Exam 1

In the documentary Power of the Poor, the rights of people in developing economies to own and have title (proof of ownership) to property is discussed. The lesson from the documentary is that it is sufficient to allow people to use land that is owned by the government in order to capture the wealth creating effects of capitalism. It is not necessary for people to have title to that property. TRUE OR FALSE

F

In the first chapter of Freakonomics, the authors discuss Paul Feldman who delivered and sold bagels to businesses in Washington D.C. Feldman relied on the honor system that allowed individuals to voluntarily pay for the bagels they ate. Feldman observed that in larger offices, where more employees worked, there was a higher rate of payment for the bagels than in smaller offices where there were fewer workers TRUE OR FALSE

F

Which of the following IS NOT an essential feature of capitalism? A. Property rights that give owners the right to use their property as they wish, and to sell their property to others. B. Government rules that protect domestic producers from foreign competition. C. An acceptance that many businesses and business ideas will fail. D. Government imposed price regulations (such as minimum wages) to ensure fair outcomes in markets. E. B and C. F. B and D. G. B, C and D.

F

You won a free ticket to see Bruce Springsteen concert (assume ticket has no resale value). U2 has a concert the same night and this represents your next-best alternative activity. tickets to the U2 concert cost $80 and on any particular day, you would be willing to pay up to $100 to see this band. assume that there are no additional costs of seeing either show. based on the information presented here, what is the opportunity cost of seeing Bruce Springsteen

$20. Opportunity cost is the value of your next best alternative. In this case, your next best alternative is attending the U2 concert. Your value for this alternative is $100 with a corresponding cost of $80 leaving a net value of $20.Note: This question is adapted from Paul J. Ferraro and Laura O. Taylor (2005) "Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science", Contributions to Economic Analysis & Policy: Vol. 4: No. 1, Article 7.

A team of four financial analysts for an investment bank is responsible for researching, evaluating and recommending stocks for the clients of the bank to buy and sell. Each analyst is given a vote on whether to recommend or not recommend a particular stock. The team leader keeps track of each person's votes and then how that stock does over the next three months. If any analyst's stock picks outperform the average of the group by 20 percent in any three-month period, that analyst is given an extra vote on each stock during the next three-month period. Concluding that the analyst who does better than the average at picking stocks is an example of: A. The Texas Sharpshooter Fallacy. B. The Halo Effect. C. Errors caused by using average performance instead of measures of marginal performance. D. None of the above.

A

According to the REM model of human nature: A. People will trade off a small amount of something they value greatly for a large amount of something they value less greatly. B. People always choose those uses of their time and resources that have the greatest monetary payoff. C. When making choices people rationally consider the fewest number of alternatives possible and only those alternatives that are legal and acceptable within the rules of society. D. All of the above.

A

An example of a price floor is A. minimum wages B. rent controls in New York C. both A & B D. none of the above

A

Government regulation: A. provides incentives to conduct business in an illegal black market B. plays no role in generating wealth C. is the best way to eliminate poverty D. does not enforce property rights

A

In the first chapter of Freakonomics, the authors found that when a daycare center started charging parents a fee for picking up their children late: A. The number of late pick ups increased. B. The number of late pick ups decreased. C. The number of customers declined as parents chose to use other daycare centers. D. None of the above, the reading was about schoolteachers and Sumo wrestlers.

A

Mr. D's Barbeque of Pickwick, TN produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is A. $7 B. $2 C. $5 D. impossible to determine

A

Opportunity cost arise due to.. A. resource scarcity B. interest rates C. limited wants D. unlimited scarcity

A

The legal reforms initiated by Hernando de Soto's institute shortened the time required to register a business in Peru from 289 days, to how many days? A. 1 B. 7 C. 14 D. 21

A

a business owner makes 1,000 items a day. each day he or she contributes eight hours to produce those items. if hired, elsewhere he or she could have earned $250 an hour. the item sells for $15 each. production does not stop during weekends. if the explicit costs total $150,000 for 30 days, the firm accounting profits for the month equals .... A. $300,000 B. $60,000 C. $450,000 D. $240,000

A

A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the sellers bottom line price is: A. $527,000 B. $523,800 C. $525,000 D. $500,000

