Which of the following “externalities” does not distort the allocation of resources?
I. An individual’s unwillingness to cut his or her own lawn in an otherwise
immaculately kept neighborhood.
II. Smoke produced by a new firm in an area which raises the costs of other firms.
III. A new firm’s bidding up skilled wages in an area, thereby raising costs of other
firms.
IV. An individual’s unwillingness to obtain job training, thereby lowering the total GNP.
Possible choices:
a. I, III, and IV.
b. III and IV.
c. III only.
d. IV only.
If the market for hulahoops is characterized by a very inelastic supply curve and a very
elastic demand curve, an inward shift in the supply curve would be reflected primarily
in the form of
a. higher prices.
b. higher output.
c. lower prices.
d. lower output.
A perfectly competitive steel mill that produces large amounts of a pollution (a negative
externality) will, from a social point of view, produce
a. too little steel.
b. the socially optimal quantity of steel.
c. too much steel.
d. too much steel only if it installs pollution control equipment.
If the wage rate rises, labor’s share in the total costs of a production process
a. will increase.
b. will decrease.
c. may increase or decrease depending on the elasticity of demand for the product.
d. may increase or decrease depending on the ease of substitution of other inputs for
labor.
If demand facing the firm is price-inelastic, marginal revenue will be
a. positive.
b. zero.
c. negative.
d. constant.
One example of Ricardian rent is
a. rent paid to landlords under price controls.
b. the difference between the price of a highly demanded unique piece of artwork and
the opportunity cost of maintaining it.
c. the amount paid to a seller above the equilibrium price of tourist class tickets in order
to receive higher quality seats in first class.
d. the price rise of wool from a disease among sheep.
A change in the distribution of income that leaves total income constant will not shift
the market demand curve for a product providing
a. everyone has an income elasticity of demand of zero for the product.
b. everyone has the same income elasticity of demand for the product.
c. individuals have differing income elasticities for the product, but the average income
elasticity for income gainers is equal to the average income elasticity for income losers.
d. any of these conditions occur.
If a tree’s value (v) is growing according to the equation with an interest
rate of 5 percent, the tree should be harvested when t =
a. 5 years.
b. 10 years.
c. 25 years.
d. 100 years.
In order to minimize the cost of a particular level of output, a firm should produce
where
a. labor input equals capital input.
b. the RTS (of L for K) = .
c. the RTS (of L for K) =
d. the MRS = .
An increase in the price of good x will be accompanied by
a. a shift in the market demand curve for good x.
b. a shift in the market demand curve for good y (a substitute for good x).
c. a movement along the market demand curve for good x.
d. a shift in the market demand curve for good y (a substitute for good x) and a
movement along the market demand curve for good x.
Consider the following three concepts:
I. Marshallian Demand [x = x(x,, py , I)]
II. Indirect Utility [V = g (px,, py, I)]
III. Compensated Demand [x = xc
x,, py, U)]
Which of these functions is necessarily homogeneous of degree zero in all its
argument?
a. All of them.
b. None of them.
c. Only I.
d. I and III, but not II.
If a person’s inter-temporal utility function is given by , lower
values for will:
a. make this person more averse to consumption fluctuations.
b. make this person less averse to consumption fluctuations.
c. reduce overall consumption levels.
d. reduce savings.
For an individual who consumes only two goods, xand y, the opportunity cost of
consuming one more unit of xin terms of how much ymust be given up is reflected by
a. the individual’s marginal rate of substitution.
b. the market prices of xand y.
c. the slope of the individual’s indifference curve.
d. none of these is correct.
In order to assure allocative efficiency,
a. people’s marginal rate of substitution must equal the economy’s rate of
product transformation.
b. people’s marginal rate of substitution must equal the firm’s rate of technical
substitution among inputs.
c. a firm’s rate of technical substitution must equal the economy’s rate of product
transformation.
d. all of the other answers are correct.
For an infinitely repeated game promising A per period with continuing cooperation, B
for the one period gain from cheating and C per period for the non-cooperative solution
(B > A > C) will have a subgame perfect Nash equilibrium in trigger strategies
providing
a. δ > B/(A + C).
b. δ > (B ” A)/(B ” C).
c. δ > B/(A ” C).
d. δ > A/(B + C).
