Microeconomics Exam 2 (Ch. 12-18) Review/Practice Questions

How much money do you have to put into a bank account that pays 10% interest compounded annually to have $10,000 in ten years? FV = PV x (1+r)^n

$10,000 = PV x (1+0.1)^10 $10,000/(1.1^10) = $3,855.43

How much would the tax or subsidy need to be to achieve the socially optimal level of output?

$4

What is the equilibrium price in this market?

$8

What is the socially optimal quantity of output in this market?

10 units

To achieve the socially optimal level of output, would the government impose a tax or a subsidy?

a subsidy

Trevor and Lynda bought a home in 2013 for $185,000 with a 20% down payment. Their mortgage payments were only applied to interest on the mortgage balance. If they have to sell their home in 2016 for $148,000, what would be the value of their equity in the home? a. $0 b. $37,000 c. $11,100 d. $29,600

a. $0

___________________________ can lead to a situation where, even if sellers are faced with a situation of ___________________________, they will decide not to cut prices for awhile because they know that buyers in this situation will not react by purchasing a ___________________________. a. Imperfect information; excess supply; higher quantity b. Adverse selection; reduced supply; lower quantity c. Adverse selection; excess supply; better quality d. Imperfect information; reduced supply; higher quality

a. Imperfect information; excess supply; higher quantity

Imagine that a $10,000 ten-year bond was issued at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%. a. Given the change in interest rates, would you expect to pay more of less than $10,000 for the bond? b. Calculate what you would actually be willing to pay for this bond.

a. Less b. PV = FV/(1+r)^n; $10,600/1.09 = $9,724.77 Remember you will get your $10,000 principal and $600 interest at the end of year 10

____________________________ that are issued by government agencies are a form of validation that a worker has completed a certain type of education or passed a certain test. a. Occupational licenses b. Industrial licenses c. Service contract licenses d. Occupational insurance licenses

a. Occupational licenses

In the U.S. political arena,_____________________ may tend to emphasize the virtues of markets and the limitations of government, while _____________________ may tend to emphasize the shortcomings of markets and the need for government programs. a. conservatives; liberals b. politicians; economists c. economists; politicians d. liberals; conservatives

a. conservatives; liberals

Negative externalities lead markets to produce a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. b. smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. c. greater than efficient output levels and positive externalities lead markets to producer efficient output levels. d. efficient output levels and positive externalities lead markets to produce greater than efficient output levels.

a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.

The presence of _______________________________ in transactions involving goods can easily cause a _______________________________ if the result is only a relatively small number of buyers and sellers communicating enough information so that they can agree on a price. a. imperfect information; thin market b. adverse information; decline in prices or quantities of products sold c. adverse selection; decline in prices or quality of purchased goods d. imperfect selection; thick market

a. imperfect information; thin market

If an alternative policy could encourage both _____________________, instead of ________________________, consumers would benefit. a. invention and competition; invention and monopoly b. invention and monopoly; invention and public funding c. invention and monopoly; invention and competition d. invention and competition; invention and public funding

a. invention and competition; invention and monopoly

Table: Percentage of Before-Tax Income Received by Families in Hapland Group % of Family Income in 2020 % of Family income in 1970 Bottom Quintile 4.1 5.5 Second Quintile 6.2 7.2 Middle Quintile 12.1 13.6 Fourth Quintile 26.9 25.8 Top Quintile 50.7 45.9 Refer to the Table above. According to the table, from 1970 to 2020, the Hapland income distribution become a. less equal. b. more equal. c. more equal at the lowest level of income but less equal at highest level of income. d. less equal at the lowest level of income but more equal at highest level of income.

a. less equal.

In some instances where voters have more than two choices in a democratic election, the principle that the _____________________ will decide the outcome may no longer make logical sense. a. majority of voters b. under-educated voters c. economically challenged d. eligible voters

a. majority of voters

When a firm invests in new technology, the _____________________________ that the firm receives are ___________________________ . a. private benefits; only a portion of the overall social benefits b. social benefits; only a portion of the overall private benefits c. private benefits; about three-quarters of the economic benefits d. social benefits; about one-third of the overall private benefits

a. private benefits; only a portion of the overall social benefits

The theory of __________________ holds that people won't bother incurring the costs of becoming informed and voting, because they know that their vote ____________________. a. rational ignorance; won't be decisive in the election b. imperfect competition; has little impact on election outcomes c. inequality of incomes; won't be decisive in the election d. democracy by majority rule; won't impact election outcomes

a. rational ignorance; won't be decisive in the election

Political institutions play a role in allocating the ______________________, and economists have played an active role along with other social scientists in analyzing ______________________. a. scarce resources of society; how such political institutions work b. single political district spending; the impossibility of the majority deciding what it prefers c. resources to pork barrel projects; the impossibility of deciding on spending limits d. funding to 51 tuition-free colleges and universities; disadvantages of price controls

a. scarce resources of society; how such political institutions work

Refer to Figure. If all external social costs were internalized, then the market's output would be a. Q1. b. Q2. c. Q3. d. Q4.

b. Q2.

