Suppose a professor announces at the beginning of a course that he will give no failing grades because they are too damaging to self-esteem. How does such a policy affect equality and efficiency?
What will be an ideal response?
Equality increases since the spread of grades now ranges from A to D, rather than A to F. Efficiency decreases since student effort may decline. Those students who just want to pass the course need make no effort at all. (Beyond the subject is whether giving someone something for nothing increases self-esteem over the long run.)
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Suppose the economy is in long-run equilibrium. In a short span of time, there is a large emigration of skilled workers, a major depletion of oil fields, and a major new regulation limiting electricity production. In the short run, we would expect
a) the price level to rise and real GDP to fall. b) the price level and real GDP both to rise. c) the price level to fall and real GDP to rise. d) the price level and real GDP both to stay the same.
When a firm creates negative externalities by polluting, in order to achieve the socially efficient outcome: a. the firm's production should be prohibited
b. the firm's production should be increased and the price of its output should be decreased. c. the firm's production should be increased and the price of its output should be increased. d. the firm's production should be reduced and the price of its output should be increased.