Econ Final

Alison decides to play the lottery. She has a 5 percent probability of winning $100 and a 95 percent probability of winning zero. The expected value of playing the lottery is: A) $100. B) $5. C) $10. D) $50.

Answer: B The expected value of this gamble is: $5 = (0.05)($100) + (0.95)($0)

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine.At the private market equilibrium, the price of each dose is: A) $50. B) $60. C) $70. D) $80.

Answer: A D1 is the private demand curve, so at the private market equilibrium,the price of each dose is $50.

Which of the following items is an example of a good that is nonrival but excludable? A) Pay-per-view movies B) Corn C) National defense D) Broadcast television

Answer: A More than one person can enjoy a per-per-view movie at one time, but people who don't pay for it can be excluded from enjoying it.

A firm is unlikely to hire a worker if: A) the additional revenue generated by hiring the worker is less than his or her wage. B) the additional output a firm gets by hiring the worker is greater than his or her wage. C) there are diminishing marginal returns to labor. D) the minimum wage set by law is less than the equilibrium wage in the market.

Answer: A A firm will not hire a worker if the revenue generated by hiring the worker is less than the cost of hiring the worker.

Under a head tax, the amount of tax paid is: A) the same for all taxpayers. B) proportional to each taxpayer's income. C) a linearly increasing function of the taxpayer's income. D) the same for all taxpayers who use the public good

Answer: A A head tax is one that collects the same amount from every taxpayer.

According to the textbook, the best possible solution to the problem of poverty is: A) a combination of a negative income tax and public employment. B) to maintain the current system. C) a negative income tax with the tax credit equal to the poverty threshold. D) the complete elimination of all efforts to assist the poor.

Answer: A A negative income tax would provide financial assistance and public employment would provide work incentives.

If it is difficult, or costly, to prevent people who do not pay for a good from consuming the good, then the good is a________good. A) nonexcludable B) pure public C) private D) nonrival

Answer: A A nonexcludable good is a good that is difficult, or costly, to prevent nonpayers from enjoying.

The pattern in which insurance is purchased more frequently by those who are the most costly for companies to insure is referred to as: A) adverse selection. B) statistical discrimination. C) risk aversion. D) moral hazard.

Answer: A Adverse selection refers to the pattern in which insurance tends to be purchased disproportionately by those who are most costly for companies to insure.

To prospective employers, an honors degree from a highly selective college is: A) a credible signal about whether a job applicant is intelligent and hardworking. B) a credible signal about whether a job applicant has had a job before. C) not a credible signal about whether a job applicant is intelligent and hardworking. D) only a credible signal about a whether job applicant is intelligent and hardworking if the job requires a college degree.

Answer: A All else equal, people who are intelligent and hard working will find it easier to graduate with honors from a highly selective college than those who are not. Thus, graduating with honors from a highly selective college is a costly-to-fake signal about whether an individual is intelligent and hardworking.

Which of the following is NOT an example of an activity with external benefits? A) Eating a sandwich in the dining hall B) Planting flowers in your front yard C) Installing smoke alarms in your house D) Having your car's faulty exhaust system repaired

Answer: A An external benefit is a benefit that falls on people other than those who pursue the activity. Eating a sandwich does not yield benefits for anyone other than the consumer.

A firm's demand for labor will increase if the: A) price of the firm's output increases. B) price of the firm's output decreases. C) marginal product of labor decreases. D) wage rate rises.

Answer: A As the price of the firm's output increases, so will the value of the marginal product of labor. Thus, the firm will be willing to hire more workers at each wage rate.

Which of the following is an example of a positional arms control agreement? A) Campaign spending limits B) Highly selective admissions standards at colleges C) Prohibiting speech that causes more harm than good D) Public education

Answer: A Because elections are determined by relative votes, there is an incentive for candidates to spend ever-increasing amounts of money on campaigns. Spending limits can keep that tendency in check.

14. Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Declaring the card room, a non-smoking area with no opportunity to negotiate would: a. A) decrease total economic surplus. b. B) increase total economic surplus. c. C) leave total economic surplus unchanged but redistribute benefits. d. D) efficiently solve the externality problem.

Answer: A Because there is an opportunity fora negotiated trade that led to surplus,banning all smoking reduces total economic surplus.

For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that A) the marginal cost of pollution control is the same across all firms. B) enforcement is vigorous. C) all firms be the same size. D) large polluters reduce emissions by more than small polluters.

Answer: A If all firms have the same marginal cost of pollution abatement, then it is efficient for all firms to reduce pollution by the same amount. Otherwise, it is efficient for firms with the lowest cost of pollution abatement to reduce pollution the most.

If workers in one part of the labor market unionize, then all else equal, we would expect the wages of unionized workers to ________, and the wages of nonunionized workers to________. A) rise; fall B) rise; remain unchanged C) remain unchanged; fall D) fall; remain the same

Answer: A If the union is successful at bargaining for higher wages, then the quantity of workers demanded in that part of the labor market will fall. As a result, workers will move into the nonunionized sector, thereby pushing wages in that sector down.

In professional baseball, some players earn over $20 million per year, while the average salary is about $4 million per year. The most likely explanation for this is that: A) the market for baseball players is a winner-take-all market. B) the best players are 5 times better than the average player. C) owners are overspending on players' salaries. D) racial discrimination.

Answer: A In a winner-take-all setting, small differences in human capital translate into large differences in pay.

Conspicuous consumption is a more effective signal of ability for people who: A) live in large cities instead of small towns. B) already have well-established reputations. C) live in small towns instead of large cities. D) don't understand moral hazard.

Answer: A In small towns, people are more likely to know each other, so there is less uncertainty about people's ability.

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ________ externality, and burning tires generates________ externality. A) a positive; a negative B) a negative; a positive C) a positive, no D) no; a negative

Answer: A Positive externalities yield benefits to others while negative externalities impose costs on others.

The growth in income inequality in the United States since the early 1980s has been driven primarily by the dramatic: A) increase in real incomes for the top 1 percent of earners. B) increase in real incomes for the top 10 percent of earners. C) increase in real incomes for the top 20 percent of earners. D) decrease in real incomes for the bottom 20 percent of earners.

Answer: A Real earnings for the top 1 percent of earners in the U.S. have more than tripled since the early 1980s.

Carmen listens to opera music every evening when she gets home from work.Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it.If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates: A) a negative externality. B) a positive externality. C) neither a positive nor a negative externality. D) both a positive and a negative externality.

