Econ Midterm 3

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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


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