Assignment 6
Part I.Multiple-choice questions
1.
Which of the following is NOT one of the three conditions for Pareto efficiency?
a.
b.
c.
d.
2.
Which of the following is a nonprice rationing scheme by which a situation where the
demand for health care services exceeds the supply might be addressed?
a.
b.
c.
d.
3.
both players in a payoff matrix have a dominant strategy.
speculators engage in hedging.
the people with the highest risk are the most likely ones to buy insurance.
the people that are most risk-averse and most careful are the most likely to
buy insurance.
Regulation restrains the unfettered market power of firms. What are the legitimate
reasons why government might choose to override the decisions made in free
markets?
a.
b.
c.
d.
5.
Let long lines and waiting times help balance supply and demand. Those
willing to stay in line stay, those who aren’t leave.
Let the children and elderly get care first, and then the middle-aged, and then
young adults.
Let the quality of customer service deteriorate.
All of the above.
Adverse selection occurs when:
a.
b.
c.
d.
4.
perfect competition
complete information
no externalities
no government
to prevent abuses of market power by monopolies or oligopolies
to remedy informational failures
to encourage prices to exceed marginal cost
both a and b
A person who feels more pain from losing $2,000 than the pleasure from gaining
$2,000 is:
a.
b.
c.
risk averse.
risk loving.
risk neutral.
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6.
Why would a market for grade insurance not work?
a.
b.
c.
d.
7.
Based on your understanding of asymmetric information, why would you expect
the price of a brand new car to fall immediately after it is bought and driven off the
lot?
a.
b.
c.
d.
8.
Because it is very expensive to bring the car back on the lot. It has to be
washed and vacuumed and recertified.
If the owner tried to sell it soon after she bought it, people will place a high
probability that something is wrong with the car.
The owner might be a smoker and the car might not smell as nice as when it
is genuinely new.
Speculators drive the price of a used car down.
Suppose that the tax on an income of $20,000 is equal to $4,000. Assume, as well,
that the tax would rise to $4,800 if this income were to rise to $22,000. The marginal
rate of tax implicit in these figures is:
a.
b.
c.
d.
9.
Most students don’t need it since they like to study hard.
Only three companies in the world provide grade insurance.
The premium for such insurance might be too high for low income students
to afford.
Students will have an incentive to get low grades, or not exert as much effort,
and collect payments from the insurance company. The grade insurance
company may go bankrupt by paying out more disbursements than the
premiums they collect.
20 percent.
about (but not more than) 21 percent.
more than 21 percent, but just under 22 percent.
40 percent.
What are the reasons for providing social insurance?
a.
b.
c.
d.
e.
Asymmetric information weakens the functioning of private insurance
markets.
Difficulty of distinguishing a need for insurance based on bad behavior or
bad circumstances.
Government insurance yields greater profits than private insurance.
A and B.
A, B, and C.
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10.
Which of the following is likely to happen according to the principles of adverse
selection:
a.
b.
c.
11.
According to Samuelson and Nordhaus what is the function of government?
a.
b.
c.
d.
e.
12.
Improving economic efficiency.
Reducing economic inequality.
Stabilizing the economy through macroeconomic policies.
Conducting international economic policy.
All of the above.
A Lorenz curve is a graph whose axes measure the:
a.
b.
c.
d.
e.
13.
As health insurance premiums rise, some of the healthy decide to forgo
insurance while the ill-proned continues to demand insurance.
As government spending on health care increases, more government
employees will seek jobs in the private medical profession.
If cosmetic surgery is covered by health insurance, the supply of cosmetic
surgeons will fall.
total amount of income in dollars on one axis and the total number of
individuals or families receiving that income or a lower one on the other.
percentage of people (10 percent, 20 percent, etc.) on one axis and the
percentage of total income received by the lowest 10 percent, the lowest 20
percent, etc., on the other.
number of individuals or families receiving a certain income on one axis and
the percentage of the total population represented by that number on the
other.
number of individuals or families in different occupations on one axis and
the median income received in that occupation on the other.
income classes (e.g., $0 to $1999 and $2000 to $3999) on one axis and the
percentage of individuals or families in each such income class on the other.
Which of the following best exemplifies moral hazard?
a.
b.
c.
d.
When quality can be judged by buyers, only owners of high-quality used cars
offer their cars for sale.
People are willing to buy a $1 lottery ticket to get a small chance at winning a
large jackpot, even though the expected value of the chance is less than $1.
Sellers of high-quality products are willing to offer product warranties.
Bank loan officers are more likely to make risky loans if their depositors’
money is federally insured.
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14.
Refer to the PPT slide below. According to the Gini indexes for the United States,
the U.S. income was _____________ distributed in 1995 than in 2005.
a.
b.
more equally
less equally
"Gini indexes" for the United States
(from Census Bureau)
15.
1975: 39.7%
1985: 41.9%
1995: 45.0%
PPI | Trade Fact of the Week | September 20, 2006
2005: 46.9%
How rich are the rich? According to the World
Bank's most recent databook, the wealthiest 10
percent of Americans received 29.9 percent of the
national income. The comparable figure for Japan
was 21.7 percent; some other examples include
33.1 percent in China; 28.5 percent in the United
Kingdom; 25.1 percent in France; 22.7 percent in
Germany and 28.5 percent in India.
Imperfect competition is inefficient because it yields:
a.
b.
c.
d.
e.
less output than a perfectly competitive industry.
higher prices than a perfectly competitive industry.
lower output and lower profits than a perfectly competitive industry.
lower prices and lower profits than a perfectly competitive industry.
a and b.
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Part II. Problem-solving questions
Consult Figure below to finish blanks in question 16 and 17. Curve SS represents a
domestic supply curve for some good X; if X is a competitive industry, then SS represents
the horizontal sum of the marginal cost curves of many firms. Curse DD represents
domestic demand for the same good. It is implicitly assumed that consumers do not care
where the good was made; they simply want to buy the indicated quantities at the indicated
prices.
16.
The market-clearing price in the absence of trade is $ A , and B units of X
would be demanded and supplied domestically at that price. If the world price of $5
were allowed to prevail, though, then C units of X would be demanded, D
units would be supplied domestically, and E units would be imported.
(Round your answer to two decimal places unless it is an integer. Please do NOT
include words or “$” in your answer.)
Your Answers :
A: $_______________
B: _______________units
C: _______________units
D: _______________units
E: _______________units
Now suppose that the domestic government has been convinced somehow to
restrict imports by 50 percent.
A tariff of $ F per unit imported would do the trick, but it would raise the
domestic price to $ G . At that price, H units would be demanded, I units
would be supplied domestically, and J units would be imported.
(Round your answer to two decimal places unless it is an integer. Please do NOT
include words or “$” in your answer.)
Your Answers:
F: $______________
G: $______________
H: _______________units
I: _______________ units
J: _______________ units
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17.
The effect of the tariff, therefore, is to A (raise / lower) the price of X, B
(raise / lower) domestic production and employment, and C (raise / lower)
imports. Given the tariff in question 16, the government would collect $ D in
revenue; this is revenue that would be collected above and beyond the revenue that it
collected from its domestic tax base. (Hint: To see the tax on your diagram,
construct a box underneath the supply and demand curves. The length is the 7.5
units that are imported, and the height is the $2.50 tariff.)
From the producer’s point of view, the higher domestic price would, however,
promote E (less / more) efficient production at home, and thereby cause a
production efficiency F (loss / gain) of $ G .
The marginal cost of producing X at home would, quite simply, increase to a level 50
percent higher than the marginal cost incurred by the rest of the world. The
domestic economy would, in other words, be wasting resources in the production of
X that would have been employed more efficiently somewhere else.
Your answers:
A: ____________(raise / lower)
B: ____________(raise / lower)
C:_____________(raise / lower)
D:$____________
E: ____________(less / more)
F: ____________(loss / gain)
G:$____________
If the government chose to impose a quota rather than a tariff, then it would award
licenses to import up to H units of X.
Your answer: H: _______________units
(Round your answer to one decimal place.)
If there were no tariff, but if it costs $2.50 per unit to transport X from the world
marketplace into the domestic economy, then your answers for Question 16, blank G
through J I (would / would not) be altered. The revenue in Question 17, blank
D identified as going to the government J (would / would not) simply go to the
transport company.
Your answers:
I: _______________(would / would not)
J: _______________(would / would not)
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18.
Refer to the graph below and answer the question below.
(Round your answer to two decimal places unless it is an integer. Please do NOT
include words or “$” in your answer.)
a.
What is the equilibrium price if the demand curve is for a perfectly
competitive industry?
Your answer: _______________
b.
What is the price if the graph describes a monopoly?
Your answer: _______________
c.
How much is the monopoly rent?
Your answer: _______________
d.
How much is the economic waste or deadweight loss?
Your answer: _______________
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19.
Refer to the graph below.
What is amount of total deadweight losses caused by the tariff?
(Round your answer to two decimal places unless it is an integer. Please do NOT
include words or “$” in your answer.)
Your answer: _______________
Part III.
20.
Essay(s)
Discuss the important functions of speculators. Why might it be efficient to support
the efforts of these people, even though they produce no output in the economy?
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Assignment 4
Part I.Multiple-choice questions
1. Which of the following is true about economic profit?
a. It the same as accounting profit.
b. It is defined as revenue minus accounting costs.
c. It is defined as revenue minus opportunity costs.
d. When a firm has accounting profits, it must have economic profits as well.
2. Which of the following is true about perfect competition?
a. In perfect competition, a firm’s accounting profit is the same as its economic profit.
b. In perfect competition, each firm can set its own prices in the market.
c. In a perfectly competitive market, a firm’s long-run economic profit is zero.
d. In a perfectly competitive market, each firm faces a downward sloping demand curve.
3. Which of the following statement is consistent with our supply and demand analysis of trade?
a. Free trade benefits the importing country but hurts the exporting country.
b. Free trade benefits the exporting country but hurts the importing country.
c. Free trade brings net gains to both the importing and the exporting countries.
d. Free trade benefits both producers and consumers within each trading nation.
