ECON 351 - FINAL

Which of the following statements is a reason that the cost of a college education is greater for the low-productivity group than for the high-productivity group?--

All of the above - They may have to pay for tutoring services or other extra help to accomplish the same educational goal. - They may have to take remedial classes, which would increase the length of time it takes to accomplish the same goal. - Even if they take no remedial classes, they may have to spend more time studying for each class, and the value of their leisure time needs to be considered in the calculation. -Based on previous signaling, such as from their high school grades or SATs, they may receive less merit-based financial assistance, and thus be under a greater financial strain during their college years.

Consider the following two examples: I - Unhealthy people are more likely to want health insurance; II - A consumer with complete medical insurance may visit the doctor more often than he would if his coverage were limited. The two examples best describe:

Example I is Adverse Selection; Example II is Moral Hazard.

Consider the following statements: I - A good is nonrival when the marginal cost of its provision to an additional consumer is zero II - A good is nonexclusive when people cannot be excluded from consuming, so that it is difficult or impossible to charge for its use.

I and II are true

Use the following statements to answer this question: I. The efficient amount of recycling of scrap materials is the amount that equates the marginal social cost of scrap disposal to the marginal cost of recycling. II. The efficient amount of recycling of scrap materials occurs when society recycles all recyclable wastes.

I is true, and II is false.

Which of the following is a negative externality connected to attending college?

The fact that the people in the next room play loud music at hours you want to sleep.

Managersʹ pursuit of which of the following objectives would NOT lead to a principal-agent problem in a corporation? --

The maximum possible profit for the corporation

The efficiency wage is--

a wage at which there is a positive amount of unemployment. Individuals who are fired for shirking will be penalized with a period of unemployment.

If households pay a fixed annual fee for trash disposal--

households have no incentive to cut back on the amount of garbage they generate.

The problem of adverse selection in insurance results in a situation in which --

unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.

How many of the following options are best described as examples of adverse selection? I - Lemons problem in the market for used cars II - Risk Averse individuals in the market for extra health care coverage III - Risk Averse drivers purchasing extra auto insurance IV - The fact that managers cannot directly observe the actions of workers

1 option - Option 1 is an adverse selection - 2 & 3 are consumer preferences - 4 is a moral hazard

Suppose California's government decides to outlaw the sharing of individuals' credit histories as an illegal invasion of privacy. As a result of this action we would expect the I - cost of borrowing money to decrease II - number of loans to unworthy credit risks to increase III - problems of asymmetric information to become more severe

II and III are true, I is false.

Use the following statements to answer this question: I. Based on the principal-agent framework in economics, we know that the lack of incentive compatibility may arise in private firms but not in public agencies or government bureaus. II. The key problem in principal-agent situations is the principalʹs fundamental inability to oversee or supervise the agent.

II is true and I is false

Good X is nonexclusive and non-rival. Therefore, we can conclude that-- I - Consumers do not value good X; II - Consumers are willing to pay a high price for good X; III - In this market, voluntary private arrangements are usually inefficient.

III is true, I and II are false.

Which of the following is a negative externality connected to automobile transportation?

In an accident, a person who chooses not to wear a seat belt becomes an object moving around the inside of the car, possibly hitting other, belted-in, passengers with lethal force.

Over the past several years, the federal government has rescued a few financially distressed banks and other large private companies, and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem. However, critics of these interventions argue that these actions generate a moral hazard problem. Why? --

Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure.

Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers?--

Modify all cars to remove the driverʹs seat belt and the steering wheel air bag.

As part of the most recent collective bargaining agreement with state employees, a state government must offer dental insurance at ʺreasonable, nonprofit rates.ʺ The state plans to self-insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $300 per year for corrective dental work and $80 for routine checkups. Administrative costs are expected to average $20 per family. The collective bargaining agreement dictates that the planʹs coverages and rates be fixed for a period of three years. The auditor considers the choice of the plan to be extremely important. Consequently, the auditor has asked you to evaluate the three proposals listed below in terms of their propensity to result in adverse selection and/or moral hazard. Proposal 1 would charge a $400 premium with no deductible. Coverage is extended to preexisting conditions, but to cover the nondeductible clause, routine checkups are not covered. Proposal 2 charges a $200 premium with a $200 deductible. The plan does not cover preexisting conditions, but does cover routine office visits. Proposal 3 charges a $150 premium with a $150 deductible. This plan doesnʹt cover preexisting conditions or routine checkups. The collective bargaining agreement dictates that participation in the plan must be at the employeeʹs option.

Plan 1: creates adverse selection because of the pre-existing condition coverage; people with conditions would choose this, however, it would discourage routine check-ups which could make issues worse creating a moral hazard Plan 2: best plan; reduces some adverse selection because of the lack of coverage in pre-existing conditions coverage, but the moral hazard would be eliminated as the routine check-ups would keep conditions in check Plan 3: also minimizes adverse selection, but makes moral hazards worse with the exclusion of routine check-ups

A positive externality is shown by a marginal social benefit (MSB) curve that is--

above and to the right of the demand curve for the good that generates it

When firms participate in group health insurance for all employees, it might reduce health insurance premiums because it reduces the_______ problem--

adverse selection

Suppose that the production of energy by Coal Power Plants produces pollution, and this market is regulated by a system of transferable permits. If consumers increase their demand for energy, then we should expect--

an increase in the price of transferable permits If there is an increase in the demand for energy, then the Coal Power Plants will want to produce more energy to meet the demand. However, the production of energy generates pollution, and the Power Plants need permits in order to pollute. Consequently, there is a higher demand for transferable permits and the price of these permits goes up.

Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D--

and quantity of R&D are both below the optimal level

When costly new technologies make cleaner production possible--

emissions are more likely to fall under a system of fees, than under a system of transferable emissions permits unless the government bought back some of the permits

The ʺefficiency wageʺ is the wage at which

employees have no incentive to shirk

Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true? The --

fraction of high quality appliances will be less than with perfect information.

In the insurance market, ʺmoral hazardʺ refers to the problem that--

individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before.

Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price--

is too low to be optimal, and the equilibrium quantity is too high

When California makes car insurance mandatory for all drivers, it --

may lower rates for all drivers to the extent that it keeps low-risk drivers in the pool.

The principal-agent problem in corporations exists because the managers of a firm --

may pursue their own goals even when the result is lower profit for owners.

Traditionally, the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood. However, the government has recently denied requests to rebuild some homes that were situated in flood-prone areas. This action represents an attempt to __________ the moral hazard problem associated with building private homes in risky areas.--

mitigate

If individuals are paid the wage at which the supply of labor is equal to the demand for labor--

no unemployment exists, and workers have an incentive to shirk.

Externalities are --

not reflected in market prices, so they can be a source of economic inefficiency

The optimum level of pollution emissions--

occurs where the marginal external cost equals the marginal cost of abatement (such as the tax or fee)

The principal-agent problem of ownership vs. control of the corporation arises when owners and managers --

pursue different objectives

The principal-agent problem of ownership vs. control of the corporation tends to get worse, when --

stock in the company is very diffusely held, with no individual or group having control over a large block of stock

The problem of adverse selection in health insurance leads to a situation in which --

the percentage of the premium-paying population that is unhealthy rises, squeezing healthy individuals out of the market.

When new technologies make cleaner production possible--

the price of transferable permits falls