Quiz 10 – Fifty Concepts in Economic Analysis

… an Atlas quiz for Atlas206 Internship Reading

microeconomicsConcept comprehension questions on
Fifty Concepts in Economic Analysis

Note: All 15 quizzes for Atlas206 Internship Reading are available at Concept Quizzes for Atlas206 Internship Reading.

CCQ206.10.01. Among the statements a-d pertaining to marginal and marginalism choose the one that is invalid or choose e if all are reasonably valid.

a. Marginal can be defined as the difference made by one extra unit of something.

b. The marginal cost (or whatever) can be very different from the average cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever).

c. Sensible choice usually requires comparing average benefit (or utility) and average cost.

d. One of the benefits of training in economic analysis is learning to recognize that small incremental changes can matter enormously and that thinking “at the margin” can lead to better economic decision making than thinking about the averages.

e. All of a-d are reasonably valid.

CCQ206.10.02. Among the statements a-d pertaining to unintended consequences choose the one that is invalid or choose e if all are reasonably valid.

a. The law of unintended consequences is that actions of people – and especially of government – always have effects that are unanticipated or unintended.

b. Economists and other social scientists have heeded the power of the law of unintended consequences for centuries; for just as long, politicians and popular opinion have largely ignored it.

c. The nineteenth century French economic journalist Frédéric Bastiat wrote: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

d. One of the benefits of training in economic analysis is to be better able to anticipate and articulate the unintended consequences of a policy initiative.

e. All of a-d are reasonably valid.

CCQ206.10.03. Among the statements a-d pertaining to “There ain’t no such thing as a free lunch” choose the one that is invalid or choose e if all are reasonably valid.

a. The term “free lunch” is used to describe a situation in which a good or service is received at no cost, with the true cost of the good or service ultimately borne by some party, which may even include the recipient.

b. “There ain’t no such thing as a free lunch” expresses the idea that even if something seems like it is free, there is always a cost, no matter how indirect or hidden.

c. One of the benefits of training in economic analysis is learning to account for the indirect and hidden costs of a policy initiative.

d. Invocations of “no free lunch” are more likely to be used by advocates of an increased public sector role than those who purport to represent the interests of taxpayers and businesses.

e. All of a-d are reasonably valid.

CCQ206.10.04. Among the statements a-d pertaining to market failure choose the one that is invalid or choose e if all are reasonably valid.

a. Market failure occurs when a market left to itself does not allocate resources efficiently.

b. Abuse of market power (when a single buyer or seller can exert significant influence over prices or output) is one of the four main sorts of market failure.

c. The existence of externalities and the need to provide public goods are two of the four main sorts of market failure.

d. The fourth source of market failure is uncertainty and incomplete or asymmetric information.

e. All of a-d are reasonably valid.

CCQ206.10.05. Among the statements a-d pertaining to economics and ideology choose the one that is invalid or choose e if all are reasonably valid.

a. Given the scientific nature of the subject matter, economics and economists are rarely associated with ideology, that is to a set of ideas and beliefs associated with values and politics.

b. In economics, the evidence rarely delivers clear answers.

c. Lack of definitive evidence leads to ongoing disputes among economists, and since ideology influences the questions researchers ask, these disputes are often viewed along ideological lines.

d. One of the benefits of training in economic analysis is to be better able to see the influence of ideology on economic assertions made by commentators and organizations.

e. All of a-d are reasonably valid.

CCQ206.10.06. Among the statements a-d pertaining to behavioural economics choose the one that is invalid or choose e if all are reasonably valid.

a. Behavioural economics tries to augment or replace traditional ideas of economic rationality (homo economicus) with decision-making models borrowed from psychology.

b. Examples of psychological phenomena relevant to behavioural economics include cognitive dissonance (holding on to a belief plainly at odds with new evidence, usually because the belief has been held and cherished for a long time) and status quo bias (being willing to take bigger gambles to maintain the status quo than to acquire it in the first place).

c. Examples of psychological phenomena relevant to behavioural economics include anchoring (being overly influenced by outside suggestion) and hindsight bias (once something happens people overestimate the extent to which they could have predicted it).

d. Although traditional utility theory assumes that people make individual decisions in the context of the big picture, psychologists have found that they generally compartmentalise, often on superficial grounds, and then make choices about things in one particular mental compartment without taking account of the implications for things in other compartments.

e. All of a-d are reasonably valid.

