FHCE 3150 final

If you are trying to guess the average age of a group that walks across a stage in a guessing contest and you are influenced by anchoring and adjusting, you will guess a higher age estimate if the group a. walks across the stage in ascending order of age. b. walks across the stage in descending order of age. c. walks across the stage in a randomly selected fashion. d. has bald rather than gray-haired senior citizens.

b, You are more influenced by the first persons to go across the stage.

The lemon principle implies that a. used-goods markets have a higher percentage of lemons in them than the total population of used items does. b. people with good used items will have incentive not to sell them. c. a person selling a used item is better off practicing the full-disclosure principle. d. all the above are true. e. none of the above are true.

d, You may disagree that (c) is correct, and it is questionable if defects of a used item can successfully be disguised.

Which could not be an efficient solution to the problem of my neighbor's playing loud music that I hate but can hear clearly through the wall of my apartment? a. My neighbor's shutting down her stereo b. My enduring the noise c. My insulating the wall d. My neighbor's insulating the wall e. My playing music we both hate loudly enough to ruin her atmosphere

e, This would make everyone worse off even though it may bring perverse satisfaction. However, it may lead to some sort of a cease-fire that is preferred to the initial state.

By adding an irrelevant option to a tough decision process, it is likely that a. the option closest to the irrelevant option will be chosen. b. the option least like the irrelevant option will be chosen. c. none of the options will be selected. d. the irrelevant option will be chosen out of frustration.

a, The halo effect applies here.

Now assume the lucky person in question 22 above has a utility function of U = √dollars. How much would Buffett have to offer to buy out this person? a. $250 b. $179 c. $500 d. $675

a, This risk averse person would need only $250 to receive 15.82 units of pleasure. Because the full $1,000 would give 31.63 units of pleasure and the chances of that are only 50%, Buffett could escape the possibility of paying $1,000 by making a deal for $250.

If the price-consumption curve of shelter is downward sloping, then a. the amount of money spent on shelter increases as its price falls. b. the amount of money spent on shelter decreases as its price falls. c. the amount of money spent on shelter stays the same as its price falls. d. it is impossible to tell whether the total expenditure on shelter has changed.

a. the amount of money spent on shelter increases as its price falls.

If borrowing and lending is possible at a positive interest rate and if there is present and future income, then the intertemporal budget constraint a. will be a straight line with a slope steeper than -1. b. will be a kinked line with the kink being at the first-year income point. c. will be a straight line with a slope of 1. d. will be concave to the origin.

a, A slope steeper than 1 means a positive interest rate.

If the statement that "anticipation is greater than reality" is true for an item, then the a. consumer's behavior may appear to have a negative time preference when she really has a positive time preference. b. consumer's behavior may appear to have a positive time preference when he really has a negative time preference. c. consumer's behavior will exhibit a neutral time preference. d. consumer will be unable to make a decision about consuming that item.

a, Anticipation actually increments the utility from the product, which is like a return from the product itself.

Which of Patrick's utility functions below indicates that Patrick is altruistic? a. U = f(Patrick's wealth + Joel's wealth/2) b. U = f(the square route of Patrick's wealth) c. U = f(Patrick's wealth / Joel's wealth) d. none of the above correctly answer the question.

a, As Joel's wealth rises, Patrick's utility rises suggesting that Patrick feels better because Joel has become better off. . In letter (b) Patrick doesn't care about Joel and in (c) Patrick feels better when Joel has less.

When there are no search costs involved in finding others like you, the proportion of trusters in the population ends up a. being greater than when there are positive search costs. b. is smaller than when there are positive search costs. c. is unchanged from when there are positive search costs. d. is indeterminate until one knows whether the cheaters will use the free information.

a, Because the net payoff will always be greater with zero search costs a truster will never work with a cheater and therefore will have a higher net payoff. Cheaters get no advantage from the information because no truster, knowing cheaters for what they are, will work with them

An ordinary demand curve a. incorporates both income and substitution effects of a price change. b. includes only the substitution effect of a price change if the good is inferior. c. would be downward sloping always. d. includes only the income effect of a price change.

a, Compare the ordinary to the compensated demand curve discussed in the text appendix.

In a village where common pastureland is the source of income for the citizens, it is normal for the farmers to a. add more cattle to the pasture until the average product received by the farmer is equal to his opportunity cost of adding the cattle. b. add more cattle to the pasture until the marginal product to society is equal to the opportunity cost of adding the cattle. c. add more cattle to the pasture until the marginal product received by society as a whole is equal to the average product of grazing. d. graze less cattle than would be grazed if the land were privately owned.

a, Farmers have no incentive to count the cost their cow inflicts on other farmer's cows who now have less to eat.

What is the expected value of a gamble where you toss a coin and win $100 if it lands heads and lose $50 if it lands tails? a. $25 b. $50 c. $0 d. -$25 e. None of the above are accurate.

a, Fifty percent times $100 + 50% times _$50 = $25.

Which of the following goods are most likely to have a negative cross-price elasticity? a. your micro text and this study guide b. your micro text and your literature text c. ice cream and candy in the snack shop d. all the above e. none of the above

a, Hopefully the text and study guide are complements, not substitutes.

If a person expects a lavish dressing style to signal that he is a gifted professional, this effort may fail because this practice does not solve the problem of _____ involved in conspicuous-consumption situations. a. positional externalities b. adverse selection c. mimicry d. full disclosure

a, If everyone does it, the expected advantage cancels out.

