Microeconomics Exam 2

In the short run:

Some inputs are fixed and some inputs are variable

Many people don't reveal their smoking and eating habits on their applications for health insurance. This is an example of:

adverse selection.

Which of the following goods best fit the characteristics of a private good?

an ice-cream cone

Moral hazard occurs when:

an individual knows more about his or her actions than other people do.

Louis has invested $1,000 in the stock market. At the end of one year, there is a 30% chance that his stock will be worth only $800, and a 70% chance that it will be worth $1,200. The expected value of his stock at the end of one year is:

$1,080.

Micah is considering turning pro before his senior basketball season. If he turns pro, Micah expects a pro contract worth $2 million in present value terms. If he does not turn pro, there is a 50% chance an injury will prevent him from playing professionally and a 50% chance he will get a pro contract worth $4 million in present value terms. What is the expected present value of Micah's pro contract if he stays in college for his senior year?

$2 million

Donald has a total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash. He keeps the cash in a safety deposit box so that it is completely safe. However, there is a 10% chance that his house will burn down by the end of the year and be worth nothing (and a 90% chance that nothing will happen to it). Without insurance, the expected value of his end-of-year wealth is:

$490,000.

Which of the following statements is false?

When the marginal product of labor is upward-sloping, the marginal cost curve is upward-sloping.

Which of the following is an example of an activity generating a positive externality?

Your next-door neighbor installs a bat house and the bats eat mosquitoes.

The term diminishing returns refers to:

a decrease in the extra output due to the use of an additional unit of a variable input, when more and more of the variable input is used and all other things are held constant

Which of the following is an example of a common resource?

a public beach with free access

The government can intervene to achieve the socially optimal quantity of a common resource by:

assigning property rights, imposing a tax on usage, or by granting a limited number of tradable permits to use the good.

Pollution has ________ and ________.

benefits; costs

The best example of a common resource is:

clean water

The average total cost curve in the short run slopes upward due to:

diminishing returns.

The long-run average cost curve will be upward sloping when the firm is experiencing:

diseconomies of scale

The U-shape of the long-run average total cost curve is primarily due to:

economies and diseconomies of scale.

When an increase in the firm's output reduces its long-run average total cost, it experiences:

economies of scale.

Marginal cost ________ over the range of increasing marginal returns and ________ over the range of diminishing marginal returns.

falls; increases

An input whose quantity cannot be changed during a particular period is a(n):

fixed input.

The tendency of people or firms to consume a public good without paying for it is the ________ problem.

free-rider

An externality is said to exist when:

individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account.

Common resources tend to be overused because:

individuals tend to ignore the cost their use of the resource has on others.

The premium on insurance is often ________ to the deductible, allowing insurance companies to ________ their customers.

inversely related; screen

For a restaurant:

labor and food would be variable resources and a building would be a fixed resource in the short run.

Which of the following is an example of environmental standards?

legal limits on SO2 emissions

The long run is a period that is:

long enough in which to vary the quantities of all factors of production.

Insurance premiums often fall substantially if a buyer purchases a policy with a high deductible, and it is often purchased by individuals who self-identify as:

low-risk drivers.

The ________ is the increase in output obtained by hiring an additional worker.

marginal product

An individual is more likely to free ride when a good is:

nonexcludable

As a big music fan, you want to attend a weekend blues festival in your town. The purchase of a wristband gives you, and thousands of other fans, access to the outdoor concert pavilion. The blues festival is a good that has the characteristics of:

nonrival and excludable.

Most neighborhood streets are illuminated at night by streetlights. The streetlights are ________ and ________. Therefore, they are likely to be ________ by the competitive market.

nonrival; nonexcludable; underprovided

When Joe watched a television movie, his viewing was ________ in consumption because other people ________ able to view the movie at the same time Joe did.

nonrival; were

When some people know things that other people don't know, this is known as a situation of ________; it can ________ economic decisions

private information; distort

Insurance companies deal with the problems created by moral hazard by:

providing an incentive for insured individuals to take reasonable precautions to avoid losses by always requiring a deductible.

Companies offering life insurance often require a drug test to determine whether the buyer is a smoker. A smoker then must pay a higher premium. This is an example of:

screening to deal with adverse selection.

Lucy decides to buy car insurance. She is doing this because:

she wants to decrease her exposure to risk.

Used-car dealers will often advertise how long they have been in business as a means of ________ their long-term ________.

signaling; reputations

In practice, insurance companies faced with adverse selection use which of the following strategies to deal with it?

signals

In the short run, as output gets larger and larger:

the average variable cost curve gets closer and closer to the average total cost curve

Given that there is general agreement that pollution is undesirable and social welfare is increased by reducing pollution, the optimal level of pollution in a society is:

the level of pollution at which the marginal social cost of pollution is equal to the marginal social benefit of pollution.

Suppose at the current amount of pollution, the marginal social benefit of pollution is greater than the marginal social cost of pollution, then:

there is too little pollution.

If government officials set an emissions tax too high:

there will be too little pollution.

When individuals take external costs and benefits into account:

they internalize the externality.

Fire insurance policies include deductibles:

to minimize the impact of moral hazard.

Health insurance policies include deductibles:

to minimize the impact of moral hazard.

The sum of fixed and variable costs is:

total cost

Marginal cost is the change in:

total cost resulting from a one-unit change in output.

The marginal product of labor is all of the following except:

total product divided by labor.

Assume the federal government determines the total level of pollutants that can be discharged by city industries. A city is able to exchange the rights to this total discharge level with other cities. This is an example of:

tradable emissions permits.

Average variable cost equals all the following except:

variable cost times output.

An input whose quantity can be changed during a particular period is a(n):

variable input.

The costs associated with variable inputs are ________ costs and the costs associated with ________ inputs are ________costs.

variable; fixed; fixed

Diminishing returns to an input set in:

when some inputs are fixed and some are variable.

In the absence of government action, polluters will pollute up to the point at which the marginal social benefit of pollution is:

zero