CCQ206.10.07. Among the statements a-d pertaining to the demand curve choose the one that is invalid or choose e if all are reasonably valid.

a. The demand curve shows how much of a good people are willing to buy at different prices.

b. Reading the demand curve vertically, the it shows the maximum price buyers are willing to pay for a given quantity.

c. Reading the demand curve horizontally, it shows the quantity buyers are willing to purchase at different prices.

d. A demand curve is a function that shows the quantity demanded at different prices.

e. All of a-d are reasonably valid.

CCQ206.10.08. Among the statements a-d pertaining to the term market equilibrium choose the one that is invalid or choose e if all are reasonably valid.

a. At equilibrium, the price is stable and gains from trade are maximized.

b. The equilibrium price is the result of competition amongst buyers and sellers.

c. Buyers compete directly with sellers and vice versa to achieve market equilibrium.

d. When the price is not at equilibrium, a shortage or a surplus occurs.

e. All of a-d are reasonably valid.

CCQ206.10.09. Among the statements a-d pertaining to the elasticity of demand choose the one that is invalid or choose e if all are reasonably valid.

a. The elasticity of demand is a measure of how responsive the quantity demanded is to a change in price.

b. For goods with fewer substitutes, consumers find it hard to adjust quantity demanded when prices change, making demand inelastic.

c. Demand is considered inelastic if the absolute value of elasticity is less than 1; demand is elastic when the absolute value of elasticity is greater than 1.

d. The narrower the classification (e.g., Bayer aspirin), the less likely consumers will be able to find a substitute, making demand inelastic.

e. All of a-d are reasonably valid.

CCQ206.10.10. Among the statements a-d pertaining to commodity taxes choose the one that is invalid or choose e if all are reasonably valid.

a. A commodity tax is a tax on goods or services.

b. Commodity taxation raises revenue and creates lost gains from trade (dead weight loss).

c. The economic incidence of the tax does not depend on the legal incidence of the tax.

d. Who pays the tax does not depend on the relative elasticities of demand and supply.

e. All of a-d are reasonably valid.

CCQ206.10.11. Among the statements a-d pertaining to subsidies choose the one that is invalid or choose e if all are reasonably valid.

a. A subsidy can be thought of as a negative, or reverse, tax where the government gives money to consumers or producers.

b. Subsidies are preferred over taxes because they create efficient trades and minimize deadweight loss.

c. Who benefits from the subsidy does depend on the relative elasticities of demand and supply.

d. Who gets the subsidy does not depend on who receives the cheque from the government.

e. All of a-d are reasonably valid.

CCQ206.10.12. Among the statements a-d pertaining to the burden of a tax choose the one that is invalid or choose e if all are reasonably valid.

a. The economic incidence (who bears the burden) of a tax differs from the legal incidence (who writes the cheque to the government) in ways that depend on the relative elasticities of supply and demand.

b. The more elastic side of the market will pay a smaller share of the tax (smaller burden).

c. The less elastic (more inelastic) side of the market will pay a greater share of the tax (greater burden).

d. These principles imply that, because the supply of labour tends to be more elastic than the demand for labour, the burden of payroll taxes falls primarily on employers.

e. All of a-d are reasonably valid.

CCQ206.10.13. Among the statements a-d pertaining to the benefit of a subsidy choose the one that is invalid or choose e if all are reasonably valid.

a. The economic incidence of a subsidy is different from the legal incidence in ways that depend on the relative elasticity of demand and supply.

b. The more elastic side of the market will receive a smaller share of the subsidy.

c. The more elastic side of the market will receive a larger share of the subsidy.

d. The proposition “no elasticity = no entry” can be used to think about who receives the benefit of a subsidy because, where supply is highly inelastic relative to the demand, other suppliers cannot enter the market to share the subsidy and most of a producer subsidy will stay with the producers.

e. All of a-d are reasonably valid.

