Midterm & QUIZZES Flashcards
Q1. Which of the following is definitely an inferior good?
A) A good with a price elasticity of demand of -0.5.
B) A good with a cross-price elasticity of demand of 1.2 with respect to another good. C) A good with an income elasticity of demand of -0.7.
D) A good with a price elasticity of demand of 2.1.
C
Q2. Consider the following scenarios of Lakshmi and Carlos’s productivity in a 2-goods economy with microchips and software modules. In which scenario does Lakshmi have a comparative advantage in producing software modules but no absolute advantage?
A) Lakshmi can produce 4 microchips or 8 software modules in one hour, while Carlos can produce 5 microchips or 7 software modules in one hour.
B) Lakshmi can produce 2 microchips or 3 software modules in one hour, while Carlos can produce 3 microchips or 2 software modules in one hour.
C) Lakshmi can produce 3 microchips or 7 software modules in one hour, while Carlos can produce 2 microchips or 5 software modules in one hour.
D
Q3. Which of the following forms of government expenditure is NOT to be considered an automatic stabilizer?
A) Unemployment benefits.
B) Food stamps.
C) Progressive income taxation.
D) Infrastructure projects.
D
Q4. In which of the following pairs of price elasticities will the economic incidence of a tax fall primarily on the seller? Each pair represents (price elasticity of demand, price elasticity of supply).
A) (-0.9, 1.2)
B) (-1.5, 1.5)
C) (-0.7, 1.8)
D) (-1.9, 1.3)
D
Q5. Consider a standard perfectly competitive market with downward-sloping demand and upward-sloping supply curves. Which of the following events can shift the market supply curve to the left?
A) A technological advancement that reduces the cost of production.
B) A decrease in the price of a complementary good.
C) An increase in the price of a key input or raw material.
D) An increase in consumer income.
C
Q6. Which of the following statements is correct about when economic surplus is maximized? [≈4 points]
A) Economic surplus is maximized when the price of a good is set above the equilibrium price.
B) Economic surplus is maximized when there are externalities.
C) Economic surplus is maximized when there are no market failures and quantity supplied equals the
quantity demanded.
D) Economic surplus is maximized when there is a binding price floor.
C
Q7. Consider the standard one-shot Prisoner’s Dilemma game that we studied in the course. Which of the following statements is correct?
A) Both players will achieve a better outcome if they cooperate than if they both betray each other.
B) It is always in the best interest of one player to cooperate, regardless of what the other player does.
C) This game always takes a different name unless Bonnie and Clyde play it.
D) The game predicts that players will always find the optimal, cooperative solution in real-life situations.
A
Q8. Which of the following situations represents a static simultaneous move game?
A) Two firms deciding on their advertising budgets for the year without knowing the other’s choice in
advance.
B) A chess game where players take turns making moves.
C) A sequential auction where bidders see the previous bids before making their own.
D) A relay race where one runner starts after the previous runner finishes.
A
Q9. Which of the following is NOT true about public goods?
A) They are non-excludable, meaning it is costly or impossible for one user to exclude others from using a good.
B) They can be efficiently provided by private markets without any government intervention.
C) They are non-rivalrous, so one individual’s use of the good does not reduce its availability to others.
D) Free-riders can consume the good without paying for it.
B
Q10. Which of the following is NOT a potential confounding element when drawing comparisons in standards of living based on nominal GDP per capita over time and across countries?
A) Differences in the structure and accuracy of data collection over time.
B) Differences in the quality of goods traded in different countries.
C) Differences in the cost of living between countries.
D) Differences in the consumption basket composition between countries.
D
Given the utility function of person X, over consumption and hours of free time. Which of the following statements is false about her indifference curves?
a. Indifference curves that are further from the origin represent higher levels of utility.
b. Indifference curves are downward sloping because as consumption increases, hours of free time have to decrease to maintain the same level of utility, assuming no change in other factors.
c.Utility is maximized when two indifference curves intersect.
d. Indifference curves that never intersect the budget constraint represent levels of utility that are not attainable.