Refer to Figure. The socially optimal level of output is a. Q1. b. Q2. c. Q3. d. Q4.

b. Q2.

If the production of a good yields a negative externality, then the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity. a. above; greater b. above; less c. below; greater d. below; less

b. above; less

Because Elaine has a family history of significant medical problems, she buys health insurance, while her friend Jerry, who has a healthier family, goes without. This is an example of: a. moral hazard. b. adverse selection. c. signaling. d. screening.

b. adverse selection.

Research on voting behavior in the U.S. has shown that, on average, people who are more __________________ tend to _______________________. a. involved with a political party; vote more frequently b. connected to society; vote more frequently c. conservative; vote less frequently d. liberal; vote less frequently

b. connected to society; vote more frequently

Refer to Figure. If this market is currently producing at Q4, then total economic well-being would be maximized if output a. decreased to Q1. b. decreased to Q2. c. decreased to Q3. d. stayed at Q4.

b. decreased to Q2.

In the investment industry, the principle of _______________ supports investing in a wide range of companies to reduce the level of risk. a. subprime loans b. diversification c. fundamentals trading d. buying low and selling high

b. diversification

A buyer confronted with ________________________ will sometimes believe that the price being charged reveals something about the ________________________ of the product. a. adverse selection; condition b. imperfect information; quality c. adverse information; condition d. imperfect selection; quality

b. imperfect information; quality

Suppose that new high-technology farming equipment is developed. These new machines are substitutes for low-income workers such as farm laborers, but they are complements for high-income workers such as farm technicians and farm owners. This new technology will ____________________________ employment and ____________________________ wages for high-income workers. a. increase; decrease b. increase; increase c. decrease; decrease d. decrease; increase

b. increase; increase

If a steel manufacturer considers the costs of labor and materials, as well as the broader costs of environmental injuries resulting from its manufacturing processes, a. its supply curve will be based on perceived benefits of maximizing utility. b. it is factoring in the social costs of the pollution it generates. c. its demand curve will be based on production choices relating to marginal costs. d. its costs will be the same as society's costs and all of the above.

b. it is factoring in the social costs of the pollution it generates.

Why would a bank require a borrower to have collateral or a cosigner before agreeing to lend funds? a. discourages some borrowers from asking for a loan b. reduces risk associate with imperfect information c. both act like a service contract in the goods market d. complicates the process to discourage risking borrowers

b. reduces risk associate with imperfect information

The problem of special interests in politics can be related to an economic policy problem called ________________________. a. pork-barrel spending b. regulatory capture c. logrolling d. imperfect competition

b. regulatory capture

If firms are perfectly competitive and profit-maximizing, the demand curve for labor is determined by a. the opportunity cost of workers' time. b. the value of the marginal product of labor. c. the value of the marginal product of capital. d. the ratio of the marginal product of labor to the marginal product of capital.

b. the value of the marginal product of labor.

Refer to Figure. This market a. has no need for government intervention. b. would be more efficient with a tax on the product. c. would be more efficient with a subsidy for the product. d. would maximize total well-being at Q3.

b. would be more efficient with a tax on the product.

If the U.S. government determines that the cost of feeding an urban family of four is $7,500 per year, then the official poverty line for a family of that type is a. $7,500. b. $15,000. c. $22,500. d. $30,000.

c. $22,500.

______________________ find ways to take the inflow of funds from many separate ______________________ of financial capital and transform it into the funds desired by ______________________ of financial capital. a. Financial intermediaries; high risks; suppliers b. Governments; suppliers; demanders c. Financial capital markets; suppliers; demanders d. Venture capital funds; the risks; demanders

c. Financial capital markets; suppliers; demanders

_______________________ are a form of _______________________ bonds that offer relatively high interest rates to compensate for their relatively high chance of default. a. Bonds; government b. High-yield bonds; municipal c. Junk bonds; corporate d. Certificates of deposit; bank

c. Junk bonds; corporate

Refer to Figure. Without government intervention, the equilibrium quantity would be a. Q1. b. Q2. c. Q3. d. Q4.

c. Q3.