The Cornell plan (see first page of this chapter in your text) to pay faculty children's tuition at other colleges will financially help Cornell most if the faculty children's demand for education at other colleges is ___________as long as there are other students waiting in line for a Cornell education. a. highly price elastic b. unitary price elastic c. price inelastic d. income elastic

a, If many Cornell faculty students go elsewhere when the price to them of another school's tuition falls, then Cornell can make more money on the new students who come.

If you operate a movie theater, you might keep a close watch on the popcorn and Netflix markets because you know that a. popcorn and movie ticket markets have a negative cross-price elasticity. b. movie tickets and Netflix rentals have a negative cross-price elasticity. c. the demand for movie tickets is almost perfectly inelastic. d. the demand for movie tickets is almost perfectly elastic.

a, If the price of popcorn goes down, people will likely go to more movies because the movie plus popcorn cost will be lower. Therefore a certain percentage decrease in popcorn prices will lead to certain percentage increase in movie sales which would mean a negative cross price elasticity between the two items as they are complements.

If one codes mental losses and gains and has an asymmetric value function in which losses are felt more keenly than foregone gains of equal value, then it is possible to explain why people a. do not ignore sunk costs in some decisions. b. fall prey to the representative bias. c. fall prey to the anchoring bias. d. make all the above mistakes.

a, Losses are hard to forget.

Information that is communicated between parties through conventional methods a. can be believed most readily if the parties have common goals. b. can be believed if it is listened to carefully because it is difficult to fake the truth in most cases. c. can be believed most readily if the parties have competing goals. d. should be believed only if empirical verification is possible.

a, Motive is an important ingredient in behavior.

The income effect of a price decrease a. refers to the influence of real income changes rather than nominal income changes on consumer purchases. b. refers to the influence of nominal income changes rather than real income changes on consumer purchases. c. measures the effect of both real and nominal income changes on consumer purchases. d. does not relate to changes in real or nominal income, but rather to the perception of change in the mind of the consumer.

a, Nominal income never changes when only prices change.

If the interest rate is zero, then the intertemporal budget constraint a. has a slope of -1. b. has a slope of zero. c. is irrelevant because no one will save at zero interest. d. will be only a point at the income coordinates.

a, One can trade off present income for future income at a dollar for dollar rate.

The moral hazard problem is the strongest when a. insurance companies overinsure a customer's assets. b. insurance companies offer customers deals that would not be as favorable as the expected value realized by self-insuring. c. no one buys insurance. d. everyone becomes a risk lover.

a, Over-insuring gives little incentive for people to engage in careful behavior to prevent loss.

You run a retail store for bicycles. You have sales and then super sales and then price so low that you hardly cover your costs. When you add up your revenue it seems to be roughly the same no matter how you price. From this information, which of the following is true? a. Demand for bicycles becomes more elastic as the price falls. b. The demand curve for bicycles is not a straight line. c. Bikes are normal goods d. All of the above are true.

a, Parents now pay only once leaving more funds available for education. Options b and c are not true.

Standard rational choice theory accepts which of the following? a. People are creatures of reason. b. People are inefficient processors of information. c. People have widely different goals and preferences. d. Economic choices frequently involve interdependencies among people.

a, People are efficient, individualistic, and have similar goals, so no others are right.

Courts will often decide damage suits using the rule that a. the correct outcome is the one that the parties would have arrived at had they had time to negotiate an agreement on their own. b. property rights provide absolute rights that cannot be violated or sold. c. liability is assessed if the damage is large. d. people should avoid any situations that could lead to damage.

a, Read the safe harbor story in your text.

Which statement is true? a. An increase in the interest rate will always cause a reduction in current consumption. b. An increase in the interest rate creates an income effect but no substitution effect. c. An increase in the interest rate will sometimes cause a reduction in future consumption. d. None of the above statements are true.

a, See Figure 5-18 in your text.

From the stories presented in this chapter we could conclude that a. the world would be better off if it was full of altruists, and trusters rather than full of cheaters, and egotists. b. altruism works as long as only some have those qualities. c. altruists are basically irrational. d. all of the above are true. e. none of the above are true.

a, Since cooperators working together are more productive and perhaps even more fulfilled as human beings, the world would be a better place if everyone cooperated. Alas, human nature has not made this possible.

The substitution effect of a price decrease for a good with a normal indifference curve pattern a. is always inversely related to the price change. b. measures the change in consumption of the good that is due to the consumer's feeling of being richer. c. is measured by the horizontal distance between the original and the new indifference curves. d. is sufficient information to plot an ordinary demand curve for the commodity being considered.

a, Since the substitution effect rotates around the indifference curve, it must be inversely related. It is not sufficient information to plot an ordinary demand curve because the income effect has not been included.

The winner's curse a. is more likely to occur at an auction than in a store. b. would not occur if people's estimates of a product's price would be normally distributed around its real value. c. exists because of the lemon principle, which says that items for sale at an auction are likely to be defective. d. is described in part by all the above. e. is described in part by none of the above.

a, Stores set prices at average values rather than at the upper tail of people's assessment of value.