Correct: C,
Option C is the correct answer. Intersection would imply that at the point of intersection, Person X has the same level of utility, which is not possible given that each indifference curve represents a different level of utility. Indifference curves representing higher levels of utility are indeed further away from the origin (Option A). Indifference curves are typically downward sloping, representing the trade-off between consumption and leisure (Option B). Option D is also true because if an indifference curve never intersects the budget constraint, it means that the combination of goods on that indifference curve is not affordable given the consumer’s budget.
Which of the following definitions of the unemployment rate is actually correct?
a. The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment.
b. The unemployment rate is the percentage of the total population that is unemployed and actively seeking employment.
c. The unemployment rate is the percentage of the total labor force that is unemployed.
d. The unemployment rate is the percentage of the total population that is unemployed, whether or not they are actively seeking employment.
Correct: A
The unemployment rate is calculated as the percentage of the total labor force that is unemployed but actively seeking employment. The labor force includes individuals who are either employed or unemployed and actively looking for work. Options B and D are incorrect because they consider the total population, not just the labor force. Option C is also incorrect as it includes all unemployed individuals in the labor force, regardless of whether they are actively seeking employment or not.
Which of the following scenarios does not capture a determinant of frictional unemployment?
a. A recently graduated software engineer taking three months to find a job because she is looking for a position that best matches her specific skills and interests.
b. A factory worker losing his job after the factory’s machinery gets upgraded, and he doesn’t have the skills to operate the new machines.
c. A graphic designer deciding to quit her current job and take some time to find a better position because her unemployment benefits allow her to maintain her standard of living for a while.
d. A sudden economic recession causing decreased consumer demand and leading companies to lay off workers.
Correct: D
Option D is the correct answer. A sudden economic recession causing decreased consumer demand and firms laying off workers is more indicative of cyclical unemployment, which is a form of structural unemployment related to the economic cycle. Options A, B, and C, on the other hand, are scenarios representing frictional unemployment due to job search, skill mismatch, and unemployment insurance, respectively.
Which of the following is considered in Claudia Goldin’s influential research a key driver of the gender gap in earnings within the same occupations, after accounting for education and work experience?
a. Women choosing lower-paying professions.
b. Gender discrimination in the workplace within the same occupation.
c.Differences in negotiation strategies between men and women within the same occupation.
d. Differences in pay due to differences in the hours that men and women work outside of the 9-to-5 schedule within the same occupation.
Option D is the correct answer. Goldin’s research indicates that, within the same occupations, a significant portion of the gender pay gap can be attributed to differences in the rewards for working longer and nonstandard hours. Occupations with a higher emphasis on working long and irregular hours tend to have larger gender disparities in earnings. This is because women, more often than men, opt for flexibility in working hours due to family or childcare responsibilities, which tend to reduce their earnings relative to men within the same occupations. Options A compares different occupations, which is not what the question is after. B and C, while relevant in broader discussions on the gender pay gap, are not the primary focus of Goldin’s research when examining earnings disparities within the same occupations and after accounting for education and work experience.
Which of the following scenarios capture the phenomenon of job polarization?
a. A country where employment in high-wage and low-wage occupations is increasing, while employment in middle-wage occupations is decreasing due to automation and offshoring.
b. A country experiencing a uniform increase in employment opportunities across low-wage, middle-wage, and high-wage occupations due to overall economic growth.
c. A country where only high-wage occupations are seeing an increase in employment, while low-wage and middle-wage occupations are seeing a decrease due to advancements in technology.
d. A country where employment in all sectors is decreasing due to economic recession and high unemployment rates.