Refer to Figure. This market is characterized by a. government intervention. b. a positive externality. c. a negative externality. d. a price control.

c. a negative externality.

Governments can improve market outcomes for a. public goods but not common resources. b. common resources but not public goods. c. both public goods and common resources. d. neither public goods nor common resources.

c. both public goods and common resources.

Market-oriented environmental tools __________________________ for firms to take the social costs of pollution into account and __________________________ in reacting to these incentives. a. draw distinctions; lower the social costs incurred b. lack incentives; prohibit firms from having flexibility c. create incentives; allow firms some flexibility d. specify particular technology; lower the social costs incurred

c. create incentives; allow firms some flexibility

Because a firm's demand for a factor of production is derived from its decision to supply a good in the market, it is called a a. marginal product of demand. b. secondary demand. c. derived demand. d. compensatory demand.

c. derived demand.

One of the problems with calculating the true amount of discrimination that takes place in the market for labor is the a. inability to calculate wage differentials. b. inability to see changes in the wage differentials over a period of time. c. difficulty in measuring productivity differences between workers. d. difficult in measuring female labor-force participation.

c. difficulty in measuring productivity differences between workers.

Why would a typical U.S. business fail to take the social costs of pollution into consideration during the development of their operating strategies? a. the range of flexible, market-oriented pollution control policies are flawed b. government regulated the limits for how much pollutant can be emitted c. it isn't required to pay any of the cost of cleaning up its pollution d. it is following the principle of voluntary exchange of benefits

c. it isn't required to pay any of the cost of cleaning up its pollution

The ______________________ of an investment is determined by how easy it is to sell an asset at any given time. a. profitability b. expected profitability c. liquidity d. sustainable outcome

c. liquidity

People cannot be prevented from using a good if the good is a a. private good or a public good. b. private good or a common resource. c. public good or a common resource. d. public good or a club good.

c. public good or a common resource.

If a rise in incomes is the same proportion for both low-income and high-income workers, a. then poverty will rise and inequality will remain unchanged. b. then poverty will rise and inequality will rise. c. then poverty will fall and inequality will remain unchanged. d. then poverty will fall and inequality will fall.

c. then poverty will fall and inequality will remain unchanged.

What do stocks, bonds, securitized mortgage assets and other financial investments all have in common? a. they are all forms of investments bought by demanders of capital b. they all guarantee rates of return c. they can only be purchased in financial markets d. their values are tracked by the Dow Jones Industrial Average

c. they can only be purchased in financial markets

If no externalities of pollution exist in a particular industry, the interaction of demand and supply ________________________. a. is based on benefits individuals perceive while maximizing utility b. is based on choices about production relative to total average costs c. will coordinate social costs and benefits d. shifts so supply has no relation to social costs

c. will coordinate social costs and benefits

Bill and Cathy built a new home in 1985 at a cost of $90,000. They paid 20% of the cost to build the home themselves and financed the remainder by way of a mortgage. They paid the mortgage off in 15 years. They used $35,000 from Bill's inheritance to upgrade the home in 2004. When they sold the home for $335,000 in 2006, what was the value of their equity? a. $35,000 b. $245,000 c. $210,000 d. $335,000

d. $335,000

Which of the following goods is rival and excludable? a. An uncongested toll road b. An uncongested non-toll road c. A congested non-toll road d. A congested toll road

d. A congested toll road

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct? a. At the current output level, the marginal social cost exceeds the marginal private cost. b. The current output level is inefficiently high. c. A per-shot tax could turn an inefficient situation into an efficient one. d. At the current output level, the marginal social benefit exceeds the marginal private benefit.

d. At the current output level, the marginal social benefit exceeds the marginal private benefit.