B

After graduating from college, Jim had three choices, listed in order of preference: (1) Move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of moving to Florida includes A. the benefits he could have received from playing soccer B. the income he could have earned at the car dealership C. both a and b D. cannot be determined from the given information

B

An individuals' value for a good or service is the... A. the amount of money he or she used to pay for the good B. the amount of money he or she is willing to pay for it C. the amount of money he or she has to spend on goods D. none of the above

B

Efficiency implies opportunity, A. always B. never C. only if accompanied by secure property rights D. none of the above

B

KU Athletics had a drawing and you won a free ticket to the basketball team's last home game of the year. A few days before the game you learn that there is someone in your dorm who is offering to pay $200 for a ticket to the game so one of their parent's can attend. You decide to keep the ticket and attend the game yourself. Based on your decision to go to the game after learning that someone was offering $200 for a ticket, we can conclude that: A. The cost to you of seeing the game was $0 since you won the ticket in a drawing, and the value of seeing the game was more than $0. B. The cost to you of seeing the game was $200, and the value of seeing the game was more than $200. C. The cost to you of seeing the game was $0, and the value of seeing the game was more than $200. D. None of the above

B

A buyer values a used car at $15,000 and the seller values the same car at $10,000. If the buyer pays $12,000 for the car then transaction will generate: A. No surplus value since it is a used car. B. $2,000 worth of seller surplus and unknown amount of buyer surplus. C. $3,000 worth of buyer surplus and $2,000 of seller surplus. D. $3,000 worth of buyer surplus and unknown amount of seller surplus

C

A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate: A. no surplis B. $4,000 worth of seller surplus and unknown amount of buyer surplus C. $6,000 worth of seller surplus and $4,000 of buyer surplus D. 6,000 worth of seller surplus and unknown amount of buyer surplus

C

all of the following are examples of variable costs, expect.... A. labor costs B. cost of raw materials C. accounting fees D. electricity cost

C

economic value added helps firms to avoid the hidden-cost fallacy... A. by ignoring the opportunity cost to using capital B. by differentiating between sunk and fixed cost C. by taking all capital costs into account including the cost of equity D. none of the above

C

he US government bought 112,000 acres of land in southeastern Colorado in 1968 $17,500,000. the cost of using this land to day exclusively for the reintroduction of the black-tailed prairie dog A. is zero, because they are already own the land B. is zero, because the land represent sunk cost C. is equal to the market value of the land D. is equal to the total dollar value the land would yield if used for farming and ranching.

C

How will commercial airlines respond to the treat of new $27,500 fines for keeping passengers on the tarmac for more than 3 hours? What inefficiency will this create?

Carriers say that to avoid those fines, they will aggressively cancel flights before and during storms— even if the bad weather never materializes. The threats could foreshadow significant changes in air travel, making it even less reliable for millions of road warriors and vacationers. By canceling flights, it could take days for all travelers to get home when storms strike

Assume that Jackson buys a used desk from an individual on Craigslist. The person selling the desk paid $300 for the desk several years ago, but sells it to Jackson for $100. Which of the following can we conclude about this transaction? A. Since it is a used desk, the exchange simply transfers the value of the desk from the owner to Jackson. The exchange does not create value. B. Jackson values the desk at $100 or more. C. The value the seller places on the desk declined by $200 since she bought the desk for $300 and then resold it for $100. D. Jackson values the desk at more than $100 and the seller values the desk at less than $100.

D

Huhtamaki produces paper containers and other paper products such as Chinet. Huhtamaki's opportunity cost of using resources to produce paper products is the value Huhtamaki foregoes by using the resources in this way rather than in Huhtamaki's next best opportunity. If Huhtamaki's opportunity costs exceed the firm's accounting profits, then: A. The firm's accounting profits may be positive or negative. B. The firm's economic profits will definitely be negative. C. Huhtamaki will be able to increase profits by stopping its current production of paper products and redirecting its resources to other opportunities. D. All of the above.

D

If a firm is earning negative economic profits, it implies... A. that the firm's accounting profits are zero B. that the firm's accounting profits are positive C. that the firm's accounting profits are negative D. that more information is needed to determine accounting profits

D

If the description of human behavior in the Nature of Man (about the REM model of behavior) is correct, which of the following practices might be useful in encouraging employees to act in the interest of the business? A. Commissions and bonuses based on individual performance. B. Undertaking an educational campaign to make employees proud of the products and services provided by the business. C. Creating an environment where groups create social pressure so that individuals feel guilty if they act inconsistent with the interest of the business. D. All of the above.

