Consumer Economic Theory Test 2

Chapters 5,6,7, and 16

More than $1,100

If you invest $1,000 in a savings account that offers an annual interest rate of 10%, compounded annually, how much will you have in the account after 2 years?

20,000*1.02 + 30,000

You have $20,000 of current income and $30,000 of future income. The interest rate between the current and future period is 2 percent. Which of the following calculates the maximum amount you could consume in the future?

-1.02

You have $20,000 of current income and $30,000 of future income. The interest rate between the current and future period is 2 percent. When you allocate consumption optimally between the two periods, your marginal rate of time preference between the two periods is ______ (assume no corner solution).

a moral hazard problem

Consider John, who purchased an insurance policy on his racquetball racket. He then proceeds to hit his racket against the wall every time he losses a point. This is an example of ______.

A life insurance company notices that individuals who purchase large life insurance policies are disproportionately those with pre-existing health issues that they do not fully disclose, leading to higher-than-expected mortality claims.

Three of the following scenarios are examples of moral hazard, one is an example of adverse selection. Which of the following scenarios is an example of adverse selection?

Firms with superior products have incentives to reveal credible information about their quality, while those that do not disclose are often treated as lower quality.

The full disclosure principle in the economics of information implies that:

Workers choosing costly levels of education to credibly reveal their higher productivity to employers.

Which of the following is an example of signaling in a market with asymmetric information?

always refuse a fair gamble

Assuming there is no pleasure in gambling, a risk-averse person with perfect information will:

All of these are true.

When someone with no health insurance buys a high deductible health insurance policy:

more predictable than for a small group of people

For a large group of individuals, the proportion of people who will have accidents is:

You are risk averse

Your bike is worth $100. There is a 50% chance that it will be stolen from the dining hall at lunch today. Your utility function for the bike is (square root of bike value). Which of the following best describes your attitude toward risk with respect to the bike? 

the expected benefit of the additional search exceeds the cost of the search.

If you are rational, you should continue to search for a new job if:

10,000 / 30,000

You have just received a job offer with an annual salary of $70,000. You estimate that all job offers for which you are qualified are uniformly distributed with annual salary between $50,000 and $80,000. Which of the following calculates the probability that the next job offer you find would pay better than the one you just received?

A situation where an auction winner pays more than the actual value of the item.

The term "winner's curse" is best defined as:

C = 50*(101/100)

A class of 100 students is participating in an auction to see who gets a large jar of quarters. Each student has an unbiased estimate of the total value of the coins. If these estimates are drawn from uniform distribution in the interval (0, 𝐶), where 𝐶 is not known, and your own estimate of the jar's value is $50, how would you estimate 𝐶?

It efficiently promotes the ongoing material interest of the person who performs it without the requirement that social justice be achieved.

The self-interest standard of rationality considers an act to be rational if:

if an externality is prohibited or fined, some people are helped but those creating the externality are hurt

As Ronald Coase pointed out in a famous paper, externalities are reciprocal. This means that ______.

will be solved by the least expensive method available even if that involves the noisemaker's changing operating methods

According to the Coase Theorem, when noise pollution is created, the perpetrator is not held liable, and negotiation costs are zero, then the pollution ______.

All of the above.

Which of the following is the likely reason why the Coase Theorem solution to externalities is not observed more frequently in the real world?

6

Suppose fishermen go fishing at a fishery that has no property rights (meaning any fisherman could fish as she liked). The marginal cost of a fishing boat is constant at $100, and the price for each pound (lb) of fish sells at $1. Further, assume the relation between the number of vessels and the catch per boat is given by the following table (i.e., each boat gets an equal share of all the fish caught). If there were no controls over fishing, how many vessels would be sent out fishing?

Number of Vessels	Catch per Boat (lb)
1	400
2	351
3	301
4	251
5	201
6	151
7	99
8	50

The informal interactions of private individuals and groups can solve many externality problems and the government should just ensure that the costs of these interactions are low.

If the main impact of the Coase theorem is to be summarized, it might be as follows:

The budget line will rotate clockwise because of the tax on X and then shift parallel to the right because of the income tax reduction

If the government put a tax on shelter and then lowered the income tax, how would that be shown using a budget line model? Put shelter on the horizontal axis and the composite good on the vertical axis

40

If Scott's demand curve for theater tickets is P = 100 – 5Q and the price of the ticket is 40, how much consumer surplus does Scott receive from buying theater tickets?