Answer: A Since Carmen's music imposes a cost on Paul, it generates a negativeexternality.

Carson and Fran are both thrill seekers. Carson has health insurance and Fran does not. One can predict that: a. A) Fran will engage in fewer dangerous activities. b. B) Carson will engage in fewer dangerous activities. c. C) Carson and Fran will participate in the same number of dangerous activities. d. D) Carson's health insurance will not affect Carson's behavior.

Answer: A Since Fran does not have health insurance, she would bear all of the cost of a negative event while Carson would have at least some of the cost of a negative event covered by insurance.

The current U.S. income tax system requires taxpayers to pay a higher marginal tax rate on higher levels of taxable income. Suppose that the tax rate is 10 percent on the first $15,000 of taxable income, 15 percent on the next $45,000 of taxable income, 30 percent on the next $60,000 of taxable income, and 35 percent on taxable income above $120,000. This income tax system is: A) progressive. B) regressive. C) proportional. D) progressive when income is low, then regressive

Answer: A Since the proportion of income paid in taxes rises as income rises, this is a progressive tax system.

Suppose Ginger is going to buy a house and a dishwasher. Assuming the marginal cost of searching for both is the same, one can predict that Ginger will A) spend more time searching for the house than the dishwasher. B) spend more time searching for the dishwasher than the house. C) spend equal amounts of time searching for the dishwasher and the house. D) trust the information from her real estate agent but not from the dishwasher salesperson.

Answer: A The benefit of having more information tends to be greater for more expensive items that for cheap ones.

Morgan lives in San Francisco and likes to dine out. Morgan has noticed that prices at restaurants near popular tourist destinations in the city tend to be higher than at restaurants of the same quality in other neighborhoods. One reason for this is that: A) search costs are higher for people who are unfamiliar with the area. B) residents don't like to eat in restaurants frequented by tourists. C) tourists don't worry about money while on vacation. D) restaurant meals are a small fraction of the total cost of a vacation.

Answer: A The cost of acquiring information will be higher for tourists who are not familiarwith their surroundings. The highercost of searching means that tourists will spend less time searching for a better deal and will end up spending more because of it.

Curly is offered the following gamble: a 25 percent chance of winning $1,500 and a 75 percent chance of losing $500. This is a(n): A) fair gamble. B) unfair gamble. C) almost-fair gamble. D) better-than-fair gamble.

Answer: A The expected value of this gamble is: $0 = (0.25)($1,500) + (0.75)(-$500). Since the expected value of this gamble is zero, it is a fair gamble.

31. The essential reason some species of whales have nearly been driven to extinction is that: a. A) it is difficult to define and enforce property rights to whales. b. B) the demand for whales is extremely high. c. C) the price of whales is very low. d. D) experienced whalers find it easy to catch whales.

Answer: A The fact that it is difficult to define and enforce the property rights to whales means that whalers donotad equately take into consideration the fact that harvesting an extra whale today reduces the breeding population, and hence the size of the future whale population.

If the labor market for doctors is perfectly competitive, then an increase in the demand for doctors is likely to cause: A) doctors' wages to increase. B) the working conditions of doctors to deteriorate. C) a persistent shortage of doctors. D) the supply of doctors to fall.

Answer: A The increase in demand will cause an increase in the equilibrium wage.

In a perfectly competitive labor market, if the value of marginal product of the last worker hired is $20 and the wage rate is $25, then the firm should: A) hire fewer workers. B) hire more workers. C) not change the number of workers it hires. D) either hire more or fewer workers, depending on the price of the firm's output.

Answer: A The last worker hired added more to the firm's cost than to its revenue, so the firm should reduce the size of its labor force.

The tragedy of the commons refers to the: A) overuse of resources that have no price. B) overuse of resources that have no cost. C) under production of goods that have external benefits. D) failure of the Coase theorem when negotiation is costly.

Answer: A The tragedy of the commons is the tendency for a resource that has no price to be used until its marginal benefit is zero.

The value of marginal product of labor equals the a. A) marginal product of labor times the net price for which each unit of output sells. b. B) total product of labor divided by the net price for which each unit of output sells. c. C) marginal product of labor divided by the net price for which each unit of output sells. d. D) average product of labor times the wage rate.

Answer: A The value of the marginal product of labor is the dollar value of the additional output a firm gets by employing one additional unit of labor.

In which of the following markets is the presence of asymmetric information of little concern to the buyer? A) The market for used textbooks B) The market for used houses C) The market for used computers D) The market for used cars

Answer: A There is less uncertainty about the quality used textbooks than the other items listed. As a result, asymmetric information is less of an issue.

A 65 percent chance of winning $10 and a 35 percent chance of losing $5 would be classified as a(n) A) better-than-fair gamble. B) worse-than-fair gamble. C) unfair gamble. D) fair gamble.

Answer: A This would be a better-than-fair gamble because the expected value of the gamble is $4.75 = (0.65)($10) + (0.35)($5), which is greater than zero.

Suppose that there are two employers in Tinytown. CareCo offers a generous health insurance package to all employees, while ApathyInc pays slightly higher wages than CareCo, but does not offer health insurance. All else equal, a person who is unhealthy and expects to have high healthcare costs will: A) prefer to work for CareCo. B) stop going to the doctor. C) be equally happy working for either firm. D) prefer to work for Apathy Inc.

Answer: A Those who are relatively unhealthy will benefit more from the health insurance policy at CareCo.

A minimum wage law prohibits employers from paying workers less than a specified hourly wage. If the minimum wage is above the equilibrium wage: A) there will be an excess supply of labor. B) there will be an excess demand for labor. C) it creates a price ceiling. D) employment levels will not fall.

Answer: A Whenever price (here, wage) is above the equilibrium price, the result will be excess supply (here, of workers).

A group of workers who bargain collectively with employers for higher wages and better working conditions is called a: a. A) labor monopsony. b. B) labor union. c. C) labor collective. d. D) closed shop.

Answer: B A labor union is a group of workers who bargain collectively with employers for better wages and working conditions.

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking.If all ten people can negotiate with each otherat no cost, then which of the following outcomes is consistent with the Coase theorem? A) The cigar smoker will not be able to smoke because the majority of people in the room dislike the smell of cigar smoke. B) The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking. C) The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration. D) The nine non-smokers will each pay the cigar smoker fifty cents and the cigar smoker will not smoke.