When the interest rate increases a. the substitution effect leads to an increase in savings. b. the overall effect is to discourage additional savings. c. the slope of the intertemporal income budget line becomes less steep. d. all of the above are true.

a, Substitution effects are always negative so an increase in interest rate makes the opportunity cost of present consumption higher so people substitute away from it toward savings.

Which of the following is a positional externality? a. Ford advertises and Chrysler loses market share b. A farmer's apple trees provide pollen for a hive owner's bees to make honey c. A paper factory pollutes the community d. All the above are positional externalities

a, The apple trees have a positive eternality and the factory imposes a negative externality, but only Ford's behavior is truly positional in nature.

It is efficient if property rights are given to the party that has the most difficult time correcting an externality problem. This statement is a. always true. b. never true. c. true only when negotiation costs are positive. d. true only when negotiation costs are 0.

a, The least costly way of solving the externality problem will then be used.

Regulatory rules identifying certain specific anti-pollution actions are efficient when a. the rule applies to the party with the least costly way of solving the problem and the specified solution is the least costly way of solving the problem. b. the rule applies to the party with the most costly way of solving the problem. c. negotiation costs between the offender and the offending parties are 0. d. none of the above are true; they can never be efficient.

a, The probability of the second part of this statement happening is low, so coercive regulation is often not efficient.

If economists tend to be left-brained people, then a. if you find a left-brained person and assume you have an economist, you are falling into the representative bias. b. if you find an economist and assume you have a left-brained person, you are falling into the anchoring bias. c. if a person is right-brained and an economist, he must have an asymmetric value function. d. if a person is a right-brained economist, she will be more susceptible to the psychophysics of perception.

a, There are far more left handed non-economists than there are left handed economists.

If an impatient and a patient consumer face the same intertemporal budget constraint, have the same first-year income, and if their indifference curves are both normally shaped, then a. both will have the same marginal rate of time preference at equilibrium unless one or the other is at a corner solution. b. the patient person will be saving less than the impatient one. c. the impatient person would be happier at the patient person's equilibrium point than at her own equilibrium point. d. all the above are true.

a, They both will optimize when they are tangent to the straight-line budget constraint, which means their rate of time preferences on the margin will be the same.

Which of the following is the most credible argument against a Coase market solution to externality problems? a. Negotiation costs are hardly ever zero. b. There are no solutions to some externality problems. c. People are ignorant of the costs they experience from pollution. d. Governments do not have authority to determine property rights in many pollution cases.

a, the answer to this problem could be debated, but letter a is clearly true whereas the rest would need further clarification.

The text tells the story of the lost ticket and the lost $10. If the money is lost on the way to buy the ticket, the buyer is inclined to buy a ticket anyway. On the other hand, if an already purchased ticket is lost, the theatergoer is inclined not to buy another ticket to replace the lost one. This is because people have a. asymmetric value functions. b. mental accounts for their expenditures. c. little understanding of sunk costs. d. anchoring biases.

b, A $10 loss from the total budget is small relative to the loss from the entertainment budget.

The golf club that charges a greens fee and an annual membership fee is likely attempting to a. take advantage of those who have a high discount rate. b. take some of the golfing consumer surplus. c. raise the marginal cost of a round of golf to reduce course congestion. d. do all of the above.

b, A consumer will pay the membership fee up to the point where it equals the consumer surplus.

In general, we would expect that heavily advertised items a. will be of lower quality than items that are not advertised. b. will be of higher quality than items that are not advertised. c. will have no tendency to be of different quality from items not advertised. d. will be of lower quality than unadvertised products if the item is a service and of higher quality if the item is a product.

b, Advertising is a sunk cost, so the product better succeed.

One interesting gambling case involves Warren Buffet's 1 billion dollar guarantee to Quicken loans if someone accurately predicts the winner of all 67 basketball games of the 2014 Spring March Madness NCAA basketball tournament. To keep the numbers manageable, assume the offer was only for $1,000. If someone with a utility function U = money2 picks every game correctly up to the final game, how much would Buffet have to pay to buy out that person to avoid the $1,000 payout? Assume each team has an equal chance of winning the final game. a. $999 b. $708 c. $500 d. $380 e. None of the above because the contestant will hold out hoping to win it all.

b, Because the expected utility would be 500,000 units of utility. If the person took their chances (1,000 x 1,000)(50%) + 0 (50%) the buyout would have to give at least that much pleasure so it would take $708 sure money to give 500,000 units of pleasure.

In the educational voucher case, parents who sent their child to public schools which were paid by taxes, now with vouchers end up spending a. Less money on education that they did without vouchers. b. More money on education that they did without vouchers. c. The same amount of money but they get more education. d. One can not tell which if the above is true but the parents do end up on a higher indifference curve.

b, Because vouchers make private education tax funded, there is no double payment required and the budget line does not drop suddenly after a basic unit of education is purchased.

Which statement is true about school vouchers? a. Parents do not need to pay for public education unless their child goes to public schools. b. The cost of private education is reduced below the cost of public education. c. the indifference curves of parents are changed becoming steeper toward increased education quality. d. All of the above are true.

b, Demand elasticity is constant at unity meaning the demand curve is concave from above.

It is most likely true that graduates of elite universities are more productive than graduates of less prestigious schools. The most reliable signal from this information, according to your text, is that a. elite universities are the best place to get an education. b. the students of elite universities are more talented than students at other universities as a rule. c. productivity has more to do with what is expected of people than with how much ability they have. d. people with elite degrees are given better productivity ratings than people without those degrees even though those without elite degrees are just as productive.

b, Good applicants make good graduates.

