Economic Analysis
Mock Exam
Course Introduction
Economic Analysis explores the tools and techniques used to examine how individuals, businesses, and governments allocate scarce resources to satisfy competing needs. The course covers fundamental concepts of microeconomics and macroeconomics, including supply and demand, market structures, consumer and producer behavior, pricing mechanisms, and the role of government intervention. Students will learn to apply economic reasoning to real-world issues such as market efficiency, policy evaluation, and the impacts of economic decisions on society. Emphasis is placed on critical thinking and quantitative analysis to interpret and solve contemporary economic problems.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 1st Edition by Thomas Nechyba
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Chapter 1: Introduction
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Sample Questions
Q1) When economists say that policy A is more efficient than policy B,they mean policy A is better than policy B.
A)True
B)False
Answer: False
Q2) One of the aims of positive economics is to rank policies under consideration from most desirable to least desirable.
A)True
B)False Answer: False
Q3) When economists assume that people are rational,they are assuming that people generally agree what is good for human beings.
A)True
B)False Answer: False
Q4) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Sample Questions
Q1) Derive the budget line equation for the case where good 1 is a composite good.What is the vertical intercept and what is the slope?
Answer: Since p<sub>1</sub> = 1,the usual budget line equation x<sub>2</sub>=I/p<sub>2</sub> - (p<sub>1</sub>/p<sub>2</sub>)x<sub>1</sub> becomes x<sub>2</sub>=I/p<sub>2</sub> - (1/p<sub>2</sub>)x<sub>1</sub>,an equation with a vertical intercept of I/p<sub>2</sub> and a slope of - (1/p<sub>2</sub>).
Q2) Kinks in budget constraints always produce non-convexities in choice sets.
A)True
B)False
Answer: False
Q3) For choice sets generated from endowment bundles,the budget line will shift parallel if both prices change by the same proportion.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) A decrease in a wage taxes causes the opportunity cost of leisure to increase. A)True
B)False
Answer: True
Q2) A bond that promises to pay $X in 10 years must be worth less than $X now.
A)True
B)False
Answer: True
Q3) Since interest rates for borrowing are usually higher than interest rates for savings,the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.
A)True
B)False
Answer: False
Q4) Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour. Answer: Equation: \(c = 2500 - 25 \ell\) Choice Set: \(C = \left\{ ( c , \ell ) \in R _ { + } ^ { 2 } \mid c = 2500 - 25 \ell \right\}\)
Page 5
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) When the price of beer goes up,our model of tastes would typically require tastes to change.
A)True
B)False
Q2) You like bundle A better than bundle B,and bundle C is an average between A and B.If your tastes satisfy convexity,then C is at least as good as A and as B.
A)True
B)False
Q3) If you observe me choosing bundle A over bundle B on Monday,bundle B over bundle C on Tuesday and bundle C over bundle A on Wednesday,it must be that my tastes violate transitivity.
A)True
B)False
Q4) Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.
Q5) Explain the following statement: For the same individual,tastes over goods may vary at the margin as we move from one bundle to another.
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Chapter 5: Different Types of Tastes
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Sample Questions
Q1) If tastes are Cobb-Douglas,they can be represented by a utility function that is homogeneous of degree k where k can take on any positive value.
A)True
B)False
Q2) Suppose consumer cannot taste the difference between Miller Lite and Bud Light,but Miller Lite is sold in 12 ounce cans while Bud Light is sold in 8 ounce cans.In a graph with cans of Miller Lite on the horizontal and cans of Bud Light on the vertical axis,which of the following is the correct slope for this consumer's indifference curves:
a.
\(- \frac { 2 } { 3 }\)
b. -1
c.
\(- \frac { 3 } { 2 }\)
d.
There is not enough information to tell.
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Chapter 6: Doing the Best We Can
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Sample Questions
Q1) Suppose you solve a consumer's constrained 2-good optimization problem for a given economic environment --- and your answer contains a negative consumption level of good 2.Which of the following is a valid conclusion on your part:
a.
The true optimum has the consumer consume none of good 1. b.
The true optimum has the consumer consume none of good 2.
c.
There are multiple "true" optimal consumption bundles.
d.
The consumer will sell good 2.
e.
None of the above.
Q2) Suppose that choice sets are convex.State assumptions about tastes that are necessary and sufficient to guarantee that the solution to the consumer optimization problem is a unique interior solution.(Explain)
Q3) Which of the following statements is correct and which is not? Explain why.
a.When we all face the same prices,our tastes become the same.
b.When we all face the same prices,our tastes become the same at the margin.