Option A is the correct choice, as it best describes job polarization. Job polarization refers to the phenomenon where employment in middle-wage, often routine jobs is declining, while employment in both high-wage, high-skilled jobs and low-wage, low-skilled jobs is increasing. This is largely due to factors like automation, which can easily replace routine jobs, and offshoring, where middle-wage jobs are outsourced to countries with lower labor costs. The other options don’t accurately represent job polarization. Option B represents a uniform employment increase across all sectors, Option C shows only high-wage occupations increasing, and Option D indicates a general employment decline due to economic downturn, none of which capture the essence of job polarization.
Which of the following helps counter wage stickiness and ameliorate structural unemployment?
a. Education and training programs.
b.Strong labor unions.
c. Inflation.
d. Increasing the minimum wage.
Option C, inflation, is correct because it reduces real wages, helping to adjust the labor market and possibly reducing structural unemployment caused by wage stickiness. Education and training programs (Option A) are crucial for reducing structural unemployment by improving workforce skills but don’t directly address wage stickiness. Strong labor unions (Option B) and increasing the minimum wage (Option D) can actually contribute to wage stickiness by resisting wage adjustments in response to economic conditions, hence they don’t aid in ameliorating the issue.
Which of the following is not true about imperfectly competitive markets?
a. Firms in these markets are price takers.
b. There can be barriers to entry that prevent new firms from entering the market easily.
c. Firms might have some degree of market power, allowing them to influence prices.
d. Product differentiation can exist, leading to brand loyalty.
Correct: A
The correct answer is A. In imperfectly competitive markets, firms are not price takers; this is a characteristic of perfectly competitive markets. In imperfect competition, due to product differentiation or other reasons, firms have some influence over the price of their product. Options B, C, and D are all true for imperfectly competitive markets.
Which of the following is not an example of monopolistic competition?
a. Independent coffee shops in a city.
b. A variety of fast food chains in a small town.
c. Local bakeries selling different varieties of bread and pastries.
d. Two firms dominating the local concrete production market.
The correct answer is D. Monopolistic competition is characterized by many firms producing differentiated products and having some degree of market power due to this differentiation. In option D, we see a situation that resembles a duopoly where two firms dominate the market, especially when they produce a homogeneous good like concrete. This differs from the characteristics of monopolistic competition. Options A, B, and C showcase scenarios where various firms offer differentiated products to consumers, which is typical of monopolistic competition.
Marginal revenue curves:
a. Are usually upward sloping.
b. Are at least as steep as the demand curve faced by the firm.
c. Are always parallel to the supply curve.
d. Represent the firm’s profit per unit.
The correct answer is B. Marginal revenue curves, especially in the context of monopolistic or monopoly markets, fall faster than the demand curve. This implies that to sell an additional unit, the firm might have to lower the price for all units, thus making the marginal revenue curve steeper than the demand curve. Option A is almost never true, as the demand a firm is facing is most often downward sloping. Option C is simply not true, as by definition marginal revenue and supply curves cannot be parallel. Option D confuses marginal revenue, which is the additional revenue from selling one more unit, with profit, which factors in both revenue and cost.
Which of the following is not true about imperfectly competitive markets?
a. Firms have some degree of price-setting power.
b. Products tend to be differentiated.
c. Firms may earn zero economic profits in the long run.
d. Equilibrium prices are always strictly higher than under perfect competition.
The correct answer is D. Bertrand competition, an imperfect competition model, can lead to prices equivalent to marginal cost, mimicking outcomes in perfect competition. Option A is incorrect because imperfectly competitive markets often grant firms some price-setting power. Option B is a feature of monopolistic competition, where differentiation is common. Lastly, even when firms in such markets earn positive short-run profits, market structure can change and profit margins can shrink, making Option C plausible.
Which of the following firms is likely to have the least monopsony power?
a. Amazon, when hiring software engineers in Silicon Valley.
b. A small town’s only hospital, when hiring registered nurses.
c. A Berlin bakery, when hiring bakers.
d. Walmart, when sourcing orange juice.