Answer: B According to the Coase theorem, if people can negotiate the purchase and sale of the right to perform activities that cause externalities, then they can always arrive at efficient solutions to the problems caused by externalities. In this case, it is socially optimal for the cigar smoker to smoke since the value to him of smoking is greater than the total value to the other nine people of clean air.

Technological advances that increase the marginal product of labor will lead to: A) a decrease in the demand for labor because the firm won't need as many workers. B) an increase in the demand for labor because workers will be more productive. C) no change in demand for labor because the demand for labor depends on the wage. D) a decrease in the supply of labor because fewer workers can get the job done.

Answer: B As the marginal product of labor increases, so will the value of the marginal product of labor, so the firm will demand more workers at any given wage rate.

Suppose that there are two types of houses for sale: those with solid foundations and those with cracked foundations. In all other respects, the two types of houses are identical. Houses with solid foundations are worth $200,000, while those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack, or $180,000. Sellers know which type of house they have, but buyers cannot detect whether the foundation has a crack. Suppose that 80 percent of the houses for sale have a solid foundation and 20 percent of the houses for sale have a cracked foundation. If buyers are risk-neutral and know the that 80 percent of the houses for sale have a solid foundation while 20 percent have a cracked foundation, then how much will buyers be willing to pay for a house? A) $200,000 B) $196,000 C) $180,000 D) $160,000

Answer: B Buyers will be willing to pay the expected value of a house, which is $196,000 = (0.80)($200,000) + (0.20)($180,000).

One way sellers can credibly signal that they have a high-quality product is to: A) sell very little of their product in order to create scarcity. B) spend a lot of money on advertising. C) lower their marginal cost of production. D) simply tell buyers more about their product.

Answer: B Compared to a seller with high-quality product, a seller with a low-quality product is less likely to find it worthwhile to spend a lot of money on advertising because even if the seller with the low-quality product can convince buyers to buy their product once, they will be less likely to generate repeat sales than will a seller with a high-quality product. This makes expensive advertising a credible signal of quality.

Suppose Scott's demand for a public good is P = 7 0.3Q and Mike's demand is P= 10 - 1.5Q. The equation for the total demand for the public good is: A) P = 20 -3.0Q. B) P = 17 -1.8Q. C) P = 3 -1.2Q. D) P = 14 -0.6Q.

Answer: B Constructing the demand curve for a public good entails the vertical (not the horizontal) summation of individual demand curves. Here,P=(7-0.3Q)+(10-1.5Q)=17-1.8Q.

If the production of a good generates a negative externality, then at the market equilibrium quantity, the marginal cost to society of another unit of the good will be: A) less than the marginal benefit of another unit. B) greater than the marginal benefit of another unit. C) equal to the marginal benefit of another unit. D) negative due to the external cost.

Answer: B Firms do not consider negative externalities when making their production decisions. Thus,at the market equilibrium quantity, the marginal cost to society of another unit will be greater than its marginal benefit.

The problems of externalities and poorly formed property rights are: A) minor in modern economies. B) among several rationales for the existence of government. C) better solved by private rather than government action. D) the only two legitimate reasons for creating government.

Answer: B Governments can help regulate activities that generate externalities, and they can help enforce property rights.

Better information about consumers' reservation prices generally leads to: A) a reduction in producer surplus. B) acquisition of goods by consumers who are willing to pay the highest price. C) equitable distribution of goods among low income consumers. D) acquisition of goods by consumers with the greatest need.

Answer: B Having information about buyers' reservation prices enables sellers to sell items to those who are willing to pay the highest price.

Taken together, factors such as education, training, experience, intelligence, and work habits are known as: A) statistical discrimination factors. B) human capital. C) productivity factors. D) learned behaviors.

Answer: B Human capital is the amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, and initiative that affects the value of a worker's marginal product.

If low-income households spend a larger share of their income on food than do high-income households,then a tax on food is: A) a progressive tax. B) a regressive tax. C) a proportional tax. D) a way to redistribute from the wealthy to the poor.

Answer: B If low-income families spend a larger share of their income on food than do high-income families, then a tax on food would take a larger share of their income, making the tax regressive.

Leo is a welfare recipient who qualifies for two means- tested cash benefit programs. If he does not earn any income, he receives $225 from each program. For each dollar he earns (which his employer is required to report to the welfare agency), his benefit from each program is reduced by 75 cents until the benefit equals zero. In the absence of any earnings, Leo will receive________in cash from each program, for a total of________in benefits. A) $225; $225 B) $225; $450 C) $225; $400 D) $200; $400

Answer: B In the absence of any earnings, Leo will receive $225 from each program for a total of $450 from the two programs.

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for$800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month.Moe could obtain a snore-eliminating device for $50 per month. The actual monthly gain in surplus to Curly and Moe from living togetherafter addressing the snoring problems in the least costly way is: A) $200. B) $150. C) $100. D) $50.

Answer: B It would cost Moe $50 per month to stop the snoring, so his total rent is $450, or $50 less than he would have to pay living alone (which he would have to do if didn't stop the snoring). Curly saves $100 in rent by sharing with Moe.

National defense is an example of a good that is: A) neither nonrival nor nonexcludable. B) largely nonrival and nonexcludable. C) only nonexcludable. D) only nonrival

Answer: B One person's enjoyment of national defense does not diminish others' enjoyment of national defense, and people who don't pay for national defense can't be excluded from enjoying its benefits.

Gasoline prices tend to be higher at stations that are just off the freeway than they are at stations in the middle of town. The most likely reason for this is that: A) freeway exit stations sell a higher quality product. B) people who buy gas at freeway exit stations tend to have higher search costs. C) freeway exit stations are more likely to have an attached convenience store. D) demand for gas at freeway exits is lower than it is in the middle of town.

Answer: B People who buy gas near a freeway exit are likely to be willing to pay for the convenient location so as to avoid having to drive more in an effort to find lower-priced gasoline.

If the government needs to raise revenue to pay for a public good, the ideal tax structure would tax A) all citizens by the same amount. B) all citizens in proportion to their willingness to pay for the public good. C) all citizens by the same proportion of their income. D) only citizens who state that they will use the public good.

Answer: B Public goods that taxpayers value are more likely to be funded if people are taxed inproportion to their willingness to pay.

In the absence of environmental protection laws, firms pollute because: A) business owners follow different norms than do environmentalists. B) controlling emissions costs money, thereby reducing profits. C) business owners do not believe that pollution is a problem. D) the cost pollution imposes on society is small relative to the cost of reducing pollution.