CCQ206.10.14. Among the statements a-d pertaining to price as a signal and incentive choose the one that is invalid or choose e if all are reasonably valid.

a. Price can be viewed as a signal wrapped up in an incentive.

b. An increase in the price of oil is a signal on how to respond and gives users of oil an incentive to respond – by using less oil or substituting lower-cost alternatives for oil.

c.  The price system allows for people with dispersed knowledge and information about the production of any commodity to coordinate global economic activity.

d. Friederich Hayek has written that the most significant fact about the price system is “the economy of knowledge with which it operates … only the most essential information is passed on only to those concerned.”

e. All of a-d are reasonably valid.

CCQ206.10.15. Among the statements a-d pertaining to price ceilings choose the one that is invalid or choose e if all are reasonably valid.

a. Price ceilings create wasteful lines and other search costs.

b. Price ceilings create shortages.

c. Price ceilings lead to reductions in quality.

d. Price ceilings create no beneficiaries.

e. All of a-d are reasonably valid.

CCQ206.10.16. Among the statements a-d pertaining to price floors choose the one that is invalid or choose e if all are reasonably valid.

a. A minimum wage is an example of a price floor.

b. A minimum wage creates a surplus.

c. A minimum wage creates lost gains from trade.

d. A price floor leads to reductions in quality.

e. All of a-d are reasonably valid.

CCQ206.10.17. Among the statements a-d pertaining to why governments enact price controls choose the one that is invalid or choose e if all are reasonably valid.

a. Despite the negative consequences, governments frequently adopt price controls.

b. Price controls are often popular, at least when initially implemented.

c. Price controls usually become widely unpopular in the longer run.

d. The economic and social costs associated with price controls are less visible than the benefits, particularly to those without training in economics.

e. All of a-d are reasonably valid.

CCQ206.10.18. Among the statements a-d pertaining to the term externality choose the one that is invalid or choose e if all are reasonably valid.

a. An externality is an economic side-effect – a cost or benefit arising from an activity and not reflected fully in prices.

b. An externality is an economic side-effect that occurs when production or consumption of one party affects the production or consumption of another party.

c. An example of an externality is how pollution from one company affects the health of individuals and the environment.

d. Getting a flu shot is an example of an externality because it provides benefit beyond the individual receiving the shot.

e. All of a-d are reasonably valid.

CCQ206.10.19. Among the statements a-d pertaining to the distinction between command and control solutions versus taxes and subsidies choose the one that is invalid or choose e if all are reasonably valid.

a. In comparing public policy options for addressing an externality (such as air pollution from electricity generation) Pigouvian taxes and subsidies are more efficient than using a command and control regulatory approach (such as mandating the maximum energy consumption of washing machines) if there are many ways to technical ways to address the externality.

b. Command and control may be the best solution if the best way to address the externality is well known and success requires strong compliance.

c. Pigouvian taxes and subsidies allow producers and users to find the lowest cost ways to reduce their production or use of a particular commodity.

d. Pigouvian taxes and subsidies would likely have enabled the isolation and vaccinate strategy to eliminate smallpox more quickly and at lower cost than the command and control approach used health authorities around the world.

e. All of a-d are reasonably valid.

CCQ206.10.20. Among the statements a-d pertaining to social surplus choose the one that is invalid or choose e if all are reasonably valid.

a. Social surplus is ultimately what we care about because we care about not just consumers and producers, we care about everyone.

b. When there are significant external costs or benefits the market will not maximize social surplus.

c. Social surplus is the benefit produced by people working together.

d. Social surplus is the sum of consumer surplus, producer surplus, and bystander surplus.

e. All of a-d are reasonably valid.

CCQ206.10.21. Among the statements a-d pertaining to efficient equilibrium choose the one that is invalid or choose e if all are reasonably valid.

a. When there is a significant external cost associated with the activity, the efficient equilibrium will be different from the market equilibrium.

b. Efficient equilibrium as the point at which private demand intersects the social cost curve.

c. When there is a significant external cost associated with the activity, efficient equilibrium is the intersection of the demand curve and the supply curve that reflects the private cost of provision.

d. There will be a deadweight loss if the market equilibrium is different from the efficient equilibrium.

e. All of a-d are reasonably valid.