If I am willing to spend $50 a year to convince the city to solve a parking problem on the public road in front of my house, and if negotiation costs of all kinds are 0, which of the following would best serve my interests? a. The city puts a "no parking" sign up without any lobbying on my part. b. The city transfers to me the property rights to the parking area in front of my house but will not put up "no parking" signs. c. The city installs parking meters with $10-per-hour rates to discourage parking in front of my house. d. The city does nothing.

b, I can now charge a fee $1 more than my inconvenience, which will serve my interests best. The interests of the public may not be served well with this result.

Which conditions in business are likely to make credible a claim that you will cut price to compete if necessary? a. A small business with high marginal and low fixed costs b. A large business with low marginal and high fixed costs c. A sole proprietorship that is highly mobile and in which the owner has great independence to make her own choices d. An output that is a service rather than a product e. A thriving company operating at capacity

b, It is hard to walk away from high fixed costs, so you will do your best to treat customers well for repeat business.

If Joe is not trustworthy but there are advantages in being trustworthy, then it would be in his best interest, according to rational choice theory, a. to become genuinely trustworthy and to be perceived as such. b. to be perceived as trustworthy without actually having these qualities. c. to change his preference to become trustworthy whether others know or not. d. to remain untrustworthy and be perceived as such.

b, Joe, if he could be trustworthy when only when it helpfed him, would get the benefit of both the trustworthy and opportunistic worlds unless, as your text suggests, it is impossible to succeed as trustworthy unless you really are trustworthy.

The consumer price index has deficiencies because a. quality changes are not registered. Therefore it underestimates inflation. b. it doesn't pick up the consumer's ability to fight off inflation by substituting goods in the market basket. Therefore it overestimates inflation. c. it alters the market basket each year in ways that overestimate inflation. d. it take the average of the beginning year price level and the end of year price level. This underestimates inflation at the end of the year.

b, Letters c and d misrepresent the way calculation occurs and letter a over rather than underestimates inflation.

Carl bought a new car and paid for it with cash from his savings account where he was earning 2%, even though the dealer had a deal where he could pay over 36 months with zero interest. What might cause Carl to make such a choice? a. Carl was mathematically and financial ignorant. b. Carl has an asymmetric value system. c. Carl was subject to the halo effect. d. Carl was subject to anchoring and adjusting.

b, One big payment seems like much less expense than monthly payments over 36 months even if the total present value of the money is more the way he paid.

A panel of present-day baseball fans was selected by a newspaper to pick an all-time baseball all-star team. They are most likely to make selections a. from the glory days of the distant past. b. from the stars of the present and the recent past. c. from those with short but glamorous careers. d. from those with high batting averages and low total bases rather than those with lower averages but many home runs.

b, Recent and more visible achievements will count for more than older mundane records.

The graphical representation of consumer surplus that sellers seek to get from consumers is a. The area under the demand curve above the horizontal axis. b. The area under the demand curve above the price charged. c. The rectangle of the price times the quantity. d. The area under the demand curve from the horizontal intercept to the price. e. None of the above.

b, See figure 5.4 in the text.

The text gives the example of an army lawyer who has unshined shoes. Which of the following statements summarized the point of the story? a. The unshined shoes signaled that the person is too intelligent to be concerned with mundane things. b. An army lawyer with well shined shoes is not likely to be independent and objective as an appointed lawyer. c. The unshined shoes signaled laziness. d. Only a lawyer with shiny shoes should be hired. e. None of the above statements is true.

b, Shoe shining impresses superiors in the army. Such a lawyer may not vigorously challenge an army prosecution and therefore would not be good for the accused.

P= 15-3Q 2) P = 24 - 6Q The first procedure required in order to sum the demand curves horizontally is to a. find the sum of 15 - 3Q and 24 - 6Q. b. solve the equations for Q. c. add the intercepts and take the average of the slopes. d. solve one equation for Q and substitute the result into the Q in the other equation. For equation 1 at a quantity of 4, the price elasticity is a. elastic. b. inelastic. c. unitary elasticity. d. indeterminate with the information given.

b, Summing horizontally means summing the Qs, not the Ps. b, It is on the lower portion of the demand curve.

You will be paid if someone runs a high-tension electric wire over your land but not if a plane flies over your property at 20,000 feet. This is primarily because a. planes cause no negative externalities at that height. b. it is more costly to identify damage and negotiate with the airlines than to negotiate with the electric company regarding the damage of electric wires. c. airplane noise is intermittent while electric wires are constant. d. airlines have more political power than electricity companies.

b, The higher the negotiation costs, the less likely it is that externalities will be addressed and resolved efficiently.

From table 4.5 in your text, answer the following question. You have been selling 100 cars a month. Then in the next month incomes of customers increase by an average of 10%. You would now expect to sell approximately _____ cars per month. a. 102 b. 240 c. 124 d. none of the above. The information in the table is not helpful in answering this question.

b, The highest cross price elasticity will be the best. In this case when margarine's price goes up 10% the sales of butter go up 8.1% which is the best percentage increase on the list.

