Econ Midterm 3
The formula for calculating how long it will take a sum of money to double is:
70/rate of interest
What is the individual mandate component of the Patient Protection and Affordable Care act?
A rule that requires, with limited exceptions, that every resident of the country must enroll in a health insurance plan or pay a fine.
Tariff
A tax on imports
T or F: International trade improves the well-being of everyone
False
T or F: International trade is a key cause of child labor. As a result, international trade should be restricted to eliminate child labor
False
T or F: International trade is unwise during a recession when unemployment is high.
False
T or F: Trade between two countries will make one country better off and the other worse off.
False
Which of the following examples of possible government mandates best illustrates the concept of meddlesome preference?
Prohibiting the public library from stocking books by authors the mayor does not like.
Financial markets attract both everyday investors, e.g., people who invest money in a 401(k) retirement account, and people who invest in asset bubbles. Which statement correctly characterizes the general difference between the two types of investors?
Participants in an asset bubble pay more than an item is reasonably worth, whereas everyday investors do not.
Which of the statements about piece-rate pay are true?
Piece-rate pay tends to raise issues of distrust Piece-rate tends to increase workers' average productivity.
Suppose you are looking at two investment portfolios. Portfolio A has an expected annual return of 10%, and Portfolio B has an expected annual return of 5%.
Portfolio A
Meddlesome Preferences
Preferences about what other people do, even when those other people don't interfere in any direct way with what you do
Why are network goods usually sold by monopolies or oligopolies?
Pressure to be compatible
Ricky wants the position of the worst-off person in society be as good as possible.
Rawls' max principle
A tournament compensation scheme is one in which the payment is based on:
Relative performance
Quota:
Restrictions on the quantity of goods that can be imported
investors face various choices regarding what they can invest in, and the choices carry varying amounts of risk. For example, stock prices are much more volatile than bond prices. What is the typical reason why investors would choose to put their money into an investment with higher risk rather than one with lower risk?
Riskier investments typically have higher returns.
Includes the stock prices of five hundred U.S. firms.
S&P 500
Budget constraint
Shows all the consumption bundles a consumer can afford, given the consumer's income and prices.
An expensive action taken to reveal information is called
Signaling
Which of the following is a network good?
Software used to create and read documents.
Cultural goods and paternalism
Some governments use tax dollars to subsidize special programs and projects, even if citizens choose to spend their money on things other than those programs and projects
Meddlesome preferences
Sometimes, a person's opinion about other individuals' actions can lead the person to seek change
A budget line slopes downward because, to buy more of Good 1, a consumer has to buy less of Good 2.
TRUE
Along a particular budget line, the prices faced by the consumer and the consumer's income are held constant.
TRUE
The budget line depicts the combinations of two goods a consumer can buy given her income and the current prices.
TRUE
Although both tariffs and quotas are tools used to restrict or reduce trade, which of the statements best describes their differences?
Tariffs are a tax on imported goods, and quotas are limits on the number of imported goods.
Economists are often confronted with questions that cannot be answered by the market alone, and which require decision-making based on moral and ethical beliefs. Please classify the questions into those that are answerable by market forces and those that are unanswerable by market forces. Should children be allowed to work if they need to help support their families?
Unanswerable
T or F: In the aggregate, international trade is beneficial
True
T or F: International trade leads to lower prices and increased variety for consumers in the importing nation
True
T or F: One of the proposed solutions to child labor is to provide subsidies to families with children who are currently attending school. The education of these children in poverty will have long-term benefits
True
T or F: The majority of children in the work force work in agricultural industries
True
T or F: The percentage of children in the work force in a country is inversely related to that country's real GDP.
True
Economists are often confronted with questions that cannot be answered by the market alone, and which require decision-making based on moral and ethical beliefs. Please classify the questions into those that are answerable by market forces and those that are unanswerable by market forces. How many immigrants should be allowed to enter the US annually?
Unanswerable
Economists are often confronted with questions that cannot be answered by the market alone, and which require decision-making based on moral and ethical beliefs. Please classify the questions into those that are answerable by market forces and those that are unanswerable by market forces. Should taxes increase proportionately with wealth?
