ECON 351 Section 4 Exam Conceptual Questions

Externalities A) are not reflected in market prices, so they can be a source of economic inefficiency. B) do become reflected in market prices, so they can be a source of economic ineffi- ciency. C) are not reflected in market prices, so they do not adversely affect economic effi- ciency. D) do become reflected in market prices, so they do not adversely affect economic efficiency. E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

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

When costly new technologies make cleaner production possible, A) 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. B) emissions would fall under a system of permits, but would not fall under a system of fees unless the government raised them. C) the price of transferable permits would rise. D) the quantity of transferable permits would rise. E) the quantity of transferable permits would fall.

A) emissions are more likely to fall under a system of fees

The provision of an education in public school is A) exclusive and rival. B) exclusive and non-rival. C) nonexclusive and non-rival. D) nonexclusive and rival. E) a public good, regardless of exclusivity and rivalness.

A) exclusive and rival.

A consumer or producer who does not pay for use of a nonexclusive good but expects others to pay is known as a: A) free rider. B) price setter. C) fringe element. D) none of the above

A) free rider.

Having a refundable deposit for recyclable material A) raises the marginal private cost of disposal. B) raises the marginal social cost of disposal. C) lowers the marginal private cost of disposal. D) lowers the marginal social cost of disposal. E) does not affect disposal costs.

A) raises the marginal private cost of disposal.

A positive externality is shown by a marginal social benefit (MSB) curve that is A) above and to the right of the demand curve for the good that generates it. B) below and to the left of the demand curve for the good that generates it. C) above and to the left of the supply curve for the good that generates it. D) below and to the right of the supply curve for the good that generates it. E) positively related to both the supply curve and the demand curve for the good that generates it.

A, above and to the right

In the economic literature on principal-agent problems, the ________ is the person who takes some action, and the ___________ is the person whom the action affects. A) agent, principal B) principal, agent C) Both statements describe the agent. D) Both statements describe the principal.

A, agent, principal

The "efficiency wage" is the wage at which A) employees have no incentive to shirk. B) employees have an incentive to do the optimal (positive) amount of shirking. C) the cost of looking for work is equal to the value of the leisure time for the unemployed individual. D) there is no unemployment. E) there is only frictional unemployment.

A, employees have no incentive to shirk

The principal-agent problem in corporations exists because the managers of a firm A) may pursue their own goals even when the result is lower profit for owners. B) may know how to operate the business better than absentee owners do, and yet not be allowed to. C) are generally unable to do the monitoring that would result in the firm's avoiding moral hazard problems. D) are generally unable to do the monitoring that would result in the firm's avoiding adverse selection.

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

The efficiency wage is A) a wage at which there is no unemployment, and shirking workers are not counted in the pool of total labor. B) 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. C) a wage at which there is a shortage of labor. Firms who fire a worker for shirking will be able to hire another one easily. D) the wage that is paid to high-quality, non-shirking workers. Other workers are paid the market-clearing wage. E) the wage that subtracts the cost of shirking from the market-clearing wage to determine that which is really paid.

B, 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

The efficiency wage is A) lower than the market-clearing wage, to penalize shirking. B) higher than the market-clearing wage, to penalize shirking. C) lower than the market-clearing wage, to allow managers the resources to monitor shirking. D) higher than the market-clearing wage, to reward workers for informing on others who shirk. E) lower than the market-clearing wage, because of shirking done by managers.

B, higher than the market-clearing wage, to penalize shirking

If individuals are paid the wage at which the supply of labor is equal to the demand for labor, A) no unemployment exists, and workers have no incentive to shirk. B) no unemployment exists, and workers have an incentive to shirk. C) some unemployment still exists, but workers have no incentive to shirk. D) some unemployment still exists, but managers can tell whether or not workers are shirking.

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

Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price P paid by consumers A) and output are too low to be optimal. B) and output are too high to be optimal. C) is too low to be optimal, and equilibrium quantity is too high. D) is too high to be optimal, and equilibrium quantity is too low. E) is optimal, but there is an excess supply.

C) is too low to be optimal, and equilibrium quantity is too high

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, A) the marginal social cost curve is above and to the right of the demand curve. B) the marginal social cost curve is below and to the left of the demand curve. C) the marginal social cost curve is above and to the left of the supply curve. D) the marginal social cost curve is below and to the right of the supply curve. E) there is a gap between quantity supplied and quantity demanded in equilibrium.

C, the marginal social cost curve is above and to the left of the supply curve

Common property resources like fish stocks in open waters tend to be over- utilized because: A) the marginal social cost is less than the private marginal cost. B) the marginal social cost is always equal to the private marginal cost. C) the marginal social cost is greater than the private marginal cost. D) none of the above

C, the marginal social cost is greater than the private marginal cost.

How do you solve a game matrix with three options and non-optimal probability strategies?

Compute the expected utility for each option for the first player (if the second player is the one using probabilities). Then, see which option has the highest utility. If it is one, play that with 100% certainty. If several are tied, play them with any combination, and exclude the other less profitable options.

Which of the following does not represent an example of adverse selection? A- unhealthy people are more likely to want health insurance B - unskilled drivers purchasing extra auto insurance C - lemons problem in the market for used cars D - risk averse consumers choosing to buy extra health care coverage E - all options above represent adverse selection problems

D - risk averse consumers choosing to buy extra health care coverage

[59] The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because A) people will buy fewer clothes that need dry cleaning than they otherwise would have. B) people will develop substitutes for dry cleaning that are wasteful. C) firms will be induced to leave the industry because of artificially high costs. D) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price. E) firms whose average private cost exceeds the price will exit (or fail to enter) the dry cleaning industry even though their average social cost is less than price.

D) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price.

When new technologies make cleaner production possible, A) emissions fees rise. B) emissions fees fall. C) the price of transferable permits rises. D) the price of transferable permits falls. E) the quantity of transferable permits falls.

D) the price of transferable permits falls

The problem of adverse selection in insurance results in a situation in which A) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies B) people choose too much coverage because they do not understand the complex information in the policies C) people choose to little coverage becasue they do not understand the complex information in the policies D) 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 E) healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people aware from the market even though they are the ones who need it most

D) 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

Assume that a particular state has decided to outlaw the sharing of individuals' credit histories as an illegal invasion of privacy. As a result of this action we would expect the A) cost of borrowing money to rise B) number of loans to unworthy credit risks to rise C) problems of asymmetric information to become more severe D) all of the above E) none of the above

D, all of the above

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? A) Government oversight of rescued firms is typically based on limited information, so the outcome is economically inefficient. B) Rescued firms will have a difficult time buying insurance in private markets, so the government will also have to insure the firm against losses from fire, theft, etc. C) Managers have more information about the financial strength of their firm than government officials, so the rescue attempts may be unnecessary. D) Managers may be more likely to invest in risky projects if they believe the gov- ernment will save the firm in case of failure. E) Both A and C are correct.

D, managers may be more likely to invest in risky projects if they believe the government will save them in case of failure

Access to the movie "Casablanca", showing in a half-empty theater, is A) a rival good because other movies are available in other theaters. B) a rival good because it is used up as it is seen. It is not enjoyed as a whole all at once. C) a rival good because individuals were willing and able to pay a positive amount to get in to the theater. D) a non-rival good because no other movie is available in that theater. E) a non-rival good because when a new viewer enters the theater, there is not less of the movie for everybody else.

E) a non-rival good because when a new viewer enters the theater, there is not less of the movie for everybody else

How do you solve a sequential game?

First, find the second player's best responses. Then, of those best responses, pick player one's best response.

Use the following statements to answer this question: I. A player must have at least one dominant strategy in a game. II. If neither player in a game has a dominant strategy, then there is not equilibrium outcome for the game.

I and II are false.

Consider the following statements: I - According to the Coase Theorem, the allocation of property rights does not affect the final payoff of each player since the outcome will be efficient when bargain is costless. II - A good is nonrival when the marginal cost of its provision to an additional consumer is zero. III - A good is nonexclusive when people cannot be excluded from consuming it, so that it is difficult or impossible to charge for its use.

II and III, I is false

Good X is nonexclusive. 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

What is another way to find the optimal tax (i.e the MEC)?

MSC - MPC

When does cooperation happen when a game is finite?

Never, the entire thing unravels

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

One option only (lemons problem)

Consider two distinct markets, the market for good X and the market for good Y. The consumption of good X generates a positive externality, while the production of good Y generates a negative externality. Define Qsoc as the socially optimal quantity in each market, and Qpc as the outcome under perfect competition (without government intervention). In the market for good X we find that ______, and in the market for good Y we find that _______.

Qsoc>Qpc, Qsoc<Qpc

When drawing a DWL graph, which lines should you draw?

The MSC and MV

What is the optimal subsidy for positive externalities?

The marginal external benefit (MEB) at the socially optimal quantity.

In a game, what is the socially optimal output?

The option with the highest joint payoff (the box with the highest total)

What does it mean to have a solution in pure strategies?

Two players are best responding to each other within the game matrix. The nash equilibrium can be found in a single cell in the game matrix.

A dominant strategy can best be described as

a strategy that is optimal for a player no matter what an opponent does

The so called Obamacare is a complex legislation aimed to change the healthcare system. One of the main changers is the requirement that all Americans must purchase health insurance. The government argues that this will reduce health insurance premiums because it reduces the ________ problem

adverse selection

When asymmetric information problems drive high quality products from a market, we refer to this situation as

adverse selection, and a lemons problem

Consider the entry-deterrence game below. The potential entrant moves first, and would have to spend some amount in sunk costs to enter the market. In this game, the Incumbent monopoly has:

an incentive to threaten low prices, which wouldn't be credible (low prices = war).

The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because

firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price

Public goods are non-rival and nonexclusive. Because of their intrinsic nature, public goods generate a

free rider problem

The efficiency wage is

higher than the market-clearing wage, to penalize shirking

In the insurance market, moral hazard refers to the problem that

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

When sellers have more information about products than buyers do, we would expect

low-quality goods to drive high-quality goods out of the market

In California, consumers pay california redemption value (CRV) when they purchase beverages from a retailer, and receive CRV refunds when they redeem the cotainers at a recycling center. CRV is 5 cents for each small beverage container. If the CRV was optimally designed to maximize social welfare, then in this market 5 cents correspond to the

marginal external cost

When firms participate in group health insurance for all employees, it

may lower rates for all people to the extent that it keeps healthy people in the pool

Access to the movie "Casablanca", showing in a half-empty theater, is A) a public good because individuals watch movies together. B) a public good only if the theater is run by the government. C) not a public good because it is a rival good. D) not a public good because it is an exclusive good. E) not a public good because it is both a rival good and an exclusive good.

not a public good because it is an exclusive good

What is the graphical definition of DWL?

the area between MSV and MC, and between Qsoc and Qpc

What is the optimal tax per unit to eliminate DWL?

the marginal external cost (MEC) at the socially optimal quantity

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers,

the marginal social cost curve is above and to the left of the supply curve

When new technologies make cleaner production possible,

the price of transferable permits falls.

Which of the following represent examples of adverse selection?

unhealthy people are more likely to want health insurance, unskilled drivers purchasing extra auto insurance