CCQ206.10.22. Among the statements a-d pertaining to deadweight loss choose the one that is invalid or choose e if all are reasonably valid.

a. Deadweight loss is the extent to which the value and impact of a tax, tax relief, or subsidy is reduced because of side effects.

b. Deadweight loss occurs when there is significant external cost associated with the activity because efficient and market equilibrium are the same.

c. Deadweight loss can be reduced through well designed public policies.

d. On a graph of quantity vs. price, the deadweight loss is the triangle formed from the difference between the efficient equilibrium on the social cost curve and the market equilibrium.

e. All of a-d are reasonably valid.

CCQ206.10.23. Among the statements a-d pertaining to transaction costs choose the one that is invalid or choose e if all are reasonably valid.

a. Transaction costs are the costs incurred during the process of buying or selling, on top of the price of whatever is changing hands.

b. Transaction costs include search and information costs, such as those in determining that the required good is available on the market and which has the lowest price.

c. Transaction costs include bargaining costs – the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on.

d. Transaction costs do not include policing and enforcement – the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

e. All of a-d are reasonably valid.

CCQ206.10.24. Among the statements a-d pertaining to average cost choose the one that is invalid or choose e if all are reasonably valid.

a. Average cost as the opportunity cost incurred per unit of good produced.

b. Average cost = total cost / quantity of output.

c. Average total cost is per unit total cost, or total cost divided by the quantity of output produced.

d. Average total cost is the sum of average fixed cost and average variable cost.

e. All of a-d are reasonably valid.

CCQ206.10.25. Among the statements a-d pertaining to marginal cost choose the one that is invalid or choose e if all are reasonably valid.

a. The marginal cost of production is the change in total cost that comes from making or producing one additional item.

b. When the average cost declines, the marginal cost is more than the average cost.

c. Increasing production may increase or decrease the marginal cost, because the marginal cost includes all costs such as labour, materials, and the cost of infrastructure.

d. Perfectly competitive firms continue producing output until marginal revenue equals marginal cost.

e. All of a-d are reasonably valid.

CCQ206.10.26. Among the statements a-d pertaining to fixed costs choose the one that is invalid or choose e if all are reasonably valid.

a. Fixed costs are production costs that do not change when the quantity of output produced changes.

b. Fixed costs are crucial to account for in determining the number of units to produce to maximize profit in the short term.

c. Fixed costs are not permanently fixed; they will change over time, but are fixed in relation to the quantity of production for the relevant period.

d. By definition, there are no fixed costs in the long run, because the long run is a sufficient period of time for all short-run fixed inputs to become variable.

e. All of a-d are reasonably valid.

CCQ206.10.27. Among the statements a-d pertaining to variable costs choose the one that is invalid or choose e if all are reasonably valid.

a. Variable costs as the part of a firm’s production costs that changes according to how much output it produces.

b. Variable costs are not affected by the level or nature of fixed costs.

c. In the long run, most costs can be varied.

d. Variable costs are the sum of marginal costs over all units produced.

e. All of a-d are reasonably valid.

CCQ206.10.28. Among the statements a-d pertaining to sunk costs choose the one that is invalid or choose e if all are reasonably valid.

a. Sunk costs are costs that once incurred can never be recovered.

b. Sunk costs need to be fully accounted for and incorporated into decisions about future spending and production.

c. Since decision-making only affects the future course of business, sunk costs should be irrelevant in the decision-making process.

d. The sunk cost fallacy is people being more likely to continue with a project if they have already invested a lot of money, time, or effort in it, even when continuing is effectively “throwing good money after bad.”

e. All of a-d are reasonably valid.

CCQ206.10.29. Among the statements a-d pertaining to the production possibility frontier choose the one that is invalid or choose e if all are reasonably valid.

a. The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.

b. The PPF measures the efficiency in which two commodities can be produced together, helping managers and leaders decide what mix of commodities are most beneficial.

c. The PPF drives home the idea that opportunity costs normally come up when an economic organization with limited resources must decide between two alternatives.

d. If a government organization is deciding between the production mix of textbooks and computers, and it can produce either 40 textbooks and 7 computers or 70 text books and 3 computers, it’s up to that organization to determine what it needs more. In this example, the opportunity cost of producing an additional 30 textbooks is 4 computers.

e. All of a-d are reasonably valid.