Unanswerable
Statistical discrimination
Using information about group averages to make conclusions about individuals
Features of Markets for Network Goods
Usually sold by monopolies or oligopolies The "Best" product may not always win Competition is "for the market" instead of "in the market."
Bobbi contends that only the need to maintain incentives should limit the amount of wealth the government takes from rich individuals to provide to the poor.
Utilitarianism
Dana argues that the focus of the government's poverty alleviation programs should be to maximize the total benefit to all people
Utilitarianism
wages adjust until similar jobs have similar:
Wages
Carefully designed incentives can narrow the gap between what you want and:
What you pay for
Direct effects:
When having more side-one users increases the value of the good to other side-one users. Ex. Grandma wants to be on Facebook if you are on Facebook.
Indirect effects
When having more side-one users increases the value of the good to side-two users, and having more side-two users increases the value of the good to side-one users. Ex. More riders increase the value to drivers, which increases the value to riders.
Asymmetric information
When one party to an exchange has more or better information than the other party.
What is a long tail risk?
a perceived high risk that has dire consequences if it defaults, but provides high payoffs otherwise
Nash Equilibrium
a situation in which no player has an incentive to change his or her strategy unilaterally
Indicate whether each of the following items is or is not a network good. a. a favorite pair of shoes b. Twitter c. your cell phone d. your personal slice of pizza e. the Internet
a. Not a network good b. Network good c. Network good d. Not a network good e. Network good
Who benefits from a tariff?
domestic producers; a tariff increases price, which increases producer surplus
Identify whether the given items are examples of imports, exports, or neither. Assume the United States is considered the domestic country. Heath lives in the United States and purchases a video game produced in Japan.
import
Which is NOT an effect of a tariff?
increased demand
Investment in human capital is best described as
investing in education and training to improve a worker's productivity.
Suppose that many people in New York City find it unappetizing to smell raw meat, so the city bans the sale or consumption of all rare steaks.
meddlesome preferences.
A Chinese consumer purchases a television produced in China.
neither
Normative Economics
recommendations or arguments about what economic policy should be
Using information about group averages to make conclusions about individuals is called
statistical discrimination
Canada is considering imposing a tax on imports of Chinese solar panels. This action would be best described as a
tariff
An approach that looks for patterns in stock and asset prices is called:
technical analysis
Suppose Martha consumes tofu and peanut butter. Which describes Martha's marginal rate of substitution for tofu and peanut butter?
the amount of tofu she needs in order to consume one less unit of peanut butter while remaining just as well off
Protectionism
the economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers
Marginal product of labor (MPL):
the increase in a firm's revenues created by hiring an additional laborer
In which industries are firms more likely to face a contestable market?
the low‑cost airline industry
Googol and Visagetext are two social media platforms. When Googol was launched, many reviewers claimed that it was better than Visagetext and advised users to switch. Today, Visagetext continues to be the leader in the sector, despite rave reviews for Googol.
the superior product not always winning. a contestable market. competition to dominate the market.
The fear of getting an inferior product can be reduced through:
warranties
Moral Hazard:
when an agent tries to exploit an information advantage in a dishonest or undesirable way
Using the rule of 70, how many years will it take an investment to double if the return is 6 %? Round your answer to two decimal places.
11.67
Tournament
A compensation scheme in which payment is based on relative performance
Indifference curve:
A curve connecting all combinations of goods, or consumption bundles, that give the consumer the same utility.
Compensating differential:
A difference in wages that offsets differences in working conditions
Miles is three years old and his grandparents have given him money to spend at the toy store as a birthday present. Miles' number one favorite thing to play with is building blocks. Assume that Miles' utility will increase by 100 units if he purchases a new set of building blocks and and it will cost him $50. His second favorite thing to play with is fire trucks. Fire trucks cost $20 and each new fire truck improves Miles' utility by 80 units. His third favorite toy is trains. Trains improve his utility by 15 units and cost $5 each. Miles does not have to spend all of his money at once, but wants to get as much happiness as possible from his money. If Miles buys only one toy, which should he buy to maximize his utility? Which relationship between marginal utility (MU) and price (P) indicates that a consumer is maximizing his or her utility regarding spending on two goods?