The correct answer is C. Monopsony power refers to the market power a single buyer has in determining the price of a product or service it purchases. In the context of hiring, it’s about the power a firm has in setting wages. A local bakery in a large city will face significant competition from other employers, so its influence on the wage rate is minimal. In contrast, Amazon in the tech hub of Silicon Valley and a sole hospital in a small town both have considerable influence. Walmart faces competition when sourcing products like orange juice, but its size gives it significant market power.
Which of the following oligopolistic markets are best captured by Bertrand but not Cournot competition?
a. Two firms selling identical software licenses.
b. Two firms producing and selling cement in a region.
c. Two pharmaceutical companies selling patented, unique drugs for different diseases.
d. Two firms producing luxury cars with distinct brand identities.
The correct answer is A.
Bertrand competition focuses on firms setting prices, where consumers buy from the firm offering the lowest price, given identical products. Hence, for identical software licenses, Bertrand competition is an appropriate description. On the other hand, Cournot competition is more suited for markets where production processes are resource-intensive and storage costs are substantial, such as in cement production or luxury car manufacturing. While it was discussed in class that pharmaceuticals might be an industry where firms can compete on prices due to less resource-intensive production, option C involves unique drugs for different diseases. This differentiation pushes it more towards Cournot competition since the differentiation in products makes the competition based more on quantities rather than just prices. Thus, B, C, and D are more in line with Cournot competition.
Which of the following scenarios best represents decreasing average product of labor?
a. A tech company hires more software engineers, and as a result, the development of a new software speeds up due to enhanced collaboration and problem-solving.
b. A factory adds more workers to the assembly line, and each worker now produces less as they get in each other’s way due to limited space.
c. A farm employs more workers for harvesting season, resulting in each worker picking the same amount of fruit, maintaining a constant output per worker.
d. In a consulting firm, as more consultants are hired, the firm is able to take on more projects, increasing the average output per consultant due to diversified expertise.
Correct: B
Option B is the correct answer. In this scenario, as more workers are added to the assembly line, each worker’s productivity is hampered due to limited space, causing the average output per worker to decline. Options A, C, and D depict situations where adding more workers leads to maintained or improved average productivity, which is contrary to the concept of decreasing average product of labor.
Which of the following claims is not consistent with the Malthusian trap?
a. Technological advancements lead to increases in population, which then consume the surplus, reverting living standards back to subsistence levels.
b. Constant growth in the GDP of a nation leads to constant population growth.
c. An increase in resources or productivity temporarily increases living standards, but population growth will eventually offset these gains.
d. War, famine, and disease act as natural checks on population growth, ensuring that it does not surpass the means of subsistence for an extended period.
Option B is the correct answer. In a Malthusian scenario, growth in GDP per capita or technological advancements temporarily increase living standards, causing a rise in population that eventually consumes the surplus, bringing living standards back to subsistence levels. However, constant GDP growth doesn’t cause constant population growth in the Malthusian model. The other options more accurately reflect concepts within the Malthusian theory, highlighting the cyclical nature of economic and population growth within the trap.
One of these phenomena is difficult to explain with the Malthusian model:
a. Periodic famines lead to significant population declines.
b. Technological advancements lead to temporary increases in living standards.
c. Declining fertility rates in richer countries.
d. A higher availability of resources leads to population growth.
Option C is correct. The Malthusian model primarily operates under the premise that advancements in technology and resources lead to population growth, which then consumes the surplus, returning the population to subsistence living standards. However, this model struggles to explain the phenomenon of declining fertility rates in richer countries. In wealthier nations, we often observe that as income and living standards increase, fertility rates tend to decrease, a trend contrary to the Malthusian expectation of increased population growth with improved living conditions. The other options align more seamlessly with the Malthusian trap’s concepts, which emphasizes natural checks like famines (Option A), and the consumption of excess wealth through population growth (Options B and D).
