Midterm & QUIZZES Flashcards

Question

One of these phenomena is difficult to explain with the Malthusian model: a. Periodic famines lead to significant population declines. b. Technological advancements lead to temporary increases in living standards. c. Declining fertility rates in richer countries. d. A higher availability of resources leads to population growth.

Answer 1

Option C is correct. The Malthusian model primarily operates under the premise that advancements in technology and resources lead to population growth, which then consumes the surplus, returning the population to subsistence living standards. However, this model struggles to explain the phenomenon of declining fertility rates in richer countries. In wealthier nations, we often observe that as income and living standards increase, fertility rates tend to decrease, a trend contrary to the Malthusian expectation of increased population growth with improved living conditions. The other options align more seamlessly with the Malthusian trap’s concepts, which emphasizes natural checks like famines (Option A), and the consumption of excess wealth through population growth (Options B and D).

Answer 2

Option C is the correct answer. Technologies introduced during the Industrial Revolution, such as spinning jennies, power looms, and steam engines, primarily aimed at saving labor. These technologies automated and expedited production processes, reducing the reliance on manual labor and increasing overall productivity. While some technologies might have saved energy or capital indirectly, the predominant and direct aim of technological advancements during the Industrial Revolution was to make processes more efficient by saving labor.

Answer 3

Option D is correct. Acemoglu and Robinson's idea of inclusive institutions refers to structures that provide a level playing field where individuals have equal opportunities to pursue their own objectives, leading to a more prosperous society. Such institutions also allow for pluralistic decision-making where power is broadly distributed, and they encourage innovation and economic progress. Options A, B, and C, despite having certain attributes that might seem ‘inclusive’ or ‘benevolent’, do not truly embody the essence of inclusive institutions as they do not necessarily guarantee a broad distribution of economic benefits and powers, or a level playing field that encourages economic prosperity through individual innovation and the protection of property rights.

Answer 4

Option C is correct. Clark posits that the Industrial Revolution was the result of a slow process of change in people’s preferences, culture, and institutions. He argues that, over time, there was a transmission of preferences and attitudes towards work and economic success due to the reproductive success and survival of economically prosperous individuals. This contributed to creating the cultural and institutional conditions necessary for the Industrial Revolution to occur.

Answer 5

Correct: B

Answer 6

Correct: A Option A is correct. Consumption smoothing has to do with the shape of the utility function (and consequently of the indifference curves). It arises from the principle of diminishing marginal returns to consumption, which posits that the utility gained from additional consumption decreases as one consumes more. This encourages individuals to spread their consumption over different periods to maintain a stable level of utility over time. Options B and C, while important factors in determining how much to consume now versus later, and do not directly explain the motivation behind consumption smoothing. The cost of borrowing and the interest rate on investments can influence the decision of when to consume, because they determine the budget constraint, but they don't inherently lead to the principle of smoothing consumption. Option D describes a preference that actually works against the principle of consumption smoothing.

Answer 7

Option C is correct. Modigliani's Life Cycle Hypothesis suggests that individuals plan their consumption and savings behavior over their life-cycle to smooth consumption. It assumes that people save during their working years and decumulate in retirement, aiming for a stable level of consumption throughout their life. However, the hypothesis has difficulty explaining why some individuals continue to accumulate wealth well into retirement, which is not consistent with the prediction of planned decumulation to smooth consumption. Options A, B, and D are phenomena that the Life Cycle Hypothesis can explain to some extent, considering that individuals may not save if they expect a steady or increasing income stream, they may dissave at retirement, and they are generally predicted to save for retirement.

Answer 8

Option C, liquidity risk, is the most closely related risk to maturity transformation. Financial institutions engage in maturity transformation when they fund long-term loans with short-term deposits. This process can create a mismatch between the maturities of assets and liabilities, leading to liquidity risk if the institution is unable to meet its short-term obligations due to this mismatch. Foreign exchange risk (Option A) pertains to the impact of currency value changes on an institution's finances but is not specifically related to the process of maturity transformation. Market risk (Option B) is a broader risk of losses in positions arising from movements in market prices, and operational risk (Option D) refers to failures in internal processes, people, and systems.

