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microeconomics

Questions and Answers of Microeconomics

8 10 12 14 16 18 20 22 24 26 28 Question 6 BB'A 'A Y0
7. In the accompanying graph, is the slope of curve AA’ positive or negative? Does the slope increase or decrease as we move along the curve from A to A’? Answer the same two questions for curve
6. KEY APPENDIX QUESTION The accompanying graph shows curve XX’ and tangents at points A, B, and C. Calculate the slope of the curve at these three points.
3. KEY APPENDIX QUESTION The following table contains data on the relationship between saving and income. Rearrange these data into a meaningful order and graph them on the accompanying grid. What
2. KEY APPENDIX QUESTION Indicate how each of the following might affect the data shown in Table A1-2 and Figure A1-2 of this appendix:a. IU’s athletic director schedules higherquality
1. Briefly explain the use of graphs as a way to represent economic relationships. What is an inverse relationship? How does it graph?What is a direct relationship? How does it graph? Graph and
Visit their Web sites and compare and contrast their views on how to achieve economic goals. How much of the disagreement is based on positive statements and how much on normative statements? Give
2. Normative Economics—Canadian Politics.Many economic policy statements made by the Liberal Party www.liberal.ca, the Reform Party www.reform.ca, the Progressive Conservative Party
Three primary economic goals are economic growth (an increase in real GDP), full employment (less than 7 percent unemployment), and price-level stability (less than 2 percent as measured by the
1. Three Economic Goals—Are They Being Achieved?
Why do so many of them quit these jobs once they have graduated high school?
12. (Last Word) Use the economic perspective to explain the behaviour of the workers (rather than the customers) observed at a fast-food restaurant. Why are these workers there, rather than, say,
11. Studies indicate that married men on average earn more income than unmarried men of the same age. Why must we be cautious in concluding that marriage is the cause and higher income is the effect?
10. Suppose studies show that students who study more hours receive higher grades.Does this relationship guarantee that any particular student who studies longer will get higher grades?
9. KEY QUESTION Explain and give an example of (a) the fallacy of composition, and (b) the “after this, therefore because of this” fallacy. Why are cause-and-effect relationships difficult to
8. KEY QUESTION Identify each of the following as either a positive or a normative statement:a. The high temperature today was 30 degrees.b. It was too hot today.c. Other things equal, higher
7. KEY QUESTION Indicate whether each of the following statements applies to microeconomics or macroeconomics:a. The unemployment rate in Canada was 6.5 percent in January 2001.b. The Alpo dog food
6. To what extent do you accept the eight economic goals stated and described in this chapter? What priorities do you assign to them?
5. KEY QUESTION Explain in detail the interrelationships between economic facts, theory, and policy. Critically evaluate this statement: “The trouble with economic theory is that it is not
4. Explain the following statements:a. Good economic policy requires good economic theory.b. Generalization and abstraction are nearly synonymous.c. Facts serve to sort out good and bad hypotheses.d.
3. Why is it significant that economics is not a laboratory science? What problems may be involved in deriving and applying economic principles?
2. What is the scientific method and how does it relate to theoretical economics? What is the difference between a hypothesis and an economic law or principle?
1. KEY QUESTION Use the economic perspective to explain why someone who is normally a light eater at a standard restaurant may become a bit of a glutton at a buffetstyle restaurant that charges a
If a government used the second-best consumption possibility frontier as if it were the appropriate utility possibility frontier, would it redistribute too much or too little relative to what it
How does your conclusion illustrate our conclusion from earlier chapters that deadweight loss from labor taxes cannot be derived by simply looking at uncompensated labor supply curves?
Might a government that derives the first- and second-best consumption possibilities frontiers from exercise 29B.13 mistakenly think that there is no efficiency loss from redistribution?
We have implicitly assumed that we can measure individual utilities in order to construct first-and second-best utility possibility frontiers. Suppose instead that we can only measure consumption.
We concluded that the Benthamite, Rawlsian, and Cobb–Douglas social welfare function with a 5 0.5 all agree that the first-best utility allocation u1 5 u2 5 0.5 is optimal, but we also found that
Can you draw the first- and second-best utility possibility frontiers and indicate how you would graphically arrive at the same results?
Verify that this is in fact a positive monotone transformation.
How is what we have just done a positive monotone transformation?
