Micro Economics Theory Applications II Set 2
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This set of MicroEconomics, Theory and Applications 2 Multiple Choice Questions & Answers (MCQs) focuses on Micro Economics Theory Applications II Set 2
Q1 | If, for John’s current intertemporal consumption pattern (satisfying his intertemporal budgetconstraint), his marginal rate of intertemporal substitution is 1 and the real rate of interest is positive, then...
- the interest rate will fall to zero.
- john could increase his lifetime utility by consuming more today.
- john could increase his lifetime utility by consuming less today.
- john is necessarily a borrower.
Q2 | 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 betweenconsumption and disposable income is...
- credit rationing which changes the intertemporal budget constraint for borrowers.
- households attempt to smooth their consumption.
- household saving provides a buffer between income and expenditure.
- ricardian equivalence.
Q3 | The accelerator principle states:
- if an increase in the growth of output is expected, investment will increase.
- if an increase in investment is expected, output will increase.
- if an increase in the growth of investment is expected, output will increase.
- small swings in investment are associated with large swings of output.
Q4 | In the case of a negative externality, the social marginal cost will
- exceed the private marginal cost.
- be equal to private marginal cost.
- fall short of private marginal cost.
- bear no significant relation to private marginal cost.
Q5 | A perfectly competitive steel mill that produces large amounts of pollution (a negativeexternality) will, from a social point of view
- produce too little steel
- produce the socially optimal quantity of steel.
- produce too much steel.
- produce too much steel only if it installs pollution control equipment.
Q6 | Each of the following provides incentives to reduce a negative externality except:
- a merger with affected firms.
- subsidizing consumption of the good being produced.
- bargaining among firms.
- taxation of the externality.
Q7 | To reach an economically efficient output level, the size of an excise tax imposed on a firmgenerating a negative externality should be
- the firm’s marginal cost.
- the social marginal cost.
- the difference between the social marginal cost and the firm’s marginal cost.
- the sum of the social marginal cost and the firm’s marginal cost.
Q8 | In perfect competition, environmental externalities need not distort the allocation ofresources providing
- transactions costs are zero.
- average costs are constant for all output levels.
- firms install pollution control equipment.
- the government sets realistic pollution standards.
Q9 | In drilling a new oil well in an existing oil field, the fact that output on existing wells isreduced means that
- existing wells have negatively sloped marginal cost curves.
- existing wells and new wells are owned by different people.
- existing wells and new wells are owned by the same people.
- there is a discrepancy between private and social marginal costs.
Q10 | Bargaining costs are generally high in cases involving environmental externalities because
- there are strong incentives to be a free rider.
- many individuals may be affected by the externalities.
- it is difficult to measure the costs of the externalities.
- all of the above.
Q11 | Externalities between two firms can be “internalized” if: I. The two firms merge. II. Bargaining costs are zero.III. The externalities affect each firm equally. IV. Marginal costs for both firms are constant. Which statement(s) correctly complete(s) the sentence?
- only ii.
- all except iii.
- i and ii, but not iii and iv.
- i and iv, but not ii and iii.
Q12 | Common property
- is owned by specific people.
- is inexhaustible.
- refers strictly to land resource.
- refers to goods “owned” by society at large and freely usable by anyone.
Q13 | Which best describes consumer surplus?
- the price consumers are willing to pay for a unit
- the cost of providing a unit
- the profits made by a firm
- the difference between the price a consumer pays for an item and the price he/she is willing to pay for it
Q14 | Which of the following statements is NOT true?In the free market changes in the price of a product:
- can act as a signal to producers
- can provide an incentive to reallocate resources
- can act as a rationing device
- are set by the government
Q15 | Community surplus equals:
- producer surplus minus consumer surplus
- profits plus utility
- total utility minus plus profit
- consumer surplus plus producer surplus
Q16 | Monopoly power in a market is likely to:
- increase consumer surplus
- increase community surplus
- lead to higher producer surplus
- lead to lower prices and lower output
Q17 | A negative production externality means:
- the social marginal cost is greater than the private marginal cost
- the social marginal benefit is greater than the private marginal cost
- the social marginal cost is greater than the private marginal benefit
- the social marginal cost is less than the private marginal cost
Q18 | A positive consumption externality occurs when:
- the social marginal cost is greater than the private marginal cost
- the social marginal benefit is greater than the private marginal benefit
- the social marginal cost is greater than the private marginal benefit
- the social marginal cost is less than the private marginal cost
Q19 | A merit good:
- is a public good
- involves a negative externality
- is overprovided in the free market
- is under provided in the free market
Q20 | A demerit good:
- is a public good
- involves a positive externality
- is overprovided in the free market
- is under provided in the free market
Q21 | A public good will probably:
- be expensive in a free market
- be overprovided in the free market
- not be provided in the free market
- has no opportunity cost
Q22 | Asymmetric information occurs when:
- information is free
- buyers and sellers have access to different information
- community surplus is maximized
- community surplus is minimized
Q23 | A situation where people who have taken out insurance behave more recklessly as a result isknown as:
- asymmetric information.
- bad luck.
- adverse selection.
- moral hazard.
Q24 | An insurance company can protect itself from moral hazard by:
- monitoring.
- imposing an ‘excess’.
- holding liquid assets
- diversification
Q25 | Taking into account the utility of all persons in society is referred to as
- a utilitarian social welfare function.
- equalizing social welfare function.
- an in-kind transfer.
- a pareto equilibrium.