Econ Exam 3

What is a long tail risk?

a perceived high risk that has dire consequences if it defaults, but provides high payoffs otherwise

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

Two students in an economics class, Harry and Sally, are discussing the problems with gender discrimination in the labor market. They both agree that men and women should be treated equally. Sally claims that the significant differences in the ratio of men to women in the market for construction workers, a relatively higher-paying field, compared to grocery clerks, a relatively lower-paying field, is abhorrent and a result of discrimination. Harry responds using the analysis he learned in the lecture on labor supply. Harry tells Sally,

"This is not necessarily discrimination. Construction work requires a lot of physical labor and women may not prefer it. Thus it could be the result of differences in gender preferences."

The accompanying graph depicts the labor markets for sanitation workers and landscapers. Both occupations face identical labor demand curves (Demand). However, labor supply differs. Supply 1 represents the supply of labor of sanitation workers, and Supply 2 represents the supply of labor for landscapers. Assume that the skills and education necessary for each job are identical. What is the difference in equilibrium wages between the two occupations? What might explain the different equilibrium wages for these occupations?

$10 The supply of sanitation workers is lower due to the unpleasantness of the job, which results in a compensating differential.

The graph represents a labor market. a. What is the equilibrium hourly wage? b. What is the equilibrium number of hours worked? c. Identify all the factors that would cause the equilibrium wage to increase. It would increase with

$5 per hour 12 hours an increase in labor demanded, a decrease in labor supplied

Brad is a broke college student who consumes only coffee and pizza. Coffee is $2 per cup, and pizza is $5 per pizza. Brad's weekly budget constraint is shown. On the graph, show how his budget constraint would change if Brad gets an additional $10 per week from his grandmother.

15 & 6

Caro has $10,000 to invest. Her best friend, Imelda, happens to be a stockbroker. Imelda tells Caro that her investments should be diversified. To make sure that Caro understand what diversification really means, Imelda asks her to rank a set of investment portfolios according to how diversified they are. Demonstrate how Caro's ranking should look below. (Most to least)

3,400 in a metal fund, 3,300 in bonds, and 3,300 in a land purchase 10,000 in mutual fund 5,000 in one stock and 5,000 in another stock 10,000 in one stock

Suppose the demand and supply schedules shown in the table represent the labor market for carpenters. a. What is the equilibrium number of carpenters who will be hired? b. What is the equilibrium hourly wage for carpenters?

7,000 $14

Mauricio has a circus act that involves monkeys on unicycles. Mauricio has a fixed amount to spend on unicycles and monkeys. The graph shows Mauricio's initial budget constraint. The price per unicycle is $120 and per monkey is $90. Using the graph, show what happens to Mauricio's budget line when the price of unicycles increases to $180. What is Mauricio's budget for monkeys and unicycles?

720

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.

A firetruck MUx/Px = MUy/Py

The MSCI EAFE Index consists of stocks from companies from over 20 developed markets to measure international equity market performance. The Index is considered the oldest truly international stock index: it has been calculated since 1969. Many foreign stock funds are compared against the MSCI EAFE Index. Bailey is thinking about investing in a mutual fund. She decides to invest in the iShares MSCI EAFE Index Fund, which mimics the MSCI EAFE Index. Select the best description of the iShares MSCI EAFE Index fund.

A passive fund

Cleo is a 28-year-old female smoker with a strong family history of breast cancer. Her mother and grandmother both died at the age of 37 from the disease. She buys a 15-year term life insurance policy of $500,000. Jenny is in excellent health and has a good medical history. She seeks term insurance, but given her health and history, she thinks the policy is too expensive. Decide which type of information asymmetry the scenario below best represents.

Adverse selection

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.

Answerable: How many toy ducks will be sold at the price of $4? How much profit will a firm make if it prices its products at $2 above cost? Unanswerable: Should taxes increase proportionately with wealth? How many immigrants should be allowed to enter the US annually? Should children be allowed to work if they need to help support their families?

Suppose the graph represents the labor market. Line ____ shows the relationship between the wage and the number of people willing to work. Line ____ shows the relationship between the wage and the number of people firms wish to hire. The demand curve for labor exhibits ____ relationship between wage and quantity of workers demanded, and the supply curve of labor exhibits _____ relationship between wage and the quantity of people willing to work.

