Microecon Exam 2

If the elasticity coefficient of supply is 0.7, supply is elastic. 1. True 2. False

2

A consumer has two basic choices in making a trip: rent a car for $30.00 a day and spend two days of travel to the destination, or spend $400 for an airplane ticket and fly to the destination in two hours. The marginal utilities of the car rental and the airline ticket are the same. The consumer values time at $5 an hour. The rational consumer will most likely 1. rent a car. 2. buy an airline ticket. 3. find the full cost of the two modes to be equal. 4. not make the trip.

1

A negative income elasticity of demand coefficient indicates that 1. the product is an inferior good. 2. the product follows the law of demand. 3. the product is a complementary good. 4. the product is a substitute good

1

According to behavioral economics, one major cause of self-control problems (such as strictly following through on "new year's resolutions") is 1. time inconsistency. 2. mental accounting. 3. anchoring. 4. framing.

1

According to behavioral economics, placement of goods in retail stores is often designed to accomplish which of the following? 1. maximize impulse buying by consumers 2. minimize shelving costs 3. maximize convenience for customers 4. maximize the amount of product the store can display

1

According to behavioral economists, precommitments 1. help people overcome their self-control problems caused by time inconsistency. 2. do not fundamentally alter decisions because they do not change the benefits or costs of a particular action. 3. end up being more costly, as people regularly violate them and incur penalties. 4. overcome cognitive biases introduced by brain System 2.

1

According to prospect theory, firms are more likely to shrink packages than raise prices because 1. consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money. 2. they don't understand that consumers recognize price increases easily, regardless of what form they take. 3. consumers associate smaller packages with higher quality luxury goods. 4. consumers are generally trying to downsize their purchases and lead simpler lives.

1

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences 1. a consumer surplus of $10, and Tony experiences a producer surplus of $190. 2. a producer surplus of $200, and Tony experiences a consumer surplus of $10. 3. a consumer surplus of $670, and Tony experiences a producer surplus of $200. 4. a producer surplus of $10, and Tony experiences a consumer surplus of $190.

1

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement. 1. True 2. False

1

Anchoring 1. can influence decision making with irrelevant information. 2. explains why, for example, hamburger will be advertised as 80% lean rather than 20% fat. 3. causes losses to be felt more intensely than gains. 4. explains why, for example, firms prefer to reduce package sizes rather than raising prices.

1

Assume that a 3 percent increase in income across the economy produces a 1 percent decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is 1. negative, and therefore X is an inferior good. 2. negative, and therefore X is a normal good. 3. positive, and therefore X is an inferior good. 4. positive and therefore X is a normal good.

1

Behavioral economists believe that while people try to make rational decisions, they are frequently subject to systematic errors. 1. True 2. False

1

Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or service. 1. True 2. False

1

Heuristics can be exploited to lead people to positive outcomes. 1. True 2. False

1

If a good that generates positive externalities was produced and priced to take into account these spillover benefits, then its 1. price and output would increase. 2. output would increase, but price would remain constant. 3. price would increase and output would decrease. 4. price would increase, but output would remain constant.

1

If price and total revenue are directly related, demand is inelastic. 1. True 2. False

1

If the price of a good increases, the substitution effect will 1. always tend to make the quantity decrease, while the income effect could go either way. 2. always tend to make the quantity increase, while the income effect could go either way. 3. go either way, but the income effect will always make the quantity increase. 4. go either way, but the income effect will always make the quantity decrease.

1

If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then 1. demand is price elastic. 2. demand is price inelastic. 3. demand is unit elastic with respect to price. 4. not enough information is given to make a statement about elasticity.

1

If the quantity demanded for good A increases from 40 to 60 when price decreases from $9 to $7, price elasticity of demand in this price range is 1.6. 1. True 2. False

1

In moving northeasterly from the origin, we encounter indifference curves that reflect higher and higher levels of total utility. 1. True 2. False

1

Neoclassical and behavioral economics are generally viewed as complementary. 1. True 2. False

1

Neoclassical economics focuses on predicting the behavior of economic agents, whereas behavioral economics focuses on the mental processes involved in decision making. 1. True 2. False

1

One important consequence of the self-serving bias is that 1. some people cannot correct a personal trait that might be causing them to fail in many ventures. 2. someone could persist in pursuing a failed policy despite overwhelming evidence of the failure. 3. bad decisions can be made because people will act without pausing to see whether their intuition is correct or not. 4. some people may wrongly believe in their forecasting ability to predict future outcomes of risky investments.

1

One major point of disagreement between neoclassical economics and behavioral economics is the assumption of rationality. 1. True 2. False

1

One major tenet of behavioral economics is that the human brain is prone to commit errors in perception. 1. True 2. False

1

Precommitments are a tool designed to overcome time inconsistency. 1. True 2. False

1

Sharon purchases two products with a given fixed budget, orange juice and soda. Her marginal utility from orange juice is 60, and her marginal utility from soda is 30. The price of a bottle of orange juice is $2.00, and the price of soda is $1.00. These data suggest that 1. Sharon is maximizing her utility from the given fixed budget. 2. Sharon should buy more orange juice and less soda. 3. Sharon should buy more soda and less orange juice. 4. Sharon should buy less orange juice and soda.

