FINAL ECON202- ALL YR
Which of the following statements is correct regarding disposable income?
Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions.
Which of the following statements about merit goods is correct?
Emergency healthcare is a merit good. Most would agree that emergency healthcare should be available to all, regardless of their ability to pay. In the U.S., emergency rooms do not have the right to turn away patients who are unwilling or unable to pay. This makes emergency healthcare a merit good.
Which of the following statements regarding Pareto efficiency is correct?
A Pareto-efficient allocation maximizes the total surplus.
Consider again the figure in Question 3. The government could implement four different policies to ensure the Pareto efficient outcome. When 38,000 bananas are produced, the difference between the marginal social cost (MSC) and the marginal private cost (MPC) is $105. In which of the following scenarios do the banana producers make the highest profit?
Coasean bargaining when the banana producers have the right to pollute. When the producers have the right to produce, the fishermen have to pay them to reduce their production level to 38,000 tons, and the producers' profits equal the producer surplus plus this payment. This is the best option for the banana producers.
Which of the following best explains the gender wage gap?
Differences in social norms The gender wage gap increases substantially after women have children, because childcare burdens fall disproportionately on women.
The figure shows the market demand curve for bread, together with original and new supply curves, where the curve has shifted due to new bakeries entering the market. All bakeries are identical, and there are no entry costs. Which of the following statements is correct?
New bakeries will continue to enter until the market price equals the firms' average cost. If there are no entry costs -- as we assumed in this question -- then bakeries will continue to enter until the price equals the minimum of the average cost.
Capitalism is an economic system based on
Private property, markets, and firms While many economic systems are built on private property and markets, capitalism is unique in that most people work for firms rather than for themselves.
The figures above shows GDP per capita grow at a(n) _____ rate.
constant As explained in Unit 1.3., a series that grows at a constant rate looks like a convex line on a linear scale and a straight upward-sloping line on a ratio scale.
Wealth, earnings, and disposable income are just three of several ways of looking at inequality. Imagine a household that earns $80,000 per year from labor. In that year, it also receives an income of $3,000 from investments, pays $12,000 in tax, and receives $7,000 in transfers from the state. Which of the following is its market income and its disposable income?
$83,000 $78,000. Market income is $83,000 and disposable income requires us deduct taxes ($12,000) and to add any cash transfers received ($7,000).
Consider the following game, where players' payoffs are measured in dollars. Which of the following statements is true?
(Defect, Defect) is the Nash equilibrium When both players defect, no player has incentive to cooperate, because that would reduce their payoff from 40 to 0. Since both players would be better off at (Cooperate, Cooperate) than at (Defect, Defect), this game is a prisoners' dilemma.
Guy and Ray can either bike or drive to work. Guy likes biking more than Ray, and both people like biking more when the other person also bikes. Their payoffs are shown below.
(Drive, Bike), that is Ray drives and Guy bikes (Drive, Bike) is the only Nash equilibrium in this game, because it is the only outcome for which neither player has an incentive to change their strategy. Ray would be worse off choosing to bike to work, because he would receive a payoff of 2 rather than 4. Similarly, Guy would be worse off choosing to drive to work, because he would receive a payoff of 2 rather than 3.
The intergenerational elasticity provides the percentage difference in a child's status given a 1% difference in their parents status. In the US today it is approximately ____, while in a perfect meritocracy it would be ____.
0.5; 0. Figure 19.11 shows that the intergenerational elasticity is approximately 0.5 in the US. In a perfect meritocracy, in which parents' status have no impact on their children's status, the intergenerational elasticity would be 0. While no country in Figure 19.11 is a perfect meritocracy, the intergenerational elasticity in Norway is approximately 0.15.
According to the World Bank, real per capita income in the U.S. increased from $57,640 in 2015 to $58,030 in 2016. What was the approximate annual growth rate?
0.7% The growth rate can be calculated using the equation in Unit 1.3. Here, the growth rate = ($58,030-$57,640)/$57,640 = 0.007 or 0.7%.
The figure below is the Lorenz curve of a population. Based on this figure, which of the following statements are correct?
50% of the population owns 100% of the land. The poorest 50% own no land. The other 50% owns all of the lands.