Answer 9

Option B is the correct answer. While central bank facilities are designed as a safety net for banks to access additional liquidity, using these facilities can be perceived as a sign of financial distress by investors and depositors. If the market interprets a bank's use of these facilities as a signal that the bank is in trouble, it may inadvertently trigger the very bank runs it aims to prevent. The other policies, such as deposit insurance (Option A) and higher capital requirements (Option C), typically serve to build confidence and reduce the likelihood of bank runs. Option D, the reduction of reserve requirements, is intended to increase banks' lending capacity, but this policy could potentially make banks more vulnerable to runs if it leads to overextension and reduces liquidity buffers, though it is not as directly related to signaling weakness as Option B.

Answer 10

Correct: A Option A is correct. When the interest rate increases, the cost of borrowing money to finance current consumption also increases. This means that for each unit of consumption an agent decides to move from the future to the present, they will have to give up more future consumption than before the interest rate increase. Thus, the budget constraint pivots downwards, reflecting that present consumption has become relatively more expensive. The outward shift in option B would suggest that the agent can consume more in both periods, which is not the case. Option C incorrectly suggests the opposite effect of what an increase in interest rates would have. Option D is incorrect because while the budget constraint is indeed determined by current income, it is also affected by the interest rate which determines the trade-off between current and future consumption.

Answer 11

Correct: B

Answer 12

Correct: A Option A is correct. Consumption smoothing has to do with the shape of the utility function (and consequently of the indifference curves). It arises from the principle of diminishing marginal returns to consumption, which posits that the utility gained from additional consumption decreases as one consumes more. This encourages individuals to spread their consumption over different periods to maintain a stable level of utility over time. Options B and C, while important factors in determining how much to consume now versus later, and do not directly explain the motivation behind consumption smoothing. The cost of borrowing and the interest rate on investments can influence the decision of when to consume, because they determine the budget constraint, but they don't inherently lead to the principle of smoothing consumption. Option D describes a preference that actually works against the principle of consumption smoothing.

Answer 13

Option C is correct. Modigliani's Life Cycle Hypothesis suggests that individuals plan their consumption and savings behavior over their life-cycle to smooth consumption. It assumes that people save during their working years and decumulate in retirement, aiming for a stable level of consumption throughout their life. However, the hypothesis has difficulty explaining why some individuals continue to accumulate wealth well into retirement, which is not consistent with the prediction of planned decumulation to smooth consumption. Options A, B, and D are phenomena that the Life Cycle Hypothesis can explain to some extent, considering that individuals may not save if they expect a steady or increasing income stream, they may dissave at retirement, and they are generally predicted to save for retirement.

Answer 14

Option C, liquidity risk, is the most closely related risk to maturity transformation. Financial institutions engage in maturity transformation when they fund long-term loans with short-term liabilities. This process can create a mismatch between the maturities of assets and liabilities, leading to liquidity risk if the institution is unable to meet its short-term obligations due to this mismatch. Foreign exchange risk (Option A) pertains to the impact of currency value changes on an institution's finances but is not specifically related to the process of maturity transformation. Market risk (Option B) is a broader risk of losses in positions arising from movements in market prices, and operational risk (Option D) refers to failures in internal processes, people, and systems.

Answer 15

Option B is the correct answer. While central bank facilities are designed as a safety net for banks to access additional liquidity, using these facilities can be perceived as a sign of financial distress by investors and depositors. If the market interprets a bank's use of these facilities as a signal that the bank is in trouble, it may inadvertently trigger the very bank runs it aims to prevent. The other policies, such as deposit insurance (Option A) and higher capital requirements (Option C), typically serve to build confidence and reduce the likelihood of bank runs. Option D, the reduction of reserve requirements, is intended to increase banks' lending capacity, but this policy could potentially make banks more vulnerable to runs if it leads to overextension and reduces liquidity buffers, though it is not as directly related to signaling weakness as Option B.

Answer 16

Correct: A Option A is correct. When the interest rate increases, the cost of borrowing money to finance current consumption also increases. This means that for each unit of consumption an agent decides to move from the future to the present, they will have to give up more future consumption than before the interest rate increase. Thus, the budget constraint pivots downwards, reflecting that present consumption has become relatively more expensive. The outward shift in option B would suggest that the agent can consume more in both periods, which is not the case. Option C incorrectly suggests the opposite effect of what an increase in interest rates would have. Option D is incorrect because while the budget constraint is indeed determined by current income, it is also affected by the interest rate which determines the trade-off between current and future consumption.