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Sample Questions
Q1) A change in the price of one good cannot leave utility unchanged unless the price change is accompanies by a change in income.
A)True
B)False
Q2) The price of peaches goes up and I observe you buying fewer strawberries.This implies strawberries must be a normal good.
A)True
B)False
Q3) Bottles of Coca-Cola and equally-sized bottles of Pepsi Cola are perfect substitutes for a consumer,but a bottle of Coke costs 10 cents less than bottles of Pepsi.The income effect of a 15 cent increase in the price of Pepsi will be for the consumer to drink less cola.
A)True
B)False
Q4) Except for the case of Giffen goods,the substitution effect always tells us that a consumer will consume less (or at least no more)of a good whose price has increased.
A)True
B)False
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Sample Questions
Q1) If leisure is an inferior good,then an increase in wages will cause workers to work more.
A)True
B)False
Q2) In a model with leisure hours and a composite consumption good,you cannot tell whether workers will work more or less if tastes are quasilinear in the consumption good.
A)True
B)False
Q3) Taxing savings in ways that lower the interest rate received by savers will lower savings.
A)True
B)False
Q4) When tastes over current and future consumption take the Cobb-Douglas form,interest rates have no impact on savings when income is earned in the current period but not in the future.
A)True
B)False
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Chapter 9: Demand for Goods and Supply of Labor and Capital
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Sample Questions
Q1) Leisure being a normal good is neither necessary nor sufficient for labor supply to slope up.
A)True
B)False
Q2) The empirically observed backward-bending labor supply curve cannot arise from homothetic tastes.
A)True
B)False
Q3) When tastes are quasilinear in leisure,the labor supply curve is vertical.
A)True
B)False
Q4) For the same sized substitution effect,own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.
A)True
B)False
Q5) If a good is quasilinear,its own-price demand curve is vertical.
A)True
B)False
11
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Chapter 10: Consumer Surplus and Deadweight Loss
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Sample Questions
Q1) For perfect complements,the (uncompensated)demand curve slopes down and the compensated demand (or MWTP)curve is perfectly vertical.
A)True
B)False
Q2) Explain the following statement: "People hate taxes primarily because of income effects while economists hate taxes primarily because of substitution effects."
Q3) Consumer surplus is accurately measured along (uncompensated)demand curves when tastes are quasilinear.
A)True
B)False
Q4) When tastes are not quasilinear,the positive economist will introduce error into the analysis if he uses the uncompensated (rather than the compensated)demand curve to predict behavior.
A)True
B)False
Q5) Indirect utility functions are homogeneous of degree 1 in income.
A)True
B)False
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) Whenever average cost is increasing,marginal cost must also be increasing.
A)True
B)False
Q2) If income effects are sufficiently strong,it may be the case that labor demand curves slope up.
A)True
B)False
Q3) In the one-input model of production,increasing marginal product implies non-convexity of the producer choice set.
A)True
B)False
Q4) The output level is constant along any isoprofit line.
A)True
B)False
Q5) Labor demand curves always slope down.
A)True
B)False
Q6) Labor demand curves are homogeneous of degree zero.
A)True
B)False Page 13
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Chapter 12: Production With Multiple Inputs
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Sample Questions
Q1) An increasing returns to scale production function could be quasiconcave.
A)True
B)False
Q2) If producer choice sets are convex and a production plan satisfies the condition that the (marginal)technical rate of substitution is equal (in absolute value)to the ratio of input prices,then the production plan is profit maximizing.
A)True
B)False
Q3) Production technologies A and B can have the same-shaped isoquant map,with technology A having decreasing returns to scale and technology B having increasing returns to scale.
A)True
B)False
Q4) Changing the labels on isoquants without changing the shapes of the isoquants implies no change in the underlying technology so long as the ordering of isoquants is preserved.
A)True
B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) Long run marginal cost curves are increasing for decreasing returns to scale production technologies.
A)True
B)False
Q2) If the cross-price demand curve for capital (relative to the wage)is vertical,the short run response by a firm to an increase in the wage is the same as its long run response.
A)True
B)False
Q3) If a firm's labor input response to a decrease in the wage differs between the short and the long run,we know that more workers will be hired after the initial short run adjustment.
A)True B)False
Q4) The cross-price demand for capital (relative to the wage)may slope up or down.
A)True B)False
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Chapter 14: Competitive Market Equilibrium
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Sample Questions
Q1) Short run market supply curves are formed by adding up individual firm supply curves in the industry.