The diagram shows the market demand and supply curves for the bread market. There are 250 identical bakeries operating in the market, but you do not know their cost structure (i.e. their average cost and marginal cost curves).
A bakery's marginal cost of producing the 21st loaf is approximately €2. At €2, the quantity supplied is 5000 loaves. Therefore each bakery will supply 20 loaves. This means that their marginal cost of supplying the 21st loaf is approximately €2.
Which of the following is an example of a negative externality?
A commuter driving to work instead of taking public transportation This is an example of a negative externality, where the driver does not take into account the negative effect on other drivers.
In which of the following markets is the equilibrium efficient?
A competitive market for a homogenous good that has no external effect This market has a Pareto efficient competitive equilibrium.
The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The per-tonne price of bananas is constant at $400.
A is the banana producers' profit-maximizing outcome. A is where the marginal private cost equates the marginal benefit (the price). Therefore this is the profit-maximizing level.
Which of the following statements are correct?
A market is in equilibrium if the actions of buyers and sellers have no tendency to change the price or the quantities bought and sold. That is the definition of a (Nash) equilibrium.
In their study of a firm during 2006-2010 that includes the financial crisis, Lazear and his co-authors found that (i) the firm's productivity increased dramatically as unemployment rose, and (ii) the wage level was kept unchanged. Based on this information, which of the following statements are correct?
A possible explanation for why the wage level was not cut may be that the firm judged that the costs of lower employee morale and retention would be greater than what they would have saved in wages. This is a possible explanation for why the wage was not cut during the recession. This was also suggested by Bewley in his study of 300 business people, labor leaders, business consultants, and career advisors in the US.
Which of the following statements regarding Adam Smith are correct?
Adam Smith argued that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. This is Adam Smith's idea of the "invisible hand": "It is not from the benevolence of butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest, led by an invisible hand to promote an end which was no part of his intention."
Which of the following statements regarding social preferences is correct?
Altruism is an example of social preferences. Altruism is the willingness to bear a cost in order to benefit somebody else. Therefore it is an example of social preferences.
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno as rent for the use of the land. Consider the following figure, which shows Angela's and Bruno's combined feasible set and the interpretation of the allocation at point E.
Angela may prefer G to E, she may prefer E to G, or she may be indifferent between the two. Without knowing Angela's indifference curve, we cannot know Angela's preference between G and E. If Angela's indifference curves are sufficiently steep then E would be on a higher indifference curve than G, but if her indifference curves are sufficiently flat then G would be on a higher indifference curve. Finally, it is also possible that the same indifference curve would pass through both points, and that she is indifferent between the two points. A complete analysis of Angela and Bruno requires information about Angela's preferences.
The figure depicts the efficiency wage equilibrium of a worker and a firm.
At A the firm pays an hourly wage of $12, so the worker exerts an effort of 0.5. This is true. The worker's best response curve shows that when the worker is paid $12/hour it is in their best interest to provide 0.5 units of effort, because that effort level balances the disutility of effort with the benefit of keeping their job.
The figure shows a bakery's marginal and average cost curves, and its isoprofit curves. The bakery is a price-taker in a large bread market.
At A, the bakery would be making a loss. P1 is below the bakery's average cost for all quantities produced. If the price were P1, the bakery would produce at A to minimize its loss until it could go out of business.
Based on this information, which of the following statements is correct?
At A, the student is willing to give up 34 grade points for five extra hours of free time.
Refer to the figure in question 6. Which of the following statements is correct?
At B, the decrease in price that keeps profits constant when one extra car is sold is larger than the decrease in price required to sell one extra car. The price decrease that keeps the profit constant when one extra car is sold is the MRS (the slope of the isoprofit curve), while the decrease in price required to sell one extra car is the MRT (the slope of the demand curve). At B, the MRS is higher than the MRT.
Consider the following assurance game. The table below shows both players' payoffs (measured in dollars) for each strategy set.
Both players want to attend the same event, but Anthony prefers the opera and Becky prefers football. Yes, the Nash equilibria in this game are (Opera, Opera) and (Football, Football). Anthony prefers the former, and Becky prefers the latter.
Which of the following statements regarding employment contracts is correct?
