Economics Micro & Macro (CliffsAP)

to “adopt” a certain portion of a highway. The adoption of the highway entails giving the paying party the responsibility
to clean its portion of the highway, and in return, the paying party gets to post its name on the side of the freeway. The
incentive for the paying party is free advertisement or just simple recognition.

Mini-Review

1. Which of the following is part of the government’s role in a free-market system?
   A. To control the stock market
   B. To regulate the output of producers
   C. To protect private property rights
   D. To save every business that is failing
   E. Both B and C


2. Which one of the following describes market failure?
   A. When supply and demand form equilibrium
   B. When inflation takes place
   C. When producers do not bear all of the costs and buyers do not benefit from all of the benefits
   D. When producers bear all of the costs and buyers receive all benefits they paid for
   E. When there are no benefits in a situation


3. If social costs are higher than private costs, what could be the cause?
   A. There is a positive externality.
   B. Producers are paying too high a cost to make their product.
   C. Producers are not bearing enough of a cost to make their product.
   D. Buyers are not bearing enough of the cost.
   E. Both buyers and producers are not bearing enough of a cost to make the product.

Mini-Review Answers

1. C.The government’s role is to protect and to clearly define private property rights.


2. C.Market failure is a situation in which producers are not bearing all of the costs to make their product (spillover
   costs) and buyers are not receiving the utility they have paid for.


3. C.When social costs are higher than private costs, a producer is not bearing enough of the cost to make its
   product. Some of the cost is being paid by society in the form of pollution, for example.

Income Equity and the Lorenz Curve

The rich and poor exist in every country. There are various distinctions of income based on the rich, the poor, and the
middle class. Although each country’s class distinction varies, all countries have distinctions. Incomes are not distrib-
uted equally, and this degree of inequality varies from country to country. To compare income distributions, economists
need a measure of income equality. The Lorenz curve is an illustration of how income is distributed among members of
a population.

Equal incomes on the graph can be plotted along a 45-degree line that stretches from left to right. This line splits the
axis equally and represents the various levels of equal incomes. The horizontal axis measures the total population in
cumulative percentages. As you examine the horizontal axis from left to right, you are viewing an increasing percentage

Part III: Microeconomics