B. The average U.S. growth rate over the past few decades has been in the range of 2.3%, with recessions happening about once every decade. Suppose, then, that we currently have a growth rate of 2.9%
A. There is little debate about the relative magnitude of welfare gains from softening recessions versus increasing long-run growth rates. Still, governments expend substantial resources on fighting
29.14 Policy Application: Smoothing the Business Cycle versus Fostering Economic Growth: Psychology Meets Normative Macroeconomics: It is sometimes argued that there is a policy trade-off between
c. The underlying rule was simple: In order to comply with the rule, it simply had to be an ascending sequence. Very few subjects correctly identified this rule, instead very confidently concluding
b. What sequence of numbers might you propose to test your assumption if you did not have confirmation bias and were open to your assumption being incorrect?
B. The following experiment, first conducted in the early 1960s, is an illustration of confirmation bias.Suppose that you are given the following sequence of numbers: 2-4-6. You are told that this
f. In the final hours before an exam, students often “study” intensely by scanning their notes and focusing on key terms that they have highlighted. Some students find that this dramatically
e. Empirical social scientists often do econometric regression analysis on real-world data to ascertain the direction and magnitude of people’s responses to different policies. As computational
d. Some have observed an increase in the number of people who believe in a variety of “conspiracy theories,” theories such as that the 9/11 attack was orchestrated by the government or that a
c. Until the mid-1980s, the Federal Communication Commission in the United States enforced a rule known as the “Fairness Doctrine.” This rule required news outlets, particularly on radio and TV,
b. In the past, opinion polls often suggested that public disapproval of a U.S. president was in the single digits, but more recently, a president is considered as doing well if his disapproval
a. Many observers of public discourse have suggested that the assumptions individuals bring to policy discussions are now often more diametrically opposed than in the past, with different camps
A. Over the past few decades, there has been a vast increase in the number of sources that individuals can use to inform themselves about what is going on in the world. For instance, most individuals
29.13 Policy Application: Confirmation Bias, Politics, Research, and Last-Minute Studying: Individuals have lots of assumptions about the way the world works, assumptions that help frame how they
f. How much consumption does each of the two individuals undertake under the first-best outcome? How about under the second-best outcome?
e. Consider next the second-best case and suppose k 5 0.0025. For the same two income levels as in (d), what is the government’s “second-best” income tax rate given that the tax system gives
d. Suppose I1 5 $200,000 and I2 5 $10,000. What is the government’s “first-best” income tax rate when it can tax individual 1’s income without any deadweight loss?
c. Suppose next that the income tax used by the government is not a lump sum tax. For a tax rate t , 1, it is able to transfer the amount 1tI1 2 1ktI1 22 2 to individual 2. If the government wants to
b. Suppose that the government uses an income tax t charged to the rich and then transfers the revenues to the poor. Suppose first that this income tax is a lump sum tax; that is, it raises revenues
a. Give an example of a utility function u1c2 that would make this equivalent to a social welfare function that chooses utility allocations. What has to be true about the marginal utility of
B. Suppose again that there are two individuals: one who makes an income I1 and the other who makes only I2, where I1 . I2. Assume that the government would like to redistribute income but does not
f. Suppose instead that the marginal utility of consumption diminishes as consumption increases.Would the application of the Rawlsian goal to consumption distributions now lead to a tax rate that is
e. Suppose that income differences arise in part from “compensating differentials” in the labor market; that is, suppose that higher income people make more money in part because they undertake
c. Now illustrate how the consumption possibilities frontier changes if the government uses an inefficient tax system. Suppose the inefficiency takes the following form: As the tax rate on the rich
b. What consumption allocation on this possibilities frontier would a Rawlsian government choose?
A. Consider in this exercise a government with Rawlsian goals; that is, the goal of making the least well off individual the most well off. If the government does not have access to information about
29.12 Policy Application: First- and Second-Best Rawlsian Income Redistribution: Most governments raise tax revenues from higher income individuals and distribute them to lower income individuals in
f. Over the past few decades, there has been a substantial decrease in national savings in the United States. How might a behavioral economist use the idea of procrastination to explain this?
e. Suppose individual 1 also has reference-based preferences subject to endowment or status quo effects. If the company gets to choose the initial investment strategy but allows individuals to opt
d. Suppose that, instead of just having inherited money, the two individuals have just accepted a job in which their company contributes to a 401k retirement plan. The individuals now must choose
c. If individual 1 is aware of his time-inconsistency problem, will he accept the financial planner’s advice? Would he have any reason not to accept it if he is unaware of his self-control problem?