Answer: B Reducing pollution is costly for firms.

Suppose Joe has a reliable two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that is reliable and only $10,000 for one that's not reliable. Lauren cannot tell whether Joe's car is reliable, but she believes that only 20 percent of two-year old Hondas for sale in the market are reliable and that the other 80 percent are not reliable. Will Lauren buy Joe's car? A) Yes, because Lauren is willing to pay $14,000 for a car that's reliable. B) No, because Lauren will not be willing to pay Joe $13,000. C) Maybe, because Lauren might be willing to pay as much as $14,000. D) Yes, because Lauren will be willing to pay Joe more than $13,000.

Answer: B Since Lauren is risk-neutral, the most she's willing to pay for the car is its expected value, which is $10,800 = (0.20)($14,000) + (0.80)($10,000). Since this is less than $13,000, Joe will not be willing to sell Lauren his car.

Suppose Joe has a reliable two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that is reliable and only $10,000 for one that's not reliable. Lauren cannot tell whether Joe's car is reliable, but she believes that only 20 percent of two-year old Hondas for sale in the market are reliable and that the other 80 percent are not reliable. To Lauren, Joe's car looks just like every other two-year Honda that's for sale.What's the most Lauren is willing to pay for Joe's car? A) $10,000 B) $10,800 C) $13,000 D) $14,000

Answer: B Since Lauren is risk-neutral, the most she's willing to pay for the car is its expected value, which is $10,800=(0.20)($14,000)+(0.80)(10,000).

The lemons problem gives the owners of aboveaverage-qualityusedcarsanincentiveto: A) exaggerate the quality of their cars when selling them. B) offer a warranty when selling their cars. C) understate the true quality of their cars when selling them. D) ask for a sales price that is higher than the blue book value of their car.

Answer: B Since a warranty is a credible signal of quality, the owners highquality used cars will have an incentive to offer a warranty when selling their cars.

Food stamps and Medicaid are examples of: A) cash transfer programs. B) in-kind transfer programs. C) welfare programs that have been eliminated. D) programs created by the Personal Responsibility Act.

Answer: B Since these programs provide specific goods and services, they are termed in-kind transfers.

Spike pays $14,000 in taxes and earns $100,000. Ace earns $120,000. If the tax system is progressive, Ace will pay________ in taxes. A) $15,500. B) more than $16,800. C) more than $15,500 but less than $16,800. D) $16,800.

Answer: B Spike's tax is 14 percent of his income ($14,000/$100,000 = 0.14). If the tax system is progressive, then Ace will have to pay more than 14 percent of his income (that is, more than $16,800=0.14 $120,000).

When an individual is judged by the characteristics of the groups to which he or she belongs rather than on his or her own characteristics, it is called: A) adverse selection. B) statistical discrimination. C) the lemons model. D) moral hazard.

Answer: B Statistical discrimination refers to the practice of making judgments about the quality of people, goods, or services based on the characteristics of the groups to which they belong.

27. In order to achieve the socially optimal level of output, goods that entail positive externalities should be: a. A) required. b. B) subsidized. c. C) taxed. d. D) deregulated.

Answer: B Subsidizing activities that yield positive externalities compensates the generator for the benefits generated.

When someone buys a movie on DVD, the DVD is a________good. A) public B) private C) collective D) commons

Answer: B The DVD is rival because one person's enjoyment of the DVD means that it's not available to others, and it's excludable because only people who buy the DVD can watch

In 1996, the Personal Responsibility Act: A) transferred responsibility for welfare programs from the state to the federal level. B) placed a five-year lifetime limit on welfare payments to any given recipient. C) increased the federal minimum wage. D) established the earned income tax credit (or EITC).

Answer: B The Personal Responsibility Act transferred responsibility for welfare programs from the federal to the state level and placed a five-year lifetime limit on welfare payments to any given recipient.

When auctions, such as those used on eBay, are used to sell a product, then: A) information about consumers' true reservation prices is minimized. B) information about consumers' true reservation prices is revealed. C) consumers have an incentive to bid above their true reservation prices. D) consumers have an incentive to bid below their true reservation prices.

Answer: B The bidding process will encourage buyers to bid up to their true reservation price.

Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. The expected starting salary for a college graduate with a bachelor's degree in economicsis: A) $30,000. B) $40,000. C) $45,000. D) $50,000.

Answer: B The expected starting salary is $40,000 = (0.25)($30,000) + (0.50)($40,000)+(0.25)($50,000).

The free-rider problem arises when people: A) obtain a good for less than the market equilibrium price. B) who do not pay for a good cannot be excluded from consuming it. C) who do not pay for a good cannot consume it. D) who pay for a good cannot consume it.

Answer: B The free-rider problem arises when too little of a good or service is produced because nonpayers cannot be excluded from using it.

A highway without any tolls between 12am and 5am when there is very little traffic is an example of a________good. A) collective B) public C) private D) commons

Answer: B The highway is both nonrival and nonexcludable.

If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state,then: A) the individual states can easily reach a solution to the problem. B) the problem is best addressed through federal regulation. C) state courts can provide adequate remedies. D) the acid rain ceases to be an externality.

Answer: B The problem of pollution is difficult to solve when the various sources of pollution (in this case, states) are not subject to regulatory control by a single government.

Matt is offered a job driving the campus shuttle bus from 4 p.m. to 6 p.m. each Monday. His reservation wage for this job is $7 per hour. If the campus transportation director offers Matt $50 per hour, how much economic surplus will Matt enjoy as a result of accepting the job? A) $36 per hour B) $43 per hour C) $50 per hour D) $86 per hour

Answer: B The surplus is the difference between the wage Matt would earn ($50 per hour) and his reservation wage ($7 per hour), which is $43 per hour.

Which of the following would be most vulnerable to the tragedy of the commons? A) Restrooms in a restaurant B) Timber on public land C) Cattle on a ranch D) Apples in Phoebe's apple orchard.

Answer: B The tragedy of the commons is most likely to arise when nobody owns a resource, so nobody has an incentive to use it optimally.

Leo is a welfare recipient who qualifies for two means- tested cash benefit programs. If he does not earn any income, he receives $225 from each program. For each dollar he earns (which his employer is required to report to the welfare agency), his benefit from each program is reduced by 75 cents until the benefit equals zero. If Leo earns $150, then he will receive ________ in total benefits from the two programs. A) $75. B) $325. C) $225. D) 0.