If good X consumes a large portion of the budget, a price increase of X a. has a very large substitution effect because consumers cannot easily absorb the expense of the price increase and so they substitute. b. has a large income effect because the consumer budget is heavily affected by price increases in big-ticket items. c. has a small substitution effect since large budget items have few substitutes. d. has a small income effect because the income effect is measured with nominal income constant.

b, The income effect (ab) would be much smaller if the indifference curves were tangent closer to the Y intercept which would be a smaller budget share for good X.

The substitution effect of a price decrease for a good with a normal indifference curve pattern is graphed by a. drawing a new budget line tangent to the indifference curve attained at the new price. b. drawing a new budget line tangent to the original indifference curve but at the slope of the new price of the good. c. drawing a new budget line parallel to the initial budget line but tangent to the indifferent curve attained at the new price. d. doing none of the above because the substitution effect cannot be graphed.

b, The original indifference curve is used to take away the increase in welfare that occurs when a price falls.

Which statement is false? a. All other things being equal, the demand for a normal good will tend to be more elastic than the demand for an inferior good. b. Toothpaste will tend to have a more elastic demand than will automobiles. c. The market for gym shoes will have a more inelastic demand than will the market for Nike gym shoes. d. Many door to door sales people have offers that are good only if you buy that very day. They know that if you have more time to consider your demand elasticity will increase.

b, The small portion of the budget that toothpaste takes makes it quite inelastic.

I get the Wall Street Journal and the Chicago Tribune. At the end of the day I sometimes look at the papers that are unread and feel as though I need to read them to justify the trees that were cut down to produce them and the delivery effort that went into getting them to my office and home. At these times I am falling into the trap of a. the psychophysics of perception. b. erroneously considering sunk costs. c. counting implicit costs rather than explicit ones. d. the halo effect.

b, The trees and delivery have already occurred and are sunk costs. Whether I read the papers or not should depend on whether that time would be best spent in reading. If I would rather be doing something else I should discard the papers.

The tragedy of common grazing land for cattle could be solved and an optimal amount of grazing would occur if you could find a way to a. have each rancher stop using it when their average benefit from an extra cow equals their cost of adding one more cow to the range. b. have the farmer who adds another cow to the range compensate the other users for lost benefits to their cattle because of the additional cow's use of the range. c. tax each animal added to the range an amount equal to the average product gained when one more cow is put on the range. d. determine when the marginal cost of adding cows is zero and limit usage to that number of cattle.

b, This would cause the farmer to compare the true marginal cost of putting a cow on the pasture with the benefit he receives from adding the cow.

If the quantity of movies you watch increases by one for each price drop of one dollar and you presently buy 5 at the current price of $5, which of the following is true? a. Your current price elasticity of demand is -5 b. Your current price elasticity of demand is -1 c. If the price falls to $4 you will spend more on movies. d. You will spend the same amount on movies no matter what happens to price.

b, Using the slope divided by the price over quantity ratio method of calculation, the answer is -1. Alternatively, the location is the midpoint of the demand so elasticity must be -1.

If you have a very steep indifference curve toward the horizontal axis of the standard time preference graphical model, which of the following would most likely be true for you? a. You recognize the value of starting to put aside funds for retirement at a young age. b. You always wear your favorite clothing first after all your clothes are washed and hanging in your closet. c. You mow the lawn and wash the car first and then enjoy a round of golf. d. You usually pay the full balance on your credit cards each month.

c, Because you place a high value on the present and have little concern for the future you do what feels best now which is wear the best clothes now. All the other options assume that you are delaying pleasure now for a better future.

The full disclosure principle works best for you if a. you have the least desirable pertinent characteristic of your group. b. you have information that will be disclosed inevitably later. c. you are looking for a job for which you have slim credentials, but they happen to be better than the others in the applicant pool. d. none of the above is true because full disclosure is something you should never do if the information is not completely complementary.

c, Even though the information you could offer is not very complementary, if it is better than the rest of your competitors it helps to disclose it because it will put you in a preferred position.

On a hot day Joe would pay $1 for his first can of soda. He would pay 60 cents for the second can and 50 cents for the third can. Which is true for Joe? a. If the price is 50 cents per can, Joe will buy 3 cans and have a total consumer surplus of $2.10. b. If the price is 50 cents per can, Joe will buy 3 cans and have a total consumer surplus of $1.60. c. If the price is 50 cents per can, Joe will buy 3 cans and have a total consumer surplus of 60 cents. d. If the price is 40 cents per can, Joe will buy 3 cans and have $1.20 of consumer surplus.

c, He has 50 cents surplus on the first can and 10 cents surplus on the second.

My neighbor loves my music and benefits every time I turn up my favorite music. Yet he never buys me a CD. According to Coase, if we could costlessly discuss the situation, we would a. find a way for my neighbor to buy his own system so I could hear his music also. b. buy a portable system between us that we could trade back and forth. c. come to an agreement where he would buy CDs occasionally for me and I would play more music. d. come to an agreement whereby I would play more music than I would normally play so his benefit could increase at no cost to him.

c, He needs to pay for the external benefit he receives, so the service is optimally provided.

Last year I survived on pizza and baseball games, which are not complementary goods for me. Each cost $6 and I consumed 15 of each every month. This exhausted my $180 monthly income. This year the pizza shop has a special half-price deal, but baseball games have gone up in price to $9 per game. My income has not changed, so I can say with confidence that a. I can do no better or worse than last year in terms of my utility level. b. I am worse off this year than last year. c. I am better off this year than last year. d. my nominal income has stayed the same but my real income has fallen.

c, I can buy last year's goods with my money and if I substitute toward pizza I will gain some more benefit.

