Microeconomics Exam 2

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After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the:

Marginal utility is positive for the fourth slice and negative for the fifth slice

The substitution effect:

Measures the change in the quantity demanded of a good from a change in its relative price

When the government provides loan guarantees and in effect "socializes losses and privatizes gains" of a project or firm, it can lead to a:

Moral hazard problem among investors

substitutability

More substitutes, demand is more elastic

unfunded liability

Social Security and Medicare

The reason why people are charged for an additional can of soda they get from a soda machine, but are not charged for an additional paper taken from a newspaper dispensing machine, is that the marginal utility of an additional:

Soda diminishes slowly, but the marginal utility of an additional paper is close to zero

Rent-seeking behavior in public choice theory refers to:

Specific groups appealing to government for special benefits at someone else's expense

"Unfunded liability" refers to a government commitment to:

Spend in the future without also committing to collect enough tax money to pay for it

"Regulatory capture" refers to the situation where a government agency charged with supervising and regulating a particular industry is:

Strongly influenced by the firms in that industry

According to behavioral economics, cognitive biases:

are misunderstandings or misperceptions that cause systematic error.

Heuristics:

are shortcuts that save time and energy in decision making.

p and tr move in opposite directions

elastic demand

price elasticity of supply

measures sellers' responsiveness to price changes. elastic supply, producers are responsive to price changes. inelastic supply, producers are not as responsive to price changes.

time

more time available, demand is more elastic

(Consider This) According to the piece "Wannamaker's Lament":

most marketing efforts have little impact on sales.

interpretation of elasticity of demand

Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed < 1 demand is inelastic Extreme cases Ed = 0 demand is perfectly inelastic Ed = ∞ demand is perfectly elastic

Movie theaters charge lower prices to see a movie in the afternoon than in the evening because there is an:

Elastic demand to see movies in the afternoon

price elasticity of supply continued

Es > 1 supply is elastic Es = 1 supply is unit elastic Es < 1 supply is inelastic Es = 0 supply is perfectly inelastic

In a market economy, the government's ability to coerce is beneficial in the following cases, except in:

Fixing resource prices

If the price-elasticity coefficient for a good is .75, the demand for that good is described as:

Inelasic

Josh will receive a salary of $300,000 next year. According to prospect theory:

Josh's satisfaction with that salary depends on how much he made in the past.

To prevent monetary policy from becoming highly politicized, many countries have:

Made their central banks be politically independent

In the corporate world of business, the principal-agent problem arises between:

Managers and stockholders

In assessing the efficiency of government policy, economic analysis would focus on:

Marginal benefits versus costs of government policy and action

Many people do not steal or commit fraud because to them, the resulting feelings of guilt and uneasiness make the:

Marginal cost of the act increase

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?

self-serving bias

elastic demand

sensitive to price changes, large change in quantity

Consider the parallel demand curves in the figure above. Which curve is relatively more elastic at P1?

BB

total utility

the total amount of satisfaction obtained from consumption of a good or service

Chronic budget deficits can lead to all of the following, except

"Smaller government" in the economy

In spending all his income on beer and pizza, Fred finds that the marginal utility of the last pizza he consumed is 8, and the marginal utility of the last bottle of beer is 4. The price of a bottle of beer is $1.50. If Fred has maximized his utility, the price of pizza must be:

$3.00

When monetary policy becomes highly politicized, the policy tends to:

Become destabilizing, instead of promoting stability

formula for price elasticity of demand

% change in quantity demanded / % change in price

directing and managing government

- No invisible Hand - Massive Size and Scope - The Need for Bureaucracy - The Need for Paperwork and Flexibility - The Information Aggregation problem - Lack of Accountability

Blossom, Inc. sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise price to $9, and the firm only manages to sell 460 bottles of perfume. The price elasticity of demand is:

0.33 and inelastic

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:

1.5

Suppose you are given the following data on demand for a product. The price elasticity of demand (based on the midpoint formula) when price decreases from $9 to $7 is: quantity 40 -> 60

1.60

The price of season tickets to a performing arts theater decreases by 3 percent. As a result, the quantity demanded increases by 6 percent. The price elasticity of demand for season tickets is:

2

If sellers could price-discriminate and charge two different prices to two different groups of buyers in order to increase revenues, then the sellers would charge:

A higher price to the buyers whose demand is inelastic

Government's ability to force people to do things involuntarily is:

Beneficial if it is used to improve economic efficiency

The public (or national) debt refers to the:

Accumulation of all past budget deficits

An indifference curve shows:

All combinations of two products from which the consumer derives a specific level of total utility

Political corruption occurs in the following instances, except when:

Businesses pay property taxes and license fees

We use the midpoint formula in computing the price elasticity of demand coefficient in order to:

Convert absolute changes into percent-changes

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:

D2 and D4

Which of the following countries had the least corruption, as reported in the Global Corruption Barometer for 2010-11?

Germany

Government in a market system can increase economic efficiency by collecting taxes in order to subsidize the production of:

Goods with positive externalities

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

When universities announce a large tuition increase and follow it with an announcement that more financial aid will be available, they are assuming that students who pay full tuition:

Have inelastic demand and students who use financial aid have elastic demand

proportion of income

Higher proportion of income, demand is more elastic

In deciding what to buy, the consumer will choose the good with the:

Highest marginal utility-to-price ratio

Deregulation can solve the problem of regulatory capture and increase economic efficiency:

If the deregulated industry becomes more competitive

When the price of a product falls for a normal good, the:

Income and substitution effects will encourage consumers to purchase more of the product

An increase in the productivity of labor over time will:

Increase in the value of time

You are the only seller of eggs in town, and the price-elasticity coefficient for eggs is known to be 0.8. If you want to increase your sales quantity by 10% through a price-change, what should you do to price?