Answer: C For each dollar that he earns, Leo will lose $0.75 from each program, or$1.50 in total. Thus, if he earns $150, he will lose $225 (=$1.50 $150),so that his total benefits will be $450-$225=$225.

A labor union in a labor market is analogous to a(n) ________ in an output market. A) monopsony B) oligopoly C) cartel D) perfect competitor

Answer: C A labor union is a group of sellers that band togetherto sell their services.

A risk-neutral individual will: A) accept only better-than-fair gambles. B) see risk as neither good nor bad. C) accept only gambles with an expected value of zero or greater. D) accept only gambles with an expected value of zero.

Answer: C A risk neutral person will only accept gambles that are fair or better-than-fair (that is, gambles with an expected value of zero or greater than zero).

According to the theory of disappearing political discourse, politicians remain silent about issues because politicians: A) are unsure of their opinions. B) don't have enough information. C) fear that if they speak out they will be misunderstood. D) fear that voters do not fully understand the issues

Answer: C According to the theory of disappearing political discourse, politicians remain silent about issues because they fear that if they take a firm stance on an issue, they will be misunderstood because voters will judge them based on the characteristics of others who have that same stance on the issue.

Information about the quality of a product is A) intangible, and therefore not subject to economic principles. B) impossible to objectively assess, and therefore not subject to economic principles. C) both beneficial to have and costly to obtain, and therefore subject to economic principles. D) subject to economic principles only when it is paid for, for example by subscribing to Consumer Reports or by hiring a financial advisor.

Answer: C Acquiring information is both beneficial and costly, so it is rational to obtain more only to the extent that the expected marginal benefit is greaterthan orequal to than the expected marginal cost.

Which of the following is an example of an activity with an external cost? A) Raising honeybees where neighbors on all sides grow apples. B) Keeping your front yard clean. C) Speeding on the interstate. D) Having to buy batteries for the new remote that came with a TV.

Answer: C An external cost also called a negative externality, is the cost of an activity that falls on people other than those who pursue the activity. One person's speeding imposes costs on others.

Suppose that there are two types of houses for sale: those with solid foundations and those with cracked foundations. In all other respects, the two types of houses are identical. Houses with solid foundations are worth $200,000, while those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack, or $180,000. Sellers know which type of house they have, but buyers cannot detect whether the foundation has a crack. Suppose that 80 percent of the houses forsale have a solid foundation and 20 percent of the houses for sale have a cracked foundation. If some of the owners of houses with solid foundations remove their houses from the market because they can't sell their house for a price that is as high as the value of their house, then: A) buyers' reservation prices will rise. B) the owners of houses with a cracked foundation will also take their houses off the market. C) the proportion of homes for sale with a cracked foundation will rise. D) the average sales price of a house will rise.

Answer: C As owners of houses with a solid foundation remove their houses from the market, a larger proportion of houses on the market will have a cracked foundation.

In the market for labor, the demand function describes A) the number of workers who are willing to work at each wage. B) the output of workers who are paid a given wage. C) the number of workers a firm is willing to hire at each wage. D) the demand for the firm's output.

Answer: C As with any demand curve, a labor demand curve depicts the relationship between price (or, here, wage) and quantity demanded (here, the number of workers the firm is willing to hire).

To derive the market demand curve for a private good, one sums the ________. For a public good, one sums the ________. A) individual quantities at various prices; individual quantities at various prices B) individual prices at various quantities; individual quantities at various prices C) individual quantities at various prices; individual prices at various quantities D) individual prices at various quantities; individual prices at various quantities

Answer: C Constructing the demand curve for a private good entails the horizontal summation of individual demand curves, while constructing the demand curve for a public good entails the vertical summation of individual demand curves.

The demand curve for a public good is constructed by: A) summing voters' desired quantity of the public good at each price. B) surveying voters on how much of a particular public good they would use at each price. C) summing voters' reservation prices at each quantity. D) dividing the total cost of providing the public good by the number of potential users.

Answer: C Constructing the demand curve for a public good entails the vertical (not the horizontal) summation of individual demand curves.

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way about Shel's consumption. Fran has bought a new Jaguar (a luxury car), and shortly thereafter, Shel bought a new Mercedes (also a luxurycar).Shel and Fran seem to be: A) making independent rational consumption decisions. B) unaware of the other's actions. C) involved in a positional arms race. D) imposing external benefits on each other.

Answer: C Fran and Shel base their happiness on their relative position and each prefers to have more things than the other. When one buys a nice new car, the other one wants a nice new car.

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney's customers have reservation prices of $5. When Sydney's cart is located on a sidewalk in an upscale mall, wealthier customers with reservation prices of $10 buy snow globes. Assume that Sydney can sell the same volume at either location and that marginal and average costs are $3 per globe at both locations. Total economic surplus will be maximized if Sydney: a. A) alternates between the two locations and price discriminates. b. B) sells only near the discount store and charges $5. c. C) sells only in the upscale mall and charges $10. d. D) alternates between the two locations and charges $5 at both locations.

Answer: C Given that Sydney's costs are the same at either location, Sydney's net benefit is maximized by selling the snow globes at the upscale mall because Sydney receives $10 instead of $5.

Matt is offered a job driving the campus shuttle bus from 4 p.m. to 6 p.m. each Monday. His reservation wage for this job is $7 per hour. Now suppose the director offers Matt $50 per hour, but also announces that the earnings from the job will be divided equally among Matt and four other students. Will Matt accept this job? A) No, because the other students are free riders. B) No, because it is not fair for Matt to do the work and then have to share the wage. C) Yes, because $50 divided by five is greater than Matt's reservation wage. D) Yes, because Matt believes in the Rawlsian theory of justice.

Answer: C Given that the $50 wage now has to be shared among 5 people, Matt's earnings would be $10 per hour. Since this is greater than Matt's reservation wage, his economic surplus from accepting the job would be positive.

Dan owns an autographed copy of a Brittany Spears CD that he values at $100.If he sells the CD at the garage sale he's planning to hold in a few weeks, it will be sold to a buyer with a reservation price of $175. If he sells it on eBay, it will be sold to a buyerwith a reservation price of $500. eBay will charge Dan $50 to auction the CD, which just covers eBay's opportunity cost of running the auction. Relative to selling the CD at his garage sale, auctioning the CD one Bay will lead: A) to no change in total economic surplus. B) total economic surplus to increase by $500. C) total economic surplus to increase by $275. D) total economic surplus to increase by $100.