In the case described in Question 8, the government passes a law that says I can protect my property any way I choose. The cheapest way for me to protect my corn is to shoot the cow if it gets into my corn. Which of the following scenarios would not be efficient? a. I charge the cow owner for the damage each time the cow gets into my corn. The owner pays if the accumulated damage is less than the cost of a fence. b. The cow owner sells the cow if the fence cost or the damage payment is more than the cow is worth. c. I shoot the cow no matter how valuable the cow is to my neighbor because that is the lowest cost way for me to solve the problem. d. All the scenarios above are efficient. e. None of the above are efficient.

c, If the fence cost < cow's benefit, shooting the cow is inefficient and some method of allocating rights should be found that promotes efficiency.

You should continue to search for a new job if a. the first offer you receive is below the average of the pay range you feel is available in the market of your search. b. the expected benefit of the search is positive. c. the expected benefit of the additional search exceeds the cost of the search. d. any one of the above is true.

c, Make sure you can explain why the others are wrong. In each case they do not insure that the principle in answer (d) is followed.

If my neighbor's cow keeps getting into my cornfield and eating my crop and a fence is the easiest way of solving the problem, who should build the fence if efficiency is the only concern and the fence cost is the same for both parties? a. My neighbor should b. I should c. It makes no difference who does as far as efficiency is concerned d. The government should

c, Only distribution issues are important in the decision because efficiency is served.

The "certainty equivalent value" a. Is the maximum insurance premium that a risk averse person would be willing to pay to avoid risk. b. The amount one would need to be paid above the expected value of a gamble in order to be convinced to take the gamble. c. Is larger for a risk lover than a risk averse person. d. Is accurately described by none of the above.

c, Risk lovers need more sure money than the expected value of the gamble while risk averse persons need less.

If two perfect complements, a keyboard and a computer, are being considered and the price of the keyboard only is increased, then the substitution effect of the price change will a. be negative because keyboards are inferior goods. b. be positive because the consumer feels poorer. c. be 0 because it is impractical to have more keyboards and fewer computers. be negative because keyboards and computers are perfect substitutes.

c, Rotate a price around the corner of an L-shaped indifference curve and no quantity change occurs.

When a tax on gasoline and a rebate program of equal amount is implemented like the one in your test a. the tax restricts gas usage and the rebate program restricts usage further. b. the tax restricts gas usage and the rebate program increases usage, but the net effect is an increase in consumption. c. the tax restricts gas usage and the rebate program encourages usage, but the net effect is a decrease in consumption. d. any of the above can occur depending on the size of the tax.

c, See figure 5.1 in the text.

If I am a risk neutral person and my friend tries to sell me a raffle ticket like the tickets described in question 10 above, I will a. definitely buy a ticket. b. definitely not buy a ticket. c. be indifferent to the opportunity to buy a ticket. d. not know what to do until I get more information about the risks.

c, Since the expected value is $10 and you are risk neutral you will be indifferent between buying a ticket and putting $10 at risk or simply keeping the $10 as a sure thing.

In early 2014, President Obama put forward a federal budget that did not include a reduction in the social security benefit inflation calculation. Many Republicans had hoped to curb social security spending by giving annual benefit increases at a rate less than the consumer price index. Which argument might an opponent of Obama's budget use when relating to the social security issue? a. Seniors have lower expenses than younger families so they need less income. b. Seniors have a fixed market basket, which is predictable so they can plan to live with less than other families. c. Seniors can substitute away from the higher priced goods and therefore they feel inflation's effects less than the official CPI rate would indicate. d. The CPI overestimates inflation because it is heavily weighted toward goods like energy and healthcare, which have the highest inflation rates.

c, The ability to substitute toward goods with the lower than average inflation rates helps everyone fight off inflation, but the CPI keeps the consumption basket constant from year to year.

The full-disclosure principle assumes that sellers disclose to buyers even things they are not supposed to tell because a. the buyer will view the seller as a liar if all is not told. b. people are inherently conscientious and cannot live with themselves if they do not tell all. c. the buyer will believe the worst about anything not disclosed. d. sellers are usually outwitted by buyers into telling everything even though it is not in the seller's interest to tell all.

c, The full-disclosure principle tells us this.

The demand for taxi service in San Diego is linear. Megan has an uncle who wants to see her doing productive work, so he offers to buy her a cab and pay all expenses for her cab business. She is in charge of pricing, and her goal is to maximize her income. Which of the following should she do? a. Price on the upper half of the demand curve. b. Price on the lower half of the demand curve. c. Price at the midpoint of the demand curve. d. It is impossible to tell where to price without knowing the demand equation or cost functions.

c, The midpoint maximizes revenue which maximizes profit also if there are no costs.

Which of the following is most likely to be true? a. New car dealers are more likely to lie than are used car dealers. b. Better marriages result from systematic computer searches of a database of potential mates because of the increased information. c. An employer interviewing applicants often learns which applicants do not have small children that might effect job availability though the question about family size would never be posed. d. People who move around frequently are more suspect today than they were years ago before the economics of information was as developed as it is today.

c, The principle of full disclosure means that people with fewer family responsibilities are likely to offer that information while the other applicants will not offer the information.