Answer 17

Option D is the correct answer. The three main functions of money are to serve as a medium of exchange, a store of value, and a unit of account. Option A, medium of exchange, means that money is widely accepted in exchange for goods and services. Option B, store of value, indicates that money can be saved and will hold its value over time. Option C, unit of account, means that money provides a standard measurement of value in the economy. Option D, means of production, is not a function of money but rather a term that refers to the resources—such as machinery, tools, and buildings—used to produce goods and services.

Answer 18

Option B is the correct answer. The statement that the CPI reflects the prices of all goods and services produced within a country is incorrect; this description actually applies to the GDP deflator, not the CPI. The CPI measures inflation by tracking the price changes of a basket of goods and services over time, which is specific to consumer purchases and includes imports (Option A and C). While the CPI does try to account for changes in the specific choice and quantity of goods and services, making it a type of cost-of-living index (Option D), it is not comprehensive of all goods and services as the GDP deflator is. The GDP deflator is broader in scope, encompassing all domestically produced goods and services, but does not include imported goods.

Answer 19

Option A is the correct answer. Repos, or repurchase agreements, are when central banks purchase government securities from banks with the agreement to sell them back at a specified future date at a higher price; the difference in price effectively represents the interest on the loan. This is a tool used by central banks to manage liquidity in the banking system. Option B is incorrect because central banks do not exchange money for shares in commercial banks. Option C is also incorrect; while central banks do increase interest rates to decrease the money supply, this action is not related to repurchase agreements. Lastly, Option D is incorrect because printing new currency is a way of increasing the money supply, but it is not what a repo transaction entails. Repurchase agreements are a monetary policy instrument used to control the amount of money in circulation and influence short-term interest rates.

Answer 20

Option C is the correct answer. Quantitative Easing (QE) is a monetary policy instrument where central banks purchase longer-term securities from the open market to increase the money supply and encourage lending and investment. This action increases the diversity of assets on a central bank's balance sheet because it involves buying not just government bonds but also other types of assets such as mortgage-backed securities. Option A is incorrect because QE generally increases, rather than reduces, the size of central bank balance sheets. Option B is incorrect; QE typically involves purchasing longer-term securities rather than short-term ones. Lastly, Option D is incorrect because, while central banks do hold foreign currencies and gold, QE specifically refers to the purchase of a broader range of assets to inject liquidity into the economy, and not just foreign assets.

Answer 21

Option B is the correct answer. An increase in the policy rate generally leads to higher interest rates across the economy, making loans more expensive. This reduces the incentive for borrowing and can lead to a decrease in spending and investing, which in turn can cause a drop in asset prices and consumption. Newly issued fixed-income securities, such as bonds, typically yield more in such scenarios because the interest rates on new bonds will be higher to reflect the increased policy rate, making them more attractive to investors looking for stable returns. This can lead to a shift away from riskier assets like stocks, potentially decreasing their prices. However, the overall effect of higher interest rates is usually a decrease in the prices of existing assets as higher yields on bonds signify higher borrowing costs, which can dampen economic activity and reduce earnings expectations for companies. Option A is incorrect because higher policy rates reduce, rather than increase, liquidity. Option C is incorrect because the overall effect is generally a decrease in asset prices across the board. Option D is incorrect because while higher rates may encourage savings due to higher returns on deposits, they do not increase consumption; in fact, they are likely to decrease it by making saving more attractive than spending.

Answer 22

Option B is the correct answer. The Federal Reserve, or the Fed, aims to control macroeconomic indicators such as the unemployment rate and inflation. The dual mandate of the Federal Reserve is to promote maximum employment and stable prices, which essentially translates to targeting low unemployment and controlling inflation. Option A is incorrect because exchange rates and international trade balances are influenced by many factors, including Fed policies, but they are not the primary targets of the Fed's monetary policy. Option C is partially correct in that the Fed does influence GDP and market liquidity through its policies, but these are not the direct targets; they are more like outcomes of the Fed's efforts to fulfill its dual mandate. Lastly, Option D is incorrect because fiscal deficits and government borrowing are fiscal policy concerns, which are the responsibility of the government, not the central bank. The Fed does not directly control fiscal outcomes but may influence them through its impact on interest rates.

Answer 23

The correct answer is D. Opening an economy to imports encourages domestic producers to specialize in goods where they hold a comparative advantage, thus potentially changing the mix of domestic supply rather than its overall level. While competition from imports may reduce domestic production in industries where the economy is less competitive (countering option C), this does not necessarily decrease the total domestic supply (countering option A). Instead, it reallocates resources to more efficient uses. Option B is incorrect because opening to imports can indeed affect domestic supply by changing what is produced domestically.