29.11 Business and Policy Application: Increased Liquidity, Procrastination, and National Savings: Over the past few decades, increasingly sophisticated financial investment possibilities have
g. If all investors were like this young investor, could our prospect theory still explain the equity premium puzzle?
f. Suppose you are a young investor who is investing for retirement in 30 years. For all practical purposes, you can in this case be almost certain that an investment in stocks will result in an
e. If this is a typical investor, is the equity premium explained by our version of prospect theory?
d. What utility will she get from investing $1,000 in stocks?
c. What utility will this investor get from investing $1,000 in bonds?
b. What is the expected return on investing $1,000 in stocks? What is the equity premium?
a. We discussed four features of prospect theory in the text: (1) reference-dependence, (2) lossaversion, (3) diminishing sensitivity, and (4) probability weighting. Which of these are we modeling
B. * Consider prospect theory (which you implicitly used in part A) a little more closely. Suppose that an investor bases her decision on a one-year investment horizon and evaluates risky gambles
d. * In your explanation in (c), you almost certainly thought of the investor as having a one-year horizon. Suppose investors are in it “for the long run,” facing a 10% chance of a loss on their
c. Can you use the concept of “loss aversion” to explain how behavioral economics might have an explanation for the equity premium puzzle?
b. Suppose you thought that investors had reference-based preferences. What do you think their reference point might be when comparing the two investments?
a. What is the expected rate of return from a stock investment. What does this imply is the equity premium?
A. Consider the equity premium puzzle through the lens of reference-based preferences. In particular, suppose you are investing $1,000 and you know you can get a 2% return on this over 1 year by
29.10 Business Application: The Equity Premium Puzzle: Investments in equities (like stocks) yield substantially higher returns than investment in bonds. By itself, this is no surprise because
f. What is the probability that the home will sell for the price you calculated in (b) and (c), and how does it compare to the probability that the home will sell at the price you calculated in (e)?
e. Next, set up the optimization problem again, but this time use y instead of u. What is the optimal asking price you now get? Is this the true optimal asking price for this homeowner?Explain.
d. If the homeowner has reference-based preferences as specified by u and y, is the price you calculated in (c) the true optimal asking price?
c. Next, suppose (from here on out) that a 5 1 and b 5 2.25. Repeat the optimization exercise assuming that the homeowner uses the function u (and not y). What would be the optimal asking price?
b. Set up the optimization problem for the homeowner under the assumptions in (a) and solve for the optimal asking price.
a. What values do a and b take in a model without reference-based preferences?
B. Consider the optimization problem faced by a homeowner who is moving and is determining an asking price for his home. Such a homeowner faces the following trade-off: A higher asking price p means
c. Housing economists have uncovered the following empirical fact: During times when housing demand is falling (putting downward pressure on home prices), houses that are for sale typically take
b. Next, consider the problem faced by a homeowner who needs to move during a “down” market. Suppose the homeowner originally purchased her home at price p0, and suppose that this price has
A. Revisit the logic behind this conclusion before proceeding.a. One reason that homeowners do not constantly switch homes when housing prices fluctuate arises from the fact that there are moving
29.9 Everyday and Business Application: Endowment Effects and Housing Markets: In end-of-chapter exercises 6.9 and 7.6, we derived the curious prediction that homeowners are made better off by
e. True or False: Our present-biased student will have greater credit card debt than the impatient student who borrows the same in the junior year, but the impatient student will accurately predict
d. Next, compare the impatient student’s level of credit card debt to the level of debt the presentbiased student plans for when he is a sophomore. Is it greater or less? What about the levels of
b. For such an impatient but nonpresent-biased student, what will consumption levels in periods 1 and 2 be? How much credit card debt will he have when he graduates?c. Compare your answer to the
a. In B(d) of exercise 29.7, you should have concluded that c0 5 $43,262 for the present-biased student when I 5 100,000, r 5 0.2, d 5 0.95, and b 5 0.5. What level of d would be required for the
B. Consider the same set-up as in part B of exercise 29.7. (You should do exercise 29.7 prior to moving on.)
c. In what sense is government regulation to limit student credit card debt more paternalistic when it is motivated by combating student impatience than it is when it is motivated by combating
b. When the two students are juniors, which plans to accumulate more debt by graduation?
a. When the two student are sophomores, which of the two plans on accumulating more credit card debt by the time he graduates?
29.8 Everyday and Policy Application: Impatient versus Present-Biased Students: In exercise 29.7, we considered how low “teaser” interest rates impact borrowing when college students are
h. True or False: Regulations that limit the amount of credit card debt that students can take on can improve the welfare of present-biased sophomores.
g. Now consider the student with b 5 0.5 as a sophomore looking ahead to being a junior. He is fully supported by his parents in his sophomore year, but he knows they will no longer support him in
f. How much credit card debt will the student from part (c) actually have when he graduates?What about the student from part (d)?

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