Multiple Choice

1. Suppose that a particular allocation is not Pareto optimal. If this is so and the allocation is changed to make someone people better off, then:

a. everyone else will be worse off.

b. no one else can be worse off.

c. Everyone else will be better off also.

d. no one else needs to be worse off.

2. Three projects are under consideration: a new concert hall, a new football stadium, and a new library. Sarah believes the concert hall will provide a large net benefit, Jesse wants the new football stadium, and Emma supports the proposed library. If all three projects are rejected in majority voting (where each voter is asked to vote yes or no), we can conclude that:

a. it is efficient to spend tax dollars on all three of these, demonstrating that it is impossible for society to make efficient choices using majority voting.

b. all three projects could be approved if we allowed vote-trading, but this doesnt

guarantee that they are all efficient ways to use public funds.

c. none of the projects can be efficient in the sense that social benefits exceed social costs.

d. only those projects that are efficient (with social benefits in excess of social costs) could be approved if we allowed vote-trading.

3. In order to derive a market demand curve for a public good, individual demand curves are ________ summed; in order to derive a market demand curve for a private good, individual demand curves are ________ summed.

a. horizontally; horizontally

b. horizontally, vertically

c. vertically; horizontally

d. vertically; vertically

4. If offered a choice, patients with relatively ______ health will choose an HMO over a traditional health insurance plan because the HMO is typically _____ expensive; this probably creates a(n) __________ problem in the market for traditional health insurance.

a. poor; less; moral hazard

b. poor; more; adverse selection

c. good; more; moral hazard

d. good; less; adverse selection

5. In order to maintain a stable pay-as-you-go social security system while the dependency ratio is increasing:

a. government can raise the tax rate to maintain benefits, although there are other options.

b. governments only option is to raise tax rates gradually as the dependency ratio increases.

c. it would be politically impossible to make any changes to the current system, so it is inevitable that social security will be bankrupt within 50 years.

d. governments only option is to increase the retirement age to keep pace with longer life spans.