Answer 24

The correct answer is B. When the market for computer chips is opened to imports, and the world price is lower than the domestic no-trade equilibrium price, domestic supply decreases. This is because domestic producers cannot compete with the lower-priced imports and will reduce their output or exit the market. Options A and D are incorrect because an increase in market demand or competition from imports would not necessarily lead to an increase in domestic supply when the world price is more competitive. Option C is incorrect because the introduction of imports at a lower price does impact domestic supply, not just the variety of products.

Answer 25

The correct answer is C. Opening the domestic market for fizzy vitamins to exports is likely to increase domestic welfare if the international price is higher than the domestic price. Domestic producers can sell at these higher prices, thereby increasing their profits and contributing to national income. While higher prices can reduce the consumer surplus for domestic consumers, this loss is typically smaller than the gains from the increased producer surplus. Overall, the net effect on domestic welfare tends to be positive. Options A and D are incorrect because the export of goods, in this case, brings in revenue that can outweigh the loss of domestic supply. Option B is incorrect because the welfare effect is not neutral; both producers and consumers are affected, but the overall impact is generally positive for the economy.

Answer 26

The correct answer is A. In the context of international trade, dumping is the practice where a company exports a product at a price lower than the price in its domestic market or below its cost of production. This can undermine domestic industries in the importing country, lead to unfair competition, and potentially result in significant economic harm. Outsourcing (B) and Franchising (D) are legitimate business practices and do not inherently raise concerns about fairness in international trade.

Answer 27

The correct answer is A. One of the fundamental principles of the World Trade Organization (WTO) agreements is non-discrimination, which encompasses two major components: the Most Favored Nation (MFN) rule and the national treatment policy. Both of these components work to ensure that trading partners do not discriminate between their trading partners (MFN) and do not discriminate against foreign products in favor of domestic products (national treatment). B) Self-sufficiency is not a principle of the WTO, as the organization promotes global trade. C) Bilateralism is not a core principle since the WTO emphasizes multilateral trading agreements. D) Protectionism is contrary to the WTO's principles, which aim to reduce trade barriers and promote open markets.

Answer 28

The correct answer is B. Rising domestic prices are a determinant of currency supply rather than demand. When domestic prices rise, consumers seek to substitute domestic products with imported goods - for which they need foreign currency. In contrast, A) Higher domestic interest rates make the euro more attractive to foreign investors, as they can earn more from savings or investments denominated in that currency, increasing demand. C) Higher foreign political risk leads to an increase in currency demand as investors look for safer investment options. D) Falling domestic prices increase the currency's purchasing power and thus its demand, because foreign consumers will demand euros in order to buy European products.

Answer 29

B is correct. The income distribution typically considers only the relevant population of a country, which usually includes people above a certain age (often 15 or 16 years). Deciles are positional metrics that divide a distribution into ten equal-sized groups based on a ranked outcome, arranged in ascending order. The second decile of the income distribution represents the 10% of the relevant population that falls above the lowest 10% but below the subsequent 80% in terms of income.

Answer 30

B is correct. GDP measures the market value of all final goods and services produced within a country in a given period. Transactions involving used and intermediate goods are not counted in the GDP. Used goods do not represent new production, and intermediate goods are products used up in the production of other goods and are not counted to avoid double counting.

Answer 31

A is correct. While purchasing power adjustments, such as Purchasing Power Parity (PPP), can account for the differences in the cost of a standardized basket of goods and services across countries, they do not address the potential differences in the quality of those goods and services. Differences in quality can still lead to incorrect inferences about the real value of income or production across nations.

Answer 32

C is correct. There is no unidirectional trend in inequality over time. While early hunter-gatherer tribes were undoubtedly almost perfectly equal, economies in the modern era have varied from highly equal to highly unequal.

Answer 33

C is correct. Economies of scale refer to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale. The situation in option C, where average costs increase with more output (serving more customers in this case), represents diseconomies of scale rather than economies of scale.

