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macroeconomics principles

Questions and Answers of Macroeconomics Principles

1.1. What are some major aracteristics of the core sphere?
1. 2. “Indeed, it has been said that democracy is the worst form of government,” said British Prime Minister Winston Churill (1874–1965), “except all those other forms that have been tried
1.1. On a sheet of paper, draw two columns. In one column, list some historical and contemporary advantages of market exanges, and in the other, list some disadvantages. Can you give examples
1. 2. e Internet has opened up a whole new set of markets for everything from antiques to airplane tiets. Pool your knowledge with that of others in the class, and, for the types of markets
1.1. Reviewing the different types of markets outlined in this section, think about whether you have ever directly participated in a market of ea type. If so, describe specific instances.
1. 2. In what sense is the term “market” being used in ea of the following sentences? “Go to the market and get some bananas.” “e market is the best invention of humankind.” “e
1.1. You aend a college or university. In what sense is it an “educational institution”? Can you identify any institutionalized paerns that structure the behavior of students and faculty at
1. 2. Make a list of several things that, over the past few days, you have eaten, drunk, been entertained by, been transported by, been sheltered by, or received other services from (e.g., “dinner
1.1. Education is sometimes provided within the core sphere (at-home presool activities and home sooling), is oen provided by the public purpose sphere (public and nonprofit sools), and
11. There was a sharp increase in the number of the longterm unemployed following the recession that began in December 2007. Rand Ghayad did the following study to better understand long-term
10. A field experiment was conducted to see how others’ opinions affect a user’s ratings online. Whenever a comment was added on a certain social news site, researchers randomly assigned an up
9. Maya and Paul want to watch a movie. There are two movies available: a comedy and an action film. Maya loves comedies, whereas Paul enjoys action films.a. As separate individuals, which movie will
7. Consider the Ultimatum Game played in reverse: The Responder moves first and decides preemptively whether to accept or reject whatever split the Proposer eventually determines. If the Responder
6. In Mario Puzo’s The Godfather, Michael Corleone (played by Al Pacino in the movie version of the book) would like to meet with Virgil “The Turk” Sollozzo. Michael is concerned that if he
5. Assume that a charity hired you to improve its results on donations. You decide to mail letters asking for donations. You use three different types of letters: Letter A: Control—standard letter
4. Let’s add a twist to the Ultimatum Game: there is $10.00 to be split, but if the Responder rejects the offer, then he gets $2.00 and the Proposer gets $4.00. Use backward induction to determine
3. There are five people in a village. Each has $10. The village is prone to flooding. Flooding is reduced if people contribute to flood-control efforts. In particular, each person in the village
2. Consider a three-person version of the Ultimatum Game: The Responder does not receive any money but instead decides whether to accept on behalf of a third-party bystander. Otherwise the structure
1. Under the tax law in 2012, you could claim all of your charitable contributions as a deduction on your federal income tax (if you decided to itemize your deductions), and the top marginal tax rate
13. What is an information cascade? Explain with examples.
12. What does herding mean? Why do individuals decide to herd?
11. What does it mean to say that a good exhibits network externalities? Can you think of a good that you use because it has network externalities?
10. How does indoctrination affect our preferences? Explain with an example.
9. Consider a trust game between two players. Suppose the players care only about their own payoffs. The payoffs are such that, in equilibrium, the players do not trust each other, leading to a
8. In the Dictator Game, the Allocator decides how a certain sum of money is to be divided, and the Recipient must accept whatever choice the Allocator makes. How does the outcome of the game differ
7. Why do lab experiments show a different outcome for the Ultimatum Game compared to the outcome predicted by game theory?
6. In the Friend or Foe? game, Foe is a (weakly) dominant strategy for both players. What can explain why, in roughly 50 percent of decisions, players chose Friend and split the sum of money with
5. In the context of this chapter, what is meant by having a preference for fairness?
4. Refer to the experiment in the chapter on soliciting donations for a children’s hospital. Experimenters put flyers on doors saying that solicitors would be stopping by at a particular time.
3. Is it correct to say that people give to charity only out of selflessness and concern for the well-being of others? Explain your answer.
