Econ Final Quiz Questions Unit 9.2, 10, 11.1, 11.6

10.3 Figure 10.3a depicts Julia's indifference curves for consumption in periods 1 (now) and 2 (later). Based on this information, which of the following statements is correct? a. The slope of the indifference curve is the marginal rate of substitution between the consumption in the two periods. b. The marginal return to consumption in period 1 is higher at E than at C. c. Julia's consumption is more equal (more 'smoothed') at C than at E. Therefore she prefers consumption choice C to E. d. Consuming exactly the same amount in the two periods is Julia's most preferred choice.

answer: a In order to stay on the same indifference curve, the change in utility due to a marginal change in consumption now must be precisely offset by the change in utility due to the change in consumption later.

Question 10.4 Figure 10.4 depicts Julia's choice of consumptions in periods 1 and 2. She has no income in period 1 (now) and an income of $100 in period 2 (later). The current interest rate is 10%. Based on this information, which of the following statements is correct? a. At F, the interest rate exceeds Julia's discount rate (degree of impatience). b. At E, Julia is on the highest possible indifference curve given her feasible set. c. E is Julia's optimal choice, as she is able to completely smooth out her consumption over the two periods and consume the same amount. d. G is not a feasible choice for Julia.

answer: b E is on the highest feasible indifference curve because any higher indifference curves would not touch the budget constraint line.

10.1 Which of the following statements are correct? a. Your material wealth is the largest amount that you can consume without borrowing, which includes the value of your house, car, financial savings, and human capital. b. Net income is the maximum amount that you can consume and leave your wealth unchanged. c. In economics, investment means saving in financial assets such as stocks and bonds. d. Depreciation is the loss in your financial savings due to unfavourable movements in the market.

answer: b Net income is the flow that corresponds to your stock of wealth, so if you consume it all your wealth is unchanged.

11.2 Figure 11.2 shows the hat market before and after a demand shift. Based on this information, which of the following statements are correct? a. After the demand increase, sellers will initially sell more hats at $8. b. The adjustment to the new equilibrium is driven by the rent-seeking behaviour of the buyers and the sellers. c. While the market adjusts, some buyers may pay more for a hat than others. d. The new equilibrium price may be anywhere between A and B.

answer: b & c Adjustment requires prices and quantities to be changed. rent-seeking provides incentives for buyers and sellers to make these changes. Until the new equilibrium is reached, buyers and sellers may find opportunities to benefit from transactions at different prices.

10.10 The following diagram depicts Julia's choice of consumptions in periods 1 (now) and 2 (later) under different interest rates. She has no income in period 1 but an income in period 2 against which she can borrow. Based on this information, which of the following statements are correct? a. A cut in the interest rate increases the marginal rate of transformation of consumption from period 2 to period 1. b. Julia will unambiguously increase her consumption in period 1 after an interest rate cut. c. Julia will unambiguously decrease her consumption in period 2 after an interest rate cut. d. The graph of interest rate (vertical axis) versus period-1 consumption (horizontal axis) is downward sloping.

answer: b & d The interest rate cut increases Julia's income and also makes present consumption cheaper relative to future consumption, so both the income and substitution effects lead her to increase consumption in period 1. We know from (b) that consumption in period 1 increases as the interest rate goes down, so consumption in period 1 is decreasing in the interest rate, meaning that the graph is downward sloping.

10.8 Which of the following statements is correct? a. Money is the cash (coins and notes) used as the medium of exchange to purchase goods and services. b. Bank money is the total money in the savers' deposit accounts at the bank. c. Base money is broad money minus bank money. d. Liquidity transformation occurs when the banks transform illiquid deposits into liquid loans.

answer: c Broad money is base money created by the central bank plus bank money created by commercial banks.

9.3 Figure 9.5 depicts the wage-setting curve and how it is derived using the best response function of the employees and the isocost lines for effort of the employers. Based on this figure: a. A cut in the unemployment benefit would shift the best response function to the left, and raise the wage-setting curve. b. If the expected period of unemployment increased, it would shift the best response function to the right, raising the wage-setting curve. c. In a country where the stigma attached to unemployment is high, the wage-setting curve would be lower. d. A sudden drop in the working age population (due, for example, to the retirement of the baby-boomer generation) would shift the wage-setting curve lower.

answer: c If there is high stigma attached to unemployment, then the workers' best response functions would move to the left. This reduces the equilibrium wage for a given unemployment rate, resulting in a lower wage-setting curve.