Increase price by 12.5%

Which of the following best explains the difference between neoclassical economics and behavioral economics?

Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors.

In the face of rising costs, some firms reduce the quality of the goods they produce rather than maintain quality and increase prices. How would behavioral economics explain this strategy?

People have an aversion to losses, and consumers are more likely to feel the loss of a price increase than a quality reduction.

If a college admits only a fixed number of applicants every year, then the school's supply curve for admissions is:

Perfectly inelastic

The situation where politicians make decisions that will raise their chances of reelection, even if those decisions are detrimental to the general public, is referred to as the:

Principal-agent problem

Making blackmail, extortion, and other forms of private coercion illegal is one way that government:

Reduces private-sector economic risk

Assume a round of golf requires four hours of leisure time, and attending a concert requires two hours. If the price of a round of golf is $40 and the price of a concert is $80, ceteris paribus, Joe will play:

Relatively less golf and attend relatively more concerts whenever his leisure time becomes more scarce

The price elasticity of demand is a measure of the:

Responsiveness of buyers of a good to changes in its price

The government adds to its overall public debt whenever it:

Runs a budget deficit

According to behavioral economics:

each successive unit of loss hurts, but less than the previous unit.

total revenue formula

TR = P x Q

Which of the following defines marginal utility?

The additional satisfaction from consuming one more unit of a product

The increase in demand for iPad tablet computers can be explained by:

The enhanced versatility and storage capacity of iPads, making their MU/P increase

income effect

The impact a price change has on a consumer's real income

substitution effect

The impact that a price increase has on a consumer's decision to purchase an item or to substitute that item for a similar product that meets the same need or want but at a lower cost.

Law of diminshing marginal utility

The more of something we consume the less extra satisfaction we get from each additional unit consumed This will mean we are prepared to pay less for each additional unit

What is a likely explanation for why the budget of a government agency might increase beyond its optimal size?

The power of special-interest groups

Chronic Budget Deficits

economic inefficiency and debt crisis

Total utility is best defined as the:

Total satisfaction received from consuming a given amount of a product

If a product has a diminishing, but positive, marginal utility, then:

Total utility increases at a diminishing rate

A consumer allocates all income between two products, A and B. If, on an indifference map, the equilibrium position shifts onto a higher indifference curve, then:

Total utility must have increased

What are the two categories of cognitive biases identified by behavioral economists?

Unevolved capacity for solving modern problems and faulty heuristics.

Health insurance often pays 80 percent of health care cost. This situation will encourage the rational consumer to:

Use more medical services than they would if they had to paid the full price

The satisfaction or pleasure one gets from consuming a good or service is called:

Utility

marginal utility

an additional amount of satisfaction

neoclassical economics

believe our decisions are rational (always the best for us) People have stable preferences that aren't affected by context People are eager and accurate calculating machines People are good planners who possess plenty of willpower People are almost entirely selfish and self-interested

Susie knows that too many sugary treats, while delicious when eaten, have long-term adverse effects on weight and health. Based on this information, a neoclassic economist would expect Susie to:

carefully weigh the short-term benefits against the long-term costs and make a rational decision about how many treats to eat.

Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from:

confirmation bias

According to behavioral economists, people's preferences toward a particular outcome

depend heavily on the contextual information that defines whether that outcome is a gain or a loss.

behavorial economics

developed to explain the systematic errors Improving outcomes by improving decision making

Myopia and Time Inconsistency

fighting self-control problems with precommitments

Two types of macroeconomic stabilization

fiscal policy and monetary policy

Government's Economic Role

government's right to coerce. force can increase economic efficiency. correct market failures (positive and negative externalities) reduce private sector economic risks.

A central focus of prospect theory is:

how people deal with "bads," as well as how they deal with "goods."

Government Failure

inefficient outcomes caused by government

P and TR move in the same direction

inelastic demand

inelastic demand

insensitive to price changes, small change in quantity

The threat of rejection in market transactions:

leads to lower prices for consumers. leads to greater cooperation between buyers and sellers. leads to better products for consumers.

Luxuries vs. Necessities

luxury goods, demand is more elastic

Behavioral economists believe that people:

often succumb to temptation

In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the:

overconfidence effect

prospect theory

people choose to take on risk when evaluating potential losses and avoid risks when evaluating potential gains

Because of "mental accounting:"

people isolate purchases and sometimes make irrational decisions.

For economists, "myopia" refers to:

people's difficulty in conceptualizing the future.

The Law of Supply suggests that the price-elasticity of supply is:

positive

Consider the demand curve above. If area 0ABC is smaller than area 0DEF, we may conclude that demand in this range is:

price-elastic

Heuristics are

shortcuts in decision making that save mental activity

According to behavioral economists, someone suffering from myopia is most likely to:

spend too much on present consumption and not save enough for the future.

Determinants of Price Elasticity of Demand

substitutability, proportion of income, luxuries vs necessities, time

Utility

the satisfaction one gets from consuming a good or service

Buck carefully plans out an early morning exercise routine to lose weight and get fit. When it's time to work out, however, Buck just "doesn't feel up to it" and decides to sleep in. Behavioral economics would say that Buck:

used System 2 of his brain to formulate his workout plan, but then gave in to System 1 when he chose to sleep in.


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