The Economic Way of Thinking, 13e (Heyne)
Chapter 12 The Distribution of Income
1) Your textbook argues that the phrase “the distribution of income” is misleading because
A) income is not created in a market economy, only wealth is.
B) it suggests that income is not earned in process of its creation and can simply be parceled out
any which way policymakers wish.
C) income in the form of wages and salaries can be negative, and therefore cannot be distributed.
D) it is only related to ethical rather than economic considerations.
2) When your textbook says that it is misleading to say that the market economy produces an
aggregate GDP-measured “economic pie,” the authors have the following claim in mind:
A) Unlike a pie, income in the economy can’t be divvied out independent of the exchange
process.
B) The economy produces more than just pies.
C) The “pie” metaphor focuses solely on real GDP and excludes the more important measure of
nominal GDP.
D) The production of pies create no income opportunities for market participants.
3) Complete this sentence: in a market system income is generally earned
A) independently of acts of exchange and production.
B) arbitrarily and randomly.
C) unproductively.
D) in the process of its creation.
4) Your textbook argues that in a market system income is earned and “distributed”
A) in the process of its creation.
B) as a result of the supply and demand for productive services.
C) in ways that might not be considered “fair” in all cases.
D) in all of the above ways.
5) Fill in the blank: A productive service is a ________ service.
A) supplied
B) demanded
C) technically efficient
D) marketed
6) Fill in the blank: Demanded services are ________ services.
A) instructive
B) deductive
C) productive
D) inductive
7) In the economic way of thinking, a productive service is
A) a meritorious service.
B) something of clear value to anybody in society.
C) an activity that enables people to obtain something for which they are willing to pay.
D) all of the above.
E) none of the above.
8) Who among the following provides a productive service?
A) Bill, a talented software developer
B) Monica, a paid Washington, D.C. intern
C) Buggs, an illicit drug smuggler
D) All of the above.
9) Who among the following provides a productive service?
A) Typewriter repairmen
B) Sellers of old 78-rpm jazz records
C) Organizers of a demolition derby
D) Mob hitmen
E) All of the above, if their services are demanded.
10) Who among the following provides a productive service?
A) The owner of a profitable cigarette vending machine business whose machines are found at
bars and bowling alleys
B) A well-paid researcher for a cigarette manufacturer who is willing to lie about the facts
C) A hard-working lawyer representing a class-action lawsuit on behalf of smokers now
suffering from lung cancer
D) All of the above.
E) None of the above.
11) Does a person who works in a brothel sell productive services?
A) Yes, if the service is demanded.
B) Yes, but only in states where brothels are legal.
C) No, because the service is immoral.
D) No, because the service does not help the overall economy.
12) The effective owner of a resource is the person who
A) can appropriate the income that arises from selling the services of the resource.
B) enjoys physical possession of the resource.
C) has legal title to the resource.
D) has mixed the resource with individual effort to create private property.
13) The owner of a productive resource is most usefully thought of as the person who
A) can appropriate the income from its use.
B) can use it most efficiently.
C) is willing to pay the most to obtain it.
D) possesses legal title.
14) Martha and George have just completed a nasty divorce, and Martha won the lion’s share of
the settlement. What can we conclude about their lawyers?
A) George’s lawyer was productive, Martha‘s wasn’t.
B) Martha’s lawyer was productive, George’s wasn’t.
C) Both Martha’s and George’s lawyers were productive.
D) Neither lawyer was productive.
15) Suppose each of the following is a highly-paid seller of services. Who provides a productive
service?
A) Dionne, the astrologer
B) Jerry, the comedian
C) Roger, the movie critic
D) Joe, the vice president
E) All of the above.
16) Income accrues to people who supply productive services, which means services that
A) add to the monetary income of the society.
B) are in demand.
C) contribute to social welfare.
D) result in tangible or durable products.
E) supply basic wants.
17) People obtain their money incomes basically by
A) chance.
B) hard work.
C) inheritance.
D) supplying something for which others are willing to pay.
18) Do people’s incomes result from the choices they make?
A) Yes, and from no constraints whatsoever.
B) Yes, but from among a limited set of options.
C) No, because obviously no one would choose to be poor.
D) No, because others often will not let people have what they choose.
19) The assertion that income accrues to people as a consequence of interactions among
suppliers and demanders
A) amounts to an endorsement of the existing system.
B) amounts to an endorsement of the pattern of income distribution.
C) ignores the fact that the interactions are often unfair.
D) offers a way of approaching the issue of income distribution.
20) Most of the money income that Americans receive annually derives from ownership of
A) interest-bearing bank accounts.
B) personal attributes.
C) political influence.
D) real estate.
E) stocks and bonds.
21) Most of the income received by families and individuals in the United States arises from the
ownership of
A) capabilities embodied in human beings.
B) corporations.
C) industrial, commercial, and residential real estate.
D) stocks, bonds, and other financial instruments.
E) transnational business enterprises.
22) Does a 21 year old who inherited millions of dollars’ worth of corporate stock and who never
works supply anyone with productive services?
A) No, by definition.
B) Only if her wealth is invested in capital equipment that adds to economic growth.
C) Only if others are willing to pay to watch her enjoy life.
D) Yes, if she supplies the services of the resources she owns.
23) Capital is
A) liquidity.
B) interest.
C) produced goods that can be used to produce future goods.
D) non-existent in a socialist economy.
E) all of the above.
24) In the economic way of thinking, capital contributes to
A) the exploitation of labor.
B) wealth.
C) greed.
D) macroeconomic inefficiency.
E) none of the above.
25) People who attend college for four years in order to equip themselves to earn higher incomes
in later life are
A) discounting the future at a higher rate than do people who don’t attend college.
B) giving up future satisfaction for the sake of current satisfaction.
C) ignoring the fact that future income has less value than current income.
D) investing in human capital.
E) revealing a high rate of time preference.
26) Which is an example of “capital”?
A) A carpenter’s skills
B) A singer’s voice
C) A judge’s unblemished reputation
D) A blast furnace
E) All of the above.
27) The term human capital refers to
A) labor from which surplus value has been extracted.
B) labor services whose rate of remuneration is set by employers.
C) machinery that is complementary to rather than competitive with labor services.
D) the valuable abilities people have acquired.
E) wealth in the possession of households rather than business or government.
28) Which of these persons is not investing in human capital?
A) A business student studying accounting
B) A teenager who stays with a job she dislikes in order to obtain a favorable recommendation
from the employer when she leaves
C) A professional boxer lifting weights
D) A student purchasing shares of stock in a computer software manufacturer
E) An aspiring opera singer taking courses in conversational Italian
29) Which of the following provides the clearest example of human capital?
A) Automated equipment that can be used without any accompanying human labor
B) Corporate stock owned by individuals and families rather than institutions such as mutual
funds or corporations
C) Machinery that has been designed and constructed by human beings
D) Tools that cannot be used effectively except in combination with workers
E) The ability to read
30) According to the textbook, people add to their stock of human capital by
A) divesting of their personal assets.
B) investing in their personal skills.
C) rearranging their pension portfolios.
D) attempting to systematically reduce, rather than expand upon, their human capabilities.
E) engaging in all the above.
31) How does time preference affect one’s willingness to invest in human capital?
A) A higher rate of time preference tends to increase human capital investment.
B) A higher rate of time preference tends to decrease human capital investment.
C) A lower rate of time preference tends to decrease human capital investment.
D) Economists have found no relationship between time preference and human capital
investment.
32) Who among the following is the most likely to invest in human capital?
A) A person with a low rate of time preference
B) A person with a high rate of time preference
C) A person with no time preference
D) None of the above.
33) Fill in the blanks: One is ________ likely to invest in human capital the ________ the
person’s rate of time preference.
A) most; higher
B) less; lower
C) more; lower
D) least; lower
34) People add to their stock of human capital
A) by being lucky.
B) by currying favor with powerful people.
C) by going to school.
D) by practicing their skills.
E) in all of the above ways.
35) Why would an economist claim that “oil comes out of our minds”?
A) She wants to sound silly.
B) She wants to tell lies.
C) She wants to remind us that the recognition of useful resources is a product of our mental
abilities.
D) She wants to sound like a really big and important theorist and could not care less about the
facts of the real world.
36) An economist might emphasize that our everyday use of natural resources is the product of
knowledge by saying:
A) “Money is the root of all that is good about the world.”
B) “Usable oil comes from our minds’ innovations.”
C) “A bird in the hand is worth two in the bush.”
D) “You’re fired.”
37) Which supports the economist’s claim that buyers don’t compete against sellers?
A) Diners would rather have more restaurants to choose among.
B) Music buyers prefer having access to internet music stores compared to only the local music
shop in town.
C) Car buyers prefer several dealerships in the region compared to only one.
D) Homebuyers prefer a larger selection of homes to a smaller one.
E) All of the above.
38) In the economic way of thinking,
A) suppliers compete against other suppliers.
B) demanders compete against other demanders.
C) suppliers cooperate with demanders.
D) all of the above are true.
39) If buyers compete against sellers, then
A) buyers would be worse off as more sellers enter the market.
B) buyers would be better off with fewer sellers in the market.
C) sellers would be worse off with more buyers for their products.
D) sellers would be better off with fewer buyers of their products.
E) all the above are true.
40) If sellers compete against buyers, then
A) sellers would prefer to face more buyers in the market.
B) sellers would prefer to face fewer buyers in the market.
C) buyers would prefer to face fewer sellers in the market.
D) buyers would prefer to face more sellers in the market.
E) both B and C are true.
41) Complete this statement. Sellers compete against other sellers and
A) sellers compete against buyers.
B) sellers cooperate with buyers.
C) buyers cooperate with other buyers.
D) both A and C are true.
42) In the economic way of thinking,
A) buyers compete against other buyers, sellers cooperate with other sellers, and buyers
cooperate with sellers.
B) buyers cooperate with other buyers, sellers cooperate with other sellers, and buyers compete
with sellers.
C) buyers compete against other buyers, sellers compete against other sellers, and buyers
cooperate with sellers.
D) buyers cooperate with other buyers, sellers cooperate with other sellers, and buyers cooperate
with sellers.
43) The ability of employers to increase their net revenue by paying low wages is limited
primarily by
A) federal and state legislation.
B) the fact that net revenue is maximized when marginal revenue equals marginal cost.
C) the other opportunities available to employees.
D) the right of labor unions to strike.
44) Labor unions benefit their members by
A) distributing income more equally among workers.
B) helping them compete more effectively against employers.
C) increasing the number of job opportunities available for employees.
D) preventing or controlling competition among workers.
E) promoting the trade they represent to assure an adequate supply of skilled workers.
45) Which one of the following is not an accurate description of the activities in which labor
unions engage?
A) Control competition among workers for jobs.
B) Encourage consumers to purchase union-made products exclusively.
C) Enforce seniority criteria when employers are contemplating layoffs.
D) Help workers compete against corporate employers.
E) Protect workers against arbitrary treatment by management.
46) The purpose of the “draft” developed by owners’ associations in many professional sports is
to
A) assure all players at least a minimum salary.
B) control competition among owners for the services of players.
C) control competition among players.
D) control competition between players and owners.
E) keep all teams at roughly equal competitive levels.
47) Unions first became powerful in the United States in industries dominated by
A) government.
B) highly profitable firms.
C) large firms.
D) small firms.
48) Demand curves for the services of productive resources
A) have no meaning, because people must have income in order to live.
B) obey the law of demand.
C) tend to be perfectly elastic in the long run because any resource can ultimately function as a
substitute for any other.
D) tend to be perfectly inelastic in the short run as long as production processes are determined
by technology.
49) Comparable worth aims at
A) increasing the earnings of the least-skilled workers in the labor force.
B) raising the relative wages paid in jobs traditionally dominated by women.
C) reducing the relative income shares going to property owners.
D) securing equal wages for people performing identical jobs.
E) securing equal wages for people performing identical jobs and performing equally well.
50) If employers were required by law to increase the wages paid to secretaries by 40 percent,
which consequence could we most confidently predict?
A) More secretaries would be employed.
B) Secretaries would begin to earn more than they are worth to their employers.
C) The marginal value of secretaries would increase by about 40 percent.
D) The total amount of wages paid to secretaries would decrease.
E) The total amount of wages paid to secretaries would increase.
51) What is the basic criticism that economic theory levels against the movement to base wages
on the “comparable worth” of jobs?
A) Markets, not employers, set wage rates for different jobs.
B) There are no jobs that are inherently more suitable for women than for men.
C) There is no way to compare the satisfactions that different people derive from a job.
D) Wage rates determine the worth of workers to an employer by determining the number that
will be hired.
E) Wage rates will be set by supply and demand and cannot be changed by anything government
does.
52) Comparable worth advocates have proposed that employers be required by law to pay wage
rates equal to the value of the job. The most telling objection to this proposal is that
A) employers will probably resist strenuously and successfully.
B) it is in the interest of employers to adjust their hiring so as to make the value of the job equal
to the wage rate that must be paid.
C) the government has no legal authority to set wage rates in the private sector.
D) this would leave little or nothing for profits.
53) The substitution of machines for labor
A) does not reduce employment opportunities because labor is required to produce the machines.
B) is not likely to reduce employment opportunities because as many or more workers will
usually be demanded to produce, service, and operate the machines.
C) will proceed more rapidly in a society the more rapidly the cost of hiring workers rises.
D) will reduce employment opportunities if increased competition associated with the
introduction of machinery lowers product prices.
54) The quintile distribution of family income in the United States shows
A) the average incomes of 5-person families grouped by age, sex, race, education, and similar
factors.
B) the percentage of total family income received by each 5 percent of U.S. families grouped by
income.
C) the percentage of total income received by each 20 percent of U.S. families grouped by
income.
D) the percentage of total family income spent on food, clothing, shelter, medical care, and
essential services.
E) the percentage of total family income stemming respectively from wages, interest, profit, rent,
and welfare grants or other transfers.
55) Roughly what percentage of money income was earned by the highest 5% of income earners
in the U.S. in 2010?
A) 10%
B) 20%
C) 30%
D) 40%
E) 50%
56) Roughly what percentage of money income was earned by the lowest 20% of income earners
in the U.S. in 2010?
A) 0.8%
B) 3.8%
C) 6.8%
D) 9.8%
57) Fill in the blanks: The percentage of money income earned by the lowest fifth of families in
the U.S. was ________ in 1960 and ________ in 2010.
A) 41.3%; 47.8%
B) 15.9%; 20.0%
C) 12.2%; 9.5%
D) 4.8%; 3.8%
58) U.S. census data suggests that
A) income inequality has been increasing since 1980.
B) income inequality has been decreasing since 1980.
C) income inequality was nonexistent in the 1990s.
D) the percentage of families living below the poverty line has surged since the 1980s.
59) According to your textbook, which of the following best explains the fact that income
inequality has increased in the U.S. since 1980?
A) The weakening of the labor union movement
B) A reduction in economic growth
C) An increase in the supply of less-skilled workers combined with an increase in demand for
more highly-skilled workers
D) A growing distrust of the efficacy of federal government spending programs combined with a
rising concern over federal budget deficits
60) According to your textbook, which of the following best explains the fact that income
inequality has increased in the U.S. since 1980?
A) The weakening of the labor union movement
B) A reduction in economic growth
C) A growing distrust of the efficacy of federal government spending programs combined with a
rising concern over federal budget deficits
D) A rise in the number of single-parent families at low income levels and a rise in two-parent
two-earner families at higher income levels
61) According to your textbook, which best explains the fact that income inequality has
increased in the U.S. since 1980?
A) A growing distrust of the efficacy of federal government spending programs combined with a
rising concern over federal budget deficits
B) A widening gap between the wages of skilled and extensively-educated workers and the
wages of those with fewer skills and less education
C) The impact of cheaply-produced and low-priced foreign imports
D) Government deregulation of business
62) Which of the following explains the increase in income inequality since 1980?
A) A widening gap between the wages of skilled and extensively-educated workers and the
wages of those with fewer skills and less education
B) A rise in the number of single-parent families at low income levels and a rise in two-parent
two-earner families at higher income levels
C) An increase in the supply of less-skilled workers combined with an increase in demand for
more highly-skilled workers
D) All of the above.
63) Other things constant, a rise in the number of unskilled immigrants tends to
A) reduce income inequality.
B) increase income inequality.
C) have no effect on income inequality.
D) initially reduce income inequality, but then increase it because immigrants steal jobs from
citizens.
64) Inequality in the distribution of income in the United States today arises primarily from
A) the collapse of the government’s income support system.
B) the highly unequal distribution of corporate wealth.
C) the tax system.
D) the weakness of labor unions.
E) unequal abilities to supply valuable human services.
65) Fact: The lowest 20% of U.S. family incomes in the U.S. has fallen from 4.8% to 3.8%
between 1960 and 2010. Your authors argue that
A) this is clear evidence that the poor have gotten poorer.
B) this is primarily the result of a general decline of the power of labor unions in America.
C) while their percentage of national income has fallen, real GDP has increased over 4 times
during the past 50 years, and so those persons actually earned much more income than before.
D) none of the above are true.
66) According to the textbook, income inequality statistics can be misleading because
A) they are collected by the Census Bureau, whose objectivity cannot be trusted.
B) they ignore the income mobility of individual families and households through time.
C) they do not take into account inflation.
D) they fail to be of use in policy proposals and debates.
67) Roughly what percent of American families lived below the poverty line in 1960?
A) 8%
B) 18%
C) 28%
D) 38%
E) 48%.
