published | Tufts Center For The Study Of Drug Development",
Csdd.Tufts.Edu, last modified 2018, accessed February 26, 2018,
http://csdd.tufts.edu/news/complete_story/tufts_csdd_rd_cost_study_now_published.

Question 29 4 out of 4 points

Suppose you read the following: “I believe that a man with a helmet defending his country should make
more money than a man with a helmet defending a football.” Explain why professional football players
tend to earn much more than professional soldiers.

Selected Answer:

The scenario depicted with respect to how professional football players tend to earn much more than
professional soldiers paradox speaks to the idea of Marginality. According to the text, this scenario is
played out in goods (i.e. material) but has just as much implication to services (i.e. the human factor).
Gwarty et al discuss economics marginality as the focus on how one thing changes if something else
changes just slightly. For example marginal utility looks at how much utility will change if consumption
changes by a single unit, marginal product look at how productivity would change if more capital or labor
were added to the manufacturing process, marginal product of labor looks at how productivity will
change if one more worker is hired.

Question 30 4 out of 4 points

What impact will restrictions on imports into the US have on exports from the US to other countries?
Explain.

Selected Answer:

According to the text, Non-economists often argue that import restrictions can create jobs it is
production of value that really matters, not jobs (p. 91). While Import restrictions may appear to expand
employment it is the secondary effect is seen within the construct of indirectly reducing exports (p. 91).
Furthermore the author’s explain that Output and employment in export industries will decline,
offsetting any jobs “saved” in the protected industries (p. 91). Finally, Trade restrictions neither create
nor destroy jobs; they reshuffle them (pp. 91-92).

Reference

Gwartney, James D.. Common Sense Economics: What Everyone Should Know About Wealth and
Prosperity St. Martin's Press. Kindle Edition.
Quiz 2:

Question 1 - 0 out of 2 points

According to Gwartney et al., when the government spends money on a project, such as a high-speed
train linking San Diego and San Francisco, the result will likely be

Selected Answer: an expansion of the overall economy as jobs are created in the building of the railroad.

Question 2 - 0 out of 2 points

Among the effects of rent control policies are:

Selected Answer: lower levels of homelessness.

Question 3 2 out of 2 points

Mises mentions the Roman emperor Diocletian who mixed more and more inexpensive copper into the
silver coinage. The result of this practice was:

Selected Answer: to create higher prices for goods and services.

Question 4 - 0 out of 2 points

Mises says in the assigned reading that, while private businesses cannot operate at a continuing loss,
governments can do so because:

Selected Answer: governments do not have to pay market prices for the workers it hires or the
resources it consumes.

Question 5 2 out of 2 points

According to Gwartney et al., a special interest group will be most effective in gaining what they want
politically if

Selected Answer: benefits are immediate and easily visible to the voters, but costs are less visible and
mostly in the future.

Question 6 0 out of 2 points

Public goods have two characteristics. They are:

Selected Answer: the government provides the good from tax revenues, and the good creates a broad
benefit for a majority of the population (such as roads or schools).

Question 7 2 out of 2 points

“Protecting jobs” by imposing tariffs on imported goods is likely to

Selected Answer: cause lost jobs in other industries, particularly export industries.

Question 8 2 out of 2 points

Gwartney et al. says that “just one indicator, __________________, spontaneously carries so much
information that it guides buyers and sellers to make decisions that help both obtain what they want.

Selected Answer: the market price of a commodity

Question 9 2 out of 2 points

The primary function of market prices is

Selected Answer: to coordinate the actions of self-interested individuals who use prices to gain
information about consumer preferences and producer costs.

Question 10 - 0 out of 2 points

Profits result from which of the following?

Selected Answer: The consumer’s willingness to pay is higher than the seller’s price.

Question 11 2 out of 2 points

Mises said, “when the government interferes with the market, it is more and more driven towards
___________.”

Selected Answer: socialism.

Question 12 - 0 out of 2 points

According to Mises, efforts to control prices during the French Revolution

Selected Answer: led to an expansion of economic output but higher unemployment rates.

Question 13 2 out of 2 points

If the equilibrium price of gasoline is $4 and the price at this moment is $3, then the result will be

Selected Answer: a shortage.

Question 14 2 out of 2 points

Mises advocated

Selected Answer: a movement away from government control over the economy.
Question 15 2 out of 2 points

When property rights to resources are not defined or enforced, the resources

Selected Answer: tend to be overused and underprotected.

Question 16 - 0 out of 2 points

Setting maximum prices tends to:

Selected Answer: create surpluses of goods.