A)True
B)False
Q2) Whenever a firm is making positive economic profit,there is nothing it can do to make more profit.
A)True
B)False
Q3) Suppose Congress passes a one-time tax refund of all taxes paid by firms in an industry last year.This will lead to a drop in output price in the industry.
A)True
B)False
Q4) A decrease in the rental rate of capital can lead to a long run increase or decrease in the number of firms in the industry.
A)True
B)False
Q5) If all firms are identical,output prices will never change.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Sample Questions
Q1) If the individuals in a group of consumers all have homothetic tastes,then we can treat the group as a single representative consumer.
A)True
B)False
Q2) If consumer tastes are quasilinear -- and ignoring the possibility of corner solutions and violations of the conditions of the first welfare theorem,the competitive market production level of the quasilinear good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to)efficiency.
A)True
B)False
Q3) Worker surplus can be measured as an area on the market labor supply curve if worker tastes are quasilinear in leisure.
A)True
B)False
Q4) Aggregate producer surplus in an industry can be measured along the market supply curve in the short run but not in the long run.
A)True
B)False
18
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Chapter 16: General Equilibrium
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Sample Questions
Q1) If the endowment allocation in an Edgeworth Box is efficient,then this allocation is also the competitive equilibrium allocation.
A)True
B)False
Q2) In the Edgeworth Box,we can set one price to 1 and only need to solve for the other price because only relative prices matter for individual choice when income is drawn from endowments.
A)True
B)False
Q3) If all goods are essential for everyone,efficiency requires that everyone get at least some of each good.
A)True
B)False
Q4) If the two goods in an Edgeworth Box are perfect complements for one person and perfect substitutes for the other,then all efficient allocations are such that the first person has the same amount of good 1 as of good 2.
Q5) Any allocation resulting from a mutually beneficial trade is efficient.
A)True
B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Sample Questions
Q1) Expected utility theory assumes that individuals have utility functions over a composite consumption good.
A)True
B)False
Q2) If the probability of the bad outcome is 0.5,the benefit level of actuarily fair insurance will be half the premium.
A)True
B)False
Q3) Suppose that individuals with state-independent and risk-averse tastes insure each other through state-contingent trades.The competitive equilibrium price will then result in actuarily fair insurance terms.
A)True
B)False
Q4) The certainty equivalent is less than the expected value of a gamble when tastes are risk averse.
A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) Suppose a consumer's demand function is \(x ( p ) = 100 - 3 p\) .
a.What's the general equation for the own-price elasticity of demand for this consumer?
b.What's the price elasticity of demand when p=25?
c.Suppose instead that the demand function is \(x \left( p _ { x } , p _ { y } \right) = 100 - 3 p _ { x } + p _ { y }\) .How does the equation for own-price elasticity change?
d.Continue with the demand equation in (c).Suppose p=25.What's the cross-price elasticity for x?
e.Continuing with part (d),what's the cross-price elasticity when the price of y is equal to 50?
Q2) The concept of "non-price rationing" means that,in general,we can deal with scarcity just as well without prices as with prices.
A)True
B)False
Q3) The price elasticity of output supply is greater in the long run than in the short run.
A)True
B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) A tax on interest income could be efficient even if it leads to a decrease in savings. A)True
B)False
Q2) The larger the wealth effect,the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.
A)True
B)False
Q3) In most cases,the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?
Q4) The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax. A)True
B)False
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Chapter 20: Prices and Distortions Across Markets
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Q1) A speculator who takes a long position in a market buys low and sells high,whereas a speculator who taxes a short position in a market buys high and sells low.
A)True
B)False
Q2) Quality of life indexes produced in popular magazines often place a heavy emphasis on the cost of housing in different cities -- with a lower housing cost entering the index as a positive feature of the city.Why might such quality of life indeces be misleading?
Q3) Suppose the price of good x in country A is lower than the price of good x in country B when no trade is permitted.In the absence of transportation costs,if the supply curve for good x in the two countries is sufficiently elastic,free trade in good x implies that country B will stop producing x.
A)True
B)False
Q4) When tariffs on imports are eliminated,everyone benefits.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) Regardless of whether a negative externality is emitted by consumers or by producers,a Pigouvian tax can be imposed on consumers only.
A)True
B)False
Q2) In order for a Pigouvian tax to be efficient,the amount of revenue raised plus the economic value of the reduction in pollution must together be larger than the loss in consumer and producer surplus.