1

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities. 1. True 2. False

1

The fact that an ounce of gold is priced higher than an ounce of chocolate suggests that 1. the marginal utility of the last unit of gold consumed or purchased is greater than the marginal utility of the last unit of chocolate consumed. 2. the total utility of gold purchased is greater than the total utility of chocolate consumed. 3. gold is a normal good, while chocolate is an inferior good. 4. there are many substitutes for chocolate but few for gold.

1

The franchising of fast-food restaurants would be an example of how a private business 1. overcomes market information problems. 2. solves the moral hazard problem in insurance. 3. expands the limits of the Coase theorem. 4. corrects the problem of externalities.

1

The greater the ease of shifting resources from product X to product Y in the production process, the greater is the elasticity of supply of product Y. 1. True 2. False

1

The market supply curve indicates the 1. minimum acceptable prices that sellers are willing to accept for the product. 2. maximum prices that buyers are willing and able to pay for the product. 3. total revenues that sellers would receive from selling various quantities of the product. 4. total amount that buyers will pay in buying a given quantity of the product.

1

The price elasticity of demand coefficient measures 1. buyer responsiveness to price changes. 2. the extent to which a demand curve shifts as incomes change. 3. the slope of the demand curve. 4. how far business executives can stretch their fixed costs.

1

The price of old baseball cards rises rapidly with increases in demand because 1. the supply of old baseball cards is price inelastic. 2. the supply of old baseball cards in price elastic. 3. the demand for old baseball cards is price inelastic. 4. the demand for old baseball cards is price elastic.

1

The supply curve of antique reproductions is 1. relatively elastic. 2. relatively inelastic. 3. perfectly inelastic. 4. unit elastic.

1

The tendency of hard-core Republicans to believe that all of the economic developments under the Obama presidency have been detrimental to the nation illustrates the 1. confirmation bias. 2. framing effect. 3. overconfidence effect. 4. availability heuristic.

1

The tendency of people to misjudge, at the present time, what they will want to do or have at some future time is called 1. time inconsistency. 2. mental accounting. 3. anchoring. 4. framing.

1

Upon learning that his auto transmission is about to fail, Ray Roma sells his car to an unsuspecting buyer. This circumstance illustrates the 1. adverse selection problem. 2. free-rider problem. 3. moral hazard problem. 4. principal-agent problem.

1

When a consumer has maximized total utility, he or she cannot increase total utility by reallocating expenditures among different products. 1. True 2. False

1

When the price of a product falls for a normal good, the 1. income and substitution effects will encourage consumers to purchase more of the product. 2. income and substitution effects will encourage consumers to purchase less of the product. 3. substitution effect will encourage consumers to purchase less of the product, and the income effect will encourage them to purchase more. 4. substitution effect will encourage consumers to purchase more of the product, and the income effect will encourage them to purchase less.

1

When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The price-elasticity of demand coefficient for this product is 1. 1.5. 2. 0.15. 3. 0.67. 4. 67.

1

When the total consumer and producer surplus is at a maximum, the deadweight loss in the market is zero. 1. True 2. False

1

When there is allocative efficiency in a market, the buyers' maximum willingness to pay for the last unit traded is equal to the sellers' minimum acceptable price for that unit. 1. True 2. False

1

Which of the following assumptions about human behavior is most likely to be accepted by behavioral economists? 1. People have preferences that are unstable and vary by context. 2. People are almost entirely self-interested in their behavior. 3. People plan out decisions well and possess lots of willpower. 4. People eagerly and accurately calculate the benefits and costs of their decisions.

1

Which of these pairs of concepts can be positively, as well as negatively, related? 1. the income of consumers and the demand for a product 2. the price of a product and the quantity of that product demanded 3. the price of a product and the demand for a complementary product 4. the cost of resources required to make a product and its supply

1

With a fixed money income, an increase in the price of one good and a decrease in the price of the other will cause the new budget line to intersect the original budget line. 1. True 2. False

1

You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. In order to increase total revenues from that product, you should 1. increase the price of the software. 2. decrease the price of the software. 3. hold the price of the software constant. 4. increase the supply of the software.

1

eBay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers. 1. True 2. False

1

eBay, Amazon, and other Internet shopping sites provide "seller ratings" done by previous buyers, in order to help deal with the problem of 1. adverse selection. 2. externalities. 3. moral hazard. 4. public goods.

1

(Consider This) Suppose that a new band, "Balin and the Wolf Riders," tries to sell its music on the Internet. Economists would expect 1. all of those enjoying the music to pay for downloads and compensate the band for its costs. 2. some of those enjoying the music to "free ride" through illegal file sharing and digital piracy. 3. government to tax those attempting to download the band's music. 4. there to be no consumer surplus for those who download the band's music.

2

(Consider This) The supply of higher education in the United States is 1. highly price elastic. 2. highly price inelastic. 3. unitary elastic with respect to price. 4. perfectly price elastic.

2

A rational consumer will cease purchasing a product at that quantity where marginal utility begins to diminish. 1. True 2. False

2

According to the Coase Theorem, externality problems 1. do not exist in reality, because all costs and benefits are internal to firms. 2. can be solved through private negotiations without the need for government intervention. 3. must only be resolved by government action, through either taxes or subsidies. 4. can never be resolved adequately, because one party always gains while the other loses.