B, A an inverse or negative, a direct or positive

Kat is deciding if she would like to join the customer loyalty plan at Bonsai Plants and Books. For simplicity, suppose that she and Patrick are the only consumers at Bonsai Plants and Books. You can think of these as types of people if that is easier for you. If Kat is the only one who joins, she gets great deals. If Patrick also joins then the deals are not that great, but outsiders are the worst off in both cases. This is the prisoner's dilemma. What is the Nash equilibrium?

Both join

Which of the statements are examples of signaling? Choose all that apply. There is more than one correct answer.

Fred's Used Cars offers a warranty on every car sold. Tommy's Tea Shop advertises by recording the testimonials of satisfied customers. Haley uses her 4.0 grade point average to land a new job. A name-brand bleach is priced 45% higher per gallon than the generic alternative. Jo decides to go to graduate school so her future employer will know that she is smart and a hard worker

Bill has $25 to spend on movie downloads and popcorn. Bill's indifference curves (I1, I2, I3, and I4) and his budget constraint (BC) are reflected in the graph. Move the point to Bill's optimal consumption bundle. Is Bill maximizing his utility at his optimal consumption bundle? How do you know?

Given Bill's budget and preferences, at this bundle, the marginal rate of substitution equals the price of bags of popcorn divided by the price of movie downloads.

Which statement is true?

Higher fees charged by mutual funds do not usually result in higher returns for the investor.

A futures contract essentially gives the owner of the contract the ability to buy a specific amount of a good at a given price at a point in the future. In a 1984 paper titled Orange Juice and the Weather, economist Richard Roll showed that the price of frozen orange juice futures could be used to predict errors in weather forecasts for Florida made by the National Weather Service. That is, there were times when the price of orange juice futures did a better job of predicting the temperatures in Florida than did the National Weather Service! Given this information, what would the efficient markets hypothesis suggest was occurring?

Investors in orange juice futures were using publicly available information that scientists at the National Weather Service were not using.

Which scenario describes the operation of a tariff? Which is NOT an effect of a tariff?

Ireland taxes the import of potatoes in order to keep domestic farmers in business increased demand

Tournament systems reward people according to their performance relative to other contestants. One advantage is that variables beyond the control of the contestants affect them all without favoring any one of them. One disadvantage is called ability risk. This refers to contestant-specific variables, such as skill or knowledge that could give a particular contestant a much greater, or smaller, chance of winning. Which scenario demonstrates the reduction of ability risk? Which is most likely to be true about a tournament?

James and David decide to play a game of basketball. The first person to reach 30 points wins. David does not really play sports much, so James gets a 25 point handicap and must score 55 points to win. Tournaments discourage cooperation between players.

Which hypothetical situation is an example of a remittance?

Juan Jimenez, a migrant worker living in the United States, wires $150 per week back to his family in Tlaxiaco, Mexico.

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.

Please select the philosophical view with which each individual's view is most closely aligned. a. Craig doesn't think equal income distribution is necessary for a just society as long as all transactions are legal and voluntary. b. Hector believes that the government should not tax the wealthy in order to support the poor. c. Dana argues that the focus of the government's poverty alleviation programs should be to maximize the total benefit to all people. d. Ricky wants the position of the worst-off person in society be as good as possible. e. 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.

Nozick's entitlement theory of justice Nozick's entitlement theory of justice Utilitarianism Rawls' maximin principle Utilitarianism

The payoff matrix shows the payoffs for two consumers when there are two standards that may be adopted. Amy prefers the PS3 gaming console and Zoey prefers the Wii gaming console, but they like to game together, so they prefer to have the same system. If Zoey chooses PS3, then Amy's best response is When Zoey chooses PS3, what is Amy's payoff if she chooses the response you selected? If Zoey chooses Wii, then Amy's best response is When Zoey chooses Wii, what is Amy's payoff if she chooses the response you selected? How many Nash equilibria are there in this game?

PS3 5000 Wii 3400 2

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? Which statement best describes the chances that an everyday investor will accidentally become a participant in an asset bubble?

Participants in an asset bubble pay more than an item is reasonably worth, whereas everyday investors do not. Investors might become unwitting participants in an asset bubble if the true value of the asset is unknown even to experts.

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%. Which portfolio is likely to be riskier?

Portfolio A

Compassion is a new orphanage in the Philippines. Assume this will be the only orphanage in the country. In their national legislature, one of the decisions facing the government is whether to contract the orphanage to private control or give it public ownership, headed by a board of directors. Suppose that the government's top priority is to minimize the cost associated with the orphanage. Which option is consistent with this goal? Suppose that the government's top priority is instead to maximize the quality of the orphanage and to make sure that the orphans will have three healthy meals a day, opportunities to learn, and a sanitary place to live. Which option should they choose? Assume that reductions in quality lower costs.

Put the orphanage under private control; the controlling party would cut costs to maximize their profit. The should choose public control

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

Which is a step often taken to minimize the information asymmetry in these types of transactions?

Sellers will offer a home warranty

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.

The housing market often involves transactions with asymmetric information. Which accurately characterizes the information asymmetry?

The person selling a house has better knowledge about the condition of the house and the need for repairs than the person buying the house.

Suppose Damon owns a used-car dealership and hires three salespeople, Mike, Michelle, and Aaron. Damon decides to pay each of them an hourly wage. A few months pass and sales are dragging. Damon decides to implement a piece rate instead, paying his employees by the number of cars they sell. By doing this, he hopes to increase productivity. The table shows the old wages the salespeople made and the new ones under the piece rate. Compared to when Damon paid an hourly wage, he now, on average, pays his workers Piece rates

The same wage increase wage inequality

Which is an example of a credible promise?

Tony's Used Cars promises that all its cars are high quality and offers a two-year, 10,000 mile warranty with every purchase.

There are trade-offs associated with international trade. Classify the statements that are consistent with mainstream economists' views on international trade as "True" and statements that are inconsistent as "False."

True: In the aggregate, trade is beneficial International trade leads to lower prices and increased variety for consumers in the importing nation False: international trade is unwise during a recession when unemployment is high trade between two countries will make one country better off and the other worse off international trade improves the well-being of everyone

Each of the events will affect the stock of the company involved. For each company, please predict the effect on the demand for its shares and its stock price. Assume that nothing else changes. a. Ford Motor Company announces that it will have to decrease profit expectations for the current year, as an increase in gas prices has led many people to hold off on buying a new car. Demand for Ford stock will _______, and the price of Ford stock will ________. b. Due to a successful advertising campaign using the "Pepsi Challenge," PepsiCo announces that sales of its signature soft drink are higher than expected. Demand for Pepsi stock will _____, and the price of Pepsi stock will _____. c. On the same day that you buy a share of Google Inc. stock, the U.S. government announces an increase in interest rates, making bonds a more attractive option for investors. Demand for Google stock will _____, and the price of Google stock will _____. d. Starbucks Coffee Company informs the public that profits this year are greater than previously predicted, due to its expansion into the retail ice cream and chocolate businesses. Demand for Starbucks stock will _____, and the price of Starbucks stock will _____.

a. decrease, decrease b. increase, increase c. decrease, decrease d. increase, increase

Classify each scenario according to whether or not it is an example of asymmetric information. a. a firm selling car insurance b. a firm that is going to promote one of two internal candidates for a management position c. a person buying a new Toyota Camry d. a person purchasing a used Hyundai Sonata e. a student choosing between his two favorite pizza spots for lunch f. a firm hiring a new employee from a list of candidates who responded to a posting on Monster.com

an example of asymmetric information not an example of asymmetric information not an example of asymmetric information an example of asymmetric information not an example of asymmetric information an example of asymmetric information

Which of the following is not an example of switching costs?

buying a new shirt

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. This is an example of

competition to dominate the market a contestable market the superior product not always winning

