The lemons problem gives the owners of above-average-quality used cars an incentive
to:
A. exaggerate the quality of their cars when selling them.
B. offer a warranty when selling their cars.
C. understate the true quality of their cars when selling them.
D. ask for a sales price that is higher than the blue book value of their car.
There are 20 residents in the village of Towneburg. The size of the village’s annual
fireworks display depends upon the number of shells that are fired off. Each resident’s
demand for fireworks is shown below. The total cost of the fireworks display is $1,000
plus $10 per shell.
Cheap Charlie is one of Towneburg’s 20 residents. While Charlie enjoys fireworks as
much as the next Towneburger, when the fireworks fund-raising campaign kicks off, he
claims to hate them. Cheap Charlie is trying to:
A. free ride.
B. rent seek.
C. force the village to be more efficient.
D. log-roll.
When the coupon rate on newly issued bonds increases from 5% to 6%, the prices of
existing bonds:
A. increase.
B. decrease.
C. remain unchanged.
D. increase only if the coupon rate is less than 6%.
Suppose that a government agency is trying to decide between two pollution reduction
policy options. Under the permit option, 100 pollution permits would be sold, each
allowing emission of one unit of pollution. Firms would be forced to shut down if they
produced any units of pollution for which they did not hold a permit. Under the
pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The
regulated firms all currently pollute and face varying costs of pollution reduction,
though all face increasing marginal costs of pollution reduction. Suppose the regulators
chose the permit policy instead of the tax policy. What might explain that decision?
A. Permit auctions raise more revenue than do taxes.
B. The permit policy allows regulators to achieve reduction goals without having
detailed knowledge about firms’ abatement costs.
C. The permit policy will reduce pollution by more than would the tax policy.
D. Firms prefer the permit policy because it allows them to choose the least-costly
reduction technology.
During the Christmas shopping season, the demand for money increases significantly. If
the Fed takes no actions to offset the increase in money demand, then nominal interest
rates will:
A. increase.
B. decrease.
C. remain constant.
D. equal the real interest rates.
The marginal benefit of additional information:
A. rises as more information is collected.
B. is independent of the amount of information that has already been acquired.
C. tends to be lower for expensive items than inexpensive items.
D. falls as more information is collected.
The participation rate is the number of people:
A. employed divided by the labor force.
B. employed divided by the population aged 16 years and older.
C. employed and unemployed divided by the labor force.
D. employed and unemployed divided by the population aged 16 years and older.
The unemployment rate equals the number of people:
A. unemployed.
B. unemployed divided by the number employed.
C. unemployed divided by the labor force.
D. unemployed plus discouraged workers divided by the labor force.
If the rate of inflation equals zero then the nominal rate of interest:
A. equals zero.
B. equals the real rate of interest.
C. can be negative.
D. equals the target interest rate.
Larry was accepted at three different graduate schools, and must choose one. Elite U
costs $50,000 per year and did not offer Larry any financial aid. Larry values attending
Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an
annual $10,000 scholarship. Larry values attending State College at $40,000 per year.
NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship.
Larry values attending NoName at $15,000 per year. Larry’s opportunity cost of
attending Elite U is:
A. $70,000
B. $50,000
C. $20,000
D. $15,000
Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would
prefer to see a comedy while Lee would prefer to see a documentary. One documentary
and one comedy are showing at the local cinema. The payoffs they receive from seeing
the films either together or separately are shown in the payoff matrix below. Both
Jordan and Lee know the information contained in the payoff matrix. They purchase
their tickets simultaneously, ignorant of the other’s choice.
Which of the following statements is true?
A. The lower-left cell is the only Nash equilibrium.
B. Both the lower-left and upper right cells are Nash equilibria.
C. Both the upper-left and lower-right cells are Nash equilibria.
D. The upper-right cell is the only Nash equilibrium.
In surveying their alumni, State U’s economics department discovered that ramen
noodle consumption declined once students graduated and found jobs. One conclusion
the survey team might draw from this result is that:
A. there is excess demand for ramen noodles.
B. the equilibrium price for ramen noodles is too high.
C. college graduates have a high reservation price for ramen noodles.
D. ramen noodles are an inferior good.
As the differences in opportunity costs between the U.S. and its trading partners
increase, the potential gains from specialization and trade ______.
A. increase
B. decrease
C. stay the same
D. become unpredictable
In the basic Keynesian model, a tax cut:
A. reduces short-run equilibrium output.
B. increases short-run equilibrium output.
C. reduces potential output.
D. increases potential output.
The money supply will increase by a multiple of the increase in bank reserves created
by the central bank unless:
A. there is fractional reserve banking.
B. there is 100 percent reserve banking.
C. the public holds no currency.
D. banks’ desired reserve/deposit ratio is 0.20.
When Cody went to the physician with a sore elbow, after hearing Cody’s symptoms
and examining the elbow manually, Cody’s physician had two options: (1) prescribe an
anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a
period; or (2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a
costly diagnostic procedure. Which of the following physicians is more likely to
recommend option 2?