2

Adam and Brittany both recently started new jobs. Both have determined that they should save 10 percent of their monthly income toward retirement. Adam's employer has no program established for payroll deduction, but he could easily set up automatic withdrawals to go into a retirement fund. Brittany's employer automatically directs 8 percent of the paycheck into a retirement fund, but the employee can change the percentage deducted. Behavioral economists would expect 1. Adam to save more, as he would set up a 10 percent automatic withdrawal, while Brittany would stay at the default of 8 percent. 2. Brittany to save more, as both would tend to stay at the defaults provided by their employers. 3. them both to save 10 percent eventually, as both had predetermined that that was the optimal amount to save. 4. Brittany to feel a greater sense of loss by seeing funds automatically withheld each month.

2

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down. 1. True 2. False

2

Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the greatest amount. 1. True 2. False

2

An effective antipollution policy from the economic perspective requires that all pollution be eliminated and banned. 1. True 2. False

2

Assume that a consumer purchases a combination of products Y and Z and that the MUy/Py = 25 and MUz/Pz = 20. To maximize utility, without spending more money, the consumer should 1. purchase less of Y and more of Z. 2. purchase more of Y and less of Z. 3. purchase more of both Y and Z. 4. make no change in the quantities Y and Z.

2

Behavioral economists have not discovered which of the following things about people's reaction to losses? 1. People judge losses in relative terms; i.e., relative to the status quo. 2. People experience increasing marginal disutility from losses. 3. People would feel the loss of $1,000 more intensely than they would feel the gain of $1,000. 4. When people lose successive equal amounts, the initial losses are more painful than later ones.

2

Ben is exhausting his money income consuming products A and B in such quantities that MUa/Pa = 5 and MUb/Pb = 8. Ben should purchase 1. more of A and less of B. 2. more of B and less of A. 3. more of both A and B. 4. less of both A and B.

2

Credit card companies put a low "minimum required payment" on people's bills in the hope that people will send in low payments, thereby allowing the card companies to earn more interest. The companies are trying to exploit the 1. framing effect. 2. anchoring effect. 3. confirmation bias. 4. endowment effect.

2

The licensing and regulation of financial advisers is one way by which the government tries to deal with the problem of inadequate information that financial firms have about their customers. 1. True 2. False

2

Fatal automobile accidents occur much more frequently than do fatal airplane crashes, yet airplane crashes receive a disproportionate amount of media coverage. As a result, some people are overly fearful of flying in planes yet have no problem riding in cars. Which of the following cognitive biases best explains this disconnect between these people's fears and the statistical realities? 1. overconfidence effect 2. availability heuristic 3. self-serving bias 4. confirmation bias

2

For an increase in demand, the price effect is smallest and the quantity effect is largest 1. when supply is least elastic. 2. in the long run. 3. in the short run. 4. in the immediate market period.

2

Generally speaking, the smaller the percentage of one's total budget devoted to a particular product, the more price elastic will be the demand for that product. 1. True 2. False

2

If a college admits only a fixed number of applicants every year, then the school's supply curve for admissions is 1. perfectly elastic. 2. perfectly inelastic. 3. quite flat. 4. downward-sloping

2

If demand for a product is elastic, the value of the price elasticity coefficient is 1. zero. 2. greater than one. 3. equal to one. 4. less than one.

2

If in the short run the demand for mass transit is inelastic and in the long run the demand is elastic, then a price 1. increase will decrease total revenue in the short run but increase total revenue in the long run. 2. increase will increase total revenue in the short run but decrease total revenue in the long run. 3. decrease will increase total revenue in the short run but decrease total revenue in the long run. 4. decrease will decrease total revenue in the short run and decrease total revenue in the long run.

2

If marginal utility is diminishing, total utility must also be declining. 1. True 2. False

2

If the price of a good increases, it will tend to make the MU to P ratio for the good rise and the good becomes more attractive to the buyer. 1. True 2. False

2

If there are external benefits associated with the consumption of a good or service, 1. the private demand curve will overestimate the true demand curve. 2. the private demand curve will underestimate the true demand curve. 3. consumers are paying for all these benefits in private markets. 4. the market demand curve will be the vertical summation of the individual demand curves.

2

In dealing with market failures, the government always bases its decisions on economic analysis of marginal cost and marginal benefit. 1. True 2. False

2

Indifference analysis assumes that utility is numerically measurable. 1. True 2. False

2

It has been proposed that a government agency be charged with the task of determining the amount of pollution that the atmosphere (or a body of water) can safely absorb, establish "rights" to this limited amount of pollution, and sell those limited amount of rights to firms. The firms can then buy and sell these rights among themselves later. This approach is known as the 1. taxes and subsidies system. 2. cap-and-trade system. 3. property rights system. 4. market and command system.

2

Neoclassical economics and behavioral economics are similar in the assumption that people are capable of making accurate, sometimes complex, calculations with respect to their utility-maximizing decisions. 1. True 2. False

2

Noncash gifts 1. increase the utility of recipients by introducing them to products they have not consumed before. 2. reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences. 3. entail as much utility as do cash gifts. 4. increase the utility of recipients because many people are uncertain of their own preferences.