Employees' effort levels cannot be the basis of an enforceable contract. For example, a restaurant owner cannot take an employee to a court to decide whether he can withhold wages because the waiter had not smiled often enough.
Which of the following statements regarding employment rents is correct?
Employers use high employment rents to exert power over workers. Workers can use the implicit threat of being fired to make the worker perform in ways that he would not choose unless they had something to lose.
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, two of Angela's indifference curves, and the Pareto efficiency curve CD. Note that Angela's preferences are quasi-linear, so IC2 is simply IC1 shifted upwards.
F is not Pareto efficient because the surplus is not maximized. At point F, the MRS does not equal the MRT, so total surplus is not maximized. Moving from F to any point on the line HG will make either Angela or Bruno or both better off. Hence, F is Pareto inefficient.
Which of the following is the best example of a non-excludable public good?
Free WiFi Free WiFi is non-excludable (because it is free) and non-rival (because one person's use does not diminish another person's use, at least until huge numbers of people are using the service). Free WiFi is a good example of a non-excludable public good.
The 1978 law that protected Bengali sharecroppers from eviction and increased their share of the crop from 50% to 75% did all the following except
Generate a Pareto improvement. The law increased the incomes of sharecroppers by more than it increased total output, so it necessarily reduced the income of landowners. Although the policy raised efficiency, it did not generate make everyone better off, so it did not generate a Pareto improvement.
Which of the following statements regarding Karl Marx are correct?
He argued that capitalism created atomized individuals instead of integrated communities. The fact that capitalism organizes production and allocation in anonymous markets was an important component of Marx's critique of capitalism.
Which of the following goods is not allocated by markets in the U.S. because doing so is widely viewed as repugnant?
Human kidneys Human kidneys are allocated through a matching algorithm that was developed in part by the economist Alvin Roth using non-market mechanisms.
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve, and how many bushels Angela would get at allocations B and D.
If Bruno cannot coerce Angela but has all the bargaining power he will offer Angela allocation D. The maximum distance between the feasible frontier and Angela's reservation indifference curve is CD, where Angela works 8 hours. If Bruno has all the bargaining power, he can therefore offer her allocation D and keep all 4.5 bushels of surplus for himself. (If Angela had some bargaining power, Bruno would have to agree with an allocation somewhere between D and C.)
The figure below illustrates Maria's employment rent on her current job, given her wage, her disutility of work, the unemployment benefit, and the expected duration of unemployment.
If the expected duration of unemployment falls to 22 weeks, Maria's employment rent will be $3,080. Halving the duration of unemployment will halve Maria's employment rent to, $4/hour ✕ 770 hrs. = $3,080.
Which of the following statements regarding Nash equilibrium are correct?
In a Nash equilibrium, no player has an incentive to change their strategy given the other player's strategy. A Nash equilibrium can also be defined as a set of strategies such that each player's strategy is a best response to the strategies chosen by the other player(s). A Nash equilibrium is an equilibrium because no player has an incentive to change behavior.
Which of the following statements regarding bargaining power is correct?
In a dictator game, the Proposer has all the bargaining power. In a dictator game, the Responder has no role other than to take whatever is offered, if anything. Therefore the Responder has no bargaining power and the Proposer has all the bargaining power.
Which of the following statements is true?
In a labor contract, one side of the contract has the power to issue orders to the other side. A labor contract gives the employer the authority to direct the activities of the employee. This distinguishes it from a sale contract that transfers property rights and does not bind the parties to further actions.
Which of the following statements regarding monopolistic and competitive markets is correct?
In a monopolistic market, the firm is a price-setter. In a monopoly market the firm sets the price to maximize its profit i.e. it is a price-maker rather than a price-taker.
Consider an ultimatum game of sharing a pie of $100. The first table shows the cumulative percentage of the Responders who accept the amount offered by the Proposers for when the game was played with two separate groups (Kenyan farmers and US university students). The second table shows the percentage of the Proposers who made those offers in the two groups.
In both groups, the highest proportion of Proposers offered the amount that maximized their expected payoff. The maximum expected payoff occurs at $40 for Kenyan farmers ($57.60) and at $30 for US students ($58.80). These are indeed the offers for which there were the highest proportions of offers.
