QUESTION 2

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?

A) MRSxy is at a maximum.

B) Px/Py = money income.

C) MRSxy = money income.

D) MRSxy = Px/Py.

E) all of the above

QUESTION 3

What will a market that experiences a positive externality also experience?

a. a smaller market output and a higher market price than is optimal.

b. a greater market output and a lower market price than is optimal.

c. a greater market output and a higher market price than is optimal.

d. a smaller market output and a lower market price than is optimal.

e. an undetermined market output and an undetermined market price than is optimal.

QUESTION 6

A rational consumer who prefers one apple to two oranges, and two oranges to one orange,

a. must prefer two oranges to one apple.

b. must prefer one apple to one orange.

c. must prefer two oranges to two apples.

d. must be indifferent between two oranges and two apples.

e. might prefer one orange to one apple.

QUESTION 8

If an individuals labor supply curve is backward bending, then

a. The income effect associated with a higher wage is greater than the substitution effect.

b. The substitution effect associated with a higher wage is greater than the income effect.

c. The substitution effect associated with a higher wage encourages more leisure.

d. Choices a and c.

e. Choices b and c.

QUESTION 1 0

John is a 55-year-old male smoker, about 50 pounds overweight, who has high blood sugar and drinks to excess a couple of times each month. Because of adverse selection in health insurance

A) John is less likely to buy health insurance than the average person, because the average persons policy premiums will be based on his risk, not the average risk

B) John is more likely to buy health insurance than the average person, because his policy

premiums will be based on the average risk, not his personal risk.

C) when John gets health insurance, he will be less likely to take care of himself.

D) when John gets health insurance, he will be more likely to take care of himself.

E) if John doesnt have health insurance already, he will not be able to get it.

QUESTION 11

Which of the following is the best example of adverse selection?

a. A consumer buys a lawnmower that does not perform as advertised.

b. A restaurant owner who has a fire insurance policy sets fire to the restaurant.

c. Risk-averse individuals always buy more insurance than they need.

d. Less healthy people are nore likely to purchase insurance.

e. Only manufacturers of high-quality products choose to offer warranties.

QUESTION 13

Which assumption about preferences tells us that a consumer's most preferred market basket will lie on the budget line, rather than below the budget line?

a. Completeness.

b. Transitivity.

c. More is better.

d. Diminishing marginal rate of substitution.

e. None of these assumptions guarantees this.

QUESTION 14

Suppose a pet owner refill her cat's prescription every month, buying exactly 30 pills, no more and no less disregarding how many days in a month, and regardless of the price. If the government eliminates all taxes on pet medications, who will benefit more?

a. Pet owner will receive the entire savings.

b. Pet owner and drug company would share the tax savings.

c. Drug company would receive the entire tax savings.

d. Neither pet owner nor drug company would see any savings.

e. More information is needed to answer this question.

QUESTION 15

Suppose there are only two goods, food and clothing, with food measured on the vertical axis. If the price of clothing changes, holding all else constant,

a. the budget line undergoes a parallel shift to the right

b. the budget line undergoes a parallel shift to the left

c. a new point of utility maximization will be reached

d. the budget line becomes flatter

e. the slope of the budget line remains constant

QUEST ION 1 7

If we want to minimize dead weight loss, which of these should we tax?

a. electricity company.

b. expensive yatchs.

c. Uber drivers.

d. food trucks.

e. plastic surgery.

QUESTION 22

An externality is defined as

a. the revenue generated by a firm in the external market

b. a byproduct of a good or activity that affects someone not immediately involved in the transaction

c. an additional cost of consumption that is borne by a third party

d. a cost or benefit arising from price changes

e. the value of a good or service to a consumer

QUESTION 25

When renting a car, the rental company will sell you a waiver that releases you from any monetary liability for damage to the car from collisions. Compared to other types of car insurance, these waivers seem quite expensive. A possible explanation is:

a. The moral hazard problem is more severe.

b. The adverse selection problem is more severe.

c. It is more expensive to repair rental cars.

d. Choices a and b.

e. Choices b and c.

QUESTION 3 0

ABC Farms raises a substantial number of bees and sells the honey. ABC Farms is situated next to the XYZ Orchard. The bees from the farm pollinate apple trees in the orchard. In this example, ABC Farms

a. derives more private benefit and provides less social benefit.

b. provides more social benefit than it derives in private benefit.

c. provides a marginal social benefit and derives a complete private benefit.

d. provides a complete social benefit and derives a marginal private benefit

e. comparison of social and private benefits cannot be ascertained.

QUESTION 3 3

How do the income and substitution effects work when the price of an inferior good decreases?

a. the income effect and the substitution effect cause an increase in the quantity demanded of the good.

b. the income effect and the substitution effect cause a decrease in the quantity demanded of the good.

c. income effect causes an increase in the quantity demanded and the substitution effect causes a decrease in the quantity demanded.

d. income effect causes a decrease in the quantity demanded and the substitution effect causes an increase in the quantity demanded.

e. None of the above.

Extra Credit 1

A firm maximizes profit by operating at the level of output where

A. Average revenue equals average cost

B. Average revenue equals average variable cost

C. Total costs are minimized

D. Marginal revenue equals marginal cost

E. Marginal revenue exceeds marginal cost by the greatest amount

Extra Credit 2

When Total Revenue and Total Cost curves have the same slope,

A. They are furthest from each other

B. They are closest to each other

C. They intersect each other

D. Profit is negative

E. Profit is zero

Extra Credit 3

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as

A. P=MR

B. P=AVC

C. AR=MR

D. P=MC

E. P=AC

Extra Credit 4

As we move downward along a demand curve for apples

A. Consumer well being decreases

B. The marginal utility of apples decreases

C. The marginal utility of apples increases

D. Both a and b are true

E. Both a and c are true