2

Private firms can hardly produce a public good profitably because of 1. liability rules and lawsuits. 2. the free-rider problem. 3. shortages and surpluses. 4. moral hazard and adverse selection

2

Specialty shops can charge and get customers to pay higher prices for identical goods than they would pay in "big box" stores. Assuming that these differences are driven by store appearance rather than differences in services provided, which of the following best explains this phenomenon? 1. availability heuristics 2. framing effects 3. confirmation biases 4. self-serving biases

2

Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is 1. 0.8. 2. 1.2. 3. 1.6. 4. 8.0.

2

That government that has the smallest budget is the most efficient in the economic sense. 1. True 2. False

2

That people tend to hold on to shares of stock well past the point where it makes sense to sell those shares can be explained in part by the 1. anchoring effect. 2. endowment effect. 3. status quo bias. 4. confirmation bias

2

The "hedonic treadmill" of prospect theory suggests that if people's incomes rise and stay at the new higher level, then their feelings of satisfaction also rise and stay at the new higher level. 1. True 2. False

2

The availability heuristic refers to people purchasing what is most easily accessible. 1. True 2. False

2

The diamond-water paradox occurs because 1. the price of a product is related to its total utility, not its marginal utility. 2. the price of a product is related to its marginal utility, not its total utility. 3. water is, in fact, very scarce in certain regions of the world. 4. diamonds are more useful than water.

2

The endowment effect makes people value things less when they think of those things as their own as opposed to identical things that are not theirs—as in "the grass is greener on the other side." 1. True 2. False

2

The income effect of a price increase for a normal good causes an increase in the consumption of the good. 1. True 2. False

2

The law of supply indicates that the price-elasticity of supply coefficient would have a negative sign. 1. True 2. False

2

The many quirky decisions that people often make, which behavioral economics have found and analyzed, are so ingrained in the human psyche that there is nothing that policymakers can do about helping people make better choices for themselves. 1. True 2. False

2

The persistence of some "urban legends" and some myths is a reflection of the 1. framing effect. 2. confirmation bias. 3. hindsight bias. 4. availability heuristic.

2

The process by which people isolate purchases and fail to consider all consumption options simultaneously is known as 1. framing. 2. mental accounting. 3. anchoring. 4. the endowment effect.

2

The socially optimal amount of pollution abatement occurs where society's marginal 1. benefit of abatement exceeds its marginal cost of abatement by the greatest amount. 2. benefit of abatement equals its marginal cost of abatement. 3. benefit of abatement is zero. 4. cost of abatement is at its maximum.

2

The supply of cars will be more elastic the 1. greater the quantity demanded. 2. longer the time interval considered. 3. greater the decline in input prices. 4. less able producers are to make other goods

2

When ordinarily neat people tend to litter in areas that are covered with graffiti, they illustrate the 1. planning fallacy. 2. framing effect. 3. confirmation bias. 4. availability heuristic.

2

When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of 1. moral hazard. 2. adverse selection. 3. externalities. 4. diminishing utility.

2

When the price of a product is increases by 15 percent, the quantity demanded decreases by 10 percent. We can therefore conclude that the demand for this product is 1. elastic. 2. inelastic. 3. cross-elastic. 4. unitary elastic.

2

Which of the following is correct? 1. If the demand for a product is inelastic, a change in price will cause total revenue to change in the opposite direction. 2. If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction. 3. If the demand for a product is inelastic, a change in price may cause total revenue to change in either the opposite or the same direction. 4. The price elasticity coefficient applies to demand, but not to supply

2

Which of the following situations is not an example of market failure? 1. Ben's Department Store cannot charge passers-by for using the sidewalk outside the store. 2. Ben cannot afford to buy a high-end Mercedes Benz luxury car. 3. Ben's Place is the only restaurant in town, and thus he has significant power to set menu prices. 4. Ben's Industries is dumping its wastewater into the unregulated river behind the factory.

2

Which of the following statements concerning a pure public good is false? 1. It is impossible to exclude nontaxpayers from the enjoyment of the public good. 2. All benefits associated with the production and use of a public good are received by the government. 3. The availability of a public good to one person simultaneously makes it available to all members of society. 4. The private sector does not have an economic incentive to produce a socially optimal amount of a public good.

2

"Heuristics" used by the human brain are one of the reasons why 1. our preferences are quite stable and consistent. 2. neoclassical economic models accurately predict human behavior. 3. human perception is susceptible to context and prone to error. 4. the utility-maximizing model of decision making is precise.

3

(Consider This) According to the Coase theorem, 1. government should levy excise taxes on firms that generate spillover or external costs. 2. taxes should be levied such that they change private behavior as little as possible. 3. private individuals can often negotiate their own resolution of externality problems, without the need for government intervention. 4. private firms should not provide public goods.

3

(Consider This) Solar City helped homeowners overcome their myopia by 1. providing improved information about the benefits of solar systems. 2. framing the installation of solar systems against the environmental costs of nonrenewable energy sources. 3. eliminating the upfront costs of solar systems. 4. appealing to homeowners' sense of fairness with regard to environmental responsibility.

3

(Last Word) Most people do not steal, because 1. stolen goods are subject to the law of diminishing marginal utility. 2. the marginal utilities of stolen goods are negative. 3. their marginal costs, including guilt costs, are too high. 4. stolen goods can only be sold at deep discounts.

