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.

Accepted Answer

C

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.

Accepted Answer

Credit rationing changes the intertemporal budget constraint for borrowers, which can lead to a tight link between consumption and disposable income.

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.

Accepted Answer

The accelerator principle suggests that an increase in the rate of economic growth (or output) leads to a proportionally larger increase in investment. This is because businesses invest more in capital goods to meet the anticipated higher demand. Choices B and C reverse the cause and effect relationship, and D describes the potential effect of the principle rather than the principle itself.

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

Accepted Answer

Consumer surplus is the difference between the price a consumer is willing to pay for a good or service and the actual price they pay. It represents the benefit or surplus enjoyment consumers receive when they pay less than what they were prepared to pay.

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

Accepted Answer

In a free market, prices are determined by the forces of supply and demand rather than being set by the government. Choices A, B, and C describe functions of price changes in a free market system.

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

Accepted Answer

Community surplus is the sum of consumer surplus and producer surplus, reflecting the total benefit to society from the production and consumption of goods or services.

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

Accepted Answer

Monopoly power typically leads to higher producer surplus because the monopolist can set prices above marginal costs, maximizing their profits at the expense of consumer surplus and potentially reducing overall community surplus.

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

Accepted Answer

A positive consumption externality occurs when the social marginal benefit of consumption exceeds the private marginal benefit, indicating that there are additional benefits to society not captured by the private consumer.

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

Accepted Answer

Merit goods are underprovided in the free market because individuals do not fully appreciate the benefits of consuming them, leading to lower demand and provision than is socially optimal.

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

Accepted Answer

Demerit goods are overprovided in the free market because their consumption has negative externalities that are not fully accounted for by the market, leading to consumption levels higher than what is socially optimal.

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

Accepted Answer

Public goods are typically not provided in the free market because they are non-excludable and non-rivalrous, making it difficult for businesses to charge consumers directly and earn a profit.

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

Accepted Answer

Asymmetric information refers to a situation where one party in a transaction has more or superior information compared to another. This often happens in markets where the seller knows more about the product than the buyer, but it can also occur in the opposite direction.

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.

Accepted Answer

Moral hazard occurs when one party in a transaction takes on more risk because they know that they are protected, such as through insurance. In the context of insurance, it refers to the idea that individuals may behave more recklessly when they know they are covered by insurance, as they do not bear the full cost of their actions.

Question 14

An insurance company can protect itself from moral hazard by:
A)monitoring.
B)imposing an 'excess'.
C)holding liquid assets
D)diversification

Accepted Answer

The answer of An insurance company can protect itself from...

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

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...

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...

The accelerator principle states:

Which best describes consumer surplus?

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

Community surplus equals:

Monopoly power in a market is likely to:

A positive consumption externality occurs when:

A merit good:

A demerit good:

A public good will probably:

Asymmetric information occurs when:

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

An insurance company can protect itself from moral hazard by: