At various times, the United States has undergone the painful process of reducing military spending. Military bases from the Carolinas to California pleaded to be spared, citing huge job losses if they close. How can one rationally decide which bases to shut down, given the necessity of jobs?
One must examine the opportunity cost of continuing to operate each base. As an example, the money used to operate the San Diego Naval Station might have a next best alternative use in improving California's state universities, which would add to productivity and so enhance growth. While closing the base would sacrifice military jobs, the opportunity cost would depend on the next best alternative employment for these workers. In the future, new jobs would be created for those trained. One would carry out the same exercise for each military installation and ax those with the highest opportunity cost. An example might be a New England base using antiquated defense equipment that provides little defense per dollar spent.
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Are the owners of taxicabs in New York City earning large profits because the city severely restricts the number of licenses?
A) No, because the city also regulates fares. B) No, because the cost of owning a license absorbs the potential profit. C) Yes, because the number of licenses has not been increased for 50 years. D) Yes, because if they were not the number of taxicabs would decline and profits would rise. E) We cannot tell because profit arises from uncertainty.
How do taxes distort the incentives of buyers and sellers in a market?
Transfer payments are
a. included in GDP because they represent income to individuals. b. included in GDP because they eventually will be spent on consumption. c. not included in GDP because they are not payments for currently produced goods or services. d. not included in GDP because taxes will have to be raised to pay for them.
You value your favorite shirt at $100. Someone else values it at $80, and that person is willing to pay you $80 for your shirt. Would selling your shirt to this person for $80 be Pareto efficient?
A. No, the person paid you $80 for the shirt so his net benefit was $0, while your net benefit was -$20. For this change to be Pareto efficient, each of you should have the same net benefit. B. Yes, because any time you engage in trade, the result must be Pareto efficient. C. Yes, because even though you lose from the trade and he gains, there is the potential for him to compensate you for your loss. D. No, because both of you are not better off as a result of the trade.