CCQ206.10.30. Among the statements a-d pertaining to creative destruction choose the one that is invalid or choose e if all are reasonably valid.

a. Creative destruction is the term coined by Joseph Schumpeter (1883-1950) to describe the market’s messy way of delivering progress.

b. Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system.

c. The social dislocation accompanying the processes of creative destruction can undermine public confidence in the political and economic system.

d. Societies that have allowed creative destruction to operate have grown more productive and richer with most of their citizens enjoying the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

e. All of a-d are reasonably valid.

CCQ206.10.31. Among the statements a-d pertaining to comparative advantage choose the one that is invalid or choose e if all are reasonably valid.

a. Comparative advantage is one of the oldest theories in economics, usually ascribed to David Ricardo, and underpins the economic case for free trade.

b. The principle of comparative advantage illustrates that countries can gain from trading with each other even if one of them is more efficient in the production of all goods and services.

c. It is impossible for a country to have no comparative advantage in anything.

d. In a bilateral relationship the dynamics of trade ensure that each country’s comparative advantage remains stable over time.

e. All of a-d are reasonably valid.

CCQ206.10.32. Among the statements a-d pertaining to absolute advantage choose the one that is invalid or choose e if all are reasonably valid.

a. Absolute advantage is the simplest yardstick of economic performance – if one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers.

b. Trade between countries is based on absolute advantage with the country with the highest absolute advantage in producing a given commodity tending to dominate global markets in that commodity.

c. Absolute advantage can change dramatically over time.

d. Being the best at something does not mean that doing that thing is the best way to use your scarce economic resources.

e. All of a-d are reasonably valid.

CCQ206.10.33. Among the statements a-d pertaining to division of labour choose the one that is invalid or choose e if all are reasonably valid.

a. Division of labour refers to the division of a large task, contract, or project into smaller tasks – each with a separate schedule within the overall project schedule.

b. Division of labour can be described as people being better off specializing than trying to be jacks of all trades and masters of none.

c. The logic of dividing the workforce into different crafts and professions is the same as that underpinning the case for free trade – everybody benefits from doing those things in which they have a comparative advantage.

d. Specialized capabilities may include equipment or natural resources in addition to skills and training and complex combinations of such assets are often important, as when multiple items of specialized equipment and skilled operators are used to produce a single product.

e. All of a-d are reasonably valid.

CCQ206.10.34. Among the statements a-d pertaining to Pareto efficiency choose the one that is invalid or choose e if all are reasonably valid.

a. Pareto efficiency as a situation in which nobody can be made better off without making somebody else worse off.

b. The Pareto frontier is the set of all Pareto efficient allocations, conventionally shown graphically.

c. A production-possibility frontier is an example of a Pareto-efficient frontier.

d. Pareto efficiency is equivalent to a socially desirable distribution of resources.

e. All of a-d are reasonably valid.

CCQ206.10.35. Among the statements a-d pertaining to monopoly choose the one that is invalid or choose e if all are reasonably valid.

a. Monopoly is a situation when the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output.

b. Typically, a monopoly will produce more, at a higher price, than would be the case for the entire market under perfect competition.

c. To maximize profit a monopolist would determine its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then set whatever price would enable it to sell exactly that quantity.

d. In practice, few monopolies are absolute, and their power to set prices or limit supply is constrained by some actual or potential near-competitors.

e. All of a-d are reasonably valid.

CCQ206.10.36. Among the statements a-d pertaining to price discrimination choose the one that is invalid or choose e if all are reasonably valid.

a. Price discrimination is the practice of selling the same product at different prices.

b. If demand curves are different, it is more profitable to set different prices in different markets – the price should be higher in the market with then more elastic demand.

c. In social welfare terms, if price discrimination increases output, it is likely to be beneficial.

d. Selective universities practice price discrimination by providing income-based financial aid.

e. All of a-d are reasonably valid.