2. Suppose the act of giving is viewed as an economic good. How can the price of charitable donations be measured? Does the quantity demanded decrease as the price of giving increases?
1. How does the standard model of Homo economicus differ from the Homo economicus that is studied in behavioral and social economics?
12. This chapter illustrates how the Coase Theorem can be applied to explain the outcome of a divorce in two different systems. In both cases, where the unhappy partner values the divorce at $5,000
11. Space heaters are dangerous. The U.S. Consumer Product Safety Commission estimates that more than 25,000 residential fires every year are associated with the use of space heaters, resulting in
10. Ronald Coase used the example of a farmer and railroad tracks to explain bargaining. Sparks from trains running on tracks near farmland would set off fires in the fields. To avoid this, railroad
9. The Johnson Steel Company generates water pollution when it makes steel. It could eliminate this pollution at a cost of $700. The Smith family lives downstream. It suffers $1,000 of damages from
8. Consider what would happen in the ultimatum game (with offers between $0 and $10) if the Responder were able to fully commit in advance. It would be as if the Responder had moved first; he would
7. The owners and the players’ union are negotiating over a contract for the upcoming hockey season. In October, the owners will make an offer to the union. If they reach an agreement, they will
6. You have learned that in a second-price auction you should always bid your actual willingness to pay; not a penny more and not a penny less. Proving why this is always best, no matter what others
5. U.S. Treasury notes are sold at a discount. For example, a buyer might offer $950 for a $1,000 note that will become due in 2 years because (as Chapter 15 explains) money received in the future
4. A town wants to build a new bridge. Construction firms are asked to submit sealed bids. The town will award the contract to the firm that submits the lowest bid and will pay the firm the amount of
3. The original Filene’s Basement in Boston had a unique pricing system. Every article in the store was marked with a tag showing the price and the date the article was first put on sale. Twelve
2. According to this chapter, in a first-price sealed bid auction (or a Dutch auction), a bidder should multiply her willingness to pay by the number of other bidders, then divide by the total
1. An escalation clause in a real estate contract specifies what a prospective buyer will offer for a home if the seller receives multiple offers. An escalation clause typically includes three
13. Explain why in situations where the Coase Theorem applies, bargaining power does not influence whether the efficient outcome is reached, but it does affect the distribution of gains.
12. How does the ultimatum game work? What does experimental evidence show about the outcome of the ultimatum game?
11. What is meant by bargaining power? What are the two factors that determine an individual’s bargaining power?
10. What does the revenue equivalence theorem state?
9. What are the similarities between an English auction and a Dutch auction?
8. Suppose a bet is placed on the outcome of the flip of a coin—if the coin comes up heads, you get $25 and if it comes up tails, you lose $25. If you accepted this bet, does it imply that you are
6. What is a Dutch auction? 7. What is meant by risk neutrality?
5. What is meant by sniping in an auction? Does it make sense to snipe to win an auction?
4. What is the dominant strategy for a bidder in an English auction?
3. What is an English auction?
2. What is the difference between an open-outcry auction and a sealed bid auction?
1. How do auctions help in price discovery?
11. Suppose there are 1,001 sellers with used cars that they value at (i.e., their willingness to accept is) $0, $100, $200, $300, . . . , $9,900, $10,000. There are many buyers who place a higher
10. The government wants to reduce white-collar crime.a. Suppose for the moment that innocent people are never wrongly convicted of a crime. Explain why the Becker model of crime and punishment
9. Janet Yellen, the Chair of the Federal Reserve, is married to the Nobel Prize-winning economist George A. Akerlof. When they hired babysitters in the 1980s, they decided to pay wages that were
8. The problem of public goods provision (discussed earlier in the textbook) can also be thought of as a problem of asymmetric information. Suppose there is a house with five roommates. Each roommate
7. Steven Levitt and Chad Syverson compared instances of home sales in which real estate agents were hired by others to sell a home to instances in which an agent sold his or her own home. They
6. The U.S. government, like many governments throughout the world, bailed out large financial institutions that were thought to be “too big to fail” during the 2008 financial crisis. Some
5. Suppose some workers are capable and others are extraordinary. Firms are willing to pay capable workers a salary of $12,000 and extraordinary workers a salary of $15,000. Workers know if they are
4. All used cars are lemons or peaches. Owners know whether or not their car is a lemon, but buyers do not— that is, the quality of a car is private information. There are many more buyers than
3. Consider used mattresses. There are three types: “likenew” (value of $600), “lightly-used” (value of $300), and “bed-bug-infested” (value of $0). Only the seller knows the type.a.