A difference between luxuries and necessities is that a. luxuries are not purchased by low-income people. b. rich people buy fewer necessities than do poor people. c. the percentage of income spent on luxuries rises as income rises, whereas the percentage of income spent on necessities falls as income rises. d. all necessities are inferior goods and all luxuries are normal goods.

c, The second half of the answer is intuitively obvious, which makes the first half true also.

When noise pollution is created, the perpetrator is not held liable, and negotiation costs are 0, then the pollution a. will likely not be stopped no matter how offensive the noise is to others. b. must be solved by the offended party's insulating itself against the noise if the cost of insulating is less than the aggravation. c. will be solved by the least expensive method available even if that involves the noisemaker's changing operating methods. d. will be solved only if the government passes regulation.

c, This is because the offended party will pay the offender to solve the problem if the offender has the least costly solution.

We had two boxes of candy on the counter. Both were identical, except one was a 10-pound box and the other was only a l-pound box. Because it was Christmas, I rationalized that four pieces a day would be okay, but I always felt better when I raided the large box instead of the small one. This tendency is an illustration of a. an asymmetric value function. b. an anchoring bias. c. psychophysics of perception bias. d. all the above. e. none of the above.

c, We see things in proportions more readily than in absolute values.

Your utility function is given by U=M1/2. You have a choice: take $100 in cash or flip a coin. If you flip a coin, the outcomes are as follows: heads, you win $225; tails, you win $25. You will a. take the $100 in sure cash. b. take the gamble. c. be indifferent between the cash and the gamble. d. none of the above.

c, You are indifferent between the two options because if you don't take the gamble you have 10 units of pleasure and if you take the gamble your expected utility is 10 also.

A risk lover will a. be inclined to accept some unfair gambles. b. have less life insurance than a risk averse person. c. pay a fee for the right to enter into a fair gamble. d. do all the above. e. do none of the above.

d, All answers show behavior that welcomes risk.

From this chapter we might conclude that a. people tend to overcome illogical psychological propensities. b. people are overly optimistic. c. the mind is basically a massive calculator of costs and benefits. d. we are subject to forces of the mind which qualify what we consider rational.

d, All of the psychological phenomenon in this chapter show how rational choice is distorted by perceptions of the mind that are not well understood except that they clearly effect our choices.

Which is true of a price-consumption curve for good X? a. Nominal income falls as the price of X falls. b. The absolute price of X falls, but the relative price between X and the composite good Y stays the same. c. It is always downward sloping for a normal good. d. It represents only those market baskets that are optimal for the given price ratio and preference pattern, and therefore a demand curve can be plotted from it.

d, Be sure to remember that real income, but not nominal income, rises when a price drops.

Which of the following is most likely to be subject to an affective forecasting error? a. The purchase of a delicious meal b. Getting a haircut c. Buying a suit d. Putting $100 of each check into a retirement account

d, Goods and services are less subject to affective forecasting errors than are experiences.

Which of the following is true according to this chapter. a. Psychological predispositions are random and therefore unpredictable. b. Altruistic people benefit society but hurt themselves. c. The person who can fake cooperative behavior gets the best of the egoistic and altruistic worlds. d. If your generosity and other-centered behavior is heartfelt it can increase your personal wellbeing.

d, If nonegoistic behavior is faked other will soon figure that out and the benefit will be lost.

If there was increasing marginal utility for both present and future goods, then a. the indifference curves would be bowed outward from the origin. b. the equilibrium solution would be either to consume all the goods now or all next year, but there would be no in-between option. c. consumer choices tend to be addicting. d. all the above are true. e. none of the above are true.

d, Increasing marginal utility will mean that the more of one good the better, so it would never pay to divide up the consumption between the two goods.

Which is true about the taxing of externalities like pollution? Assume the tax is an amount exactly equal to the least costly way of cleaning up the pollution. a. If negotiation is costless, taxing the polluter will lead to the efficient outcome. b. If negotiation is costly, taxing the polluter will result in an efficient outcome if the polluter has the least costly way of reducing pollution damage. c. Taxing the polluter will lead to an inefficient outcome if negotiation is impractical and the victim has the least costly means of avoiding damage. Assume no government subsidy to the offended. d. All the above are true.

d, Item (c) is true because there is no incentive to have the victim do the clean-up.

Elasticity values a. establish proportion and therefore give perspective to an issue. b. eliminate the need for constant specification of units of measurement. c. can be calculated with numerous methods. d. are described, in part, by all the above. e. are explained, in part, by none of the above.

d, Letter "b" is the most important point on this list.

All of the models in this chapter assume certain things. Which of the following is not an assumption that applies? a. All consumers are rational. b. Consumer indifferent curves are concave from above. c. Substitution effects are always negative. d. Nominal income can not change. Only real income changes.

d, Nominal income changes when the budget line shifts in a parallel fashion.

We can be sure that a person is risk averse if a. he accepts a fair gamble only. b. he accepts a gamble that has a zero expected value. c. he accepts a gamble that has a negative expected value. d. his utility from sure income is greater than the utility derived from gambling income with the same expected value as the sure income.

d, One is willing to give up expected value for certain income.

