# public finance

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1. why is a consumers optimal choice the point at which the budget cinstraint is tangent to an indifference curve?
• We must combine what a consumer can obtain (budget constraint) and
• the preferences (indifference curve). The optimum is the highest point
• on the indifference curve that is still within the budget constraint.
• This will usually occur where the indifference curve is tangent
• to budget constraint. At the optimum point, MRS = relative prices of
• goods since MRS = slope of indifference curve, and relative price =
• slope of budget constraint. The marginal rate of substitution is the
• rate at which consumers are willing to trade-off, and is equal to rate
• at which they can trade.
• Changes in income will undoubtedly affect the optimal choice.
• The budget constraint will shift parallel to the original - upwards for
• an increase in income, and downwards for a decrease in income. The new
• equilibrium for a higher income will be on a higher indifference curve,
• and since income is higher, more of both products could be consumed. For
• normal goods, as income increases, more of the good will be preferred.
• For inferior goods, as income increases, less of the good will be
• chosen.
2. what does correlation does not imply causation mean?
Correlation does not imply causation" is a phrase used in science and statistics to emphasize that correlation between two variables does not automatically imply that one causes the other (though correlation is necessary for causation and can indicate possible causes or areas for further investigation)
3. why is there a deadweight loss associated with sales tax?
• Recall that in a competitive market, a given tax surcharge
• added to the price of each unit of a particular good (gasoline tax, food
• tax, federal tax) will:
• lower the price received by the seller and;increase the price paid by the buyer.
• This allows us to use supply and demand diagram to analyze the
• effects of a tax on total surplus. We see that the tax places a wedge
• between the gross price and net prices, and the equilibrium quantity
• will fall as a result of the tax. What are the gains and losses as a
• result of a tax? The government receives tax revenue of T x Q, where T
• is the amount of tax per unit, and Q is the quantity sold. This is a
• benefit to those on whom the government spends the tax revenue.
• To see the welfare losses, consider the total surplus before
• and after the tax. Deadweight loss, also known as "excess burden", is a
• pure loss to society. It represents lost value to consumers and
• producers due to the reduction in the sales of the good, but not
• captured by government revenue. In other words, the loss to consumers
• and producers from the tax is larger than the size of the tax revenue.
4. why is there a deadweight loss associated with subsidy?
• If a subsidy lowered the price that patrons pay from C to P, the quantity
• of goods purchased would rise from E to Q. The amount that patrons pay
• for the quantity Q would equal the area of the rectangle 0PSQ, and their
• net benefit would increase from the area of the triangle BCD to that of
• the triangle BPS. That increase--which is equal to the area of CPSD--measures
• how much patrons would gain from the subsidy. The cost of the subsidy to
• taxpayers, however, would equal the area of the rectangle CPSU. Thus, the
• subsidy's cost to taxpayers would exceed its benefit to patrons by an amount
• equal to the area of the shaded triangle DUS. That difference is known
• as the deadweight loss due to the subsidy. It reflects costs that would
• be incurred by taxpayers but not offset by any benefit to patrons, and
• it results from the distortion in consumption decisions caused by the price
• subsidy
5. what is positive economics?
the study of what is among economic relationships, does not need to be correct, just testable
6. what is normative economics?
judgements about what ought to be in economic matters. these statements cannot be scientifically tested because ther validity rests on value judgements.

ex. the inflation rate should be lower
7. what is the utility theory?
Definition

• Economics concept that although it is impossible to measure the utility derived from a good or service, it is usually possible to rank the alternatives in their order of preference to the consumer. Since this choice is constrained by the price and the income of the consumer, the rational consumer will not spend money on an additional unit of good or service unless its marginal utility
• is at least equal to or greater than that of a unit of another good or
• service. Therefore, the price of a good or service is related to its
• marginal utility and the consumer will rank his or preferences
8. why is a consumers optimal choice the area where the budget constraint is tangent to the indifference curve?
• We must combine what a consumer can obtain (budget constraint) and
• the preferences (indifference curve). The optimum is the highest point
• on the indifference curve that is still within the budget constraint.
• This will usually occur where the indifference curve is tangent to
• budget constraint. At the optimum point, MRS = relative prices of goods
• since MRS = slope of indifference curve, and relative price = slope of
• budget constraint. The marginal rate of substitution is the rate at
• which consumers are willing to trade-off, and is equal to rate at which they can trade.
• Changes in income will undoubtedly affect the optimal choice.
• The budget constraint will shift parallel to the original - upwards for
• an increase in income, and downwards for a decrease in income. The new
• equilibrium for a higher income will be on a higher indifference curve,
• and since income is higher, more of both products could be consumed. For
• normal goods, as income increases, more of the good will be preferred.
• For inferior goods, as income increases, less of the good will be
• chosen.
9. what do you think about raising taxes on beer to reduce teen casualities
• http://www.physorg.com/news204479777.html
• http://www.cspinet.org/new/pdf/why_raise_alcohol_excise_taxes.pdf
10. social welfare functions can be created in many different ways, they can be additive ( all utility curves added together), or least best ( person with the least has it maximized) if you had to choose, what would u pick and why?
pg 44-46 of rosen, 499-501507-508 pg855 in hillman
11. what are the differences b/w efficiency and distributional fairness?
distributional fairness

• efficiency
• In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.[1] An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:
• No one can be made better off without making someone else worse off.No additional output can be obtained without increasing the amount of inputs.Production proceeds at the lowest possible per-unit cost.
• These definitions of efficiency are not exactly equivalent, but they
• are all encompassed by the idea that a system is efficient if nothing
• more can be achieved given the resources available.
12. what is a free market? and why does it presuppose that
http://en.wikipedia.org/wiki/Market_system
13. what is a minimal state?
is a libertarian political ideology which maintains that the state's only legitimate function is the protection of individuals from aggression, theft, breach of contract and fraud.[2][3] (Such states are sometimes called night watchman states.) Minarchists defend the existence of the state as a necessary evil.[1][4] Generally, minarchists identify themselves within the broader propertarian libertarian movement.[citation needed] Some classical liberals, who believe in the necessity of the state, label themselves as minarchists to differentiate from market anarchists.

• Important ethical aspects of libertarianism include the non-aggression principle, self-ownership, and property rights.[4]
• Minarchists oppose all compulsory spending, intervention, and
• regulation, except those whose only function is to protect individuals
• from aggression.[1] Such minimal functions include courts, military, and police. However, most minarchists support some level of government funding, including perhaps taxation in some limited cases, as long as the state does not compromise all other areas of individual liberty.[2]
 Author: Anonymous ID: 39175 Card Set: public finance Updated: 2010-10-05 07:01:27 Tags: public finance Folders: Description: public finance Show Answers: