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Chapter 5 Public Spending and Public Choice 483
24) In the above figure, if a Medicare subsidy that had previously been paid by the government has
now been eliminated, the result will be
A) an increase in the price received by producers, from P0to Ps.
B) a decrease in the price received by producers, from Psto P0.
C) an increase in the price paid by consumers, from P0to Ps.
D) a decrease in the price paid by consumers, from Psto P0.
25) Refer to the above figure. In the absence of a subsidy,
A) Qd would be demanded and QMwould be supplied.
B) the price Pdwould be charged and quantity QMdemanded.
C) the quantity Qoand price Powould prevail in the market.
D) None of the above is correct.
26) The funding of public education is
A) a private program. B) a subsidy program.
C) done by voluntary contributions. D) provided by Social Security.
27) Which of the following statements about public education is TRUE?
A) Over the last 40 years, there has been an increase in spending for public education, while
there has not been a significant increase in performance.
B) Over the last 40 years, there has been a decrease in public spending for public education,
while there has not been a significant increase in performance.
C) Most of the increases in public spending on public education have gone into programs that
have increased student learning.
D) Over the last 40 years there has been no decline in any of the measures of student
performance in public education.
28) If the government pays a per unit subsidy to the producer of a service, we would expect to see
a(n)
I. increase in the quantity demanded.
II. decrease in the out of pocket price paid by consumers.
III. increase in the quantity supplied by producers.
A) I only B)
b
oth I and II only
C)
b
oth II and III only D) I, II, and III
29) Over the past 40 years, there has been an increase in spending on public education without a
significant increase in student performance. One explanation given by economists on why
student performance has not improved is that
A) not enough funds have been spent on public education.
B) schools are providing high priced services that are not valued by parents.
C) the quantity of educational services has not increased beyond the pre subsidy
equilibrium.
D) too much competition for educational services.
30) In public education, the value of the services provided is
A) greater than the value that parents and students place on the services.
B) equal to the value that parents and students place on the services.
C) less than the value that parents and students place on the services.
D) zero since they are a public good.
31) Measures of student performance have not increased even though per pupil government
subsidies have increased because
A) there is a need for more funds to be spent.
B) we have declining enrollment in public schools.
C) parents and children value the last unit of educational services received more than the
cost.
D) parents and children value the last unit of educational services received less than the cost.
32) By subsidizing the provision of public education, the government
A) generates an increase in the quantity of educational services demanded..
B) pushes the per unit price that consumers pay for educational services below the market
clearing price..
C) pushes the per unit price that producers of educational services receive above the market
clearing price.
D) All of the above
33) Government outlays include all of the following EXCEPT
A) dividend payments. B) spending on the military.
C) electricity for the Capital Building. D) letterhead stationery.
34) Government spending as a percent of national income
A) peaked during the Reagan administration.
B) peaked during World War II.
C) has been steadily climbing since 1850.
D) has been almost constant this century.
35) The largest spending category for state governments is
A) welfare. B) health care.
C) education. D) highway construction.
36) What effect have Medicare subsidies had on the consumption of medical services?
A) The consumption of medical services has been unaffected, because people don t consider
the financial cost when seeking services related to their health.
B) The consumption of medical services has been unaffected, because government restrictions
have prevented patients from seeking a level of care above and beyond what they would
choose if they had to pay for medical treatment out of pocket.
C) The consumption of medical services has increased because Medicare subsidies give
people the incentive to seek more care than they would otherwise.
D) The effect cannot be measured because it is difficult to quantify the amount of resources
devoted to our health care system.
37) How have some patients been harmed by Medicare reimbursement caps?
A) They have been discharged from the hospital too soon, so that the hospital can cut costs.
B) They have been kept in the hospital too long, so that the hospital can get a higher
reimbursement amount.
C) They have had to undergo unnecessary procedures, so that the hospital can get a higher
reimbursement amount.
D) They have had to wait too long for essential procedures.
38) Public schools
A) allow students to get an education without incurring any opportunity cost.
B) provide education at a price below the market price.
C) provide education at a price above the market price.
D) have done a better job of educating their students in science, math, reading, and writing as
the subsidies they receive have increased over the years.
39) Economically speaking, the design of Medicare
A) encourages the consumption of medical services.
B) discourages the consumption of medical services.
C) helps to decrease the cost of care to non Medicare patients.
D) discourages the provision of medical services.
40) Medicare is an example of a third party payment for medical services that
A) causes providers to supply less of medical services than they would without the payment.
B) causes buyers to consume more of medical services than they would without the payment.
C) does not cause any change in the equilibrium position for medical services which existed
without the subsidy.
D) causes the price of medical services to rise for the consumer once the payment is provided.
41) The economic problem with Medicare financing is that
A) there is a built in incentive to provide fewer services by doctors.
B) there is a built in incentive to travel to Canada to receive medical services.
C) the cost of providing services is falling annually.
D) there is a built in incentive to consume more services.
42) Which of the following is NOT a consequence of the introduction of the Medicare program?
A) an increased quantity of medical services demanded
B) an increased ability for the elderly to obtain medical services
C) an increased ability for the poor to obtain medical services
D) a reduced demand for medical services
43) The government s policy of reducing payments for physicians services has generated a relative
A) increase in the number of physicians in the program.
B) reduction in the number of physicians in the program.
C) reduction in the demand for medical services.
D) increase in the income of the physicians remaining in the program.
44) The total amount that the U.S. government spends to support a covered type of health care
service under the Medicare system equals
A) the per unit subsidy provided to producers of that service times the quantity of the service
demanded by consumers at a below equilibrium out of pocket price of the service.
B) the per unit subsidy provided to producers of that service times the equilibrium quantity
of the service demanded at the market clearing price that would arise in the absence of
Medicare.
C) the below equilibrium, out of pocket price that consumers pay for the service times the
quantity of the service provided by producers at that out of pocket price.
D) the below equilibrium, out of pocket price that consumers pay for the service times the
quantity of the service demanded by consumers at that out of pocket price.
45) The amount of government spending on education per public school student has ________ since
1960, and the achievement level of students has generally ________ since that time.
A) increased; increased B) decreased; decreased
C) increased; decreased D) decreased; increased
46) Medicare
A) subsidizes the care of older people, which gives them NO incentive to consume more
medical services.
B) subsidizes the care of older people, which gives them an incentive to consume more
medical services.
C) subsidizes the care of young people, which gives them an incentive to consume less
medical services.
D) subsidizes the care of middle aged people, which gives them an incentive to consume
more medical services.
47) Which of the following is NOT a transfer payment?
A) Medicare B) Social Security retirement payments
C) Social Security disability payments D) spending on national defense
48) Which of the following is heavily subsidized by state and local governments?
A) Medicare B) Social Security
C) public education D) food stamps
49) What happens in public schools when government funds subsidize education?
A) There is a shortage of schools.
B) The quality of education rises.
C) The cost of providing the education is less than what the student pays.
D) The cost of providing the education is more than what the students pays.
50) If public subsidies for education were eliminated, what would you expect as an outcome in the
market for educational services?
A) More students would enroll in school.
B) The price students pay to attend school would equal the value of an additional unit of
education consumed.
C) There would be no correlation between the price students pay and the cost of providing
the educational services.
D) The quality of education would deteriorate.
51) Medicare and Social Security are examples of
A) transfer payment programs.
B) public goods.
C) programs that do not respond to rational economic incentives.
D) the efficient allocation of resources under a free market system.
52) What is one result of the Medicare subsidy?
A) The health care industry is more efficient than it otherwise would be.
B) Patients may elect to have some treatments that are of low value to them but that are costly
to provide.
C) The elderly population in the United States receives a lower quality of medical care than
what is provided for the elderly population in other countries.
D) The number of physicians in the United States has declined.
53) Public elementary and high school education in the United States is provided
A) as a free good.
B) as a subsidized good.
C) at the market clearing price.
D) in an amount less than the equilibrium quantity.
54) Education in the United States is
A) subsidized mainly by state and local governments.
B) funded by the federal government only.
C) paid for by the parents of students in public school system.
D) paid for by Social Security taxes.
55) According to your text, which of the following represents the largest component of federal
spending?
A) Education B) Social Security
C) Medicare D) National Defense
56) Use the concept of supply and demand to explain why an increase in Medicare subsidies can
lead to an increase in health care spending by the government.
57) Briefly explain why government subsidies are a reason for the declining student performance in
public education.
492 Miller Economics Today, 16th Edition
5.6 Collective Decision Making: The Theory of Public Choice
1) One of the most important characteristics of the price system is that
A) consumers are the ones who ultimately decide what is produced.
B) politicians are the ones who ultimately decide what is produced.
C) competition among sellers is reduced.
D) all exchanges are regulated by the government.
2) When comparing market and public sector decision making, which statement is NOT true?
A) Self interest is the motivating force in each decision making arena.
B) In both decision making sectors, majority rule is how things are done.
C) In both decision making sectors, there are scarcity constraints.
D) Collective (political) outcomes and economic outcomes may differ.
3) All of the following are assumptions of both market and public sector decision making
EXCEPT:
A) Decisions are based on majority rule.
B) Decisions are motivated by individuals self interest.
C) Opportunity costs exist in decisions.
D) Choices reflect incentives faced by decision makers.
4) Which of the following is FALSE about public sector decision making?
A) Decisions are based on majority rule.
B) The price charged to consumers is often less than its full opportunity cost.
C) Decisions involve no opportunity cost.
D) Incentives play a role in decision making.
5) An important assumption in the theory of public choice is that
A) individuals will act within the political process to maximize their individual well
b
eing.
B) individuals will act within the political process to maximize their collective well
b
eing.
C) individuals will only operate outside the political process when their well
b
eing is
involved.
D) scarcity does not exist in the government sector.
6) In which of the following ways is the private market sector similar to the public sector in terms
of decision making?
A) Prices determine the demand for goods and services in each sector.
B) There is competition for scarce resource in both sectors.
C) Both sectors may use a type of force if necessary.
D) Votes by individual voters are basically equal in importance with dollars spent by
individuals on goods.
7) Which of the following characterizes the largest difference between the way decisions are made
in the private sector versus the public sector?
A) The incentive system for individuals to perform efficiently are vastly different.
B) The workers themselves are really quite different types of people.
C) In both sectors individuals will try to maximize their own individual gains over the gains
of others.
D) Costs and resources are vastly different in each sector.
8) Government goods are provided to the consumer at a zero price. This means that
A) the cost to society is zero.
B) the political system is run by proportional rule.
C) people are getting something for nothing.
D) the cost of the goods is the value of the resources used to produce the good.
9) Which of the following is TRUE about the political and market systems of voting?
A) The political voting system functions according to proportional rule, while the market
voting system functions according to majority rule.
B) The political voting system functions according to majority rule, while the market voting
system functions according to proportional rule.
C) The political voting system functions according to minority rule, while the market voting
system functions according to majority rule.
D) The political system and the market system are identical.
10) What is the assumption underlying public choice theory?
A) Elected officials believe in cooperating with one another and they seek to avoid
competition among themselves.
B) The costs and benefits of being efficient are the same whether one is in the private sector or
in the public sector.
C) Individuals act within the political process to improve their own individual well
b
eing.
D) Resources in the public sector are not scarce.
11) The theory of public choice suggests that
A) government agencies tend to be inefficient because the people running them do not
understand the concept of opportunity cost.
B) government agencies tend to be inefficient because they are subject to institutional
arrangements in which managers do not have an incentive to be efficient.
C) the goods provided by government, whether public or private goods, are not scarce.
D) you can lower your tax bill if you are careful not to consume too many government
resources, regardless of what your neighbors do.
12) A difference between the market and the public sector is that
A) scarcity exists only in the market sector.
B) government can use force, while the market does not.
C) we can only vote in the public sector.
D) the cost of private goods to society is zero.
13) The theory of public choice
A) is the theory of how government decides on what military hardware to purchase.
B) considers government decision making efficient.
C) is the study of collective decision making.
D) is the study of how negative externalities can be reduced.
14) Scarcity
A) affects both market and public sector decision making.
B) affects market, but not public sector decision making.
C) affects public sector, but not market decision making.
D) is really not an issue in such a wealthy nation as the United States.
15) The market and public sector are similar in that
A) there is competition amongst the participants in both sectors.
B) the resources used in both sectors are scarce.
C) the participants in both sectors react to incentives.
D) All of the above are true.
16) A difference between the market and the public sector is that
A) competition exists only in the market sector.
B) resources are only scarce for the market sector.
C) decision making is by majority rule in the public sector but not in the market sector.
D) only the public sector produces private goods.
17) The incentive structure is a
A) system of rewards and punishments that individuals consider when making decisions.
B) system determined by the federal government that gives certain states more federal funds.
C) system of infrastructure in the United States that improves commerce.
D) system of checks and balances in the government.
18) If U.S. consumers increase their spending on hybrid cars by 60 percent, and 60 percent more
hybrid cars are produced, this is known as the
A) majority rule. B) proportional rule.
C) government rule. D) profit rule.
19) Briefly explain the similarities and differences of decision making by the market sector and the
public sector.
20) List and explain the four key assumptions in the theory of public choice.
21) What are the voting rules followed by the political system as opposed to the market system?