10 hours

If the theater was giving away tickets on a first come first serve basis instead of charging admission, and if Scott's time was worth 100 units of consumer surplus pleasure per hour, how many hours would Scott be willing to wait in line for free tickets if he was assured of getting the number he wanted from the wait. Assume there is no limit on the amount of tickets he can have when he gets to the ticket window.

people consumed the same market basket no matter what the relative prices of the goods.

The upward bias of the consumer price index would not exist if

171, .4

(For simplicity the passenger numbers in the following story are reduced by five zeros.) On May 13, 1999 the US government accused American Airlines of cutthroat competition. On May 14 the Chicago Tribune listed rates and passenger numbers for three cities. Before the low-cost carriers entered the Dallas-Colorado Springs route, American charged $156 and had 37 passengers. When the competition came into the market, the fare was $88 and 199 passengers traveled the route on all carriers. After the small carriers went bankrupt the rates went back to $133 and 92 people bought tickets. Given this information we can say that the elasticity of demand for air travel between Dallas and Colorado Springs is very nearly a straight line with a vertical intercept of approximately _____ and a slope of approximately

elastic

From the information given in question 5-5 above, the elasticity over the entire specified range of the demand function is

The answer cannot be determined from the information given.

From the information given in question 5-5 above, which of the three alternative prices would be the best for American Airlines if it were the only airline flying the route?

199

The intertemporal tradeoff function drawn below shows two years with the incomes of those years given. Borrowing and saving is possible. Sam and Joe have identical incomes shown as 100 in year one and 110 in year 2. The following two questions relate to the graph.

From the information given, what should be the numerical value of X rounded to the nearest whole number?

All of the above are true.

Given the intertemporal preferences of Joe and Sam in question 5-8, we can say that

The income effect of a price increase does reduce alcohol consumption.

Studies in the price elasticity of alcohol indicate that

Ford Focus sedan

Which product is likely to have the most elastic demand?

30

What is the amount of consumer surplus reaped by the consumer in the graph below when the consumer faces the price of 6?

Jill could be better off in year two if she adjusted her market basket somewhat

Jill optimizes her utility with a given income level as she faces a given set of relative prices for goods X and Y in year 1. Then in year 2 the price of good X rises and the price of good Y falls. However, she is still able to purchase the exact same bundle of goods that she purchased in year 1 after which her money is gone. Which of the following statements is definitely true?

625

You run a health club and all your customers have the demand curve P = 100 – 2Q. If your marginal costs of providing the club benefits are 50 and you price at marginal cost, what would be the maximum club membership fee you could charge to extract all the welfare you could possibly get.

Faculty children have an elastic demand for an education at other colleges.

In the case of the Cornell faculty educational benefit described in the text, the administration did not take into account the fact that

M1 + M2/(1 + i)

If a person earns M1 this year and M2 next year and the interest rate is denoted by the letter i, what is the formula for the present value of both incomes?

neutral time preference.

A person willing to forego 100 dollars today in order to receive 100 next year is said to have a

A persuasive preacher who preaches against materialism regularly will likely cause the time preference of his parishioners to become more positive or less negative if it were originally negative.

Which statement is false

If the budget line is relatively steep and the indifference curve of the consumer is relatively flat, then the consumer is patient and the interest rate is relatively high.

A graph has current income on the horizontal axis and future income on the vertical axis. Which statement is true from the graphical perspective?

the present value of all future income.

Milton Friedman's concept of permanent income refers to

will be of higher quality than items that are not advertised.

In general, we would expect that heavily advertised items

the buyer will believe the worst about anything not disclosed.

The full-disclosure principle assumes that sellers disclose to buyers even things they are not supposed to tell because

The high level of student interaction and socializing typical on a college campus lowers the cost of individual information gathering.

Why do local newspapers often have dating information services while small college newspapers do not?

statistical discrimination

Lee, a 45 year old marathon runner in excellent health with no family history of heart disease, pays more for life insurance than Pete, age 37, who is 40 pounds overweight, is a couch potato, and has lost his older brother to a heart attack. This apparent insurance premium mistake occurs due to

adverse selection

Many desirable people avoid dating services because they view the process as subject to

conspicuous consumption and the full disclosure principle

Some people of moderate income make a public display of their lifestyle even though they cannot match the Mercedes jet set standard of living. This behavior is likely due to the following combination of explanations.