New technologies brought about by the Industrial Revolution are purposefully:
a. Energy saving
b. Capital saving
c. Labor saving
d. All of the above
Option C is the correct answer. Technologies introduced during the Industrial Revolution, such as spinning jennies, power looms, and steam engines, primarily aimed at saving labor. These technologies automated and expedited production processes, reducing the reliance on manual labor and increasing overall productivity. While some technologies might have saved energy or capital indirectly, the predominant and direct aim of technological advancements during the Industrial Revolution was to make processes more efficient by saving labor.
Inclusive institutions (in the sense of Acemoglu and Robinson 2011) characterize:
a. A country where the power is held by a benevolent social planner.
b. A country ruled by a group of dynasties that represent proportionally all ethnicities in the population.
c. A country where a single company controls the majority of the market, limiting entry for new firms.
d. A country with well-enforced property rights and a broad distribution of economic benefits and powers.
Option D is correct. Acemoglu and Robinson’s idea of inclusive institutions refers to structures that provide a level playing field where individuals have equal opportunities to pursue their own objectives, leading to a more prosperous society. Such institutions also allow for pluralistic decision-making where power is broadly distributed, and they encourage innovation and economic progress. Options A, B, and C, despite having certain attributes that might seem ‘inclusive’ or ‘benevolent’, do not truly embody the essence of inclusive institutions as they do not necessarily guarantee a broad distribution of economic benefits and powers, or a level playing field that encourages economic prosperity through individual innovation and the protection of property rights.
Clark’s theory of the Industrial Revolution emphasizes:
a. The significance of legal institutions.
b. Major technological innovations.
c. Gradual change in culture and institutions.
d. Access to natural resources, in the country as well as from colonized territories.
Option C is correct. Clark posits that the Industrial Revolution was the result of a slow process of change in people’s preferences, culture, and institutions. He argues that, over time, there was a transmission of preferences and attitudes towards work and economic success due to the reproductive success and survival of economically prosperous individuals. This contributed to creating the cultural and institutional conditions necessary for the Industrial Revolution to occur.
Consider an agent choosing how much to consume between now (on the x axis) and later (on the y axis). How does her budget constraint change as investment opportunities available to her improve and pay a higher interest rate?
a. The budget constraint will shift inward, as the agent will have less current consumption to allocate between the present and the future.
b. The budget constraint will pivot upwards, indicating that the agent can afford more future consumption for each unit of present consumption foregone.
c. The budget constraint remains unchanged because it is determined by the agent’s initial wealth, not by the rate of return on investments.
d. The budget constraint will shift outward, indicating that the agent can afford more consumption in both periods without changing her current consumption-savings decision.
Correct: B
Consumption smoothing follows from:
a. Diminishing marginal returns to consumption.
b. The cost of borrowing.
c. The interest rate on investments.
d. A preference for current consumption over future consumption.
Correct: A
Option A is correct. Consumption smoothing has to do with the shape of the utility function (and consequently of the indifference curves). It arises from the principle of diminishing marginal returns to consumption, which posits that the utility gained from additional consumption decreases as one consumes more. This encourages individuals to spread their consumption over different periods to maintain a stable level of utility over time. Options B and C, while important factors in determining how much to consume now versus later, and do not directly explain the motivation behind consumption smoothing. The cost of borrowing and the interest rate on investments can influence the decision of when to consume, because they determine the budget constraint, but they don’t inherently lead to the principle of smoothing consumption. Option D describes a preference that actually works against the principle of consumption smoothing.
Modigliani’s Life Cycle Hypothesis fails to explain:
a. Why some individuals do not save at all during their working years.
b. The increase in consumption at retirement despite a drop in income.
c. The accumulation of wealth by individuals well into retirement.
d. The tendency of individuals to save for post-retirement life.
Option C is correct.