Nancy works for PeopleSoft, an up-and-coming company that makes soft people, such as inflatable paramedic demonstration dummies. The working atmosphere at this start up organization provides workers with a more relaxed, family feel so that workers do not feel over stressed. At the same time, there exists a strong motivation to get PeopleSoft's product out to the market. Part of the CEO's plan is to forge communal bonds to emphasize the need to be innovative in everything the company does, so that it can separate itself from the competition. The atmosphere of values that makes up the environment where Nancy works is better known as

corporate culture

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 accompanying graph represents the hypothetical market for bank tellers at Firstar Bank. Assume no bank in the industry will hire women tellers. Move the curve(s) on the graph to illustrate what will happen if Firstar decides they will not engage in gender discrimination and will hire the best qualified people, no matter whether they are men or women. Assume Firstar begins to lose customers as a result of this practice of employing women. The president of the bank asks Pat, the lead economist at the bank, why the market isn't imposing an economic penalty on the Bank's competitors. Pat responds that

customer discrimination is preventing the market from imposing the penalty.

Eva and Bruce are a young couple in good health. Eva begins her new job as a dolphin trainer and is offered elective health care coverage from her company for a price less expensive than she and Bruce would pay if they purchased insurance on their own. The policy provides the same coverage to all participants regardless of age or health status. Every year for the next five years, they see an increase in their insurance costs. After five years, they receive a notice in the mail informing them that their insurance company has gone bankrupt. Eva contacts the company to inquire the reasoning behind the company's failure. She is informed that over the past several years, healthier individuals chose to leave their insurance policy, shrinking the company's participant pool. Eventually, no more healthy people remained in the pool except Eva and Bruce. The insurance company had no choice but to increase costs for all members. Finally, they could no longer afford to operate. Which term best describes what Eva and Bruce's insurance company has experienced? Which policy would not have been a solution for the insurance company?

death spiral require all members to see a doctor approved by the insurance company

The law of diminishing marginal utility means that that as person receives more of a good, the added utility from each additional unit

decreases

Suppose that Swaziland decides to open trade with the world market for carbonated beverages and becomes an importer. The accompanying graph depicts Swaziland's domestic supply and demand for carbonated beverages. Please adjust the accompanying graph to depict this new reality. Then, answer the questions. After the opening of trade, the price per can of carbonated beverage for the domestic consumer After trade opens, how many millions of cans of carbonated beverages will Swaziland import?

decreases 4 million cans

Identify in each scenario the category of risk it primarily involves. a. Boat salesmen during a drought: b. An experienced salesman versus an inexperienced salesman: c. A new-car salesman versus a used-car salesman: d. A luxury car salesman versus a low-cost-import salesman: e. A professional athlete versus an amateur: f. Students competing on an achievement test:

environmental risk ability risk environmental risk environmental risk ability risk ability risk

Many people find it difficult to apply strictly rational economic thinking to many areas of life because their values often conflict with what might be economically efficient. Identify which manifestation of subjective values best relates to each scenario. a. 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 for the whole process, which can take more than a year, and she agrees because she is in desperate need of money. This is an example of b. 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. This behavior involves the issue of c. 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. This advocacy involves the concept of d. 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. These subsidies reflect e. 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. This policy is the result of

exploitation fair and equal treatment meddlesome preferences cultural goods and paternalism meddlesome preferences

Please label each definition with the correct term. 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. 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. Sometimes, a person's opinion about other individuals' actions can lead the person to seek change. An individual in a more opportune position takes advantage of another individual for his own economic gain.

fair and equal treatment cultural goods and paternalism meddlesome preferences exploitation

Please label the statements regarding child labor as true or false. International trade is a key cause of child labor. As a result, international trade should be restricted toeliminate child labor. The majority of children in the work force work in agricultural industries. The percentage of children in the work force in a country is inversely related to that country'sReal GDP. One of the proposed solutions to child labor is to provide subsidies to families with children who arecurrently attending school. The education of these children in poverty will have long-term benefits.

false true true true

Indicate whether each of the following statements, regarding education and productivity, apply to the signaling model, the human capital model, or both. a. Policies that increase the amount of schooling will increase productivity. b. When students graduate from college, they are no more productive than when they started. c. The more schooling a person has, the more income he or she will earn, since education increases a worker's productivity. d. Education and natural ability are correlated. e. This model assumes that students are rational. f. People with more education earn higher wages.