3

A perfectly inelastic demand curve 1. has a price elasticity coefficient greater than unity. 2. has a price elasticity coefficient of unity throughout. 3. graphs as a line parallel to the vertical axis. 4. graphs as a line parallel to the horizontal axis.

3

A union argues that a price cut will boost the revenues of the firm, while management argues that the opposite is true. This suggests that the price elasticity of demand is 1. unit-elastic from the union's perspective and unit-inelastic from management's perspective. 2. perfectly inelastic from the union's perspective and perfectly elastic from management's perspective. 3. elastic from the union's perspective, inelastic from management's perspective. 4. inelastic from the union's perspective, elastic from management's perspective.

3

One of the important contributions of behavioral economics is the focus on how people make decisions involving 1. goods and services. 2. inputs and outputs. 3. good things and bad things. 4. prices and money.

3

According to behavioral economics, advertising works because it 1. provides useful information that improves consumers' ability to make decisions. 2. exploits the self-serving bias. 3. exploits the recognition heuristic. 4. quickly communicates price changes that exploit the law of demand.

3

According to behavioral economics, cognitive biases 1. create errors in decision making, but these errors are random and follow no particular pattern. 2. occur but are not prevalent enough to distort the behavioral predictions of neoclassical economics. 3. are misunderstandings or misperceptions that cause systematic error. 4. are solely the result of faulty heuristics.

3

According to the "endowment effect," 1. people are willing to pay more for things they don't own than they would have to receive to give up something they already have. 2. people feel gains and losses with equal intensity. 3. people assign higher values to things they own than things they don't. 4. the intensity of feelings from gains and losses depends on how much wealth one possesses.

3

Balin purchases fair trade cocoa out of concern for workers' rights and environmental sustainability. He could purchase cocoa of equal quality at a lower price. Behavioral economists would consider Balin's purchase 1. unusual in that it demonstrates concern for others. 2. purely self-interested but motivated by something other than his financial well-being. 3. as evidence that Balin is not acting purely in his self-interest. 4. a bad decision because it ignores important information that could improve Balin's well-being.

3

Behavioral economists criticize neoclassical models as being 1. messy and imprecise. 2. accurate but artificially elegant. 3. precise but inaccurate. 4. vague but accurate.

3

Behavioral economists suggest that the reason why many consumers tend to stick to one brand in things that they often buy, like food items, is people's tendency to have the 1. anchoring effect. 2. mental accounting effect. 3. status quo bias. 4. confirmation bias.

3

Deadweight losses occur when the quantity of an output produced is 1. less than, but not when it is greater than, the competitive equilibrium quantity. 2. greater than, but not when it is less than, the competitive equilibrium quantity. 3. less than or greater than the competitive equilibrium quantity. 4. such that the marginal benefit of the output is just equal to the marginal cost.

3

Economists distinguish among the immediate market period, the short run, and the long run by noting that 1. supply is most elastic in the short run and least elastic in the immediate market period. 2. demand is most elastic in the short run, and least elastic in the long run. 3. supply is most elastic in the long run and least elastic in the immediate market period. 4. supply is most elastic in the short run and least elastic in the long run.

3

Frank is purchasing products C and D in utility-maximizing amounts. If the price of C is $4 and the price of D is $2, then 1. the marginal utility of D is twice that of C. 2. the marginal utility of D is the same as that of C. 3. the marginal utility of C is twice that of D. 4. the marginal utility of C is four times that of D.

3

From the viewpoint of potential criminals, the probability of being fined or imprisoned 1. raises the marginal utility of criminal behavior. 2. lowers the marginal utility of criminal behavior. 3. raises the marginal cost or "price" of criminal behavior. 4. lowers the marginal cost or "price" of criminal behavior.

3

Health insurance often pays 80 percent of health care costs. This situation will encourage the rational consumer to 1. consume less health care because the cost is too expensive. 2. obtain health insurance that pays less than 80 percent of medical care costs. 3. use more medical services than they would if they had to paid the full price. 4. eliminate their health care coverage because it does not cover 100 percent of the cost.

3

If a 10 percent increase in the price of one good results in no change in the quantity demanded of another good, then it can be concluded that the two goods are 1. complementary goods. 2. substitute goods. 3. independent goods. 4. normal goods.

3

If money income increases and the prices of products A and B both increase, then the budget line 1. must shift to the right. 2. must shift to the left. 3. may shift either to the right or the left, or not at all. 4. will no longer be tangent to an indifference curve.

3

If total utility has reached a maximum level, and assuming that diminishing marginal utility already applies, then what will happen as the consumer consumes additional units of the product? 1. Marginal utility of the additional units will be greater than zero. 2. Total utility will turn negative. 3. Marginal utility of the additional units will turn negative. 4. Total utility will increase at a diminishing rate.

3

If you receive a gift whose market price is $20, but you consider it to be worth only $10, then 1. there is a $10, or 50 percent, value gain. 2. there may or may not be a value loss. 3. there is a $10, or 50 percent, value loss. 4. you can be relatively certain the giver was a sibling or other close relative.

3

In deciding what to buy, the consumer will choose the good with the 1. highest marginal utility. 2. lowest price. 3. highest marginal utility-to-price ratio. 4. lowest marginal utility-to-price ratio.

