Microeconomics Exam 2
After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the:
Marginal utility is positive for the fourth slice and negative for the fifth slice
The substitution effect:
Measures the change in the quantity demanded of a good from a change in its relative price
When the government provides loan guarantees and in effect "socializes losses and privatizes gains" of a project or firm, it can lead to a:
Moral hazard problem among investors
substitutability
More substitutes, demand is more elastic
unfunded liability
Social Security and Medicare
The reason why people are charged for an additional can of soda they get from a soda machine, but are not charged for an additional paper taken from a newspaper dispensing machine, is that the marginal utility of an additional:
Soda diminishes slowly, but the marginal utility of an additional paper is close to zero
Rent-seeking behavior in public choice theory refers to:
Specific groups appealing to government for special benefits at someone else's expense
"Unfunded liability" refers to a government commitment to:
Spend in the future without also committing to collect enough tax money to pay for it
"Regulatory capture" refers to the situation where a government agency charged with supervising and regulating a particular industry is:
Strongly influenced by the firms in that industry
According to behavioral economics, cognitive biases:
are misunderstandings or misperceptions that cause systematic error.
Heuristics:
are shortcuts that save time and energy in decision making.
p and tr move in opposite directions
elastic demand
price elasticity of supply
measures sellers' responsiveness to price changes. elastic supply, producers are responsive to price changes. inelastic supply, producers are not as responsive to price changes.
time
more time available, demand is more elastic
(Consider This) According to the piece "Wannamaker's Lament":
most marketing efforts have little impact on sales.
interpretation of elasticity of demand
Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed < 1 demand is inelastic Extreme cases Ed = 0 demand is perfectly inelastic Ed = ∞ demand is perfectly elastic
Movie theaters charge lower prices to see a movie in the afternoon than in the evening because there is an:
Elastic demand to see movies in the afternoon
price elasticity of supply continued
Es > 1 supply is elastic Es = 1 supply is unit elastic Es < 1 supply is inelastic Es = 0 supply is perfectly inelastic
In a market economy, the government's ability to coerce is beneficial in the following cases, except in:
Fixing resource prices
If the price-elasticity coefficient for a good is .75, the demand for that good is described as:
Inelasic
Josh will receive a salary of $300,000 next year. According to prospect theory:
Josh's satisfaction with that salary depends on how much he made in the past.
To prevent monetary policy from becoming highly politicized, many countries have:
Made their central banks be politically independent
In the corporate world of business, the principal-agent problem arises between:
Managers and stockholders
In assessing the efficiency of government policy, economic analysis would focus on:
Marginal benefits versus costs of government policy and action
Many people do not steal or commit fraud because to them, the resulting feelings of guilt and uneasiness make the:
Marginal cost of the act increase
Which of the following cognitive biases refers to people's tendency to attribute their successes to personal ability and effort, and failures to forces outside their control?
self-serving bias
elastic demand
sensitive to price changes, large change in quantity
Consider the parallel demand curves in the figure above. Which curve is relatively more elastic at P1?
BB
total utility
the total amount of satisfaction obtained from consumption of a good or service
Chronic budget deficits can lead to all of the following, except
"Smaller government" in the economy
In spending all his income on beer and pizza, Fred finds that the marginal utility of the last pizza he consumed is 8, and the marginal utility of the last bottle of beer is 4. The price of a bottle of beer is $1.50. If Fred has maximized his utility, the price of pizza must be:
$3.00
When monetary policy becomes highly politicized, the policy tends to:
Become destabilizing, instead of promoting stability
formula for price elasticity of demand
% change in quantity demanded / % change in price
directing and managing government
- No invisible Hand - Massive Size and Scope - The Need for Bureaucracy - The Need for Paperwork and Flexibility - The Information Aggregation problem - Lack of Accountability
Blossom, Inc. sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise price to $9, and the firm only manages to sell 460 bottles of perfume. The price elasticity of demand is:
0.33 and inelastic
When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The price-elasticity of demand coefficient for this product is:
1.5
Suppose you are given the following data on demand for a product. The price elasticity of demand (based on the midpoint formula) when price decreases from $9 to $7 is: quantity 40 -> 60
1.60
The price of season tickets to a performing arts theater decreases by 3 percent. As a result, the quantity demanded increases by 6 percent. The price elasticity of demand for season tickets is:
2
If sellers could price-discriminate and charge two different prices to two different groups of buyers in order to increase revenues, then the sellers would charge:
A higher price to the buyers whose demand is inelastic
Government's ability to force people to do things involuntarily is:
Beneficial if it is used to improve economic efficiency
The public (or national) debt refers to the:
Accumulation of all past budget deficits
An indifference curve shows:
All combinations of two products from which the consumer derives a specific level of total utility
Political corruption occurs in the following instances, except when:
Businesses pay property taxes and license fees
We use the midpoint formula in computing the price elasticity of demand coefficient in order to:
Convert absolute changes into percent-changes
The price-elasticity coefficients are 2.6, 0.5, 1.4, and 0.18 for four different demand schedules D1, D2, D3, and D4, respectively. A 2 percent increase in price will result in an increase in total revenues in which of the following cases:
D2 and D4
Which of the following countries had the least corruption, as reported in the Global Corruption Barometer for 2010-11?