Which of the following statements regarding the Malthusian model are correct when there is a permanent, positive technological shock (such as an improved seed)?
Income initially rises but then falls back to the subsistence level. In Malthus' model, subsistence is the average product at which there is no population growth. An improved seed will temporarily raise the average product above subsistence, but the population will then grow until the average product again equals subsistence
Which of the following statements most accurately summarizes recent trends in global income inequality, as presented in Unit 19.1?
Inequality between countries is declining, while inequality within countries is rising, with the net effect being falling global inequality. Whatever the gains and losses to Western economies arising from globalization, it has helped rapid income growth in countries like India and China. Since these are also very large countries (as measured by population), the overall effect on world inequality has been negative.
Consider a world of just two individuals, Gonzalo and Leila, who each need two goods to survive, apples and wheat. They differ in how productive they are in growing apples and wheat: There are gains from specialization (or gains from trade) because:
Leila has a comparative advantage in producing wheat. Gonzalo can produce twice as much apples and 1.2 times more wheat than Leila. Therefore Leila has a comparative advantage in producing wheat and a comparative disadvantage in producing apples.
Which of the following statements is correct?
Market failures occur when market prices do not fully account for the effect that actions have on others. Market failures occur whenever there are (positive or negative) externalities from market transactions.
Consider Figure 19.10. Which of the following statements cannot be inferred from the figure?
Men earn lower incomes in Denmark than in the US. While men may earn higher incomes in the US than in Denmark, it cannot be inferred from Figure 19.10. The figure says nothing about the earnings of men in the 1st or 5th quintile, only about how men's relative earnings are transmitted from one generation to the next.
According to Malthus, which of the following are the causes of diminishing average product of labor?
More labor is devoted to a fixed quantity of land, or new land brought into cultivation is of inferior quality. This is the main cause of diminishing average product of labor.
A firm's fixed cost is $0 and marginal cost is $20. P is the price of the unit and Q represents the number of units produced. Which of the following statements is correct?
Producing 2,000 units with a price of $40 (Q=2000, P=40) and producing 20,000 units with a price of $22 (Q=20,000, P=22) are both points on the same isoprofit curve. When Q=2,000 and P=40, profit = ($40-$20)(2,000)=$40,000. When Q=20,000 and P=22, profit = ($22-$20)(20,000)=$40,000. Therefore, these two points are on the same isoprofit curve
Which of the following is a non-excludable public good?
Streetlights Streetlights are non-excludable (since you cannot stop your neighbours from benefitting) and non-rival (since your use does not reduce the light available to your neighbours). This makes them a pure public good.
Reductions in the amount of resources (labor, machines, land, energy, time) required to produce a given amount of the output is known as
Technological progress The Industrial Revolution launched the permanent technological revolution in Britain around 1800.
Production of cloth requires two inputs: L workers and R tonnes of coal. The following diagram depicts the isocost line associated with production. The wage (w) is $20 and the price of coal (p) is $30. Which of the following statements is correct?
The cost of using 6 workers and 2 tonnes of coal is the same as that of using 3 workers and 4 tonnes of coal. (6, 2) and (3, 4) are both points on the same isocost line.
The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves.
The deadweight loss in the profit-maximizing outcome is $23,580. The profit-maximizing outcome is C. The deadweight loss is ½ × (5440 - 2820) × (50 - 32) = $23,580.
In the following diagram you are given two technologies, A and B, which can produce 100 meters of cloth. Technology A uses 1 worker and 4 tonnes of coal, while technology B uses 4 workers and 2 tonnes of coal. The diagram also depicts three isocost curves, NM, GF and JH. The wage and the price of coal are denoted by w and p, respectively. In period 1, the wage cost and the price of coal are (w, p) = ($10, $20) and in period 2, the wage cost and the price of coal change to (w, p) = ($20, $10). Which of the following statements is correct?
Technology B is cheaper in period 1 and Technology A is cheaper in period 2. In period 1, Technology B is cheaper, because it costs 4*$10 + 2*$20 = $80 instead of 1*$10 + 4*$20 = $90. In period 2, technology A is cheaper, because it costs 1*$20 + 4*$10 = $60 instead of 4*$20 + 2*$10 = $100.