3

Internationally, participation differences in organ donation programs are mostly attributed to 1. cultural views. 2. financial compensation for organ donors. 3. what default option is set for participation or nonparticipation. 4. living standards as measured by per capita GDP.

3

Neoclassical economic analysis tends to disregard the following motivations in people's decisions and actions, except 1. charity. 2. selflessness. 3. self-interest. 4. focus on the common good

3

Neoclassical economists generally believe which of the following about human behavior? 1. While individuals attempt to make rational decisions, poor computational skills often lead to systematic errors. 2. People care a lot about fairness and are often willing to sacrifice some of their own well-being to treat others fairly. 3. When individuals make mistakes in decision making, they adjust to these errors and rarely repeat them. 4. When individuals are selfless and act for the good of others, the invisible hand guides the collective behaviors to promote the good of society

3

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a 1. negative externality. 2. supply-side market failure. 3. demand-side market failure. 4. government failure.

3

Producer surplus is the difference between 1. the maximum prices consumers are willing to pay for a product and the lower equilibrium price. 2. the quantity supplied and quantity demanded at an above equilibrium price. 3. the minimum prices producers are willing to accept for a product and the higher equilibrium price. 4. the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

3

The 2010 Health Care Reform Law, also known as "Obamacare," includes a part known as universal coverage which requires everyone to have health insurance. One reason for this is to address the problem of 1. moral hazard. 2. externalities. 3. adverse selection. 4. public goods.

3

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that 1. both groups felt that the demand was elastic but for different reasons. 2. both groups felt that the demand was inelastic but for different reasons. 3. the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic. 4. the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.

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The coefficient of price-elasticity of supply for a product is 2 if 1. a 1 percent decrease in the price causes a 0.2 percent decrease in quantity supplied. 2. a 2 percent decrease in price causes a 1 percent decrease in quantity supplied. 3. a 1 percent decrease in price causes a 2 percent decrease in quantity supplied. 4. a 2 percent decrease in price causes a 2 percent decrease in quantity supplied

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The market demand curve for a public good 1. is derived in the same manner as demand curves for private goods. 2. is derived by horizontally summing all individual demand curves. 3. shows the total value that all individuals place on each additional unit of the good. 4. shows the total number of units that would be produced by the public sector at each possible price.

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The price-elasticity coefficients are 2.6, 0.5, 1.4, and 0.18 for four different demand schedules,D1, D2, D3, and D4, respectively. A 2-percent increase in price will result in an increase in total revenues in which of the following cases? 1. D1 and D3 2. D1 and D4 3. D2 and D4 4. D1, D2, and D3

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The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is that 1. the real income of the consumer has been increased. 2. the real income of the consumer has been decreased. 3. the product is now relatively more expensive than it was before. 4. other products are now relatively more expensive than they were before.

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When gasoline at $3.60/gallon looks relatively cheap after a period of $5/gallon gas, that's an illustration of the 1. planning fallacy. 2. confirmation bias. 3. framing effect. 4. availability heuristic.

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When people retroactively believe that they had accurately foreseen past events, they are illustrating the 1. confirmation bias. 2. framing effect. 3. hindsight bias. 4. self-serving bias

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Which of the following cognitive biases refers to people's tendency to attribute their successes to personal ability and effort, and failures to forces outside their control? 1. overconfidence effect 2. confirmation bias 3. self-serving bias 4. hindsight bias

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Which of the following is a significant difference in the outcomes between the dictator game and the ultimatum game? 1. There is little difference, as fairness considerations lead to similar splits of the money in both games. 2. The dictator game tends to result in a more even split of the money. 3. The ultimatum game tends to result in a more even split of the money. 4. Self-interest is revealed more strongly in the ultimatum game than in the dictator game.

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Which of the following is an example of a market failure? 1. There are not enough tickets available to concerts of extremely popular performers and artists. 2. The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and procedures. 3. Successful public schools provide benefits to the students who attend them, as well as to the community as a whole, including those who don't go to those public schools. 4. Sharply declining prices of electronic equipment result in large numbers of bankruptcies in the computer industry.

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Which of the following is not an assumption of the theory of consumer behavior described in this chapter? 1. The consumer has to make purchasing decisions within a given budget constraint. 2. The consumer experiences diminishing marginal utility from consuming goods. 3. The consumer's tastes and preferences continually change within the period studied. 4. The consumer aims to get maximum total utility out of a given budget.

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Which of the following would be an example of a moral hazard problem? 1. a person in poor health who purchases life insurance 2. a person who is taxed on the purchase of a carton of cigarettes 3. a person who purchases auto insurance and then drives more recklessly 4. a person who receives a subsidy from the Federal government to insulate a home

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Why do credit card companies typically require small minimum payment amounts on their customers' monthly credit card statements? 1. Credit card companies are concerned that their customers will be put in financial distress if required to make higher payments. 2. Credit card companies want to promote faster repayment, and customers will be encouraged to pay more each month if they're able to pay well beyond the minimum. 3. Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements. 4. Credit card companies actually charge the highest minimum payment they are allowed by law to charge.

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(Consider This) Kara was earning $40,000 per year. When her income rose to $60,000 per year, she enjoyed the higher level of consumption for a while, but eventually she was no more happy than when she earned $40,000 (assume prices didn't change over this time period). Economist Richard Easterlin described this as 1. anchoring. 2. the endowment effect. 3. irrational economic behavior. 4. the hedonic treadmill.