75: 7,500

Use the following information for the next three questions. My watch is worth $100. There is a 25% chance that it will be stolen from the locker room when I play racquetball. My utility function for money is U = (money)².

On the basis of this information the expected value of my watch is ______ and the expected utility from my watch, given these circumstances, is ________.

13.40

I am able to buy an insurance policy to cover my watch against theft. How much would I be willing to pay for the insurance?

$25

The insurance company that insures my watch will not insure it unless I pay a premium of

I would be willing to pay the insurance company more than the amount that the risk lover would pay.

If I were risk averse

shift the supply curve rightward by getting the needed information at lower cost

The text tells the story of the Army lawyer who was defending Captain MacDonald in a capital case. The advice to examine the lawyers shoes was an attempt to

demand shifts right and supply stays constant

If the graph above shows the government intelligence market for information that existed prior to the terrorism of September 11, 2001, what is the most likely effect of those acts on the market in the short run?

Heavily advertised items are generally of lower quality because they do not sell on their own merits

Which statement is false about information?

Adverse selection

Which of the following does not relate to the full disclosure concept?

risk averse

If you are the owner of the car in the graph above, you are

have either 0 or 0w amount of utility but I cannot tell which in advance

If I do not buy insurance for my car, and there is a 50% chance that it will be stolen, then I will

ac

If I decide to buy insurance for my car, the graph above makes it clear that I will not pay a higher premium than ___ to be insured

bc

The auto insurance company would be unwilling to insure me if I paid them less than

fit all of the above options since they are consistent with each other

If your marginal utility of money is increasing at an increasing rate you will

will buy insurance only if the insurance company sells it at cost

Someone who is risk neutral

takes aims as given exogenously and therefore these aims are not subject to critique

Present-aim rationality

all of these are true.

If Franny's utility function is U = f(Franny's income and Zooey's income), then

preferences depend on historical and developmental circumstances

Biologists have helped economists see that

preferences are interdependent in that someone may gain utility by seeing another’s welfare increase

The text case of Zooey and Franny illustrates that

people’s tastes must differ because uniform tastes would expose a population to invasion by groups with competing strategies

This chapter argues that

people are unable to hide their true preferences

One assertion of this chapter is that

hold the motivations sincerely and are good judges of the character of others.

Noneqoistic motivations will payoff for people if they

all of these are true.

This chapter challenges the prevailing wisdom in NeoClassical economic modeling that

people are willing to pay money in order to enforce their concept of fairness.

According to your text

Bounded rationality

Which of the following best explains why people who budget carefully tend to spend less money?

They give cash rebates rather than reduce the price of the item

Which case best shows how marketing people use the asymmetric value function to their advantage

if you find a left-brained person and assume you have an economist, you are falling into the representative bias

If economists tend to be left-brained people, then

considering out-of-pocket costs as full opportunity costs

Karl is a senior faculty member who bought his house 20 years ago. His neighbor, Carlos, just joined the faculty and for a similar house has mortgage payments that are three times what Karl pays. Recently Carlos commented that life would be so much easier if he had housing costs as low as Karl. This comment illustrates the problem of

of the initially steep slope of the utility function for losses.

Credit cards have reduced the pain of shopping, not only because they are convenient, but because

Regression to the mean

In the late 1990’s Sammy Sosa and Mark McGuire engaged in a dramatic home run race to beat each other and the all-time season record. Most sports writers felt that if the record did not fall in that year it might stand for a long time to come. Yet the die-hard fans expected another record breaking year the following year. Which of the following concepts would tend to back the sports writer’s view?

The idea of availability in memory as it relates to more recent events

In my intermediate micro class the exams seem to get progressively more difficult for the students as the semester goes along. The material builds and the concepts become more complicated. Although I do not try to make the exams harder, I welcome this trend because students tend to be pleasantly surprised by their final course grade. What from this chapter would explain why they are surprised at how high a final grade they receive?

Buying most purchases with a credit card

An asymmetric value function underlies which of the following behavior?

It is a false sense of relief because housing costs have not diminished at all

People often feel a sense of relief when they pay off their mortgage and have a debt free house. Which of the following is an accurate assessment of that feeling?

hedonic framing because of an asymmetric value system

My daughter recently purchased a new car. There was the sticker price and the dealer discount. There also was a $1000 manufacturers discount and a student $400 discount, plus a zero percent finance charge for a 36 month loan. All the options were already included on the sticker as standard equipment. This practice takes advantage of the psychology of

get upset when the toll on the highway doubles to 50 cents but ignore the price increase of a round of golf which goes from $25 to $26.