4. A price taker is:
a. a firm that charges different prices for different customers.
b. a perfectly competitive firm.
c. a firm that can influence the market price.
5. Producer surplus measures:
a. the excess of revenues over costs of production.
b. the difference between what consumers are willing to pay and what they actually pay for a
good or service.
c. the output produced in a perfectly competitive market in excess of what is demanded.
6. Economists refer to the “break-even point” for a competitive firm. This break-even point in the
short run occurs at the output level where:
a.
b.
c.
d.
e.
marginal cost (MC) equals average cost (AC).
average variable cost (AVC) equals average fixed cost (AFC).
MC equals AVC.
AC equals AVC.
MC equals AFC.
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7. If a firm is operating at the shutdown point in the short run, it is:
a.
b.
c.
d.
just covering all fixed cost.
just covering all cost.
just covering all variable cost.
just covering marginal cost.
8. The profit-maximizing rule for a firm in perfect competition is “marginal cost equals price”.
This rule means that a firm should:
a.
b.
c.
d.
increase output until price has risen to equal marginal cost.
increase output until price has fallen to equal marginal cost.
increase output until marginal cost has fallen to equal price.
increase output until marginal cost has risen to equal price.
9. A firm operating in circumstances of perfect competition faces a market price of $10. It is
producing 2,000 units of output daily at a total cost of $19,000. This firm:
a.
b.
c.
d.
should increase its output to improve its profit position.
should reduce its output to improve its profit position.
should shut down to minimize its loss.
may or may not be at the output level yielding maximum profit—the information furnished
is not sufficient to cover this point.
10. Because of a city tax reduction, the total fixed cost a firm must pay is reduced by $500 monthly.
The firm operates in conditions of perfect competition. If the firm seeks to maximize its profit,
this cost reduction should (at least in the short run) result in:
a.
b.
c.
d.
e.
a reduction in price.
an increase in output.
an increase in price.
a reduction in output.
no change in output or in price.
11. A firm operating in a perfectly competitive industry is producing a daily output which supports
total revenue equal to $5,000. That output is its profit-maximizing output. The firm’s average
total cost is $8, its marginal cost is $10, and its average variable cost is $5. Its daily output is:
a.
b.
c.
d.
200 units.
500 units.
625 units.
1,000 units.
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12. The (total) fixed cost for the firm described in question 11 is:
a.
b.
c.
d.
$10.
$100.
$500.
$1,500.
13. A firm must sell its product at a market price of $1.90. Its present operating figures are as
follows: average cost, $2.00; marginal cost, $1.50; average variable cost, $1.50; total fixed costs,
$500 per period. By the rules of maximum profit (or minimum loss) for a competitive firm, this
firm would:
a.
b.
c.
d.
increase its present output level.
reduce its present output level.
remain at its present output position.
shut down.
Use the figure below to answer Question 14 through 16.
14. The producer surplus in this perfectly competitive market (when the equilibrium price=$50 and
the equilibrium quantity=50) is:
a.
b.
c.
d.
$0
$100
$1,000
$1,250
15. The total surplus in this perfectly competitive market (when the equilibrium price=$50 and the
equilibrium quantity=50) is:
a. $0
b. $100
c. $1,000
d. $2,500
16. If the government imposes a price ceiling of $40 on the market illustrated in the figure above,
producer surplus in this perfectly competitive market will fall to: (Hint: when P=$40, Q=40)
a.
b.
c.
d.
$100
$500
$800
$1,000
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II. Problem-solving questions
Use the following information for Question 17 through 20. Suppose the world is consisted of two
countries, Country A and Country B, whose supply and demand for a particular product are given as
follows:
Country A:
Supply function: Qs ,a 4 2 Pa
Demand function: Qd ,a 18 2 Pa
Country B:
Supply function: Qs ,b 3 Pb
Demand function: Qd ,b 12 Pb
17. If the two countries are isolated (no trade exists between the two countries), what are the
equilibrium price and quantity in Country A? (Round your answer to two decimal places if it is
not an integer. Please do NOT include words or $ in your answer.)
Your answer:
Equilibrium quantity (Qa): _________
Equilibrium price (Pa):_________
18. If the two countries are engaged in free trade and there are no transaction or transportation
costs, which country is the importer and which country is the exporter for this particular product?
(Hint: Your answer should be either “exporter” or “importer”.)
Your Answer:
Country A: _______
Country B: _______
19. If the two countries are engaged in free trade and there are no transaction or transportation costs,
what is the world equilibrium price? (Round your answer to two decimal places. Please do NOT
include $ in your answer.)
Your Answer:
World equilibrium price: ________
20. Which country (or countries) will gain from free trade? (Hint: Your answer should be either
“gain” or “loss”.)
Your Answer:
Country A: _______
Country B: _______
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Part III.
Short Essay Question
21. Ms. Smith says, “In the long run, since economic profits are zero, firms will have no incentive to
produce output in a perfectly competitive market. Why would anyone produce and sell a
product if they are going to earn no profits?” Do you agree?
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