D

Taxes A. Impede the movement of assets to higher-valued uses B. Reduce incentives to work C. Decrease the number of wealth creating transactions D. All of the above

D

The biggest advantage of capitalism is that A. it generates equality B. price assist in moving assets from high value to low value uses C. it is fair D. it creates wealth by letting a person follow his or her own self-interest

D

The biggest advantage of capitalism is: A. It generates wealth with the help of government intervention. B. That prices assists in moving assets from high valued to low value uses. C. It forces involuntary exchanges. D. Creates wealth by letting a person follow his or her own self-interest.

D

Wealth creating transactions are more likely to occur A. with private property rights B. with strong contract enforcement C. with black markets D. all of the above

D

a business owner makes 1,000 items a day. each day he or she contributes eight hours to produce the items. if hired, elsewhere he or she could have earned $250 an hour. the item sells for $15 each. production does not stip during weekends. if the explicit costs total $150,000 for 30 days, the economic profit for the month equals; A. $300,000 B. $60,000 C. $450,000 D. $240,000

D

fixed-cost fallacy occurs when... A. firm considers irrelevant cost B. firm ignored relevant cost C. a firm considers overhead or depreciation costs to make short-run decisions D. both a and c

D

The story of the oil executives who paid too much for oil rights illustrates: A. How people can become emotionally attached to a belief despite data and evidence that is inconsistent with that belief. B. How the Texas Sharpshooter Fallacy can cause decision makers to make the wrong choices when they rely on random data. C. How including fixed costs in the estimate of the value of the oil caused the executives to overestimate the value of the oil and pay too much for the oil rights. D. All of the above. E. None of the above.

E

The US government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it at reasonable rates. what inefficiency does this create?

Subsidies are like taxes in this case. Taxation will keep some efficient transactions from being consummated because potential transactions where the difference in buyer and seller valuation is positive will no longer cover the amount of the tax to be paid. This prevents the asset from moving to its highest valued use. With a subsidy, transactions in which the assets moves from a higher valued use to a lower valued use can be consummated so long as the difference is less than the amount of the subsidy. This moves the asset to a lower valued use. With flood insurance worth an expected $20,000, homeowners would be willing to spend $120,000 to build a house that they value at only $100,000. Wealth is destroyed.

Some US companies locate factories in other countries where labor and other costs are lower. These companies then import some of those foreign produced products back into the U.S. and sell them to U.S. consumers. In order to protect American jobs, the U.S. government may pass regulation prohibiting U.S. companies from importing goods made in other countries back into the U.S. If this prohibition is put in place, we can say for certain that it will destroy value for U.S. consumers. TRUE or FALSE

T

When Coca Cola hired a new CEO in 1980, Coca Cola was a successful business made up of many successful operating divisions (concentrate, bottling, wine....). However, the new CEO was not satisfied with how the operating divisions were calculating profits. As a result, he adjusted the profit measure of each division by subtracting 16 percent from their profits. After this adjustment was made it was obvious that most of Coca Cola's businesses were operating at negative economic profits TRUE OR FALSE

T

I recently sold my used car. if no new production occurred for this transaction, how could it create value

The value of my willingness-to-sell was less than the buyer's willingness-to-pay. Any transaction price between these allows for a voluntary exchange in which we both benefit. Since we are both better off, value was created.

Due to the housing bubble, many houses are now selling fro much less than their selling price two to three years ago. there is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. what fallacy are they making?

These two homeowners have virtually identical houses that should sell at virtually identical prices. The purchase price from years ago is a sunk cost and therefore irrelevant to the pricing decision. They are committing the sunk cost fallacy.

you were able to purchase two tickets to an upcoming concert for $100 apiece when the concert was first announced three months ago. recently, you saw that StubHub was listing similar seats for $225 apiece. what does it cost you to attend the concert?

What you paid three months ago is irrelevant to your costs now. The decision you are facing is to attend the concert or not. If you do not attend, you can sell the tickets for $225 (ignoring any brokering fees and hassle costs). Thus, you forego $450 to attend the concert.