2. There are fifty low-risk people in a town and fifty highrisk people. A low-risk person has an average of $1,000 in medical expenses each year and is willing to pay $1,200 for medical insurance
1. Your new car is stolen just days after you buy it. You purchased it for $20,000 but the insurance company believes it is worth only $16,000.a. Why would the insurance company believe it is only
10. How can crime and punishment be modeled as a principal– agent problem? What does the model suggest about crime prevention?
9. Explain the potential costs of high-powered incentives by considering the case of providing incentives to police officers. Would it be a good idea to pay higher wages to police officers if they
8. How might unemployment benefits create a moral hazard problem?
7. Does the presence of asymmetric information necessarily imply that governments should intervene in a market?
6. When do firms pay efficiency wages? What is the relationship between moral hazard and efficiency wages?
5. Explain the following terms:a. Principal–agent relationshipb. Moral hazard
4. How do third-party certifications and warranties solve the adverse selection problem in the used car market? Explain your answer.
3. Why does adverse selection occur in the health insurance market?
2. Explain why “bad cars drive out the good ones” in the market for used cars.
1. What is asymmetric information? What are the two kinds of asymmetric information?
12. Assume the interest rate is 50 percent. What is the present value of a payment of $60 paid 1 year from now? How about the present value of $60 paid today and $60 paid a year from now? Challenge
11. You are a venture capitalist who has just purchased a stake in a small company. You believe that a year from now this company may no longer exist, in which case your stake is worthless; there is
10. Your house is worth $400,000, and you have $300,000 in a savings account. There is a 1 percent chance of a fire in your house during the next year. If the fire occurs, there will be $300,000 in
9. You are considering playing a card game. The rules of the game are such that you pick a card from a standard deck of fifty-two cards and if the card is a diamond, you win $30. The catch is, you
8. Say whether or not each of the following statements assumes independence between events:a. “There is no such thing as a ‘hot hand’: A basketball player is just as likely to make her next
7. This chapter talked about the idea of independent events.a. Suppose you draw a card from a standard deck of cards, you put that card back in the deck, and draw a second card. Are the events
6. You observe a banker give $75 for a bond that pays out $100 in one year. Based on this observation, what do you conclude about the interest rate? Suppose that the price of this bond today suddenly
5. Stafford loans are student loans that the federal government provides to graduate and undergraduate students to fund their education. Since Stafford loans can be extended up to 30 years, the
4. You are considering purchasing a new piece of equipment for your factory. The equipment will cost $3,000 right now and can be used for 3 years. If you purchase it, the machine will generate
3. Suppose you won the Powerball lottery on January 1, 2017. You can choose to receive the entire amount of $400 million either as a lump sum on January 1, 2017, or you can receive four equal annual
2. When you were born, your parents deposited $10,000 in the bank. The bank offered a fixed interest rate of 4 percent. On your eighteenth birthday, your parents decide to withdraw the money that
1. The “Rule of 70” is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling time,
11. Why might it make sense to avoid paying for extended warranties on TVs and small home appliances?
10. What is meant by expected value? How is it calculated?
9. When are outcomes said to be independent? What is meant by the gambler’s fallacy?
8. How is the probability of an event defined?
7. When is an outcome risky?
6. What is meant by a preference reversal?
5. What is meant by present bias?
4. The greater your discount weight, the more your current decisions are driven by the future consequences of those decisions. Do you agree? Explain.
3. How is net present value used to decide whether a project should be undertaken?
2. How is the present value of a future payment calculated?
1. Is $1,000 received today worth as much as $1,000 received 1 year from now? Explain your answer.

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