Correct : B. rival in consumption and subject to exclusion.
2. The M RTS L,K between any two inputs be equal in the production of all commodities.
3. The MRPTx,y be equal to the MRSx,y for any two goods.
Correct : D. condition 1, 2 &3 are satisfied
3. Points outside the production possibility frontier are
Correct : D. unattainable.
4. Positive economics
Correct : C. examines how the economy actually works (as opposed to how it should work).
5. The Coase theorem has problems because
Correct : A. generally, bargaining costs are not zero.
6. The marginal rate of substitution is
Correct : D. the slope of the indifference curve.
7. The slope of the production possibilities curve is the
Correct : C. marginal rate of transformation.
8. The First Fundamental Theorem of Welfare Economics requires
Correct : D. all of the above.
9. Market failure can occur when
Correct : D. all of the above.
10. A public good is
Correct : B. nonrival in consumption.
11. Movement from an inefficient allocation to an efficient allocation in the Edgeworth Box will
Correct : B. increase the utility of at least one individual, but may decrease the level of utility of another person.
12. Points on the utility possibility frontier are
Correct : D. pareto efficient.
13. Market mechanisms are unlikely to provide
Correct : B. nonrival goods efficiently.
14. Public goods can be
Correct : D. all of the above.
15. Externalities can be positive because
Correct : B. utility can be impacted positively as well as negatively.
16. A Pigouvian subsidy
Correct : D. moves production to the socially optimal level of output
17. Which method can help in obtaining a welfare improvement if externalites exist?
Correct : D. all of the above
18. Marginal damages
Correct : A. must always be considered in social marginal costs.
19. In a public goods context, it is difficult to measure impact on real income because
Correct : C. it is hard to measure how people value the public good.
20. According to the required reading from the 2003 Washington Post, a recent study by the U.S.
Office of Management and Budget found that
Correct : A. the benefits of tough new clean-air regulations in the past decade were five to seven times greater than their costs
21. impossibility theorem was propounded by
Correct : B. arrow
22. According to a required reading from the 2003 Economist, the biggest problem facing
Indonesia’s economy is
Correct : C. inadequate rule of law
23. According to a required reading by P.J. O’Rourke, which of the following statements is
false?
Correct : D. famines are mainly caused by natural disasters or pestilence
24. According to a required reading by P.J. O’Rourke, which of the following statements is
false?
Correct : B. despite their other problems, eastern european countries did a good job protecting the environment during the communist era
25. The assigned Washington Post Op-Ed by Daniel Chirot can be interpreted as asserting that
Correct : C. saddam hussein’s government could be described as adhering to an organic philosophy
26. If, for John’s current intertemporal consumption pattern (satisfying his intertemporal budget
constraint), his marginal rate of intertemporal substitution is 1 and the real rate of interest is positive, then...
Correct : C. john could increase his lifetime utility by consuming less today.
27. There are strong theoretical reasons to expect that changes in wealth are responsible for changes in consumption. Nonetheless, one reason that we observe a tight link between
consumption and disposable income is...
Correct : A. credit rationing which changes the intertemporal budget constraint for borrowers.
28. The accelerator principle states:
Correct : A. if an increase in the growth of output is expected, investment will increase.
29. In the case of a negative externality, the social marginal cost will
Correct : A. exceed the private marginal cost.
30. A perfectly competitive steel mill that produces large amounts of pollution (a negative
externality) will, from a social point of view
Correct : C. produce too much steel.
31. Each of the following provides incentives to reduce a negative externality except:
Correct : B. subsidizing consumption of the good being produced.
32. To reach an economically efficient output level, the size of an excise tax imposed on a firm
generating a negative externality should be
Correct : C. the difference between the social marginal cost and the firm’s marginal cost.
33. In perfect competition, environmental externalities need not distort the allocation of
resources providing
Correct : A. transactions costs are zero.
34. In drilling a new oil well in an existing oil field, the fact that output on existing wells is
reduced means that
Correct : D. there is a discrepancy between private and social marginal costs.
35. Bargaining costs are generally high in cases involving environmental externalities because
Correct : D. all of the above.
36. Externalities between two firms can be “internalized” if: I. The two firms merge. II. Bargaining costs are zero.
III. The externalities affect each firm equally. IV. Marginal costs for both firms are constant. Which statement(s) correctly complete(s) the sentence?
Correct : C. i and ii, but not iii and iv.
37. Common property
Correct : D. refers to goods “owned” by society at large and freely usable by anyone.
38. Which best describes consumer surplus?
Correct : D. the difference between the price a consumer pays for an item and the price he/she is willing to pay for it
39. Which of the following statements is NOT true?
In the free market changes in the price of a product:
Correct : D. are set by the government
40. Community surplus equals:
Correct : D. consumer surplus plus producer surplus
41. Monopoly power in a market is likely to:
Correct : C. lead to higher producer surplus
42. A negative production externality means:
Correct : A. the social marginal cost is greater than the private marginal cost
43. A positive consumption externality occurs when:
Correct : B. the social marginal benefit is greater than the private marginal benefit
44. A merit good:
Correct : D. is under provided in the free market
45. A demerit good:
Correct : C. is overprovided in the free market
46. A public good will probably:
Correct : C. not be provided in the free market
47. Asymmetric information occurs when:
Correct : B. buyers and sellers have access to different information
48. A situation where people who have taken out insurance behave more recklessly as a result is
known as:
Correct : D. moral hazard.