A fire truck MUx/Px = MUy/Py
Platform Firm
A firm that helps two (or more) sides of a market to connect with one another for mutual gain
Network good:
A good that increases in value to a given person the more other people use the good
Contestable market
A market in which the threat of potential competition is enough to make the market behave competitively
Which of the following is most likely to operate in a contestable market?
A pharmaceutical company (Not many competitors but will still act in a competitive manner because the market is contestable)
Credible promise:
A promise that the promissory has an incentive to keep
Suppose the United States restricted the number of cars that could be imported to 50,000 per month. This is an example of:
A quota
An experienced salesman versus an inexperienced salesman:
Ability Risk
A professional athlete versus an amateur:
Ability risk
Students competing on an achievement test:
Ability risk
When there are two equilibria in a network market, the winner is usually decided by:
Accidents of history
Chronically ill person opts to purchase health insurance without disclosing his or her illness.
Adverse selection
People who might need to retrieve part or all of their investment relatively soon, such as the elderly, are often advised to invest a higher percentage of their money in bonds, and thus a lower percentage in stocks, than people who can leave the investment untouched for decades. We know, however, that bonds typically have a lower rate of return than stocks. Why would people be advised to invest in assets that yied lower average returns?
Although stocks have a higher rate of return in the long run, they are much more volatile, or riskier, in the short run. Therefore, there is a higher probability that the value of the stocks will be less than the original value of the investment for people who might need to withdraw the investment in the short run.
A firm hiring a new employee from a list of candidates who responded to a posting on Monster.com
An example of asymmetric information
A firm selling car insurance
An example of asymmetric information
A person purchasing a used Hyundai Sonata
An example of asymmetric information
Signal
An expensive action that is taken to reveal information
Exploitation
An individual in a more opportune position takes advantage of another individual for his own economic gain
Human Capital:
Tools of the mind; the stuff in people's heads that makes them productive
Economists are often confronted with questions that cannot be answered by the market alone, and which require decision-making based on moral and ethical beliefs. Please classify the questions into those that are answerable by market forces and those that are unanswerable by market forces. How many toy ducks will be sold at a price of $4?
Answerable
Economists are often confronted with questions that cannot be answered by the market alone, and which require decision-making based on moral and ethical beliefs. Please classify the questions into those that are answerable by market forces and those that are unanswerable by market forces. How much profit will a firm make if it prices its products at $2 above cost?
Answerable
One benefit of stock markets is that they:
Are a source of capital for businesses
Judi has $50 to spend. If movies cost $8 and books cost $5, Judi can purchase five movies and three books.
False
Suppose you are conducting a research study of the impact of Facebook's acquisition of Instagram in 2011 on the digital social network market. Your observation of the industry shows that Facebook controlled 90%90% of the social networking market after the merger.
Because Facebook is a network good, market share is less important in making a decision than the ability of other firms to contest the market.
Labor market discrimination
By employers Customers, employees, government
Child Labor
By making a country poorer, trade restrictions may increase the number of child workers Studies show that more openness to trade increases income and reduces child labor. The real cause of child labor is poverty, not trade.
In general, which of the statements is most likely to occur as a result of the proposed tax on imported solar panels?
Consumers in Canada will face higher prices for solar panels.
Index of the stock prices of thirty large firms.
DIJA
The law of diminishing marginal utility means that that as person receives more of a good, the added utility from each additional unit
Decreases
How to pick stocks
Diversify, avoid high fees, compound returns build wealth, there is no return without risk
Effects of a tariff
Domestic suppliers respond to the higher price by increasing production. Domestic consumers respond to the higher price by buying less. Imports decrease. Government revenue = tariff amount x quantity of imports
The Devil You Know barbecue buffet restaurant in Durham, North Carolina - also the home of Duke University - charges a higher price to patrons wearing clothing colored in light blue - the color of Duke's arch-rival, the University of North Carolina at Chapel Hill - instead of the dark blue favored by the owner. Anyone wearing clothes that directly connect the wearer to UNC is not served at all.