_____________________ is something valuable that a lender would have a right to _____________________ if the loan is not repaid. a. Collateral; sue for b. A guarantee; seize and retain c. A guarantee; sell d. Collateral; seize and sell

d. Collateral; seize and sell

Which of the following cannot be used to help explain wage differences among different groups of workers? a. Education Level b. Discrimination c. Unions d. Minimum-Wage Laws

d. Minimum-Wage Laws

One strategy insurance companies have adopted to reduce moral hazard is to require an injured party to pay a _______________ . a. actuarial fairness b. a contribution c. a premium d. a deductible

d. a deductible

If immigration consists of mainly high-skilled workers, then a(n) ________________________ in immigration will ________________________ the wages of high-skilled workers. a. increase; increase b. increase; not affect c. decrease; decrease d. decrease; increase

d. decrease; increase

Why did inequality of household income increase in the United States in recent decades? a. growth of single-parent families at the top end of the income distribution b. higher-earner couples near the top end of the income distribution c. increase in earnings received by high-skilled labor relative to low-skilled labor d. demand for high-skilled labor at higher wages increased and b and c

d. demand for high-skilled labor at higher wages increased and b and c

When the U.S. Congress begins to draft laws and regulations that attempt to reduce the harmful effects of environmental pollution, lobbyists of affected industries will a. study every word and comma in the legislation. b. suggest alternate wording in the legislation. c. often contribute to campaigns of legislators on key committees. d. do all of the above in order to influence legislation in their favor.

d. do all of the above in order to influence legislation in their favor.

The table below shows the quantity demanded and supplied in the labor market for economics professors at a local university, where all the professors belong to a union. All of the economics professors could also work as economic consultants, but the market for economic consultants is not unionized. Annual Salary Quantity Demanded Quantity Supplied $50,000 95 20 $60,000 80 30 $70,000 65 40 $80,000 50 50 $90,000 35 60 $100,000 20 70 If the union negotiates an annual salary increase for economics professors that is $20,000 higher than the market wage rate for economic consultants, then the market wage rate for the consulting positions will _____________________________ and the quantity of economic consultants employed will _____________________________. a. rise; rise b. rise; fall c. fall; fall d. fall; rise

d. fall; rise

Guarantees, warranties, and service contracts are all examples of a. how sellers provide information to would-be buyers. b. forms of reassurance used in the labor market c. how sellers are able to charge high prices d. forms of explicit reassurance provided by sellers

d. forms of explicit reassurance provided by sellers

When an externality is present, the market equilibrium is a. efficient, and the equilibrium maximizes the total benefit to society as a whole. b. efficient, but the equilibrium does not maximize the total benefit to society as a whole. c. inefficient, but the equilibrium maximizes the total benefit to society as a whole. d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

From a profit maximizing firms' point of view, the key question regarding the higher wages paid to union workers is whether the higher wage level a. is matched by non-union producers. b. can be passed on to its customers. c. leads to workers with more experience. d. is matched with higher productivity.

d. is matched with higher productivity.

Concerning market forces and labor markets that determine peoples' wages, which of the following is a true statement? a. labor markets consider how much a family needs for health care b. market forces consider what happens to families in their business decisions c. labor markets consider how much a family needs for necessities d. labor markets create considerable inequalities relating to income

d. labor markets create considerable inequalities relating to income

Which of the following will provide an investor with a legally valid claim of partial ownership of a firm? a. entitlement to bond interest b. ownership of a Treasury bond c. entitlement to dividends d. ownership of stock

d. ownership of stock

Labor unions can: a. be a primary line of defense against suppressed wage levels. b. be controversial in a for-profit market driven economy. c. bring better economic gains for their memberships. d. protect workers' pensions and all of the above.

d. protect workers' pensions and all of the above.

When the level of insurance premiums that someone pays is equal to the amount that an average person in that risk group would collect in insurance payments, the level of insurance a. will be adverse to profits. b. will be actuarially sound. c. complies with fundamental law. d. reaches actuarial fairness.

d. reaches actuarial fairness.

Some economists argue that if privately owned firms were required to pay the social costs of their pollution, the result would be: a. each would create less pollution b. each would lower production to decrease pollution levels c. their supply curves will represent all of those social costs d. the price of goods will rise and a and b above

d. the price of goods will rise and a and b above

If a society decides to reduce the level of economic inequality, which of the following sets of tools can it use? a. a tax imposed on the value of inheritances b. redistribution from those with high incomes to those with low incomes c. trying to assure that a ladder of opportunity is widely available d. the three main sets of tools it can use include all of the above

d. the three main sets of tools it can use include all of the above

If incomes rise for both low-income and high-income workers, but rise less for the high-income workers, a. then poverty will rise and inequality will fall. b. then poverty will fall and inequality will rise. c. then poverty will rise and inequality will rise. d. then poverty will fall and inequality will fall.

d. then poverty will fall and inequality will fall.