CCQ206.10.37. Among the statements a-d pertaining to barriers to entry choose the one that is invalid or choose e if all are reasonably valid.

a. Barriers to entry is how firms keep out competition – an important source of incumbent advantage.

b. An example of a barrier to entry is where a firm owns a crucial resource, such as an oil well, or where a firm has an exclusive operating licence, for instance, to broadcast on a particular radio wavelength.

c. An example of a barrier to entry is where a big firm with economies of scale has a significant competitive advantage because it can produce a large output at lower costs than can a smaller potential rival.

d. An incumbent firm may make it hard for a would-be entrant by incurring huge sunk costs, spending lots of money on things such as advertising, which any rival must match to compete effectively but which have no value if the attempt to compete should fail.

e. All of a-d are reasonably valid.

CCQ206.10.38. Among the statements a-d pertaining to economies of scale choose the one that is invalid or choose e if all are reasonably valid.

a. Economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

b. Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well.

c. Because long run average cost curves in most industries tend to continue to fall, most industries would become monopolies in the absence of government intervention.

d. Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades frequently and so may avoid specialty grades even though they have higher margins leaving a niche for smaller (usually older) manufacturing facilities to remain viable by changing from commodity grade production to specialty products.

e. All of a-d are reasonably valid.

CCQ206.10.39. Among the statements a-d pertaining to human capital choose the one that is invalid or choose e if all are reasonably valid.

a. Human capital can be viewed as tools of the mind, the stuff in people’s heads that makes them productive.

b. Human capital can be increased by investing in education, training, and health care.

c. Human capital is relatively easy to measure and compare, within the same country over time, and between countries.

d. The accumulation of human as well as physical capital (plant and machinery) is a crucial ingredient of economic growth, par­ticularly in the new economy.

e. All of a-d are reasonably valid.

CCQ206.10.40. Among the statements a-d pertaining to human capital and signaling choose the one that is invalid or choose e if all are reasonably valid.

a. There is a clear correlation between earnings and degree completion.

b. Degree completion signals factors in addition to human capital accumulation – including the factors associated with admissions.

c. To determine the role of human capital on earnings one should distinguish between the contribution to earnings from increased knowledge and the contribution from the signaling effect of a credential.

d. It has been demonstrated that the contribution of education to earnings is due human capital rather than “sheepskin effects” – the signaling value of the credential.

e. All of a-d are reasonably valid.

CCQ206.10.41. Among the statements a-d pertaining to the term public good choose the one that is invalid or choose e if all are reasonably valid.

a. Public goods have two distinct aspects – nonexcludability and nonrivalrous consumption.

b. Nonexcludability means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive.

c. An example of nonrivalrous consumption is when non-payers can watch a show without increasing the show’s cost or diminishing everyone else’s enjoyment.

d. Nonrivalrous consumption is usually considered the more important aspect of a public good.

e. All of a-d are reasonably valid.

CCQ206.10.42. Among the statements a-d pertaining to the term common resource choose the one that is invalid or choose e if all are reasonably valid.

a. A common resource is a non-excludable and non-rival good.

b. A common resource is an non-excludable but rival good.

c. No one can be excluded from fishing for tuna, but they are rival – for every tuna caught, there is one less for everyone else.

d. Non-excludable but rival resources often lead to what we call a “tragedy of the commons.”

e. All of a-d are reasonably valid.

CCQ206.10.43. Among the statements a-d pertaining to the term free riding choose the one that is invalid or choose e if all are reasonably valid.

a. Free riding is the illegal act of getting the benefit of a good or service without paying for it.

b. There can be a free-rider problem in situations where the number of people willing to pay for the good or service is not enough to cover the cost of providing it.

c. Public goods are often at risk of free riding.

d. The problem of free-riding can be overcome by financing the good by imposing a tax on the entire population.

e. All of a-d are reasonably valid.

CCQ206.10.44. Among the statements a-d pertaining to the term tragedy of the commons choose the one that is invalid or choose e if all are reasonably valid.

a. The tragedy of the commons as an economic theory of a situation within a shared-resource system where individual users acting independently and rationally according to their own self-interest behave contrary to the common good of all users by depleting that resource.

b. The tragedy of the commons is often cited in connection with sustainable development.

c. Although commons have been known to collapse due to overuse many examples exist which prosper without collapse.

d. The tragedy of the commons has also been used in analyzing behaviour in the fields of evolutionary psychology and anthropology.

e. All of a-d are reasonably valid.