Answer 34

Option D is correct. Scenario A: Abigail's opportunity cost for apples: 0.5 oranges/apple. That is she makes 0.5 oranges in the time that she can make an apple. Dev's opportunity cost for apples: 0.75 oranges/apple. Result: Abigail has a comparative advantage in apples; Dev in oranges. Abigail has an absolute advantage in apples. Scenario B: Abigail's opportunity cost for apples: 0.75 oranges/apple. Dev's opportunity cost for apples: 1.33 oranges/apple. Result: Abigail has a comparative advantage in apples; Dev in oranges. Dev has an absolute advantage in oranges. Scenario C: Abigail's opportunity cost for apples: 0.5 oranges/apple. Dev's opportunity cost for apples: 0.5 oranges/apple. Result: Both have equal opportunity costs for apples, so no clear comparative advantage. Abigail has absolute advantage in both goods. Scenario D: Abigail's opportunity cost for apples: 0.33 oranges/apple. Dev's opportunity cost for apples: 0.33 oranges/apple. Result: Both have equal opportunity costs for apples, so no clear comparative advantage. Dev has absolute advantage in both goods. And yes, “no clear comparative advantage” is consistent with attributing the comparative advantage to either Abigail or Dev

Answer 35

The correct answer is C (meaning, given the question, that C is incorrect). Giffen goods are not superior products; they are considered inferior. The characteristic feature of a Giffen good is that an increase in its price causes an increase in the quantity demanded. This unusual outcome occurs because the negative income effect (related to the good being inferior) is strong enough to outweigh the substitution effect. Two concepts we have not introduced in class yet: The “income effect” is the change in consumption resulting from a change in purchasing power (or "real income"), whereas the “substitution effect” is the change in consumption in response to a relative change in the prices of goods, with consumers substituting away from more expensive items and towards less expensive ones. In the case of Giffen goods, the reduced purchasing power due to a price increase (negative income effect) leads consumers to buy more of the inferior good and less of other, now relatively more expensive, goods.

Answer 36

A is correct. A market is fundamentally about interactions between providers (supply) and seekers (demand) of goods, services, or opportunities. While the garden described provides a space for meditation and enjoyment, there isn't an interaction or exchange mechanism linking the supply and demand side. The other options all demonstrate some form of interaction or exchange, making them akin to market structures.

Answer 37

B is correct. When the price elasticity of demand is elastic, it means that consumers are relatively responsive to price changes. If a firm increases the price in such a market, the decrease in quantity demanded will be proportionally greater than the price increase, leading to a reduction in total revenue. However, in a perfectly competitive market, firms are price takers, meaning they cannot influence the market price. If a firm in such a market tries to charge a price higher than the prevailing market price, consumers will buy from other suppliers offering the product at the market price. Therefore, the firm that increases its price will lose all its sales, resulting in a decrease in its revenue to zero.

Answer 38

C is correct. A perfectly competitive market is characterized by a large number of sellers offering a homogeneous product, with no single seller being able to influence the market price, and consumers having perfect information. In the case of branded sneakers, different brands offer distinct designs, features, and brand value, leading to product differentiation. This differentiation allows brands to have some level of pricing power, making this market less perfectly competitive compared to the others listed.

Answer 39

C is correct. Negative cross-price elasticity indicates that the goods are complements. Laptops and laptop carrying cases are complementary goods; when the price of laptops rises, it's also likely for the demand for laptop carrying cases to decrease. As for option B, if you're a Swiftie, you can't be influenced by the price of something associated with SB. The other pairs (A and D) represent substitutes.

Answer 40

B is correct. For products like metal detectors, which often cater to specific sectors such as big organizations or specialized groups where purchasing decisions are governed by formal procurement processes, surveying the general population or informal groups (like friends and family) might not provide meaningful insights. In such circumstances, empirical methods like running promotions can be more effective. By offering varying discounts in different regions and observing sales responses, you can directly gauge how price changes impact the demand. While survey methods can be invaluable when you're able to directly survey the relevant population of interest, in this context, they may be less effective due to the specialized nature of the product's primary consumers.

Answer 41

The correct answer is C. Tax expenditures refer to reductions in tax liabilities that result from preferential provisions, such as tax deductions, tax credits, and tax breaks. They're often considered "spending through the tax code" because they provide financial benefits to specific activities or groups. Examples include deductions for mortgage interest or contributions to retirement savings, as well as credits for certain types of investment. Option C represents a flat tax model, which is not a preferential treatment or exception to general tax rules, and thus, not considered a tax expenditure. The flat tax model is mostly prevalent in former communist states, if you’re interested in the topic here’s a not so recent but still relevant note: https://www.ecb.europa.eu/pub/pdf/other/mb200709_focus10.en.pdf.