49. An insurance company can protect itself from moral hazard by:
Correct : B. imposing an ‘excess’.
50. Taking into account the utility of all persons in society is referred to as
Correct : A. a utilitarian social welfare function.
51. When the average buyer of an insurance policy is likely to have higher risk than others in his
class, this is known as
Correct : A. adverse selection.
52. Health care markets may be inefficient because of
Correct : D. all of the above.
53. The government can address by providing universal health insurance coverage and charging
uniform premiums.
Correct : D. adverse selection
54. When people behave in ways that involve increased risk because they have insurance, this is
known as
Correct : B. moral hazard.
55. Which of the following is not an assumption used in class for reaching the conclusion, using
utilitarian reasoning, that income should be divided equally:
Correct : D. some people are more productive than others
56. In the economic analysis of the market for new drugs, it is critical to take into account
Correct : D. all of the above
57. Suppose that you have complete health insurance that covers all expenses. You will use
medical care up to the point where your:
Correct : B. marginal benefit is zero.
58. If the government subsidizes the health insurance costs of individuals because individuals do
not sufficiently realize the importance of having health insurance, which of the following justifications for government intervention is being used?
Correct : C. ignorance
59. Which of the following is a reason why employers are the predominant source of insurance?
Correct : D. both b and c are correct.
60. Adverse selection can occur when
Correct : B. one person has information not available to others.
61. Adverse selection occurs when
Correct : B. a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.
62. Adverse selection occurs when there is
Correct : C. an unobserved characteristic.
63. If reckless drivers are more likely to buy automobile insurance than safe drivers are,
Correct : B. adverse selection has occurred.
64. An individual is willing to pay something for information because
Correct : C. this allows him or her to increase utility.
65. An individual will not choose to acquire all available information because
Correct : A. that would maximize utility given his or her budget constraint.
66. Adverse selection arises because
Correct : A. insurance buyers have more information than insurance sellers.
67. Adverse selection in competitive insurance markets harms
Correct : B. low risk individuals.
68. One way the “lemons problem” in the used-car industry can be mitigated is by
Correct : C. requiring sellers to guarantee trouble-free cars.
69. An example of adverse selection is
Correct : B. high health insurance premiums resulting from the poor health of people who buy policies.
70. If markets are perfect, a rational actor may reasonably conclude from the high price of a good that the good
Correct : B. is of better quality.
71. In volatile markets, “speculators” would be expected to provide some stability because
Correct : C. they will buy when price is below equilibrium and sell when it is above equilibrium.
72. A market participant who obeys the principles of rational expectations will base his or her
expectations of market price on
Correct : A. all possible information about supply and demand curves.
73. The “lemons model” predicts quality deterioration in the used car market because
Correct : B. suppliers and demanders have different information about cars’ quality.
74. The standard economic model assumes people are
Correct : A. rational
75. What is the methodology of positive economics
Correct : D. models should be judged on their ability to predict
76. The standard economic model assumes people are
Correct : D. selfish
77. Which of the following statements is correct about behavioural economics
Correct : A. it builds upon the standard economic model
78. What is a Nash equilibrium
Correct : A. a strategy for each player such that total payoffs are maximized
79. An outcome is Pareto efficient if
Correct : A. no person can be made better off without making someone worse off
80. The permanent increment to future consumption expressed as a fraction of the initial
consumption forgone is.....
Correct : B. perpetual rate of return
81. Diversifiable risk can be eliminated by
Correct : C. both a and b
82. Non diversifiable risk affects I. the opportunity cost of capital II. should enter into the risk premium
Correct : C. both i &ii
83. Several combination of commodities x and y that the economy can produce by fully utilizing
all of the fixed amounts of labour and capital with the best technology available is depicted by I. production possibility frontier II. transformation curve III. production possibility curve
Correct : D. all the above
84. Who opined that economic growth meant bringing W closer to W*
Correct : B. adamsmith
85. Who argued that welfare is improved when ‘the greatest good (is secured) for the greatest
number’
Correct : C. bentham
86. Which criterion refers to economic efficiency which can be objectively measured
Correct : C. the pareto-optimality criterion
87. The sum of forgone interest and depreciation costs the machine’s owner must pay is the
Correct : A. competitive rental rate
88. The marginal conditions must be satisfied for the attainment of a Pareto-efficient situation in
an economy :
Correct : D. all the above
89. Points where the slopes of the isoquants are equal
Correct : B. contract curve
90. The set of all Pareto efficient allocations in an Edgeworth box diagram is called the
Correct : B. contract curve
91. A scientific paper titled “The Tragedy of the Commons” was written by
Correct : C. garrett hardin
92. A negative externality from consumption occurs if there is a
Correct : B. snob effect
93. The tragedy of the commons results in
Correct : D. all the above
94. An important mechanism through which sellers and buyers deal with the problem of
asymmetric information is
Correct : A. market signalling
95. The concept of market signalling was first developed by
Correct : A. michael spence
96. Non diversifiable risk arises because
Correct : C. both a & b
97. The risk premium for a capital investment by comparing the expected return on that
investment with the expected return on the entire stock market is measured by
Correct : C. capital asset pricing model
98. The quantity of present goods that must be forgone to increase future consumption by 1 unit is
called