Fair and equal treatment
Diminishing marginal utility
Each additional unit of a good adds less to utility than the previous unit did.
A luxury-car salesman versus a low-cost-import salesman:
Environmental risk
A new-car salesman versus a used-car salesman:
Environmental risk
Boat salesmen during a drought:
Environmental risk
Surrogacy is when in vitro fertilization is used by a couple in order to have a child using a third party, i.e., a surrogate woman. Suppose that Jack and Diane, an American couple, arrange through the Internet to have Felicia, a Canadian woman, act as their surrogate. They pay her only $50$50 for the whole process, which can take more than a year, and she agrees because she is in desperate need of money.
Exploitation
A farmer in Iowa sells corn to a food processing plant in China.
Export
Chevron drills for oil in the United States and sells this oil to refineries in Brazil and Mexico.
Export
The budget line shows possible production bundles.
FALSE
Coordination game:
Game in which the players are better off if they choose the same strategies than if they choose different strategies and there is more than one strategy on which to potentially coordinate
If Kay's goal is to raise the grade average in the class, which of the incentive schemes would not help Kay achieve this result?
Grade on an absolute scale
Which statement is true?
Higher fees charged by mutual funds do not usually result in higher returns for the investor.
Risk-return trade-off:
Higher returns come at the price of higher risk
The optimal consumption bundle is on the
Highest indifference curve still on the budget constraint
Principal - agent problem
How can a principal incentivize an agent to work in the principal's interest even when the agent has information the principal does not?
Using one of the schemes given, Kay's class gets the highest average grades in the school. However, her principal fires her instead of rewarding her, as Kay's solution did not do anything to improve her class' comprehension of the material. What does this say about incentives?
Incentive schemes need to be carefully designed to get what you actually want.
Which statement best describes the chances that an everyday investor will accidentally become a participant in an asset bubble?
Investors might become unwitting participants in an asset bubble if the true value of the asset is unknown even to experts.
Which scenario describes the operation of a tariff?
Ireland taxes the import of potatoes in order to keep domestic farmers in business.
A firm that is going to promote one of two internal candidates for a management position
Is not an example of asymmetric information
The market supply of labor:
Is upward sloping
Rawls' maximum principle
Justice requires maximizing the benefits going to society's most disadvantaged group
When U.S. tariffs are decreased, imports increase and U.S. jobs are lost. What else happens to offset the job losses in that industry?
Lower prices increase consumer spending on other goods.
Fair & Equal Treatment
Many purely rational decisions in economics may go against this principle, which seeks to treat all people the same, regardless of any difference that might exist between them.
The change in utility from consuming one more unit is called
Marginal utility
Although child labor was quite common in the early 20th century, many social activists believed that child labor was wrong and advocated for policies banning its use.
Meddlesome preferences
Includes the stock prices of firms whose shares are traded "over-the-counter."
NASDAQ Composite
Veronica lives in Tennessee and buys an orange grown in Florida.
Neither
A Nash equilibrium occurs when
Neither player has an incentive to switch their strategy given what the other player is doing.
Anti-trust policy may be different between a market for network goods and non-network, or traditional, anti-trust policy. What tension causes this?
Network goods are often produced by a monopoly or an oligopoly, but the low level of competition in the market in the market is balanced by the high level of competition for the market.
Which choice is not a feature of markets for network goods?
Network goods do not have switching costs.
A person buying a new Toyota Camry
Not an example of asymmetric information
A student choosing between his two favorite pizza spots for lunch
Not an example of asymmetric information
Craig doesn't think equal income distribution is necessary for a just a society as long as all transactions are legal and voluntary
Nozick's entitlement theory of justice
Hector believes that the government should not tax the wealthy in order to support the poor.
Nozick's entitlement theory of justice
A small change in how decisions are presented that brings about a big change in outcomes is called a(n):
Nudge
Adverse selection:
Occurs when an offer contains negative information about the product being offered
Free rider
One who consumes but does not pay
Studies show that passive investing:
Outperforms most mutual funds
Costs of protectionism
The US Gov restricts sugar imports As a result, US consumers pay 50%-100% more than world price TWO ASSUMPTIONS: 1. The tariff is so high that it eliminates all sugar imports. 2. If we had complete free trade, all sugar would be imported
Which of the following illustrates moral hazard?