Answer 42

Your answer is incorrect. The correct answer is C. Automatic stabilizers are mechanisms that automatically adjust in response to economic conditions, helping to moderate the business cycle without any additional action from policymakers. For instance, during a recession, more people may become unemployed and claim unemployment benefits, leading to increased government spending. Conversely, in times of economic growth, fewer people claim unemployment benefits, which reduces government spending. These automatic changes help to stabilize the economy. Options A, B, and D are discretionary government expenditures that are decided upon and aren't automatic responses to the state of the economy.

Answer 43

The correct answer is C. A shortage occurs when the quantity demanded exceeds the quantity supplied. Price ceilings, when set below the market equilibrium price, lead to such a situation because they reduce the price producers can charge, which can decrease the quantity supplied, while also increasing the quantity demanded by consumers due to the artificially low price. In Option C, the price ceiling is set below the equilibrium price, which creates a shortage. Options A and B are situations where the government's intervention doesn't affect the equilibrium. Option D, with a price floor above the equilibrium price, would result in a surplus, not a shortage.

Answer 44

The correct answer is A. The economic incidence of a tax falls primarily on the side of the market (buyers or sellers) that is less responsive to price changes, or more inelastic. In Option A, demand is inelastic while supply is elastic, meaning buyers are less responsive to price changes than sellers. Therefore, the economic incidence of the tax will fall primarily on the buyers. Options B and C sneak in cross-price and income elasticities, respectively, which aren't directly relevant for determining the incidence of a tax. In Option D, both demand and supply are relatively inelastic, but supply is more inelastic.

Answer 45

The correct answer is D) The U.S. Prohibition in the 1920s, which explicitly prohibited the production, sale, and transportation of alcoholic beverages. Quantity regulations target specific quantities of a good or service, either allowing or disallowing their production, sale, or consumption. The U.S. Prohibition is a clear example of a quantity regulation as it directly set the legal quantity of alcohol that could be produced, sold, and transported to zero. While Brazil's deforestation limits (Option B) also act as a quantity regulation on the area that can be deforested, the U.S. Prohibition is a more straightforward and comprehensive ban on a particular item. The other options, Option A and Option C, don't fit the criteria of quantity regulations in the same direct manner.

Answer 46

The correct answer is B. Asymmetric information occurs when one party in a transaction has more or better information than the other, potentially leading to market inefficiencies or imbalances. With fresh fruits at a local market, both buyers and sellers can easily assess the quality, making it less prone to asymmetric information. In contrast, for used cars, artwork from lesser-known artists, and insurance policies, there is often a knowledge gap between the buyer and the seller.

Answer 47

The correct answer is C. Economic surplus is generally understood as the sum of consumer and producer surplus, representing the combined benefits that both parties gain from participating in market transactions. Option C actually describes a surplus in the context of supply and demand, commonly referred to as an "excess supply" or a "surplus" in market terms, but it does not define Economic surplus.

Answer 48

The scenarios that feature market failures are A and D. In Option A, the pharmaceutical company has "Market power" as they are the sole producer of the drug, allowing them to influence its price. Option D illustrates "Irrationality", where consumers seem to be making decisions based on factors other than optimal benefit or value. Options B and C don't clearly exhibit a market failure.

Answer 49

The correct answer is C. Adverse selection occurs when one party in a transaction has more information about a relevant aspect of the transaction than the other party. In the context of health insurance, individuals with high health risks are more likely to buy insurance without disclosing their health status, which insurance companies might not be aware of. Moral hazard arises when one party changes its behavior due to the protection or implications of the agreement made. For health insurance, once insured, individuals might take more health risks or avoid precautionary measures because they know the costs of medical care will be covered by the insurance. Option B, Second-hand cars, predominantly features adverse selection. Sellers may have information about the car that buyers do not, which can lead to "lemons" in the market where the buyer ends up with a subpar product. Option D, renting a house without a formal lease agreement, mostly concerns moral hazard. Without formal terms or a lease agreement, tenants might not take good care of the property since there are no outlined repercussions or responsibilities. Option A doesn't inherently involve either adverse selection or moral hazard in the way that the other options do.

