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MS 2220 Final T/F
MS 2220 Final Exam Study Guide Questions
| Question | Answer |
|---|---|
| Chapter 11 | :-) |
| 1) When we speak of capital, we refer primarily to money and financial assets such as bonds and stock. | False “We refer not to money or to finanical assets such as bonds and stocks, but instead to the firm’s physical plant, equipment, inventory, and intangible assets” (pg 223) |
| 2) In economics, "investment" refers only to the creation of new capital. | True. “The term investment,when used correctly refers only to an increase in capital” (pg 223) |
| 3) Payments for capital include interest and rent | False. Interest and Profits. “Capital income is received by households in many forms, the two most important of which are interest and profits” (pg 225) |
| 4) A firm will continue investing up to the point at which the marginal revenue product of capital is equal to the interest rate. | False. MR = price of capital OR expected rate of return = interest rate |
| 5) A firm should invest as long as funds are available and the expected rate of return is greater than the interest rate. | True |
| 6) When a firm retains earnings for investment purposes, it is effectively saving on behalf of its shareholders. | True |
| 7) A considerable amount of uncertainty is involved in making investment decisions. | True. Economic forecasting. “forecasting is an inexact science because so much depends on events that cannot be foreseen” (pg 230) |
| 8) Benefits of investments are generally certain, but costs are harder to quantify and involve greater uncertainty. | False. Benefits = future profits and require forecasting whereas the costs can be evaluated with data from expected return and interest rates(pg 230) |
| 9) If the expected rate of return on an investment is 10% and the market interest rate is 12%, then the investment will be undertaken. | False. This could cause a negative return on investment. |
| 10) Savers and investors interact through intermediaries in financial capital markets. | True. “The part of the capital market in which savers and investors interact through intermediaries is often called the financial capital market” (pg 225) |
| 11) The level of household savings constrains firm investment. | True |
| 12) Owning a share of stock entitles the shareholder to a portion of the firm's profits. | True |
| 13) Venture capital funds involve very low risk. | False. “...such funds take household savings and put them into high-risk ventures...” (pg 228) |
| Chapter 16 | :-) |
| 1) Ronald Coase argued that property rights should always be assigned to the party that is harmed by the negative externality. | False (bargaining will bring parties to solution regardless of where rights are initially assigned) |
| 2) An efficient outcome can always be reached by requiring the individual who produces the externality to fully compensate individuals for any damage inflicted. | ???? |
| 3) According to the Coase theorem, bargaining will bring the contending parties to the correct solution only if the rights are initially assigned to the party causing the externality. | True |
| 4) In any case where there is a negative externality, it is better to form a government agency to solve the problem. | false |
| 5) If there are no externalities, producing where price is greater than marginal cost is inefficient because for every unit produced, consumers derive benefits that are less than the cost of the resources needed to produce it. | ????? |
| 6) Subsidies can be used to internalize positive externalities. | True |
| 7) Acid rain is an example of a negative externality. | True |
| 8) Marginal damage cost is the difference between marginal social cost and marginal cost. | True; MSC - MPC = MDC |
| 9) For the Coase Theorem to work, three conditions must be satisfied: the basic rights must be clearly understood, there must be no impediments to bargaining, and only a few parties are involved. | True |
| 10) Liability rules are laws that require party A to compensate party B for damages imposed. | True |
| 11) Externalities always involve the imposition of costs on parties outside an activity or transaction. | True |
| 12) Marginal social cost is the difference between the marginal cost and the marginal damage cost. | False; MSC= MPC + MDC |
| 13) Marginal damage costs are easily measured. | ????? |
| 14) Taxes, tradable pollution permits, and direct regulation of pollution are all market approaches to dealing with pollution. | False (Government?) |
| 15) An injunction is a court order that forbids the continuation of behavior that leads to benefits. | False (leads to damages, not benefits) |
| 16) Every good that the government provides is an example of a public good. | True |
| 17) At the optimal level of public goods provision, society's total willingness to pay per unit is equal to the marginal cost of producing the good. | True |
| 18) One of the most important characteristics of information is that it is essentially a private good. | False - information is a public good |
| 19) In the presence of market failure, government involvement will lead to efficient outcomes. | False |
| 20) Logrolling is a questionable practice that always leads to decidedly inefficient results | False (efficient!) |
| 21) The impossibility theorem, demonstrated by Paul Samuelson, shows that it is impossible to have public officials behave in a manner consistent with the best interests of society. | False (Kenneth Arrow) |
| 22) The voting paradox demonstrates how majority-rule voting can lead to contradictory and inconsistent results. | True |
| 23) The public choice field in economics views public officials as having a significant capacity to make inefficient choices and to produce bureaucratic waste. | ????? |
| 24) Industries that lobby public officials for favorable treatment, softer regulation, and or antitrust exemption are engaged in rent-seeking. | True |
| 25) Governments will likely achieve the optimal level of public goods, but not the correct amount of control over externalities. | False |
| 26) In the presence of externalities and public goods, we get closer to the efficient allocation of resources through government intervention than by leaving everything to the market. | ???? |
| Chapter 17 | :-) |
| 1) Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet. | False (Expected value is greater than zero) |
| 2) Expected value and expected utility are synonyms. | False |
| 3) If a game is a fair bet, then people will be willing to play the game regardless of the payoffs. | False |
| 4) For a risk averse individual, marginal utility of income does not diminish. | False |
| 5) A diagram of an individual's utility from income will be a line with a constant slope if the individual is risk neutral. | True |
| 6) A diagram of an individual's utility from income will be a line with an increasing slope if the individual is risk averse. | True |
| 7) In general, risk averse individuals experience diminishing marginal utility from income. | Flase |
| 8) Adverse selection is a situation in which asymmetric information results in low-quality goods or low-quality consumers being squeezed out of transactions because they are unable to demonstrate their quality. | False; should be high for both instead of low |
| 9) Moral hazard occurs when one party to a contract changes his behavior in response to that contract and thus passes on costs of that behavior to the other party. | True |
| 10) Adverse selection and moral hazard are problems that arise in the presence of asymmetric information. | True |
| 11) The insurance industry is susceptible to adverse selection problems, but not problems of moral hazard. | False |
| 12) Jim used to be very careful with his car. However, once he bought full auto insurance on it, he stopped turning on his alarm or even locking it when parking it. This is an example of adverse selection. | False |
| 13) Annie, a high school student, baby sits to earn extra cash. In order to differentiate herself from other baby sitters, Annie took a babysitting course from the Red Cross. This is an example of a market signal. | True |
| 14) Refer to the Economics in Practice on page 361. Advertisements provide information in two ways—what they say and what they omit. | True |
| 15) Labor market compensation contracts can be designed to screen out poor quality workers as well as provide employees with incentives to work hard. | True |
| 16) Performance compensation that is tied to outcomes out of the employee's control will provide employees with the incentive to work hard. | True |
| 17) Mechanism design can be used to provide employers and employees with the right incentives in labor markets. | True |
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savelae
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