The following table gives different technologies that produce 100 meters of cloth. Based on this information, which of the following statements is correct?
Technology B is never cost-minimizing. Technology B is dominated by technology C. Therefore it will never be chosen.
Which of the following statements regarding the average product of labour (APL) is correct?
The APL at 4 hours is 12.5. At 4 hours, the student receives a final grade of 50, so their APL is 50/4 = 12.5
Consider the Lorenz curves for pirate ships and navy ships.
The Gini coefficient on pirate ships was much lower than the Gini coefficient on navy ships. Recall the Gini coefficient = A/(A+B), and the area A is very small for the Royal Rover.
Select the correct statement regarding the Gini coefficient.
The Gini coefficient takes the value of 1 when a single individual receives all income. The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality), which would be the case when one person receives all income.
Which of the following statements regarding marginal product of labour (MPL) are correct?
The MPL at 4 hours is the slope of the tangent line. The MPL shows the rate of increase in the final grade as hours of study increase. Note you can calculate that the MPL is between 7 and 8 (since the grade increases by 8 points when study hours are increased from 3 to 4, and it increases by another 7 hours when study hours are increased from 4 to 5).
Based on this figure, which of the following statements is correct?
The Nash equilibrium price is $8. In equilibrium, no one has an incentive to deviate, which is the case when supply equals demand. Therefore $8 is the Nash equilibrium.
Review Figure 19.2 below. Which of the following statements is true?
The UK had a relatively high level of wealth inequality until 1970. The share of total wealth held by the richest 1% in the UK was higher than in the other countries listed, although the data shows the similar pattern over time with inequality rising (until about 1918) and falling (until about 1980).
A bakery is one of many that operate in the bread industry. The market demand curve for bread is downward-sloping. The bakery incurs fixed costs and has an upward-sloping marginal cost curve. Which of the following statements is correct?
The bakery faces a flat demand curve. For the bakery, it is not the market demand curve that affects its demand, but instead the price charged by its competitors. The demand curve faced by the bakery is therefore horizontal at this price.
Consider an employee with a reservation wage of $6 an hour. The employee chooses an effort level between zero and one. Which of the following statements regarding her best response curve is correct?
The best response curve describes the effort that the employee would choose for any hourly wage. The best response curve shows the effort level that will make the employee best off, given any hourly wage.
Based on this information, which of the following statements is correct?
The change in the choice from C to D represents the substitution effect.
The diagram depicts the demand curve for a product. Assume that there are 100 potential buyers who can choose to purchase one unit each.
The diagram demonstrates the Law of Demand. The Law of Demand states that when the price is high, demand is low, while when the price is low, demand is high. The downward-sloping demand curve clearly demonstrates this.
Which of the following factors contribute to a firm's diseconomies of scale?
The difficulty of monitoring workers' effort as the number of employees increases. If you only have one employee then you can make sure that they work hard. You cannot do this when there are 100 workers. This leads to diseconomies of scale.
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and her reservation indifference curve. If Angela does not work, she receives a survival ration of 2.5 bushels from the government.
The economically feasible set is a subset of the technically feasible set. Any allocation between the biological survival constraint and the feasible frontier is technically feasible, but only allocations between the reservation indifference curve and the feasible frontier are economically feasible. Angela will only voluntarily agree to allocations in the economically feasible set when her reservation option is point Z.
Labor contracts are incomplete because
The firm cannot observe exactly how an employee fulfills the contract. The firm cannot contract an employee not to leave. The firm cannot specify every eventuality of a contract. All of the above. Employment contracts are incomplete for a number of reasons, including all the reasons above. This distinguishes the labor market from markets with complete contracts (such as the market for apples).
In which of the following cases would a firm be maximizing profits?
The firm minimizes the cost per unit of effort. What matters to a firm's profit is not the number of hours worked but the amount of effort put in by its employees. Minimizing the cost per unit of effort minimizes the cost of production, hence maximizing the firm's profit.
Consider the perfectly competitive market for bread analyzed in Unit 8. Why is the competitive equilibrium Pareto efficient?
The gains from trade are maximized. This is true, because every producer sells bread at its marginal cost, so every loaf is sold where WTP > WTA.