Answer: C If Dan sells the CD at his garage sale, then total economic surplus will be $75 (= $175 -$100). If Dan sells the CD on eBay, then total economic surplus will be $350 (= $500 -$100 -$50). Thus, if Dan sells the CD on eBay, total economic surplus will increase by $275 (= $350 -$75).

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively________reduction in driving if demand is ________. A) small; perfectly elastic B) large; perfectly inelastic C) small; relatively inelastic D) large; relatively inelastic

Answer: C If demand is inelastic, a tax will increase price but will not change the quantity demanded by a large amount.

Curly pays $12,000 in taxes and earns $150,000. Moe pays $7,000 in taxes. If the tax system is proportional,then Moe's income is: A) $56,000. B) $125,000. C) $87,500. D) $98,000.

Answer: C If the tax system is proportional, then both Curly and Moe will pay the same proportion of their income in taxes. Curly's tax is 8 percent of his income ($12,000/ $150,000 = 0.08). If Moe's tax is 8 percent of his income, then his income must be $87,500 ($7,000/0.08 = $87,500).

The presence of an unregulated negative externality means that the unregulated market equilibrium quantity is: A) efficient. B) smaller than is optimal. C) larger than is optimal. D) greater than demand.

Answer: C In the presence of a negative externality, more than the socially optimal quantity is produced because not all of the cost of producing or consuming the product is reflected in the supply curve.

Your state department of transportation is considering installing toll booths with gates on a quiet section of highway. If this is done, a good that is currently a: A) public good will become a private good. B) nonrival good will become a rival good. C) nonexcludable good will become an excludable good. D) rival good will become an excludable good.

Answer: C Installing tool booths with gates would enable the department of transportation to exclude those who don't pay from using the highway.

The reason the marginal benefit of information curve is downward sloping is because A) some information is useless. B) most information is useless. C) information adds less and less benefit as more of it is acquired. D) there is only so much to learn about a product.

Answer: C The more information a person has, the less beneficial is having still more information

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for$800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month.Moe could obtai n a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for: A) Curly to endure Moe's snoring. B) both to live alone. C) Moe to eliminate his snoring. D) Moe to pay Curly for his discomfort.

Answer: C It would cost Moe $50 per month to stop the snoring.It would cost Curly $150 a month to put up with the snoring. Renting a separate apartment would cost Curly $100 more than splitting an $800 per month rent bill.

Which of the following is the best example of a pure public good? A) Cable television B) A national park C) National defense D) Education

Answer: C National defense is both highly nonrival and nonexcludable

Pure public goods: A) should always be provided by government. B) should always be provided by private firms. C) are frequently provided by the government, and are sometimes provided by private firms. D) are, by definition, goods and services provided by the government.

Answer: C Not all public goods should be provided by the government, and not all goods and services provided by the government are public goods. Nonetheless, public goods are often (but not always)provided by the government.

The use of pollution permits by the government to reduce pollution is: A) theoretically interesting, but untried in the United States. B) workable in theory but unworkable in practice. C) common in several parts of the United States. D) common in the third world.

Answer: C Selling pollution permits is done in certain parts of the U.S.

Lane and Riley are the only two residents in a neighborhood, and they share the same driveway. They would like to have the driveway paved. The value of the paved driveway is $1,500 to Lane and $900 to Riley. Regardless of who pays for the paving both people will benefit from it. What is the most a contractor can charge to pave the driveway and still be assured of being hired by at least one of them? A) $600 B) $900 C) $1,500 D) $2,400

Answer: C Since Lane values a paved driveway at $1,500, this is the most a contractor could charge.

To derive the labor demand curve for a particular market, one should ________ for all the firms in the market. A) vertically sum the value of the marginal product of labor curves B) vertically sum the marginal product of labor curves C) horizontally sum the value of the marginal product of labor curves D) horizontally sum the marginal product of labor curves

Answer: C Since as each firm's labor demand curve is its VMP curve, adding all of the firms' VMP curves will yield the market demand curve.

Statistical discrimination in the automobile insurance industry means that young male drivers who drive ________ will pay ________ rates relative to the claims theygenerate. A) carefully; lower B) recklessly; higher C) carefully; higher D) slowly; lower

Answer: C Since insurance companies cannot tell which young male drivers drive carefully and which drive recklessly, insurance rates will be based on the driving behavior of the average young male.

According to the textbook, the real mean income of the top 5 percent of families increased by ________percentfrom 1980 to 2016. A) 10 B) 13 C) 75 D) 55

Answer: C Since the early 1980s income growth has been much larger for those at the top than for those at the bottom of the income distribution.

In the market for used cars, the lemons model predicts that: A) sellers are less likely to sell low-quality cars than highquality cars. B) buyers are more likely to overstate their reservation price. C) sellers are more likely to sell low-quality cars than high quality cars. D) sellers are more likely to understate the condition of their cars.

Answer: C Since the sellers of high-quality cars will be unlikely to get their asking price in the presence of asymmetric information, they will have little incentive to sell high-quality cars.

Your economics professor has announced that he or she will assign final grades as follows: the top 20 percent of students will get an A, the bottom 20 percent of students will get an F, and everyone else will get a C. You would expect that, as the semester progresses, students who really care about getting an A will: A) study less and less to maintain low standards. B) try to forget about the grading scheme. C) engage in a positional arms race, studying more and more. D) maintain a stable agreement to not study for exams.

Answer: C Students' final grades depend on their relative standing, so students who want an Ahave an incentive to study more and more.

In terms of improving the standard of living of the poor, one drawback on the earned income tax credit (EITC) is that: A) it provides workers with in-kind transfers. B) it's only available to individuals whose incomes are above a certain threshold. C) it provides no benefits to people who are unemployed. D) it gives firms a strong incentive to lay off low-wage workers.

Answer: C The EITC is a policy under which low-income workers receive credits on their federal income tax. Only workers who are employed are eligible to receive the EITC.

The most appropriate level of government to provide public goods is: A) local. B) state. C) dependent on the specific public good in question. D) federal.

Answer: C The appropriate government level at which to provide public goods can vary with the specific goods at hand.

If the government taxes a good that generates a negative externality, then the government: A) will generate tax revenue, but lower economic surplus. B) can increase total economic surplus, but tax revenue will fall. C) can increase total economic surplus and generate tax revenue. D) will neither increase total economic surplus nor generate tax revenue

Answer: C The government can increase total economic surplus and generate tax revenue by taxing goods that generate negative externalities.