Adverse selection is most likely to occur in which industry? a. Agriculture b. Banking c. Retail selling d Insurance

d, Pooling of risk tends to attract high-risk people.

Which of the following public actions is not intended to address the issue of externalities? a. Zoning laws that restrict certain kinds of building projects b. Taxes on businesses that create emissions in the environment c. Laws against smoking in public places d. Sales taxes on all but food and health care e. Because all of the above are used to mitigate externalities none of the answers is correct

d, Sales taxes are designed more for public revenue than to address any specific externality.

The income elasticity of an inferior good is a. negative because as people get richer they increase their purchases of the good by smaller and smaller amounts. b. 1 because the increased income offsets the desire to consume less of the good because it is inferior. c. greater than 1 because the richer you get, the less you consume of the good. d. negative because higher income leads to a reduction in the amount consumed of the product.

d, The definition of an inferior good will make this answer correct. People consume less as their incomes increase.

In the deterrence problem in the text, in which Jones prosecutes Smith, who stole the briefcase, the fundamental factor that makes this case difficult for the pure rational theorist is a. the problem of not knowing the present expected value of deterrence that would be gained by Jones when he prosecutes. b. that the briefcase may have been damaged. c. that Jones miscalculated when he prosecuted. d. that Jones calculated correctly that prosecuting was not worth his while, yet he went ahead anyway because of his anger.

d, The emotion of anger resulted in irrational behavior and therefore wrong rational choice predictions.

My friend sells raffle tickets one-tenth of which will return $100. Which of the following will be most inclined to buy a ticket if the ticket costs $10? a. A risk averse person. b. A person with a diminishing marginal utility of wealth. c. A person well insured as opposed to a person with little insurance. d. A person with an increasing marginal utility of income.

d, The increasing marginal utility of wealth indicates a risk loving position which would be required in in order to pay more than $10.

A toad with a medium-sized croak will croak even though his competitor can outperform him because a. female toads do not choose mates based on their croaks. b. female toads prefer medium croaks to loud croaks. c. he was taught about the economics of information by his mother. d. he wants to be sure he is ranked ahead of all the small-sized croakers.

d, The principle of full disclosure is at work here.

Most community laws require that lakeshore property owners allow other people to trespass on their beach property, but they do not require cottage owners to permit trespassing on their lawns. According to your text, this is because a. lakeshore owners tend to be more community-minded than city dwellers. b. beach property is not very easy to destroy. c. negotiation costs would be much higher with cottage owners than with lakeshore owners. d. the cost of not being able to cross a person's beach is much higher than the cost of not crossing a cottage lawn.

d, This is a case where law is based on economic efficiency rather than innate rights.

Climate change is likely caused by emissions from cars, factories, and nature itself. The externalities of pollution from human activities could be stopped by laws, regulations, incentives such as tax credits or cap and trade property rights. All these are tried, but still pollution continues happening all around. Why do these efforts seem to fail? a. Climate externalities are frequently hard to measure. b. Climate externalities have long-term effects requiring discounting where discount rates and time preferences will vary a great deal among people. c. Some people believe that dealing with the damage as it occurs is more efficient than trying to prevent it. d. All of the above are true. externalities to long workweeks in a firm.

d, This problem points out some of the difficulties in working with externality problems.

If you were to behave according to the typical rational choice model when confronted with a loss of $25 on the same day in which you receive an unexpected gift of $26 you would a. value the loss of $25 more heavily than the gain of $26. b. See the net gain of $1 and consider yourself better off. c. see the two events as exactly offsetting and thereby of no consequence in your overall welfare. d. none of the above. There is not enough information to be sure how you might feel.

d, Until we know the degree to which loses are valued above gains of equal value this question can not be answered definitively.

If a risk-averse person insures for very small risk even if self insurance could be easily afforded, then such a person a. will be better off than if they were self insured because no risk is absorbed. b. will be worse off because insurance company premiums cover the expected loss as well as company profit so self insurance is less expensive. c. will be at the same utility level as she would be with insurance since on the tiny risks utility is not relevant. d. may or may not be better off because the utility function must be used to evaluate the situation.

d, While some of the other options seem correct, they are based on expected value rather than expected utility. Until we know how much utility is lost from even small risks we can not be sure what the person should do.

What would be the effect on demand for winter coats if a tax policy was introduced that took $300 away from rich people and gave the money to the homeless? a. The demand would shift right if the Engel curve for coats rises at a decreasing rate. b. The demand would shift right no matter what the Engel curve for coats is like. c. The demand would shift left no matter what the Engel curve looks like. d. The demand would shift left if the Engel curve for coats rises at an increasing rate. e. None of the above statements are true.

e, Demand would shift right if the Engel curve for costs rises at an increasing rate.

Academic deans and department chairs receive requests from people in business who are seeking a career change into academia. The reason often given is that they are tired of working 80 hours a week away from home and would rather have a different lifestyle. Given this information, which of the following statements is clearly false? a. These people would probably favor a requirement that would make long workweeks an exception rather than the rule. b. There are positional externalities to long workweeks in a firm. c. The cost of career climbing is starting to exceed the benefits for these workers. d. These workers are not willing to give up good ratings and promotions in business for family time, so they seek an environment where family time and work esteem are not mutually exclusive. e. None of the above are clearly false.

e, There is a positional problem in worker advancement. Finding a work environment where the competition for position does not involve as much travel is an answer for some.