human capital model signaling model human capital model signaling model both both

Identify whether the given items are examples of imports, exports, or neither. Assume the United States is considered the domestic country. Colby lives in the United States and purchases a video game produced in Japan. Veronica lives in Tennessee and buys an orange grown in Florida. A Chinese consumer purchases a television produced in China. A farmer in Iowa sells corn to a food processing plant in China. ConocoPhillips drills for oil in the United States and sells this oil to refineries in Brazil and Mexico.

import neither neither export export

One of the most famous examples of a standards war arises from what is known as the War of Currents between Thomas Edison and Nikola Tesla. Edison favored the use of direct current (DC) systems whereas Tesla promoted the use of alternating current (AC) systems. Each had their own benefits and drawbacks, but both men knew that neither system would be successful unless one format was adopted on a wide scale. Using this information, please fill in the payoff matrix. In each label, the number before the comma is Edison's payoff and the number after the comma is Tesla's payoff. What would you expect to happen to the price of the standard that wins the war?

increase

The world price of grapefruits is above the price that currently prevails in Cuba in the absence of trade. Assuming that Cuba is a small economy compared to the rest of the world, what happens if Cuba decides to open up trade with the world grapefruit market? The price of domestic Cuban grapefruit for consumers will Cuban exports of grapefruits will Lastly, consumer surplus in Cuba will _____, while producer surplus in Cuba will ______.

increase increase decrease, increase

Assume an economy is currently engaged in free trade but considering implementing a tariff on its main import, athletic shoes. With a tariff, price _____, domestic production ______, imports _______, and domestic producer surplus ________.

increases, increases, decreases, increases

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. Which argument for protectionism is Bertrand using?

national security agreement

Over the past year, shareholders have come to believe that Adam is making decisions that might be profitable in the short run but may have negative consequences in the long run. Investors, even though they benefit in the short run, want Adam to make decisions which ensure returns in the long run and not just the short run. Which is a possible solution to this problem?

offer stock in the company as a large portion of Adam's compensation

Identify whether each statement is positive or normative. The unemployment rate is 8.2%. At 8%, unemployment in the United States is too high. The richest 1% should be paying more in taxes. The richest 1% of the population earn 24% of the total income.

positive normative normative positive

Classify each characteristic according to whether it describes positive economics or normative economics. a. Describes current economic events. b. Predicts how the economy will change as a result of specific events. c. Concerns over the effects of an economic decision on people and not on how they will feel about it or what they will believe about why the decision was made. d. Involves recommendations or arguments about what should be. e. Offers plans for what the economy should look like based on an individual's subjective values and beliefs. f. Is concerned with how a variety of moral or ethical questions should be solved.

positive economics positive economics positive economics normative economics normative economics normative economics

A certain division of an auto finance company is notorious for repossessing cars. Upper management wants to change this perception, so they issue a challenge to the division. If the division does not repossess any cars this month, everyone in the division receives a $500 bonus. What is the most likely result of this incentive scheme? The division

reduces repossessions this month but next month repossessions either return to their average rate or increase.

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

In which industries are firms more likely to face a contestable market?

the low‑cost airline industry

Slow and Steady Trucking is a publicly traded company with many shareholders. Adam is the chief executive officer (CEO) and manages the day-to-day operations of the company. Using this information, answer the questions about the principal-agent problem. The shareholders are Adam is

the principal the agent

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

Classify each statement as either true or false. A tournament compensation scheme is subject to ability risk. Josephina receives the largest bonus because she had the highest sales last month. Jana had the secondhighest sales and receives the second largest bonus. This is an example of a tournament compensation scheme. Professors who grade on a curve are using a tournament compensation scheme.

true true true

Determine if the statements are true or false. a. Along a particular budget line, the prices faced by the consumer and the consumer's income are held constant. b. The budget line shows possible production bundles. c. Judi has $50 to spend. If movies cost $8 and books cost $5, Judi can purchase five movies and three books. d. A budget line slopes downward because, to buy more of Good 1, a consumer has to buy less of Good 2. e. The budget line depicts the combinations of two goods a consumer can buy given her income and the current prices.

true false false true true