68) Roughly what percent of American families lived below the poverty line in 2010?
A) 12%
B) 22%
C) 32%
D) 42%
E) 52%
69) Fill in the blanks: The percentage of American families with incomes below the poverty line
was ________ in 1960 and ________ in 2010.
A) 10.1%; 10.7%
B) 8.7%; 13.9%
C) 18.1%; 11.8%
D) 26.8%; 48.3%
70) Your authors state that the rise in the U.S. poverty rate from 2000 to 2010 was primarily
caused by
A) the rise of huge corporations and “big box stores” in the consumer goods sector.
B) the growing number of students straddled with student loan debt.
C) the Great Recession that began in 2008.
D) none of the above reasons.
71) Your authors argue that, since the 1960s in the U.S.
A) poverty has substantially decreased.
B) inequality has substantially increased.
C) poverty has substantially increased.
D) inequality has substantially decreased.
72) According to your textbook authors, what explains the dramatic decline in the U.S. poverty
rate since the 1960s?
A) The power of labor unions
B) Steady economic growth
C) Increases in the minimum wage
D) The growth of in-kind government transfers
E) The growth of government welfare assistance paid in money
73) In 2010 the family mean income of householders aged 15-24 years was approximately
A) $11,000.
B) $21,000.
C) $31,000.
D) $41,000.
E) $51,000.
74) Which age householder group’s mean income among the following was the highest in 2010?
A) 15-25 years old
B) 25-34 years old
C) 45-54 years old
D) 65 years and older
75) What is meant by the marginal tax rate?
A) The highest rate that can be extracted.
B) The lowest rate that will still meet the government’s revenue requirements.
C) The percentage of additional income that is taken by taxes.
D) The rate paid by businesses that are just barely able to survive.
76) A mother of three who receives $600 a month in total welfare benefits if she is not working,
but who loses all those benefits and also pays 10 percent of her earnings to the tax collector if
she takes a job paying $1000 a month, is being taxed on her earnings at an effective marginal
rate of
A) 10 percent.
B) 30 percent.
C) 50 percent.
D) 70 percent.
77) If you pay $400 in taxes when you earn $10,000 and $600 in taxes when you earn $12,000,
you are subject to a marginal tax rate of
A) 4%.
B) 5%.
C) 6%.
D) 8%.
E) 10%.
78) Suppose a single-parent father with four children receives these welfare benefits from the
government each month: $400 in cash, $200 in food stamps, and $100 in medical benefits. If the
father takes a job paying $1000 per month he will lose all these benefits and will also pay $100
in income and social security taxes. His earnings from the job are consequently being taxed at an
effective marginal rate of
A) 80%.
B) 60%.
C) 40%.
D) 20%.
E) 10%.
79) The ability of the federal government to regulate the distribution of income among families
and individuals is
A) enormous, as shown by the redistribution that has occurred from the rich to the poor since
World War II.
B) largely limited to what can be accomplished through revisions in the rules of the game.
C) unlimited because government is sovereign.
D) virtually unlimited because few people would be willing to emigrate merely in order to
escape taxation.
80) Do policies that alter the distribution of income also entail a change in property rights?
A) It is impossible to tell because of the uncertainty such policies create.
B) Not if they are confined to changing relative prices.
C) Not if they redistribute income without confiscating anyone’s wealth.
D) They do so necessarily.
81) Sudden and extensive changes in property rights make social cooperation less effective by
A) encouraging excessively conservative attitudes.
B) inducing people to save for the future rather than spending now.
C) making planning more difficult.
D) reducing the power of government to manage the economy.
82) Property rights are social facts because
A) they are created and enforced by government.
B) they are widely distributed throughout society.
C) they depend upon other people’s acceptance of corresponding obligations.
D) they must be held in common to be effective.
83) Social cooperation by means of voluntary contracts and exchanges
A) cannot occur in a socialist economic system.
B) cannot occur where government sets rules that restrict behavior.
C) is easier to achieve when the laws of the society are clear and unchanging.
D) is harder to achieve when the members of the society own very little material property in
common.
84) Insecure property rights induce owners of productive assets to
A) discount expected income from their ownership at a very low rate.
B) place a higher value on those assets if they want to sell them.
C) use those assets more cautiously to reduce depreciation.
D) do all of the above.
E) do none of the above.
85) People who come to fear that their wealth is going to be confiscated will acquire a relatively
greater incentive to invest in
A) agricultural land.
B) human capital.
C) machinery and physical equipment.
D) urban real estate.