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A 4 percent reduction in the price of a product has zero effect on the dollar amount of consumer expenditure on the product. The price elasticity of demand is 1. zero. 2. greater than zero. 3. greater than zero but less than 1. 4. equal to 1.

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A firm produces and sells two goods, A and B. Good A is known to have many close substitutes; good B makes up a significant portion of most families' budgets. A price increase for each good would most likely cause total revenues from good A to 1. increase and total revenues from good B to decrease 2. increase and total revenues from good B to increase. 3. decrease and total revenues from good B to increase. 4. decrease and total revenues from good B to decrease.

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A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the 1. more elastic the supply curve. 2. larger the elasticity of demand coefficient. 3. more elastic the demand for the product. 4. more inelastic the demand for the product

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A public good 1. generally results in substantial negative externalities. 2. can never be provided by a nongovernmental organization. 3. costs essentially nothing to produce and is thus provided by the government at a zero price. 4. can't be provided to one person without making it available to others as well.

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A supply curve that is parallel to the horizontal axis suggests that 1. the industry is organized monopolistically. 2. the relationship between price and quantity supplied is inverse. 3. a change in demand will change price in the same direction. 4. a change in demand will change the equilibrium quantity but not price.

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Airlines charge business travelers more than leisure travelers because there is a more 1. elastic supply of business travel. 2. inelastic supply of business travel. 3. elastic demand for business travel. 4. inelastic demand for business travel.

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Along a linear downward-sloping demand curve, the price elasticity of demand will be 1. greater than one across each price range. 2. less than one across each price range. 3. equal to zero across each price range. 4. different across each price range.

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An indifference map implies that 1. money income is constant, but the prices of the two products vary directly with the quantities purchased. 2. the two products under consideration are perfectly substitutable for one another. 3. a consumer is better off to be at some point high on a given curve as opposed to a point low on the same curve. 4. curves farther from the origin yield higher levels of total utility.

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Assume that a consumer purchases a combination of products Y and Z and that the MUy/Py = 30/2 and MUz/Pz = 45/3. To maximize utility, without spending more money, the consumer should 1. purchase less of Y and more of Z. 2. purchase more of Y and less of Z. 3. purchase more of both Y and Z. 4. make no change in the quantities of Y and Z.

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Assume you are spending your full budget and purchasing such amounts of X and Y that the marginal utility from the last units consumed is 40 and 20 utils, respectively. Assume (a) the prices of X and Y are $8 and $4 respectively; (b) it takes 3 hours to consume a unit of X and 1 hour to consume a unit of Y; and (c) your time is worth $2 per hour. You 1. should substitute X for Y until the marginal utility per hour is the same for both products. 2. are consuming X and Y in the optimal amounts. 3. should consume less of Y and more of X. 4. should consume less of X and more of Y.

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Cost-benefit analysis attempts to 1. compare the real worth, rather than the market values, of various goods and services. 2. compare the relative desirability of alternative distributions of income. 3. determine whether it is better to cut government expenditures or reduce taxes. 4. compare the benefits and costs associated with any economic project or activity.

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Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of 1. public goods. 2. externalities. 3. moral hazard. 4. adverse selection.

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Credit card companies require low minimum payments that impose significant interest costs on consumers choosing to pay the minimum. Recent legislation has required credit card companies to show on customer billing statements how much interest would be paid and how long it would take to repay the current balance if only the minimum is paid. Behavioral economists would expect this legislation to 1. substantially increase monthly payments, as consumers make better decisions when they have more information. 2. overcome the status quo bias that keeps people paying the minimum. 3. cause credit card companies to increase the minimum payments. 4. have little effect, as anchoring would keep many people paying the minimum.

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Dan was certain that his upcoming economics test would be so easy that he could wait to study until the night before and still do well on the exam. When he cracked open his book and notes the night before the exam, he realized he should've started studying earlier. According to behavioral economics, Dan's error was caused primarily by 1. a planning fallacy. 2. an overconfidence effect. 3. framing effects. 4. hindsight bias.

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Diminishing marginal utility explains why 1. the income effect exceeds the substitution effect. 2. the substitution effect exceeds the income effect. 3. supply curves are upsloping. 4. demand curves are downsloping

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For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve? 1. frozen yogurt 2. bubble gum 3. microwave popcorn 4. courts of law

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Graphically, producer surplus is measured as the area 1. under the demand curve and below the actual price. 2. under the demand curve and above the actual price. 3. above the supply curve and above the actual price. 4. above the supply curve and below the actual price.

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High-end retailers spend a lot on architecture, displays, and packaging in order to take advantage of the 1. hindsight bias. 2. confirmation bias. 3. availability heuristic. 4. framing effect.

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If a consumer has an income of $200, the price of X is $5, and the price of Y is $10, what is the maximum quantity of X the consumer is able to purchase? 1. 5 2. 10 3. 20 4. 40

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If you purchase a gift worth $25 for your sister, but your sister would be willing to pay only $10 ifshe bought the item for herself, then the 1. total utility of the gift is $35. 2. total utility of the gift is $15. 3. marginal utility of the gift is $15. 4. loss of value in the gift is $15.

