1. Poverty Review Questions

3. Question 1
Government programs that take money from high-income people and give it to low-income people typically
a. improve economic efficiency by reducing poverty.
b. reduce economic efficiency because they distort incentives.
c. have no effect on economic efficiency because they both reduce poverty and distort incentives.
d. sometimes improve, sometimes reduce, and sometimes have no effect on economic efficiency.
e. have no effect on economic efficiency because they both eliminate poverty and restore incentives.

4. Question 1 Answer
b. reduce economic efficiency because they distort incentives.

5. Question 2
Refer to Table According to the table, from 1950 to 2000, Hapland income distribution became
a. less equal.
b. more equal.
c. unchanged.
d. more equal at the lowest level of income but less equal at highest level of income.
e. less equal at the lowest level of income but more equal at highest level of income.

6. Question 2 Answer
a. less equal.

7. Question 3
Refer to Table According to the table, what percent of families in Hapland have income levels below $90,000?
a. 20 percent
b. 40 percent
c. 60 percent
d. 80 percent
e. 100 percent

8. Question 3 Answer
c. 60 percent

9. Question 4
Which of the following statements illustrates diminishing marginal utility?
a. An extra dollar of income to a poor person provides that person with more additional utility than does an extra dollar to a rich person.
b. An extra dollar of income to a poor person provides that person with less additional utility than does an extra dollar to a rich person.
c. An extra dollar of income to a poor person provides that person with the same additional utility as does an extra dollar to a rich person.
d. An extra dollar of income to a poor person provides that person with the same total utility as does an extra dollar to a rich person.
e. An extra dollar of income to a poor person is just as important as an extra dollar to a rich person.

10. Question 4 Answer
a. An extra dollar of income to a poor person provides that person with more additional utility than does an extra dollar to a rich person.

11. Question 5
Refer to Figure If the government imposes a minimum wage above Wo, it is likely to
a. increase employment to a level above Qo.
b. reduce employment to a level below Qo.
c. provide more income to the working poor than they collectively received before the minimum wage was set.
d. have no effect on employment.
e. not be binding

12. Question 5 Answer
b. reduce employment to a level below Qo.

13. Question 6
Economists who support minimum-wage legislation are likely to believe that the
a. demand for unskilled labor is relatively inelastic.
b. demand for unskilled labor is relatively elastic.
c. supply of unskilled labor is relatively elastic.
d. supply of unskilled labor is relatively inelastic.
e. supply and demand do not work efficiently in the labor market.

14. Question 6 Answer
a. demand for unskilled labor is relatively inelastic.

15. Question 7
When the government taxes income as part of a redistribution program,
a. the poor pay higher taxes.
b. the rich always benefit more than the poor.
c. the poor are encouraged to work.
d. incentives to earn income are diminished.
e. incentives to earn income are enhanced.

16. Question 7 Answer
d. incentives to earn income are diminished.

17. Question 8 Binding minimum-wage laws
a. are most effective at alleviating poverty when labor demand is highly elastic.
b. force a market imbalance between the supply and demand for labor.
c. increase the efficiency of labor markets.
d. are typically associated with a rise in employment among the poor.
e. allow markets to find a more efficient wage.

18. Question 8 Answer
b. force a market imbalance between the supply and demand for labor.

19. Question 9 Anti-poverty programs
a. encourage saving among recipient groups.
b. impose a very low marginal tax rate on income.
c. are only made available to those with no other source of income.
d. may discourage the poor from escaping poverty on their own.
e. encourage the poor to escape poverty on their own.

20. Question 9 Answer
d. may discourage the poor from escaping poverty on their own.

21. Question 10
A government’s policy of redistributing income makes the income distribution
a. more equal, distorts incentives, alters behavior, and makes the allocation of resources more efficient.
b. more equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient.
c. less equal, distorts incentives, alters behavior, and makes the allocation of resources more efficient.
d. less equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient.
e. more equal, restores incentives, alters behavior, and makes the allocation of resources more efficient.

22. Question 10 Answer
b. more equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient.

23. Question 11
The following table reflects the levels of total utility received from income for each of four members of a society.
a. Assume that the society has the following income distribution:
Peter $3, Paul $7, Mary $5, Jane $3
Is it possible for the government to increase total aggregate utility by redistributing income among members of society? Explain your answer.
b. Assume that the government has $19 to allocate among the four members of society. (Assume that no one has any income to start with.) If the government is interested in distributing income in a way that maximizes aggregate total utility, how should it distribute the $19 of income?
c. Does the table describe a situation characterized by diminishing marginal utility? Explain your answer.

24. Question 11 Answer
a. No. If a dollar is taken from anyone, the possible net gain in utility to any other person is less than or equal to the loss incurred by the person it is taken from.
b. Peter $4
Paul $7
Mary $5
Jane $3
c. Yes. Marginal utility declines as income increases for each person.