Deck 3: Microeconomics and Externalities: Exploring Consumption Patterns, Taxes, and Social Costs

Question 1

If, for John's current intertemporal consumption pattern (satisfying his intertemporal budget constraint), his marginal rate of intertemporal substitution is 1 and the real rate of interest is positive, then...

A)the interest rate will fall to zero.
B)john could increase his lifetime utility by consuming more today.
C)john could increase his lifetime utility by consuming less today.
D)john is necessarily a borrower.

Answer 1

john could increase his lifetime utility by consuming less today.

Question 2

There are strong theoretical reasons to expect that changes in wealth are responsible for changes in consumption. Nonetheless, one reason that we observe a tight link between consumption and disposable income is...

A)credit rationing which changes the intertemporal budget constraint for borrowers.
B)households attempt to smooth their consumption.
C)household saving provides a buffer between income and expenditure.
D)ricardian equivalence.

Answer 2

credit rationing which changes the intertemporal budget constraint for borrowers.

Question 3

The accelerator principle states:

A)if an increase in the growth of output is expected, investment will increase.
B)if an increase in investment is expected, output will increase.
C)if an increase in the growth of investment is expected, output will increase.
D)small swings in investment are associated with large swings of output.

Answer 3

if an increase in the growth of output is expected, investment will increase.

Question 4

Which best describes consumer surplus?

A)the price consumers are willing to pay for a unit
B)the cost of providing a unit
C)the profits made by a firm
D)the difference between the price a consumer pays for an item and the price he/she is willing to pay for it

Question 5

Which of the following statements is NOT true? In the free market changes in the price of a product:

A)can act as a signal to producers
B)can provide an incentive to reallocate resources
C)can act as a rationing device
D)are set by the government

Question 6

Community surplus equals:

A)producer surplus minus consumer surplus
B)profits plus utility
C)total utility minus plus profit
D)consumer surplus plus producer surplus

Question 7

Monopoly power in a market is likely to:

A)increase consumer surplus
B)increase community surplus
C)lead to higher producer surplus
D)lead to lower prices and lower output

Question 8

A positive consumption externality occurs when:

A)the social marginal cost is greater than the private marginal cost
B)the social marginal benefit is greater than the private marginal benefit
C)the social marginal cost is greater than the private marginal benefit
D)the social marginal cost is less than the private marginal cost

Question 9

A merit good:

A)is a public good
B)involves a negative externality
C)is overprovided in the free market
D)is under provided in the free market

Question 10

A demerit good:

A)is a public good
B)involves a positive externality
C)is overprovided in the free market
D)is under provided in the free market

Question 11

A public good will probably:

A)be expensive in a free market
B)be overprovided in the free market
C)not be provided in the free market
D)has no opportunity cost

Question 12

Asymmetric information occurs when:

A)information is free
B)buyers and sellers have access to different information
C)community surplus is maximized
D)community surplus is minimized

Question 13

A situation where people who have taken out insurance behave more recklessly as a result is known as:

A)asymmetric information.
B)bad luck.
C)adverse selection.
D)moral hazard.

Question 14

An insurance company can protect itself from moral hazard by:

A)monitoring.
B)imposing an 'excess'.
C)holding liquid assets
D)diversification