Micro Final Exam

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?

$1,500

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?

$10,800

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 together after addressing the snoring problems in the least costly way is:

$150

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?

$196000

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. The external benefit of each dose is:

$20

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.

$225

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.

$225; $450

The essential reason some species of whales have nearly been driven to extinction is that:

it is difficult to define and enforce property rights to whales.

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 your house?

$25000

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

$32

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 economics is:

$40000

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?

$43 per hour

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:

$5

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 another one 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:

$5.

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:

$50

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:

$87,500.

According to the textbook, the real mean income of the top 5 percent of families increased by ________ percent from 1980 to 2016.

75

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

A) Pay-per-view movies

In which of the following markets is the presence of asymmetric information of little concern to the buyer?

The market for used textbooks

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 other at no cost, then which of the following outcomes is consistent with the Coase theorem?

B) The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking.

In terms of improving the standard of living of the poor, one drawback on the earned income tax credit (EITC) is that:

it provides no benefits to people who are unemployed.

A group of workers who bargain collectively with employers for higher wages and better working conditions is called a:

labor union.

Which of the following is an example of a positional arms control agreement?

Campaign spending limits

Alex just got a new car. Because Alex obtained full-coverage car insurance, Alex will have an incentive to ________ because of ________.

drive less cautiously than if he didn't have insurance; moral hazard

Carson and Fran are both thrill seekers. Carson has health insurance and Fran does not. One can predict that:

Fran will engage in fewer dangerous activities.

Which of the following statements about the provision of public goods is true?

If the marginal benefit of a public good exceeds its marginal cost, more should be provided.

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 least costly solution to the externality present in this situation is for:

Moe to eliminate his snoring.

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?

No, because Lauren will not be willing to pay Joe $13,000.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Is it socially optimal for Quick Burger to operate a drive-through window?

No, because total payoffs are higher when Quick Burger does not operate a drive- through window.

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:

P=17-1.8Q.

Which of the following investments is part of a positional arms race?

Studying hard for your economics exam because your professor grades on a curve

Which one of the following government actions is intended to generate positive externalities?

Subsidies for planting trees on hillsides

The lemons problem gives the owners of above- average-quality used cars an incentive to:

offer a warranty when selling their cars.

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?

Yes, because $50 divided by five is greater than Matt's reservation wage.

According to the textbook, the best possible solution to the problem of poverty is:

a combination of a negative income tax and public employment.

To prospective employers, an honors degree from a highly selective college is:

a credible signal about whether a job applicant is intelligent and hardworking.

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 negative externality

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 positive; a negative

Broadcast television is an example of:

a public good provided by private firms.

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 regressive tax.

A risk-neutral individual will:

accept only gambles with an expected value of zero or greater.

Better information about consumers' reservation prices generally leads to:

acquisition of goods by consumers who are willing to pay the highest price.

The pattern in which insurance is purchased more frequently by those who are the most costly for companies to insure is referred to as:

adverse selection.

If the government needs to raise revenue to pay for a public good, the ideal tax structure would tax

all citizens in proportion to their willingness to pay for the public good.

The problems of externalities and poorly formed property rights are:

among several rationales for the existence of government.

Technological advances that increase the marginal product of labor will lead to:

an increase in the demand for labor because workers will be more productive.

It will be difficult to find a solution to the problems caused by greenhouse gas emissions because:

an international political organization would be necessary to enforce a solution.

Pure public goods:

are frequently provided by the government, and are sometimes provided by private firms.

A 65 percent chance of winning $10 and a 35 percent chance of losing $5 would be classified as a(n)

better-than-fair gamble.

Information about the quality of a product is

both beneficial to have and costly to obtain, and therefore subject to economic principles.

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

both nonrival and nonexcludable.

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 really annoying. In this case, Stan's saxophone playing generates:

both positive and negative externalities

If the government taxes a good that generates a negative externality, then the government:

can increase total economic surplus and generate tax revenue.

When attorneys, accountants and other professionals wear expensive clothing, it:

can serve as a credible signal of ability.

Statistical discrimination in the automobile insurance industry means that young male drivers who drive ________ will pay ________ rates relative to the claims they generate.

carefully; higher

A labor union in a labor market is analogous to a(n) ________ in an output market.

cartel

The use of pollution permits by the government to reduce pollution is:

common in several parts of the United States.

A patch of edible mushrooms growing wild in a national forest is a ________ good.

commons

Differences in wage rates associated with differences in working conditions are called:

compensating wage differentials.

In the absence of environmental protection laws, firms pollute because:

controlling emissions costs money, thereby reducing profits.

Suppose that the EPA has proposed strict 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:

decrease

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:

decrease total economic surplus.

The most appropriate level of government to provide public goods is:

dependent on the specific public good in question.

If the labor market for doctors is perfectly competitive, then an increase in the demand for doctors is likely to cause:

doctors' wages to increase.

Which of the following is NOT an example of an activity with external benefits?

eating a sandwich in the dining hall

The government subsidizes education because:

education is thought to have positive externalities.

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:

engage in a positional arms race, studying more and more.

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):

fair gamble.

According to the theory of disappearing political discourse, politicians remain silent about issues because politicians:

fear that if they speak out they will be misunderstood.