The following figure shows labor productivity and the real wage index in England from 1750 to 2000. Based on this information, which of the following statements is correct?
The graph demonstrates that workers need bargaining power to benefit from higher labor productivity. The average product of labor determines the size of the pie to be divided up. The bargaining power determines the share of the pie going to workers.
Suppose that the unit cost of producing a t-shirt is $5, regardless of the level of output and there are no fixed costs. Which of the following statements is correct?
The marginal cost curve is a horizontal line The marginal cost is equal to $5 for all outputs. That means this is a horizontal straight line
Which of the following markets best approximates perfect competition?
The market for milk. Milk is highly substitutable. There are many sellers and many buyers. Therefore the milk market is highly competitive.
The figure shows the market supply curve for second-hand textbooks, together with original and new demand curves, where the curve has shifted due to the arrival of new students. Based on the figure, which of the following statements is correct?
The more elastic (or more flat) the supply curve, the smaller the price rise. For a given shift in the demand curve, the price rise would is smaller the more elastic (or more flat) the supply curve.
Consider a student whose final grade increases with the number of hours spent studying. Her choice is between more free time and higher grades, both of which are 'goods'. Which of the following is not the same as her marginal rate of transformation between the two goods?
The number of percentage points the student is willing to give up for another hour of free time. The number of percentage points a student is willing to give up is equal to the student's marginal rate of substitution. Note that her MRS describes her preferences rather than her feasible set. When the student maximizes their utility subject to the feasible set, the MRS equals the MRT.
Figure 1.2 shows the distribution of income across and within countries in 2014. The height of each bar represents the annual income of the population (for each decile), measured in 2005 US$, while the width of each country's bar represents its population. The red countries were the poorest countries in 1980, while the green countries were the richest in 1980.
The poorest decile in the US earns more than the richest decile in some poor countries.
The figure shows the Lorenz curve for market income and disposable income in the Netherlands in 2010.
The poorest fifth of the Dutch population has virtually no market income. The poorest 20% of the population collectively receive about 1% of market income.
The following figure depicts an employee's best response to wage when the expected unemployment duration is 44 weeks. Which of the following statements is correct?
The slope of the best response curve is the employer's marginal rate of transformation of higher wages into worker effort. The employer can "transform" wages into an effort by moving along the best response curve.
In Britain before 1870, both wages and hours worked rose, while after 1900 working hours fell as wages continued to rise. Based on this information, which of the following statements is correct?
The substitution effect dominated the income effect before 1870, but the income effect dominated the substitution effect after 1900. As wages increase, so does the opportunity cost of free time, so the substitution effect is always negative. However, as wages increase so do workers' incomes, allowing them to "purchase" greater leisure, so the income effect is always positive.
Consider the figure in Question 1. Suppose instead the government decides to impose a specific (or fixed) tax of T per kg of salt, to be paid by the suppliers. Which of the following statements is correct?
The supply curve shifts up in a parallel manner. Unlike a sales tax, where the tax is a percentage of the price, with a specific tax the amount of tax is fixed at T for all prices. Therefore the supply curve shifts up in a parallel manner.
The government now decides to impose a sales tax of 30% on the price of salt, to be paid by the suppliers. Which of the following statements is correct?
The tax causes a decline in the quantity traded. The quantity traded is reduced to the point where the difference between the price on the demand curve (the price received by the consumers) and the price on the supply curve (the price received by the suppliers) is 30% of the latter.
Consider the case where a government introduces a specific tax on cigarettes, which reduces the consumption of cigarettes. Which of the following statements is correct?
The tax may increase social welfare. If cigarettes harm smokers and others, the tax may increase welfare by decreasing smoking. Note the cost of tax collection is also an important consideration. For example, the Danish tax on butter was abolished after only 15 months due to the administrative burden it placed on firms, despite reducing the consumption level by 20%.
The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves. At C, the firm sets the price at $5,440, sells 32 cars, and earns a profit of $63,360. Which of the following statements is correct?
The total cost of producing 32 cars is $110,720. The total revenue at C is 5,440 × 32 = $174,080. The profit at C is $63,360. Therefore the total cost is 174,080 - 63,360 = $110,720.