Answer 50

The correct answers are A and D. A) Sweden's carbon dioxide tax: Recognized as one of the earliest attempts by a nation to directly tax carbon emissions, it was introduced to combat climate change by reducing greenhouse gas emissions. The intention was to give economic incentives for businesses and individuals to reduce their carbon footprint. D) Mexico's sugary drink tax: With an aim to combat the rising rates of obesity and related health issues in Mexico, this tax was introduced to reduce the consumption of sugary drinks and thereby reduce the associated health externalities. Option B, The US Tobacco Master Settlement Agreement (MSA) in 1998, did address the negative health impacts of tobacco. However, the MSA was primarily an agreement to settle litigation between the major tobacco companies and the state attorneys general, rather than a direct tax to reduce production. Option C, The French luxury tax on yachts in 2018, was more a revenue-generating measure and an attempt to address wealth disparities rather than to address a negative externality from overproduction.

Answer 51

The correct answer is D) An artwork from an emerging artist. A) A loaf of bread from a local bakery: Most consumers have a good understanding of what they're willing to pay for staple foods like bread based on their previous purchases and the prices at competing stores. B) A subscription to a new online streaming service that just launched: While there might be some uncertainty given it's a new service, consumers can still base their willingness to pay on the value they derive from similar streaming services or entertainment platforms they're familiar with. C) A regular coffee from a nearby café: This is a routine purchase for many, and consumers usually have a set price range in mind based on their past experiences and what they consider to be reasonable for a cup of coffee. D) An artwork from an emerging artist: Art is highly subjective and can vary widely in price depending on many factors such as the artist's reputation, the medium used, personal preference, and perceived future value. For emerging artists, in particular, there's often less publicized information or previous sales data for consumers to base their valuation on, making it challenging for them to have a clear assessment of their willingness to pay.

Answer 52

The correct answers are A and D. A) A decrease in consumer and producer surplus resulting from a tax: When a tax is imposed on a good, it creates a wedge between what consumers are willing to pay and what producers are willing to accept. This typically results in reduced quantities produced and consumed, leading to a loss of some consumer and producer surplus that is not offset by tax revenue, known as the deadweight loss. B) A loss suffered by a company due to a strike by its workers: While strikes can lead to financial losses for companies, this is not what economists refer to as "deadweight loss." Deadweight loss specifically relates to inefficiencies in market outcomes that reduce overall societal welfare. C) A financial loss incurred when unsold goods are discarded: This pertains to inventory losses or waste and not to market inefficiencies that deadweight loss describes. D) A reduction in total welfare when a monopolist sets prices above the competitive level: Monopolists can increase prices above marginal cost and reduce output, leading to a loss in consumer surplus and societal welfare that isn't captured by the monopolist. This inefficiency is captured by the concept of deadweight loss.

Answer 53

The incorrect statement is A. A) Both players will always choose to cooperate if given the chance to communicate beforehand: In a one-shot version of the Prisoner's Dilemma, where mutual cooperation is not an equilibrium, communication is unlikely to induce cooperation. B) True. If both prisoners were to cooperate (or remain silent), they would both receive a lighter sentence, leading to the most beneficial outcome for them collectively. C) True. The Nash equilibrium in the static Prisoner's Dilemma is for both players to betray, even though mutual cooperation would be a better outcome for both. D) This is a key insight from the Prisoner's Dilemma. Both players' decisions to not cooperate results in a suboptimal outcome for both.

Answer 54

The correct statement is B. A) Not necessarily. Nash equilibrium reflects the outcome where no player can benefit from changing their strategy, given the strategies of other players, regardless of whether this leads to cooperation or not. B) True. This is the definition of a Nash equilibrium: given the choices of the other players, no player has an incentive to unilaterally change their current strategy. C) False. While the Nash equilibrium reflects stable points in a game where no player wishes to change strategy given the strategies of others, it doesn't necessarily ensure the maximization of joint payoffs. D) False. Nash equilibria can be Pareto inefficient, meaning there are other potential outcomes where at least one player can be made better off without making any other player worse off.

Answer 55

The correct answer is C. Repeated interaction in games can lead to strategies like "tit-for-tat" which encourage cooperation. While communication, as in Option A, might facilitate cooperation, it doesn't ensure it. Option B suggests that players heavily discount future outcomes, but even with such an orientation, without repeated interactions, collusion might not be sustained. Option D is misleading; identical payoffs don't inherently encourage cooperation.