The additional output a firm gets from hiring an additional unit of labor is the A) value of the marginal product of labor. B) total product of labor. C) marginal product of labor. D) average product of labor.

Answer: C The marginal product labor is defined as the additional output a firm gets by employing one additional unit of labor.

Which of the following statements about the provision of public goods is true? A) The government should always provide public goods. B) The optimal level of a public good occurs when all taxpayers receive some of the good. C) If the marginal benefit of a public good exceeds its marginal cost, more should be provided. D) The total benefit of a public good should equal its total cost.

Answer: C The optimal amount of any good occurs at the point at which its marginal benefit equals its marginal cost.

The level of income below which the federal government classifies a family as poor is called the: A) relative measure of poverty. B) absolute measure of poverty. C) poverty threshold. D) median income threshold.

Answer: C The poverty threshold is the level of income below which the federal government classifies a family as poor.

Pat goes to the local electronics store to learn about highend audio equipment. The salesperson spends an hour talking with Pat and demonstrating equipment. Pat then leaves and orders an audio system on the Internet for $250 less than the price at the store. Pat's behavior: A) is illegal. B) is a form of statistical discrimination. C) illustrates the free-rider problem. D) illustrates the problem of adverse selection.

Answer: C The store provides valuable information to Pat, but Pat can buy his stereo elsewhere. That is, even though Pat doesn't have to pay for the information, he cannot be excluded from using it.

It will be difficult to find a solution to the problems caused by greenhouse gas emissions because: A) the scientific evidence on the negative effects of greenhouse gas emissions is weak. B) voters are not aware of the problems caused by greenhouse gas emissions. C) an international political organization would be necessary to enforce a solution. D) the technology to reduce greenhouse gas emissions is undeveloped.

Answer: C To the extent that the problem of greenhouse gases is international in scope, an international organization would have to exist to enforce rules for dealing with the problem.

Which of the following investments is part of a positional arms race? A) Watching your friend train for a soccer game B) Renting movies for the weekend C) Studying hard for your economics exam because your professor grades on a curve D) Playing golf for fun

Answer: C Trying to improve your position when relative performance counts is an investment in a positional arms race.

One disadvantage of using the government to provide pure public goods is that everyone receives ________ of the public good and has ________ for the public good. A) a different amount; a different reservation price B) a different amount; the same reservation price C) the same amount; a different reservation price D) the same amount; the same reservation price

Answer: C While everyone receives the same amount of a pure public good (since its nonrival and nonexcludable), the value people place on the public good will differ.

Suppose that the EPA has propose dstrict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, the quantity of diesel fuel sold after imposition of the regulation will: A) remain the same. B) increase. C) decrease. D) decrease only if diesel fuel is a normal good.

Answer: C With conventionally-sloped demand and supply curves, a vertical shift upward in cost will lead to a new equilibrium with a higher price and lower quantity.

Insurance companies practice statistical discrimination because: A) young males are willing to pay more for insurance than other groups. B) the demand for insurance is very inelastic. C) young males are more likely than other groups to generate insurance claims. D) insurance markets aren't perfectly competitive.

Answer: C Young males are more likely than other groups to generate insurance claims, and since the insurance company can't tell whether any given young man is a risky driver, the company simply charges all men more for insurance.

Suppose Frank likes to snack on sugary candy. Frank knows that it's bad for his teeth to eat sugary candy, but he doesn't care. Frank's snacking habits have no impact on anyone other than Frank. In this case, Frank's consumption of sugary candy generates: A) a negative externality. B) a positive externality. C) neither a positive nor a negative externality. D) both a positive and a negative externality.

Answer: C Since Frank's consumption of candy has no impact on anyone other than Frank, it generates neither a positive nor a negative externality. That is, all of the costs and benefits of Frank's snacking habits,fall on Frank

A program under which the government gives all citizens a substantial lump sum payment that is financed by a tax earned income is termed a(n): A) positive income tax. B) in-kind transfer. C) unearned income tax credit. D) negative income tax.

Answer: D A negative income tax is a system under which the government grants each citizen a cash payment, financed by an additional tax on earned income.

If a good can be consumed by one person without reducing its availability to others, then it is a________good. A) nonexcludable B) pure public C) common D) nonrival

Answer: D A nonrival good is a good whose consumption by one person does not diminish its availability to others.

A proportional tax results in: A) a larger percentage of income going to taxes as income rises. B) a smaller percentage of income going to taxes as income rises. C) the same dollar amount going to taxes for all taxpayers. D) the same percentage of income going to taxes for all taxpayers.

Answer: D A proportional tax is one under which all tax payers pay the same percentage of their income in taxes.

Jobs in which there is a higher risk of injury or death will: A) hire risk-averse workers. B) pay less than otherwise similar jobs. C) pay the same as otherwise similar jobs. D) pay more than otherwise similar jobs.

Answer: D All else equal, jobs with less favorable working conditions will pay higher wages.

According to John Rawls, if people had to choose an income distribution without any knowledge of their own talents and abilities, they would likely prefer an income distribution that: A) rewards hard work. B) rewards innate intelligence C) rewards creativity. D) gives everyone an equal share.

Answer: D Because people are risk averse, Rawls argued that most people would prefer to eliminate the risk of having a low income by choosing an equal distribution of income.

Broadcast television is an example of: A) a collective good provided by the government. B) a private good provided by private firms. C) a private good provided by the government. D) a public good provided by private firms.

Answer: D Broadcast television is both nonrival and nonexcludable, so it is a public good, but it is provided by private companies.

When attorneys, accountants and other professionals wear expensive clothing, it: A) only serves as a useful signal of ability if they already have wellestablished reputations. B) does not serve as a credible signal of ability because anyone can wear nice clothes. C) is a waste of money because professionals do not need to signal their ability. D) can serve as a credible signal of ability.

Answer: D Buying expensive clothing is inherently costly, so it is a costly-to-fake signal of success.

Differences in wage rates associated with differences in working conditions are called: A) compensating income differentials. B) equalizing wage ratios. C) conditional differentials. D) compensating wage differentials.

Answer: D Compensating wage differentials is the name given to wage differences that are attributable to difference in working conditions.