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John's friend Rosika won a major lottery jackpot. Seeing this, John goes out and buys a bunch of lottery tickets despite struggling financially and even though he knows that millions don't win and that the odds of winning are infinitesimal. John's decision to buy the lottery tickets under these circumstances would best be explained by the 1. hindsight bias. 2. self-serving bias. 3. confirmation bias. 4. availability heuristic.

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Most people's natural aversion against complex mathematical problems is an example of 1. confirmation bias. 2. a mental heuristic. 3. rational choice. 4. cognitive bias.

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Natural disasters often cause shortages of critical supplies. What outcomes would neoclassical and behavioral economics typically predict from these events? 1. Both would expect prices to rise significantly, whether from market forces or from self-interest overwhelming any sense of compassion for others. 2. Both would expect sellers to keep prices unchanged, whether to keep customers happy long-term or out of a sense of fairness. 3. Neoclassical economists would expect economic chaos and collapse, while behavioral economists would expect everyone to act cooperatively. 4. Neoclassical economists would expect prices to rise dramatically as a natural result of the greater scarcity, and behavioral economists would expect prices to increase less or not at all as people try not to take advantage of the situation.

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Neoclassical economics does not hold which of the following assumptions? 1. People are fundamentally rational. 2. People can make errors initially, but they learn quickly. 3. People's errors are random and rare. 4. People make regularly repeated mistakes.

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Nonrivalry and nonexcludability are the main characteristics of 1. consumption goods. 2. capital goods. 3. private goods. 4. public goods.

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One major consequence of the overconfidence effect is that 1. some people cannot correct a personal trait that might be causing them to fail in many ventures. 2. someone could persist in pursuing a failed policy despite overwhelming evidence of the failure. 3. bad decisions can be made because people will act based on irrelevant information. 4. some people may wrongly believe in their forecasting ability to predict future outcomes of risky investments.

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Sellers will opt out of markets in which 1. there are significant negative externalities. 2. standardized products exist. 3. there are only foreign buyers. 4. information about buyers is inadequate, and some buyers can impose high costs on the sellers.

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So-called precommitments are effective ways of fighting 1. framing effects. 2. mental accounting. 3. anchoring. 4. self-control problems.

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The concept of price elasticity of demand measures 1. the slope of the demand curve. 2. the number of buyers in a market. 3. the extent to which the demand curve shifts as the result of a price decline. 4. the sensitivity of consumer purchases to price changes.

4

The fact that most medical care purchases are financed through insurance 1. has no effect on health care consumption because aggregate costs are the same regardless of payment method. 2. reduces the amount of health care consumed by raising the price of additional units of care. 3. has decreased health care costs and therefore reduced aggregate health care expenditures. 4. increases the amount of health care consumed by reducing the price of additional units of care.

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The goal of a rational consumer is to maximize 1. the quantities of all goods consumed. 2. the MU/P of all goods consumed. 3. marginal utility of all goods consumed. 4. total utility from all goods consumed.

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The marginal rate of substitution 1. may increase or decrease on a given indifference curve, depending on whether the substitution or the income effect is dominant. 2. increases as one moves southeast along an indifference curve. 3. is constant at all points on the budget line. 4. declines as one moves southeast along an indifference curve.

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The marginal rate of substitution measures the 1. magnitude of the substitution effect. 2. total utility received by a consumer when equilibrium is achieved. 3. extra utility that a consumer derives from successive units of a product. 4. consumer's willingness to substitute one product for another so that total utility will remain constant

4

We would expect the cross elasticity of demand between dress shirts and ties to be 1. positive, indicating normal goods. 2. positive, indicating complementary goods. 3. negative, indicating substitute goods. 4. negative, indicating complementary goods.

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When people convince themselves that they "knew all along" what was going to happen, when in fact their predictions were incorrect, they suffer from 1. overconfidence bias. 2. self-serving bias. 3. framing bias. 4. hindsight bias.

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When total utility reaches a maximum, then marginal utility is 1. increasing. 2. decreasing. 3. at a minimum. 4. equal to zero.

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Which of the following defines marginal utility? 1. the change in total utility divided by the price of a product 2. the maximum amount of satisfaction from consuming a product 3. the total satisfaction derived from a certain amount of the product 4. the additional satisfaction from consuming one more unit of a product

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Which of the following facts is not a basis for prospect theory in behavioral economics? 1. People evaluate gains and losses in relation to the status quo, not in absolute terms. 2. People feel losses much more intensely than they feel gains. 3. People experience diminishing marginal disutility for losses. 4. people do not experience diminishing marginal utility for gains.

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Which of the following statements best reflects behavioral economists' views on self-interest versus the interests of others? 1. Self-interest dominates human behavior; even seemingly selfless behavior is driven by self-interest. 2. Most people care so deeply about others that self-interest is a minor consideration in their decision making. 3. The system is most efficient when people focus solely on their self-interest and allow the invisible hand to work out what is best for society. 4. People are always self-interested to a degree, but their behavior is also affected by moral and ethical considerations.

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Which of the following statements is not true? 1. Some public goods are paid for by private philanthropy. 2. Private provision of public goods is usually unprofitable. 3. The free-rider problem results from the characteristics of nonrivalry and nonexcludability. 4. Public goods are only provided by government.

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