11.5 The figure shows an order book for News Corp shares. Which of the following statements about this order book is correct? a. A buyer wants 500 shares at $16.59. b. A limit buy order at $16.56 means that the buyer would pay at least $16.56 per share. c. A limit sell order for 100 shares at $16.58 will be unfilled. d. A limit buy order for 600 shares at $16.59 will be filled with 500 shares bought at $16.59 and the remaining 100 shares at $16.60.

answer: c The order cannot be filled because there are no buy orders at a price as high as $16.58.

9.2 Which of the following statements is correct? a. participation rate = employed ÷ labour force b. unemployment rate = unemployed ÷ population of working age c. employment rate = employed ÷ population of working age d. employment rate + unemployment rate = 1

answer: c definition of employment rate

10.11 Which of the following statements are correct regarding the principal-agent problem? a. A principal-agent problem exists in loans due to a positive possibility of the principal not being repaid. b. The principal-agent problem can be resolved by writing a binding contract for the borrower to exert full effort. c. One solution for the principal-agent problem in loans is for the borrower to provide equity. d. The principal-agent problem leads to credit rationing in the loans market.

answer: c & d Equity implies that the agent has more to lose if the project fails, reducing the difference in the incentives between the principal and the agent. This occurs because some otherwise-viable projects will not be funded owing to the principal-agent problem. In particular, those with few assets or little wealth, who cannot afford to put in equity or provide collateral, will be more likely to be credit rationed because of the principal-agent problem.

10.12 An an economy with a population of 100, there are 80 farmers and 20 lenders. The farmers use the funds to finance the planting and tending of their crops. The rate of profit for the harvest is 12.5%, while the interest rate charged is 10%. Compare the following two cases: Case A: All farmers are able to borrow. Case B: Only 50 farmers are able to borrow. Based on this information, which of the following statements is correct? a. The share of total output received by the farmers who can borrow is 25%. b. The Gini coefficient for Case A is 0.5. c. The Gini coefficient for Case B is 0.6. d. There is a 10% increase in the Gini coefficient in Case B compared to Case A.

answer: d 0.7 is 16.7% higher than 0.6.

10.2 Mr Bond has wealth of £500,000. He has a market income of £40,000 per year, on which he is taxed 30%. Mr Bond's wealth includes some equipment, which depreciates by £5,000 every year. Based on this information, which of the following statements is correct? a. Mr Bond's disposable income is £40,000. b. Mr Bond's net income is £28,000. c. The maximum amount of consumption expenditure possible for Mr Bond is £23,000. d. If Mr Bond decides to spend 60% of his net income on consumption and the rest on investment, then his investment is £9,200.

answer: d 60% of his net income is £13,800, leaving £9,200 to spend on investment.

10.7 The following diagram depicts Julia's choice of consumption in periods 1 (now) and 2 (later) when the interest rate is 78%. She has no income in period 1 and an income of $100 in period 2. She chooses the consumption choice G. Based on this information, which of the following statements regarding Julia's balance sheet is correct? a. The asset after borrowing but before consumption in period 1 is 56. b. The net worth after consumption in period 1 is 0. c. The liability before consumption in period 2 is 35. d. The asset after consumption but before repaying the loan in period 2 is 62. Check my answers

answer: d Her income in period 2 is 100, of which she consumes 38, leaving 62 before she repays the loan.

10.9 The following example is a simplified balance sheet of a commercial bank. Based on this information, which of the following statements is correct? a. The bank's base money consists of cash and reserves and financial assets. b. Secured borrowing is borrowing with zero default risk. c. The bank's net worth is its cash and reserves of £2 million. d. The bank's leverage is 33.3.

answer: d Leverage is net worth divided by assets, here £3 million/£100 million = 33.3.

9.1 Which of the following statements is correct? a. To maximize profits, firms set the wage at the level where the workers are indifferent between working and not working. b. Firms aim to set as high a price as possible. c. In equilibrium, the wage clears the labour market, so there is no unemployment. d. If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.

answer: d The real wage is W/P while the markup is (P − W)/P = 1 − (W/P). So the higher the former, the lower the latter.