The psychophysics of perception would be a reason why most people

the Anchoring and adjustment factor

Politicians might notice that 70% of those who enter a primary, including those unopposed, win the party nomination. Yet, in a two-person race, one can win only 50% of the time. If politicians keep surfacing because they first see the 70% figure, they are likely being influenced by

representativeness

One of the sad aspects of the terrorist attacks was the way many people of Middle East decent were treated after the tragedy. Since probably 100% of the terrorists were from the Middle East many people mistrusted thousands of other folks who came from that region originally. This mistake is most likely due to biases in judgment related to

availability

After playing 4 holes of golf without success I mysteriously rolled in a par. On the way to the next tee I calculated what my score would be if I pared the rest of the holes. I had fallen prey to the bias of

DN

The following nine questions relate to the graph below and the story that follows. Mr. Loud Mouth buys tickets to a baseball game. He is more interested in beer and raucous behavior than baseball so he makes life difficult for Mr. Ardent Fan who is seated next to him. The marginal benefit curve on the graph shows the extra benefit Loud gets from each successive beer. Thus the area under the curve is the total perceived benefit he gets from beer. If he tried to protect people like Ardent from being annoyed he would have to stop drinking or hire someone to monitor his behavior and keep it in check. The more he drinks, the more expensive the monitor. This cost is listed as "Cost of monitoring beer drinker ." Two other costs are relevant to this problem. First, Ardent Fan could absorb the irritation by staying in the next seat. This cost function is called "Cost of sitting next to beer drinker." Finally, Mr. Fan could move back to a less desirable, but unoccupied seat. This function is called: "Cost of moving away." The more beer Loud drinks the further Ardent must move away.

If the rules allow Loud Mouth to do as he pleases and Mr. Mouth and Mr. Fan can negotiate without cost, how many drinks will Loud consume?

DN

If the rules prohibit disturbing behavior and are enforced only upon request of an offended party and Loud and Ardent can negotiate freely, how much will Loud drink?

if negotiation costs are zero, it makes no difference who is responsible because efficiency will be reached

The moral of the story of questions 16-1 and 16-2 is

DK

If Ardent and Loud are so upset with each other that no deals can be made and there are no rules against disturbance, then ______ beer will be consumed.

DGK

What will be the disturbance cost of Loud's action in question 16-4 above?

DN

If Ardent and Loud are so upset with each other that no deals can be made and disturbances are stopped upon complaint, how much beer will Loud drink?

when negotiation costs are prohibitive the best alternative is to make the person responsible who has the lowest cost of solving the problem.

The moral of the story in questions 16-4 to 16-6 is that

DEK, Ardent would win the bid.

If ball park owners held an auction between Loud and Ardent, how high would Loud bid and who would win the bid for the right to make the beer drinking rules?

EN per beer.

In the case of Loud and Ardent, the ball park owners could achieve the efficient result if they added a tax to the cost of beer. The correct amount of tax would be

None of the above are clearly false.

In recent months increasing numbers of people in business have begun seeking a career change into academia. The reason often given is that they are tired of working 80 hours a week away from home and would rather have a different lifestyle. Given this information, which of the following statements is clearly false?

if an externality is prohibited or fined, some people are helped but those creating the externality are hurt.

As Ronald Coase pointed out in a famous paper, externalities are reciprocal. This means that

develop social rules and rights that force the person with the least cost solution to solve the problem.

Coase suggested that the efficient way to deal with externalities is to

would have been found privately if transactions costs had been zero.

Economics and law have combined to find the most efficient legal outcomes. As in the safe harbor case, Judges are inclined to find outcomes that

there was a way to discern and charge for the effects people have on others in public places.

The tragedy of the commons would not exist if

the marginal cost of the security should not exceed the marginal benefit of the security

The terrorist attacks of September, 2001 illustrate how impossible it is to negotiate on a case by case basis what would be an efficient set of laws to prevent future attacks. Yet the degree of security expense we must absorb should, as much as possible, still be based on the principle that

the transactions cost of roommates negotiating an agreement on air rights in an apartment are fairly low.

No law exists which prohibits smoking in apartment buildings even though the externalities of smoking are great. This is most likely true because