Question 17 2 out of 2 points

Adam Smith said that the individual “intends only his own gain, and he is… led by an invisible hand to
promote an end which was not part of his intention.” By this, Smith meant that

Selected Answer: self-interested individuals have an incentive to serve the needs of others in the
marketplace in order to make themselves better off.

Question 18 2 out of 2 points

Mises, in the assigned reading, says that the only legitimate function of government is:

Selected Answer: to provide security.

Question 19 - 0 out of 2 points

All of the following would be examples of public goods except:

Selected Answer: national defense.

Question 20 2 out of 2 points

Mises argued in the assigned reading that

Selected Answer: some government intervention leads to more government intervention to solve the
problems of the first intervention.

Quiz 1
Question 1 2 out of 2 points

Gwartney et al. point out that investment rates in eastern European economies and the Soviet Union
were very high for several decades prior to the collapse of Communism. Despite this investment, these
economies did not enjoy rising living standards because

Selected Answer: political considerations dominated which projects would be funded, so that many
projects were economically wasteful.

Question 2 2 out of 2 points

Gwartney et al. say that if “private owners fail to maintain their property or if they allow it to be abused
or damaged, they will bear the consequences in the form of a decline in the property’s value.” This
implies that

Selected Answer: private ownership encourages wise stewardship.

Question 3 - 0 out of 2 points

When governments impose price floors, such as a minimum price for milk,

Selected Answer: the economy tends to improve since the producers of the price-controlled item earn
more money and will therefore spend more in the rest of the market.

Question 4 2 out of 2 points

According to Sowell, which of the following is the most significant reason that developing countries have
lingered in poverty?

Selected Answer: Large parts of their economies are “underground,” where formal property rights are
not secured by the holders of property.

Question 5 2 out of 2 points

The bribery, kickbacks, favoritism, and other corruption caused by involvement of the government in the
market leads to a system referred to by Gwartney et al. as:

Selected Answer: crony capitalism.

Question 6 2 out of 2 points

The Economic Freedom of the World index shows that higher levels of economic freedom are correlated
with

Selected Answer: higher levels of per capita income and economic growth.

Question 7 2 out of 2 points

According to Gwartney et al., various “doomsday” forecasts predicting resource exhaustion have tended
to be wrong because

Selected Answer: privately owned resources are both discovered and conserved by owners hoping to
maintain income far into the future.

Question 8 - 0 out of 2 points

According to Sowell, poor countries can best increase their economic growth rates by welcoming

Selected Answer: modern population control methods.

Question 9 2 out of 2 points

Which of the following is a consequence of competition in the marketplace?

Selected Answer: firms make efforts to satisfy customers, innovate, and stay cost-effective.

Question 10 2 out of 2 points

The economic principle that incentives matter is best seen in which of the following statements?

Selected Answer: Voters are more likely to support public policies that they believe will create the
greatest net benefits for them.

Question 11 2 out of 2 points

Contrasting Japan, Germany, Switzerland, and Sweden with Spain, Sowell points out that:

Selected Answer: having a colonial empire has not been important to economic growth in the colonizing
country.

Question 12 2 out of 2 points

Major reductions in income tax rates in the US, in the 1920s, the mid-1960s, and the 1980s, were
immediately followed by

Selected Answer: expansions in real economic output.

Question 13 - 0 out of 2 points

According to Sowell, which of the following would not be a contributor to economic growth?

Selected Answer: Exposure to the knowledge of other cultures.

Question 14 2 out of 2 points

Trade with countries that have far lower wages than the US will tend to

Selected Answer: raise living standards in the US and those other countries.

Question 15 - 0 out of 2 points

Looking back at thousands of years of history, Sowell sees a great advantage for commerce and therefore
economic growth in all of the following except:

Selected Answer: the introduction of railroads.

Question 16 2 out of 2 points

Thomas Sowell points out that in 1991, China and India had similar levels of output per person. But ten
years later, China’s output per person was nearly twice that of India. According to Sowell, this was the
result of

Selected Answer: the shift in China toward a more market-oriented economy, relative to India.

Question 17 2 out of 2 points

When the money supply expands rapidly, the result is most likely to be:

Selected Answer: inflation.

Question 18 - 0 out of 2 points

Which of the following is true about government spending programs intended to stimulate the
economy?

Selected Answer: Programs like the Agricultural Adjustment Administration, created during the Great
Depression, show that government spending programs tend to help the economy during recessions.

Question 19 2 out of 2 points

High income tax rates:

Selected Answer: tend to discourage work effort and reduce overall production in the economy.

Question 20 - 0 out of 2 points

Restricting imports through trade barriers will:

Selected Answer: hurt domestic producers, but help foreign producers since they will have no choice but
to sell in their own economies at reduced transportation costs.