CCQ206.10.45. Among the statements a-d pertaining to the term asymmetric information choose the one that is invalid or choose e if all are reasonably valid.

a. Asymmetric information is defined as somebody knowing more than somebody else.

b. Asymmetric information can make it difficult for the two people to do business together.

c. Asymmetric information will lead to propitious selection.

d. Asymmetric information can distort people’s incentives and result in significant inefficiencies.

e. All of a-d are reasonably valid.

CCQ206.10.46. Among the statements a-d pertaining to the term moral hazard choose the one that is invalid or choose e if all are reasonably valid.

a. Moral hazard refers to the idea that when one party has an information advantage, they may have an incentive to exploit the other party.

b. Moral hazard refers to the notion that people with insurance may take greater risks than they would do without it because they know they are protected.

c. A solution to moral hazard is to make information less asymmetric, meaning both parties have similar information.

d. A solution to moral hazard is to reduce the incentive of the agent to exploit their information advantage.

e. All of a-d are reasonably valid.

CCQ206.10.47. Among the statements a-d pertaining to the term signaling choose the one that is invalid or choose e if all are reasonably valid.

a. Signaling is a solution to one of the biggest sources of market failure.

b. An example of signaling is attending a leading university to become more attractive to employers.

c. Signaling is an action that reveals information.

d. Signaling is a solution to asymmetric information.

e. All of a-d are reasonably valid.

CCQ206.10.48. Among the statements a-d pertaining to the term adverse selection choose the one that is invalid or choose e if all are reasonably valid.

a. Adverse selection is one of two main sorts of market failure often associated with insurance – the other being moral hazard.

b. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer; in particular, insurance will often not be profitable when buyers have better information about their risk of claiming than does the seller.

c. When there is adverse selection, people who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying.

d. Adverse selection is exacerbated when purchase of insurance is compulsory.

e. All of a-d are reasonably valid.

CCQ206.10.49. Among the statements a-d pertaining to game theory choose the one that is invalid or choose e if all are reasonably valid.

a. Game theory is a technique for analysing how people, firms and governments should behave in strategic situations (in which they must interact with each other), and in deciding what to do must take into account what others are likely to do and how others might respond to what they do.

b. Competition between two firms can be analysed as a game in which firms play to achieve a long-term competitive advantage for example in anticipating in advance what its competitor will do in response to a price increase.

c. In game theory, which can be used to describe anything from wage negotiations to arms races, a dominant strategy is one that will deliver the best results for the player, regardless of what anybody else does.

d. Game theory is based on assumption of utility maximization and therefore not well suited to application within the public sector.

e. All of a-d are reasonably valid.

CCQ206.10.50. Among the statements a-d pertaining to the prisoners’ dilemma choose the one that is invalid or choose e if all are reasonably valid.

a. The prisoners’ dilemma as a favourite example in game theory showing why co-operation is difficult to achieve even when it is mutually beneficial.

b. Two prisoners have been arrested for the same offence and are held in different cells and each has two options (confess, or say nothing) and there are three possible outcomes – 1) one could confess and agree to testify against the other as state witness, receiving a light sentence while his fellow prisoner receives a heavy sentence; 2) they can both say nothing and may be lucky and get light sentences or even be let off, owing to lack of firm evidence; 3) they may both confess and probably get lighter individual sentences than one would have received had he said nothing and the other had testified against him.

c. The second outcome would be the best for both prisoners but the risk is that the other might confess and turn state witness is likely to encourage both to confess, landing both with sentences that they might have avoided had they been able to co-operate in remaining silent.

d. An example of the prisoners’ dilemma is an oligopoly where firms often behave like these prisoners, not setting prices as high as they could do if they only trusted the other firms not to undercut them and as a result, they are worse off.

e. All of a-d are reasonably valid.

Page created by: Ian Clark, last modified on 2 June 2017.

Image: Triple A Learning, at http://web.sis.edu.hk/Departments/EcoBus/microeconomics_11/page_01.htm, accessed 1 April 2016.