Modigliani’s Life Cycle Hypothesis suggests that individuals plan their consumption and savings behavior over their life-cycle to smooth consumption. It assumes that people save during their working years and decumulate in retirement, aiming for a stable level of consumption throughout their life. However, the hypothesis has difficulty explaining why some individuals continue to accumulate wealth well into retirement, which is not consistent with the prediction of planned decumulation to smooth consumption. Options A, B, and D are phenomena that the Life Cycle Hypothesis can explain to some extent, considering that individuals may not save if they expect a steady or increasing income stream, they may dissave at retirement, and they are generally predicted to save for retirement.
Which of the following risks are tightly related to maturity transformation?
a. Foreign exchange risk.
b. Market risk.
c. Liquidity risk.
d. Operational risk
Option C, liquidity risk, is the most closely related risk to maturity transformation. Financial institutions engage in maturity transformation when they fund long-term loans with short-term deposits. This process can create a mismatch between the maturities of assets and liabilities, leading to liquidity risk if the institution is unable to meet its short-term obligations due to this mismatch. Foreign exchange risk (Option A) pertains to the impact of currency value changes on an institution’s finances but is not specifically related to the process of maturity transformation. Market risk (Option B) is a broader risk of losses in positions arising from movements in market prices, and operational risk (Option D) refers to failures in internal processes, people, and systems.
Which of the following policies to prevent bank runs can actually make them more likely?
a. Deposit insurance schemes that guarantee a certain amount of depositor funds.
b. Central bank facilities that banks can use as a last resort for liquidity.
c. Higher capital requirements for banks to ensure they can absorb losses.
d. Reduction of reserve requirements to increase banks’ lending capacity.
Option B is the correct answer. While central bank facilities are designed as a safety net for banks to access additional liquidity, using these facilities can be perceived as a sign of financial distress by investors and depositors. If the market interprets a bank’s use of these facilities as a signal that the bank is in trouble, it may inadvertently trigger the very bank runs it aims to prevent. The other policies, such as deposit insurance (Option A) and higher capital requirements (Option C), typically serve to build confidence and reduce the likelihood of bank runs. Option D, the reduction of reserve requirements, is intended to increase banks’ lending capacity, but this policy could potentially make banks more vulnerable to runs if it leads to overextension and reduces liquidity buffers, though it is not as directly related to signaling weakness as Option B.
Consider an agent choosing how much to consume between now (on the x axis) and later (on the y axis). How does her budget constraint change as the interest rate at which she can borrow increases?
a.
The budget constraint will pivot downwards because present consumption becomes more expensive relative to future consumption.
b.
The budget constraint will shift outward, allowing for more consumption now and later.
c. The budget constraint will pivot upwards as present consumption becomes cheaper relative to future consumption.
d. The budget constraint will not change because it is only determined by the agent’s current income.
Correct: A
Option A is correct. When the interest rate increases, the cost of borrowing money to finance current consumption also increases. This means that for each unit of consumption an agent decides to move from the future to the present, they will have to give up more future consumption than before the interest rate increase. Thus, the budget constraint pivots downwards, reflecting that present consumption has become relatively more expensive. The outward shift in option B would suggest that the agent can consume more in both periods, which is not the case. Option C incorrectly suggests the opposite effect of what an increase in interest rates would have. Option D is incorrect because while the budget constraint is indeed determined by current income, it is also affected by the interest rate which determines the trade-off between current and future consumption.
Consider an agent choosing how much to consume between now (on the x axis) and later (on the y axis). How does her budget constraint change as investment opportunities available to her improve and pay a higher interest rate?
a. The budget constraint will shift inward, as the agent will have less current consumption to allocate between the present and the future.
b. The budget constraint will pivot upwards, indicating that the agent can afford more future consumption for each unit of present consumption foregone.
c. The budget constraint remains unchanged because it is determined by the agent’s initial wealth, not by the rate of return on investments.
d. The budget constraint will shift outward, indicating that the agent can afford more consumption in both periods without changing her current consumption-savings decision.
Correct: B