The figure shows the demand and supply curves in the salt market. The government imposes a sales tax of 30% on the price of salt, to be paid by the suppliers. This decreases the quantity traded from Q* to QT, decreases the price received by producers from P* to PT1, and increases the price paid by consumers from P* to PT2.
The total surplus is equal to A + B + D + F. The gains from trade or the total surplus is the sum of the consumer surplus A, the producer surplus F, and the tax revenue B + D.
Consider the technologies and costs from the previous problem. In period 1, the wage and the price of coal are (w, p) = ($10, $20) and the firm uses technology B. In period 2, the wage cost and the price of coal change to (w, p) = ($20, $10). The price of the cloth is $2 per meter in both periods. Which of the following statements is correct?
There is a positive economic rent in switching from technology B to A in period 2. This is true - the cost of labor has increased relative to the price of coal in period 2, so there is a benefit in switching the technology to a more energy-intensive one.
The figure shows a demand curve for Cheerios. Based on this figure, which of the following statements is correct?
There is no demand if the price is set above $7.20. The vertical axis intercept shows that no one would purchase a pound for more than $7.20.
Consider the following four games where players Row and Column each have two strategies: A and B. Which of the following games illustrates a prisoners' dilemma?
This is a prisoners' dilemma because there is a single Nash equilibrium, (B, B), and this dominant strategy equilibrium is worse for both players than if both players played the strategy A.
In Guadeloupe and Martinique, the use of pesticide chlordecone on banana plantations devastated fishing communities downstream. Which of the following statements is correct?
This was an example of a social dilemma. Here the unregulated pursuit of self-interest leads to outcomes that are Pareto inefficient, compared to the outcome when individuals take into account the effect of their decision on others. Therefore it is an example of a social dilemma.
You currently work for 40 hours a week at wage rate of £12 an hour. Your free hours are defined as the number of hours not in work, which in this case is 24 hours × 7 days - 40 hours = 128 hours per week. Suppose that you are happy to keep your total weekly income constant. Then:
To have 16 hours of more free time, your wage rate needs to increase by £8. The current total weekly income is £12 × 40 hours = £480. 16 extra hours of free time means 128 hours + 16 hours = 144 hours of free time, or 24 hours of work. To keep your weekly income constant, your wage rate needs to increase to £480 / 24 = £20 an hour, which is an increase of £8.
There are five students who are looking to buy one second-hand textbook each. Their willingness-to-pay are £5, £6, £8, £12, and £15, respectively. Based on this information, which of the following statements is correct?
To sell three books, the maximum price that can be charged is £8. If the price is £8, the demand is 3 books, and demand is less than 3 books for prices higher than £8.
Wealth is usually more unequally distributed than earnings. This is mainly because:
Wealth is accumulated savings that can be passed on from parents to children. Bequests of inherited wealth are a major route through which parents influence the life chances of children. Most children inherit little or no wealth from their parents, while a few inherit large fortunes. Parents' earnings do not similarly affect their children's ability to earn income, although wealthy parents are able to buy superior education and other advantages for their children.
Review Figure 19.13. Which of the following statements is true.
Wealth is distributed more unequally than most people think. People estimate that the richest 20% of Americans own about 60% of the nation's wealth, but the richest quintile actually owns about 85% of all wealth.
Figure 3.2 is a plot of GDP per capita against average annual hours of free time per worker in different countries. Which of the following statements is correct?
Workers in the US and Turkey enjoy a similar amount of free time despite a large disparity in income. This is evident in the diagram: workers from the US and Turkey both enjoy 6900-7000 hours of free time but the US has a much higher GDP per capita than Turkey.
Diminishing average product of labor means
as more labor is used in a production process, the amount produced per worker decreases. This is the foundations of Mathus' model. Recall the famer example in the text: as more farmers work on a fixed amount of land, the average product of labor (total output divided by total number of workers) falls
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve. If Angela does not work she receives a survival ration of 2.5 bushels from the government.
d. At allocation d. Bruno receives nothing (and therefore is indifferent to Z), but Angela is above her reservation indifference curve. Hence point d. Pareto dominates Z.
In economics, institutions refer to
the rules of the game. Established laws and social customs are institutions that specify who can do what, when they can do it, and how each player's actions determine their payoff.