An external benefit implies that private markets will provide ________ than the socially optimal quantity, and an external cost implies that private markets will provide ________ than the sociallyoptimalquantity. A) more; more B) less; less C) more; less D) less; more

Answer: D External benefits and external costs are not considered by firms and consumers.Thus,ifagoodinvolvesanexternalcost,thenprivatemarkets will produce too much of the good, and if a good involves an external benefit, then private markets will provide too little of the good.

The optimal number of workers for a perfectly competitive firm to hire occurs when A) total labor cost equals total revenue. B) diminishing marginal productivity is first experienced. C) the wage rate equals the marginal product of the last worker. D) the wage rate equals the value of marginal product of the last worker.

Answer: D Firms will continue to hire workers whenever the value of the marginal product of labor is greater than the wage rate, right up to the point where the value of the marginal product of labor equals the wage rate.

Alex just got a new car. Because Alex obtained full-coverage car insurance, Alex will have an incentive to ________ because of ________. A) drive more cautiously than if he didn't have insurance; moral hazard B) drive more cautiously than if he didn't have insurance; adverse selection C) drive less cautiously than if he didn't have insurance; adverse selection D) drive less cautiously than if he didn't have insurance; moral hazard

Answer: D If Alex has car insurance, then he has less incentive to drive cautiously.

Suppose you are planning to sell your house. You value your house at $200,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $220,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $250,000. Assume that the realtor's opportunity cost of negotiating the sale is $5,000. In this case, how much additional economic surplus is generated by using a realtor to sell yourhouse? A) None, because you value the house at $200,000 no matter who buys it. B) $250,000. C) $200,000. D) $25,000.

Answer: D If you do not use a realtor, total economic surplus from the sale of your house will be $20,000 (= $220,000 -$200,000). If you use a realtor, total economic surplus will be $45,000 (= $250,000 -$200,000 -$5,000). Thus, using a realtor increases total economic surplus by $25,000.

A winner-take-all labor market is one in which: A) large differences in human capital translate into small differences in wages. B) one worker receives all of the available compensation and the rest receive nothing. C) small differences in human capital translate into small differences in wages. D) small differences in human capital translate into large differences in wages.

Answer: D In a winner-take-all market, small differences in human capital will translate into large differences in pay, typically because technology enables these talented individuals to serve broad markets.

Aaron's neighbor Cliff keeps his front yard well manicured and plants beautiful flowers which Aaron enjoys. If local law prevents Cliff from fencing his yard, the beauty of Cliff's front yard is: A) nonrival. B) a private good. C) nonexcludable. D) both nonrival and nonexcludable.

Answer: D One person's enjoyment of the beauty Cliff's front yard does not diminish others' enjoyment of his front yard, and people cannot be prevented from enjoying the beauty of Cliff's yard if Cliff can't build a fence

Which one of the following government actions is intended to generate positive externalities? A) Taxing polluting industries B) Speed limits on the highways C) Requiring autos to meet minimum emissions regulations D) Subsidies for planting trees on hillsides

Answer: D Only the landscape subsidy would generate positive externalities. The others address negative externalities.

4. On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music annoying. In this case, Stan's saxophone playing generates: A) a negative externality. B) a positive externality. C) neither a positive nor a negative externality. D) both positive and negative externalities.

Answer: D Since Stan's music imposes a cost on some, but generates a benefit to others, it generates both positive and negative externalities.

The government subsidizes education because: A) it is a pure public good. B) private firms will not provide education. C) the government can provide a better education than can private firms. D) education is thought to have positive externalities.

Answer: D Since education entails positive externalities, market demand will not reflect all of the benefits of education.

When a negative externality is present in a market, the government should: A) always intervene. B) intervene it if the public supports doing so. C) never intervene. D) intervene if the benefit of doing so exceeds the cost.

Answer: D Since regulation entails costs, the government should only intervene if the benefit of doing so exceeds the cost.

A patch of edible mushrooms growing wild in a national forest is a________good. A) public B) private C) pure public D) commons

Answer: D Since the mushrooms are located in a national forest, they are nonexcludable,, but they are rival because if one person picks them, then they are no longer available to any one else.

The sum of the possible outcomes of a gamble multiplied by their respective probabilities is known as: A) a fair gamble. B) the variance of the gamble. C) a better-than-fair gamble. D) the expected value of the gamble.

Answer: D The expected value of a gamble is the sum of the possible outcomes of the gamble multiplied by their respective probabilities.

The marginal product of the 14th worker is 8 and the firm sells its output for $4 per unit. If labor is the only variable cost, then the value of the 14th worker's marginal product is A) $2. B) $4. C) $12. D) $32.

Answer: D The value of the marginal product of the 14th worker is found by multiplying the marginal product of the 14th worker (8) by the output price ($4).

Suppose Jack just booked a ticket to fly home to see his family for Thanksgiving. When he purchases the ticket, he decides to purchase travel insurance that allows him to get a full refund on his ticket if he's too sick to travel. Knowing this, Jack doesn't bother to take care of himself in the weeks leading up to the trip, reasoning that if he ends up being too sick to travel, then he can always get a full refund. Jack's failure to take care of himself in the weeks leading up to his trip is an example of: A) adverse selection. B) the lemons model. C) a positional externality. D) moral hazard.

Answer: D This is an example of a moral hazard because after Jack insured himself against illness, he made less effort to protect his health.

In the absence of laws requiring individuals to purchase insurance, insurance is most attractive to: A) the poor. B) the wealthy. C) those with lowest likelihood of filing a claim. D) those with the highest likelihood of filing a claim.

Answer: D Those with the highest likelihood of filing a claim stand to gain the most from purchasing insurance.

In markets with incomplete information, middlemen tend to ________ total economic surplusby________. A) reduce; raising prices B) reduce; giving misleading information C) increase; raising prices D) increase; matching sellers with buyers who have high reservation prices

Answer: D Total economic surplus is increased by middlemen being able to match sellers with buyers who have high reservation prices.

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find anotherone for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. For Vinnie,the expected value of searching for another vacation rental is: A)$200. B)$50. C)$45. D)$5.

Answer: D : If Vinnie searches for another vacation rental, there's a 75 percent chance he'll find another one that's the same price and a 25 percent chance he'll save $200. Thus, the expected value of search is: $5 = (0.75)($0) + (0.25)($200) -$45.

In competitive labor markets, ________ demand labor and ________ supply labor. A) firms; labor unions B) labor unions; firms C) workers; firms D) firms; workers

Answer: D Firms demand labor supplied by workers.