Answer 56

The correct answer is A. In an extensive form game, decision nodes are points in the game where a particular player must make a choice among available strategies. In contrast, end nodes, or terminal nodes, represent the final outcomes or payoffs of the game once all choices have been made. Option B is incorrect because decision nodes indicate where a decision is to be made, and end nodes display the payoffs, not the strategies. Option C is misleading; while end nodes mark the conclusion of the game, decision nodes don't necessarily show where it begins. Option D is not accurate as decision nodes represent specific choices, not the total number of strategies, and end nodes show outcomes, not probabilities.

Answer 57

The correct answer is A. In the realm of business, the company that introduces a new product or innovation first often gets a first-mover advantage, especially if they can establish significant market share or customer loyalty before competitors can catch up. This can be seen when tech companies release groundbreaking products. Option B depicts a scenario more akin to a repeated game, rather than a clear first-mover advantage. Option C describes a follower advantage, where flexibility is beneficial - one player waits to see the actions of others before making a move. Option D is an example of the "game of chicken," where both players can benefit from the other's action but are hesitant to act themselves.

Answer 58

The correct answer is C. In games with multiple equilibria, it's often uncertain which equilibrium will be played as players' choices depend on their beliefs about what the other players will do. Option A is false; multiple equilibria can arise even in two-player games. Option B is misleading; having multiple equilibria can sometimes make coordination more challenging rather than trivial. Option D is incorrect; not all games have multiple equilibria.

Answer 59

The correct answers are C and D. A strategy is strictly dominated if another strategy always provides better outcomes, regardless of the other player's actions. B sounds potentially right, but we have too little information about every players’ strategies to determine that this is strictly dominated. In the context of driving, always driving on the right in a left-driving country would always result in worse outcomes compared to following the local traffic rule. In a prisoner’s dilemma, the payoffs from mutual cooperation MC, letting down the partner when they cooperate L, being the sucker when let down S and mutual defection MD are always such that L>MC>MD>S, and such payoffs always imply that cooperation in the one-shot game is strictly dominated by defection. A is strictly dominant.

Answer 60

The correct answer is B. In the Game of Chicken, the crux of the strategic interaction lies in the players' anticipation of each other's moves. If one believes the other will drive straight, their best response is to swerve to avoid a catastrophic outcome. Option A is incorrect; neither player has a dominant strategy in this game. Option C is also incorrect because, in strategic games, players always benefit from knowing the other player's strategy. Lastly, option D is incorrect because while the game does involve strategic interaction, both players choosing the same action (e.g., both driving straight) results in the worst possible outcome for both.

Answer 61

The correct answer is B. In a finitely repeated public goods game, the theoretical prediction based on backward induction suggests that in the last period, players have no incentive to contribute to the public good since there's no future period to benefit from building a cooperative reputation. This absence of future repercussions leads to a free-riding problem in the last round. Given that players anticipate this last-period free-riding, they are also less inclined to contribute in the second to last period, and this logic unravels backward, potentially leading to suboptimal contributions throughout. Options A, C, and D are not consistently predicted in standard game-theoretic analyses of finitely repeated public goods games.

Answer 62

The correct answer is B. Field experiments are conducted in real-world settings and are especially valuable when the external validity or generalizability of findings to real-world situations is paramount. Options A and C are more characteristic of laboratory experiments. While some might argue that replication (as in D) is a strength of lab experiments because of the control they offer, it's the real-world applicability and context that sets field experiments apart.

Answer 63

The correct answer is D. While understanding game theory might influence an economist's predictions about behavior, subjects' actions in experiments are driven by their personal motivations, not necessarily their understanding of theoretical constructs. Factors such as fairness concerns (Option A), reputational concerns in repeated settings (Option B), and cognitive biases (Option C) have been documented as reasons for deviations from the Nash equilibrium predictions in the Ultimatum Game.

Answer 64

The correct answer is B. Theoretically, when individuals decide to punish free-riders, they incur a cost to themselves, and this leads to a decrease in the overall payoff in that specific round of the game. This seems wasteful. However, in practical settings, the threat or act of punishment can deter individuals from free-riding in subsequent rounds, leading to increased cooperation and higher overall payoffs in the long run. Option A is incorrect because punishers usually incur a cost and don't gain immediate benefits. Option C might hold some truth, but it doesn't explain the increased cooperation observed. Option D is incorrect as punishment doesn't directly influence the amount of public good provided.

Midterm & QUIZZES Flashcards

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