The auto mechanic is exploiting an information advantage; this is an example of moral hazard.
Marginal Utility
The change in utility from consuming an additional unit. MUA is the marginal utility of good "A".
Entitlement theory of justice
The distribution of income in a society is just if property is justly acquired and voluntarily exchanged
In their pursuit of profits, entrepreneurs act in ways that reduce discriminatory wage differentials. There are times, however, when the profit motive is not powerful enough to overcome wage differentials that arise from discrimination. Which of the statements exemplifies one of the most important limits to a competitive market's ability to eliminate discriminatory wage differentials?
The government bans the hiring of workers with brown eyes.
Utilitarianism
The idea that the best society maximizes the sum of utility
As the wage falls and more workers are hired, they are assigned to less important tasks. This means that as the wage falls, so does:
The marginal product of labor
Bertrand is an avid supporter of protectionism. His primary political principle is the idea that the United States imports too many foreign goods. He dislikes that many of his clothes are made in China instead of the United States because clothing is a basic need, even for babies. He would prefer that the United States drill in the Arctic National Wildlife Refuge (ANWR) instead of importing oil from Kuwait because oil powers our military's tanks and planes.
The national Security Agreement
Efficient markets hypothesis:
The prices of traded assets reflect all publicly available information
Myra's dentist identified 10 cavities that need to be filled by the dentist. She decided to get a second opinion, and only two cavities needed treatment. This is an example of
The principal- agent problem.
Marginal rate of substitution
The rate at which the consumer is willing to trade one good for another and remain indifferent. MRS = the slope of the indifference curve
Assuming insurance company either never discovers deception or that it cannot change the policy after discovering the deception, what is the result?
The rest of the insured cover the cost.
Corporate culture:
The shared collection of values and norms that govern how people interact in an organization
THe marginal rate of substitution is equal to:
The slope of the indifference curve.
Buy and hold:
To buy stocks and hold them for the long run, regardless of what prices do in the short run
What is the primary reason for the individual mandate
To make sure healthy people do not opt out and reduce the risk pool for insurance companies
Optimal Consumption Rule
To maximize utility, a consumer should allocate spending so that the marginal utility per dollar is equal for all purchases.
Indicate whether or not each scenario necessarily exemplifies discrimination in the labor market. a. A man is promoted instead of a woman. b. It is observed that men and women make different salaries. c. A woman is promoted instead of a man. d. All women are prohibited from applying for a promotion. e. Race is the basis to "break a tie" between two qualified candidates. f. A man receives a higher salary than a woman with identical human capital characteristics and work history.
a.does not necessarily exemplify discrimination b.does not necessarily exemplify discrimination c.does not necessarily exemplify discrimination d.exemplifies discrimination e.exemplifies discrimination f.exemplifies discrimination
Piece rate
any payment system that pays workers directly for their output
Stock Market indices
are average stock prices for a group of companies meant to measure a section of the stock market.
Golden Care provides lawn services in residential areas. They advertise by paying workers to put flyers on front doorknobs where residents are most likely to see them. Initially, these workers were paid based on how many flyers they distribute. After a few days of noticing flyers attached to mailboxes, side mirrors of cars, and dropped in gutters, Golden Care decides to change the incentives to improve the quality of the work performed.
compensation based on the number of new customers who respond to flyers
Many Japanese people view rice as the cornerstone of their national identity. Despite declining domestic consumption of rice per capita, lower yield compared to other rice-producing nations, and higher production costs, the Japanese government has, with some exceptions, traditionally supported the rice-production industry. This support includes both subsidies funded by taxes collected from a citizenry that has increasingly tenuous links to the countryside, and import tariffs and quotas. Which concept best corresponds to the Japanese government's protection of its rice-production industry?
cultural goods and paternalism
The German government annually spends 8 million euros to support the domestic cuckoo clock industry, which does not earn nearly that much in yearly revenue.
cultural goods and paternalism.
Positive economics
describing, explaining, or predicting economic events