In competitive labor markets, ________ demand labor and ________ supply labor.

firms; workers

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:

gives everyone an equal share.

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:

greater than the marginal benefit of another unit

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 luxury car). Shel and Fran seem to be:

involved in a positional arms race.

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:

hire fewer workers.

To derive the labor demand curve for a particular market, one should ________ for all the firms in the market.

horizontally sum the value of the marginal product of labor curves

Taken together, factors such as education, training, experience, intelligence, and work habits are known as:

human capital.

Pat goes to the local electronics store to learn about high- end 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:

illustrates the free-rider problem.

Food stamps and Medicaid are examples of:

in-kind transfer programs.

The growth in income inequality in the United States since the early 1980s has been driven primarily by the dramatic:

increase in real incomes for the top 1 percent of earners.

In markets with incomplete information, middlemen tend to ________ total economic surplus by ________.

increase; matching sellers with buyers who have high reservation prices

To derive the market demand curve for a private good, one sums the ________. For a public good, one sums the ________.

individual quantities at various prices; individual prices at various quantities

When auctions, such as those used on eBay, are used to sell a product, then:

information about consumers' true reservation prices is revealed.

The reason the marginal benefit of information curve is downward sloping is because

information adds less and less benefit as more of it is acquired

When a negative externality is present in a market, the government should:

intervene if the benefit of doing so exceeds the cost.

Which of the following would be most vulnerable to the tragedy of the commons?

timber on public land

National defense is an example of a good that is:

largely nonrival and nonexcludable.

The presence of an unregulated negative externality means that the unregulated market equilibrium quantity is:

larger than is optimal.

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 socially optimal quantity.

less; more

Conspicuous consumption is a more effective signal of ability for people who:

live in large cities instead of small towns.

The value of marginal product of labor equals the

marginal product of labor times the net price for which each unit of output sells.

The additional output a firm gets from hiring an additional unit of labor is the

marginal product of labor.

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:

moral hazard.

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.

more than $16,800.

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:

nonexcludable good will become an excludable good.

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

national defense

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):

negative income tax.

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:

neither a positive nor a negative externality

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.

non excludable

If a good can be consumed by one person without reducing its availability to others, then it is a ________ good.

non-rival

Refer to the figure below. This graph suggests that the private market provides incentives to:

over-produce paper

The tragedy of the commons refers to the:

overuse of resources that have no price.

Jobs in which there is a higher risk of injury or death will:

pay more than otherwise similar jobs.

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:

people who buy gas at freeway exit stations tend to have higher search costs.

In 1996, the Personal Responsibility Act:

placed a five-year lifetime limit on welfare payments to any given recipient.

The level of income below which the federal government classifies a family as poor is called the:

poverty threshold.

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:

prefer to work for CareCo.

A firm's demand for labor will increase if the:

price of the firm's output increases.

When someone buys a movie on DVD, the DVD is a ________ good.

private

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:

progressive.

A highway without any tolls between 12am and 5am when there is very little traffic is an example of a ________ good.

public

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 ________.

rise; fall

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:

search costs are higher for people who are unfamiliar with the area.

In the market for used cars, the lemons model predicts that:

sellers are more likely to sell low-quality cars than high- quality cars.

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:

sells only in the upscale mall and charges $10.

A winner-take-all labor market is one in which:

small differences in human capital translate into large differences in wages.

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 ________.

small; relatively inelastic

Which of the following is an example of an activity with an external cost?

speeding on the interstate

One way sellers can credibly signal that they have a high-quality product is to:

spend a lot of money on advertising.

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

spend more time searching for the house than the dishwasher.

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:

statistical discrimination.

In order to achieve the socially optimal level of output, goods that entail positive externalities should be:

subsidized

The demand curve for a public good is constructed by:

summing voters' reservation prices at each quantity.

A firm is unlikely to hire a worker if:

the additional revenue generated by hiring the worker is less than his or her wage.

The sum of the possible outcomes of a gamble multiplied by their respective probabilities is known as:

the expected value of the gamble.

For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that

the marginal cost of pollution control is the same across all firms.

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:

the market for baseball players is a winner-take-all market.

In the market for labor, the demand function describes

the number of workers a firm is willing to hire at each wage.

If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state, then:

the problem is best addressed through federal regulation.

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 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:

the proportion of homes for sale with a cracked foundation will rise.

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.

the same amount; a different reservation price

Under a head tax, the amount of tax paid is:

the same for all taxpayers.

A proportional tax results in:

the same percentage of income going to taxes for all taxpayers.

The optimal number of workers for a perfectly competitive firm to hire occurs when

the wage rate equals the value of marginal product of the last worker.

A minimum wage law prohibits employers from paying workers less than a specified hourly wage. If the minimum wage is above the equilibrium wage:

there will be an excess supply of labor.

In the absence of laws requiring individuals to purchase insurance, insurance is most attractive to:

those with the highest likelihood of filing a claim.

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 buyer with 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 on eBay will lead:

total economic surplus to increase by $275.

The free-rider problem arises when people:

who do not pay for a good cannot be excluded from consuming it.

Insurance companies practice statistical discrimination because:

young males are more likely than other groups to generate insurance claims.