A. A physician who is compensated under a conventional health insurance plan.
B. A physician who is part of an HMO.
C. A physician who is concerned about the marginal cost of an MRI.
D. All physicians would recommend option 2.
Starting from full employment at the initial target inflation rate, if there is an adverse
inflation shock, then the Federal Reserve must _____ in order to avoid a recession.
A. increase the target inflation rate.
B. decrease the target inflation rate.
C. maintain the initial target inflation rate.
D. shift the short-run aggregate supply curve up.
In the United States since 1929, the duration of recessions on average has been:
A. longer than the duration of expansions.
B. shorter than the duration of expansions.
C. steadily decreasing.
D. steadily increasing.
The dollar price of a good relative to the average dollar price of all other goods is the
good’s:
A. market price
B. equilibrium price
C. nominal price
D. real price
The seven leaders of the Federal Reserve System headquartered in Washington, D.C.
constitute the:
A. Federal Reserve Bank of Washington, D.C.
B. Federal Open Market Committee.
C. Federal Economic Advisory Board.
D. Board of Governors.
During Thanksgiving you participated in a pumpkin-pie eating contest. You really
enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one
you became ill and lost the contest. You got ______ utility from eating the first pie than
from eating the third pie.
A. less
B. more
C. the same amount of
D. less variable
Refer to the figure above. An increase in supply is represented by shifting from:
A. curve A to curve B.
B. curve B to curve A.
C. curve C to curve D.
D. curve C to curve B.
Based on the following information, what is the amount of public saving?
A. +3,700
B. +2,500
C. +200
D. -300
The figure below shows the demand curve for a product that can be sold only in
whole-number amounts.
At a price of $25 per unit, what would be the total consumer surplus in this market each
day?
A. $0
B. $5
C. $15
D. $30
The table below shows how total donations, average donations, total labor costs and
average labor costs vary depending on the number of employees State U hires for its
fundraising activities.
The Chair of the Economics Department at State U says that fundraising employees
should be hired as long as their marginal benefit exceeds their marginal cost. If the
University follows this advice, then ______ employee(s) will hired, and the net benefit
(total donations minus total labor costs) will be ______.
A. 1; $22,000
B. 2; $25,426
C. 3; $25,426
D. 2; $3,476
When the price of a perfectly competitive firm’s output rises:
A. the firm will produce more.
B. the firm’s marginal cost curve will shift to the right.
C. the firm will produce less.
D. the firm’s marginal cost curve will shift to the left.
According to the theory of disappearing political discourse, politicians remain silent
about issues because politicians:
A. are unsure of their opinions.
B. don’t have enough information.
C. fear that if they speak out they will be misunderstood.
D. fear that voters do not fully understand the issues.
Refer to the figure above. Assume the market is originally at point W. Movement to
point Z is a combination of:
A. an increase in quantity supplied and an increase in demand.
B. an increase in supply and an increase in demand.
C. an increase in supply and an increase in quantity demanded.
D. a decrease in supply and an increase in quantity demanded.
Refer to the figure below. At the private market equilibrium quantity, the social
marginal cost of the last unit produced is ______ the marginal benefit of the last unit
produced.
A. equal to
B. greater than
C. less than
D. less important than
The population of Omega totals one million people, 30 percent of whom are employed.
Average output per worker in Alpha is $30,000. Real GDP per person in Alpha totals:
A. $9,000.
B. $21,000.
C. $30,000.
D. $100,000.
Will and Grace have adjoining unfenced back yards and each has just adopted a new
puppy. Will values a fence between their yards at $250 and Grace values a fence
between their yards at $200. The cost of building the fence is $300, which will be split
equally if they both agree to build the fence. Therefore, their payoff matrix is as
follows.
This game is a(n) ______ because ______.
A. tragedy of the commons; the backyard is treated as a common area by the puppies.
B. prisoner’s dilemma; by playing their dominant strategy, both Will and Grace do
worse than if they had both played their dominated strategy.
C. example of logrolling; both neighbors need to cooperate to provide the good.
D. inequitable situation; Grace does not value a fence as highly as does Will.
The following payoff matrix shows the outcomes for the Unites States and Russia from
relying on conventional weapons versus atomic weapons in a military conflict. The
percentages refer to the fraction of the population that would die.
For the US, the dominant strategy is to have _______, and for Russia, the dominant
strategy is to have ______.
A. atomic weapons; conventional weapons
B. conventional weapons; atomic weapons
C. conventional weapons; conventional weapons
D. atomic weapons; atomic weapons
An argument against a central bank policy of announcing numerical inflation targets is
that inflation targeting policies:
A. enhance central bank credibility.
B. anchor inflationary expectations.
C. emphasize inflation at the expense of output stabilization.
D. increase uncertainty.
This graph illustrates the marginal costs and marginal benefits of acquiring information
before making a major purchase.
Suppose the marginal cost and marginal benefit curves were MC0 and MB0 several
decades ago. However, because information about this product is now available online,
the:
A. optimal amount of information will decrease.
B. optimal amount of information will increase.
C. optimal amount of information will stay the same, but it will cost less to acquire.
D. demand for information will increase.