The “Classical Dichotomy” refers to
a. a distinction between “value in use” and “value in exchange.”
b. separate theories of demand and supply.
c. the possibility of Giffen’s Paradox
d. determination of relative prices independent of the nominal price level.
If an individual’s utility function for coffee (x) and cream (y) is given by
U(x, y) = min (x, 5y), the demand function for coffee is given by
a. X = I/2x .
b. X = I/(x + y).
c. X = I/(x + 0.2y).
d. X = I/(x + y)2.
For the cost function consider the following statements:
I. The function exhibits decreasing average cost.
II. The function is homogeneous of degree 1 in v and w.
III. The elasticity of marginal cost with respect to v exceeds the elasticity with respect
to w.
a. None is true.
b. All are true.
c. Only I is true.
d. Only I and II are true.
In the short run, specific taxes on a firm result in
a. price increases which may not persist in the long run.
b. an increase in consumer surplus because the tax permits spending in additional
government services.
c. shortages of the good being taxed.
d. an increase in producer surplus because of the rise in price.
The present value of $1 payable in two years is
a. $1.
b. $1/(1 + 2).
c. $1/(1 2).
d. $1/(1 + )2.
Which of the following conditions would result in the short run marginal cost curve not
correctly reflecting the supply behavior of a profit-maximizing firm?
a. The firm is a price taker.
b. Price exceeds average total cost.
c. The elasticity of demand facing the firm is -3.
d. The firm can vary several inputs in the short run.
A profitmaximizing firm should spend an additional dollar on advertising so long as this
expenditure results in more than one dollar of:
a. additional sales.
b. reduced costs.
c. increased profits.
d. demand.
Each of the following factors might interfere with the efficiency of perfect competition
except:
a. increasing returns to scale.
b. imperfect price information.
c. externalities.
d. diminishing returns to scale.
Which statement best characterizes the second-best policy offered by a monopoly
insurer when it can”t observe the consumer’s risk?
a. It is a single contract offering partial insurance at an intermediate price such
that all types are served.
b. It is a menu of contracts providing full insurance for the least risky types
and partial insurance for higher risks.
c. It is a menu of contracts providing full insurance for the riskiest type and
partial insurance at lower prices for lower risks.
d. The market breaks down since the monopolist cannot design contracts without
observing each consumer’s risk.
Which contracting party gains from the use of a more sophisticated contract?
a. The principal, who offers the contract.
b. The agent, who accepts the contract.
c. Both parties may lose.
d. Both parties gain equally.
A market characterized by imperfect information will have an equilibrium price if at
that price
a. quantity demanded equals quantity supplied when all participants have the same
information.
b. quantity demanded equals quantity supplied given prevailing information levels.
c. quantity demanded equals quantity supplied under perfect information.
d. quantity demanded exceeds quantity supplied if suppliers are better informed (and
viceversa).
Compared to the case in which a monopoly insurer offers the consumer a contract, if
insurance is competitively provided,
a. any moral hazard or adverse-selection problem is alleviated.
b. any moral hazard or adverse-selection problem is worsened.
c. the essence of any moral hazard or adverse-selection problem would not
change much.
d. insurers would no longer offer menus of contracts.
For an increasing cost industry, the longrun supply curve has a(n) _____________
elasticity of supply
a. infinite.
b. negative.
c. positive.
d. zero.
In drilling a new oil well in an existing oil field, the fact that output on existing wells is
reduced means that
a. existing wells have negatively sloped MC curves.
b. existing wells and new wells are owned by different people.
c. existing wells and new wells are owned by the same people.
d. there is a discrepancy between private and social marginal costs.
In an input market, economic rent is defined as the
a. total remuneration paid to a factor of production.
b. minimum amount required to retain a factor of production in its present use.
c. total cost for a firm of renting land, equipment, and buildings.
d. extent to which payments to a factor of production exceed the minimum amount
required to retain it in its present use.
Risk aversion is best explained by
a. timidness.
b. increasing marginal utility of wealth.
c. constant marginal utility of wealth.
d. decreasing marginal utility of wealth.
If bargaining is costless and an externality exists,
a. an efficient outcome may be reached depending on which party is assigned property
rights.
b. an efficient outcome will be reached regardless of which party is assigned property
rights.
c. an efficient outcome will not be reached without government intervention.
d. an efficient outcome can never be reached.