Germany
Government in a market system can increase economic efficiency by collecting taxes in order to subsidize the production of:
Goods with positive externalities
fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
When universities announce a large tuition increase and follow it with an announcement that more financial aid will be available, they are assuming that students who pay full tuition:
Have inelastic demand and students who use financial aid have elastic demand
proportion of income
Higher proportion of income, demand is more elastic
In deciding what to buy, the consumer will choose the good with the:
Highest marginal utility-to-price ratio
Deregulation can solve the problem of regulatory capture and increase economic efficiency:
If the deregulated industry becomes more competitive
When the price of a product falls for a normal good, the:
Income and substitution effects will encourage consumers to purchase more of the product
An increase in the productivity of labor over time will:
Increase in the value of time
You are the only seller of eggs in town, and the price-elasticity coefficient for eggs is known to be 0.8. If you want to increase your sales quantity by 10% through a price-change, what should you do to price?
Increase price by 12.5%
Which of the following best explains the difference between neoclassical economics and behavioral economics?
Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors.
In the face of rising costs, some firms reduce the quality of the goods they produce rather than maintain quality and increase prices. How would behavioral economics explain this strategy?
People have an aversion to losses, and consumers are more likely to feel the loss of a price increase than a quality reduction.
If a college admits only a fixed number of applicants every year, then the school's supply curve for admissions is:
Perfectly inelastic
The situation where politicians make decisions that will raise their chances of reelection, even if those decisions are detrimental to the general public, is referred to as the:
Principal-agent problem
Making blackmail, extortion, and other forms of private coercion illegal is one way that government:
Reduces private-sector economic risk
Assume a round of golf requires four hours of leisure time, and attending a concert requires two hours. If the price of a round of golf is $40 and the price of a concert is $80, ceteris paribus, Joe will play:
Relatively less golf and attend relatively more concerts whenever his leisure time becomes more scarce
The price elasticity of demand is a measure of the:
Responsiveness of buyers of a good to changes in its price
The government adds to its overall public debt whenever it:
Runs a budget deficit
According to behavioral economics:
each successive unit of loss hurts, but less than the previous unit.
total revenue formula
TR = P x Q
Which of the following defines marginal utility?
The additional satisfaction from consuming one more unit of a product
The increase in demand for iPad tablet computers can be explained by:
The enhanced versatility and storage capacity of iPads, making their MU/P increase
income effect
The impact a price change has on a consumer's real income
substitution effect
The impact that a price increase has on a consumer's decision to purchase an item or to substitute that item for a similar product that meets the same need or want but at a lower cost.
Law of diminshing marginal utility
The more of something we consume the less extra satisfaction we get from each additional unit consumed This will mean we are prepared to pay less for each additional unit
What is a likely explanation for why the budget of a government agency might increase beyond its optimal size?
The power of special-interest groups
Chronic Budget Deficits
economic inefficiency and debt crisis
Total utility is best defined as the:
Total satisfaction received from consuming a given amount of a product
If a product has a diminishing, but positive, marginal utility, then:
Total utility increases at a diminishing rate
A consumer allocates all income between two products, A and B. If, on an indifference map, the equilibrium position shifts onto a higher indifference curve, then:
Total utility must have increased
What are the two categories of cognitive biases identified by behavioral economists?
Unevolved capacity for solving modern problems and faulty heuristics.
Health insurance often pays 80 percent of health care cost. This situation will encourage the rational consumer to:
Use more medical services than they would if they had to paid the full price
The satisfaction or pleasure one gets from consuming a good or service is called:
Utility
marginal utility
an additional amount of satisfaction
neoclassical economics
believe our decisions are rational (always the best for us) People have stable preferences that aren't affected by context People are eager and accurate calculating machines People are good planners who possess plenty of willpower People are almost entirely selfish and self-interested
Susie knows that too many sugary treats, while delicious when eaten, have long-term adverse effects on weight and health. Based on this information, a neoclassic economist would expect Susie to:
carefully weigh the short-term benefits against the long-term costs and make a rational decision about how many treats to eat.
Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from:
confirmation bias
According to behavioral economists, people's preferences toward a particular outcome
depend heavily on the contextual information that defines whether that outcome is a gain or a loss.
behavorial economics
developed to explain the systematic errors Improving outcomes by improving decision making
Myopia and Time Inconsistency
fighting self-control problems with precommitments
Two types of macroeconomic stabilization
fiscal policy and monetary policy
Government's Economic Role
government's right to coerce. force can increase economic efficiency. correct market failures (positive and negative externalities) reduce private sector economic risks.
A central focus of prospect theory is:
how people deal with "bads," as well as how they deal with "goods."
Government Failure
inefficient outcomes caused by government
P and TR move in the same direction
inelastic demand
inelastic demand
insensitive to price changes, small change in quantity
The threat of rejection in market transactions:
leads to lower prices for consumers. leads to greater cooperation between buyers and sellers. leads to better products for consumers.
Luxuries vs. Necessities
luxury goods, demand is more elastic
Behavioral economists believe that people:
often succumb to temptation
In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the:
overconfidence effect
prospect theory
people choose to take on risk when evaluating potential losses and avoid risks when evaluating potential gains
Because of "mental accounting:"
people isolate purchases and sometimes make irrational decisions.
For economists, "myopia" refers to:
people's difficulty in conceptualizing the future.
The Law of Supply suggests that the price-elasticity of supply is:
positive
Consider the demand curve above. If area 0ABC is smaller than area 0DEF, we may conclude that demand in this range is:
price-elastic
Heuristics are
shortcuts in decision making that save mental activity
According to behavioral economists, someone suffering from myopia is most likely to:
spend too much on present consumption and not save enough for the future.
Determinants of Price Elasticity of Demand
substitutability, proportion of income, luxuries vs necessities, time
Utility
the satisfaction one gets from consuming a good or service
Buck carefully plans out an early morning exercise routine to lose weight and get fit. When it's time to work out, however, Buck just "doesn't feel up to it" and decides to sleep in. Behavioral economics would say that Buck:
used System 2 of his brain to formulate his workout plan, but then gave in to System 1 when he chose to sleep in.