A)True
B)False
Q3) It the marginal social benefit from contributions to charities is the same for all individuals who give to charities,then allowing individuals to deduct charitable contributions from their income taxes cannot serve as a Pigouvian subsidy under a progressive income tax system.
A)True
B)False
Q4) Explain how any cap-and-trade system can be made to be equivalent to a pollution tax and vice versa.
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) Consider two types of rules that might govern an otherwise unregulated health insurance market: (1)Insurance companies can price-discriminate against the sick and old; (2)insurance companies cannot price discriminate against the sick and old.Explain why,in equilibrium,insurance may be very expensive for the sick and old regardless of which case we find ourselves in.
Q2) Explain the following statement: "In health insurance markets,moral hazard implies individuals will consume too much health care,whereas adverse selection implies too little health care will be consumed."
Q3) Expected utility theory predicts that individuals will fully insure in actuarily fair markets so long as their tastes are state-independent.How might adverse selection result in some individuals under-insuring?
Q4) Adverse selection in insurance markets results in missing markets because people engage in riskier behavior once they are insured. A)True B)False
Q5) Whenever there is adverse selection,there will be missing market. A)True B)False
Page 25
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Chapter 23: Monopoly
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Q1) Low demand consumers are indifferent between second degree and first degree price discrimination.
A)True B)False
Q2) Under second degree price discrimination,the average price per unit paid by high demand consumers is not equal to marginal willingness to pay for one additional unit.
A)True B)False
Q3) For any constant-elasticity market demand curve,a monopolist is profit maximizing regardless of what quantity he produces so long as marginal costs are zero.
A)True
B)False
Q4) Explain what the Saudi oil minister meant when he warned OPEC of using its market power too much by saying "Remember,the Stone Age did not end because we ran out of stones."
Q5) The more profit a monopolist makes,the more inefficient is the monopoly outcome. A)True B)False
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Chapter 24: Strategic Thinking and Game Theory
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Q1) In any subgame perfect equilibrium to an infinitely repeated Prisoners' Dilemma game,the players will end up cooperating.
A)True
B)False
Q2) If a separating equilibrium is played in a signaling game,the receiver will "update" his beliefs during the game.
A)True
B)False
Q3) Bayesian updating in a separating equilibrium implies the initially uninformed player will fully know what type he is playing when he has to make his move.
A)True
B)False
Q4) Non-credible threats that are made in a Nash equilibrium (that is not subgame perfect)of a sequential game cannot be made in the first stage by the player who begins the game.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) Suppose two Bertrand price competitors have different constant marginal costs.In any simultaneous move Nash equilibrium,only the lower cost firm will produce.
A)True
B)False
Q2) If two firms in an oligopoly produce undifferentiated products and face identical constant marginal costs,then,absent any implicit or explicit collusion,they will price at marginal cost regardless of whether they move sequentially or simultaneously -assuming price is the strategic variable.
A)True
B)False
Q3) Explain why firms in a cartel might lobby for government regulation.
Q4) Suppose a market is currently served by an incumbent firm.If a potential entrant can enter prior to the incumbent firm announcing its output (or price),the entrant will enter the market and force the incumbent to compete.
A)True
B)False
Q5) Explain how two Bertrand price competitors can price above marginal cost in an infinitely repeated game setting.
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) Under monopolistic competition,the number of firms increases as fixed entry costs fall and as demand for the type of good produced in the market increases.
A)True
B)False
Q2) Bertrand price competitors can recover some market power when they differentiate their products.
A)True
B)False
Q3) Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.
Q4) In the circle model with constant marginal cost,each point on the circle will contain a firm in equilibrium if fixed entry costs are zero.
A)True
B)False
Q5) Information advertising might provide information about prices in stores,or it might provide information about product characteristics that consumers might not know about.Which one do you think is more likely to be efficient?
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Chapter 27: Public Goods
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Q1) If everyone has identical preferences over public goods,Lindahl prices for providing the efficient level of the public good will be the same for everyone.
A)True
B)False
Q2) Public goods arise because of externalities.
A)True
B)False
Q3) We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem,it cannot eliminate it."
Q4) What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?
Q5) If private giving to public goods involves externalities,what is a Pigouvian solution to the public goods problem?
Q6) When the government contributes to a public good,private contributions will fall.
A)True
B)False
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Chapter 28: Governments and Politics
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Q1) Vote trading in legislatures can lead to efficient outcomes that might otherwise not have been reached.
A)True
B)False
Q2) A democratic (majority rule)decision over a multi-dimensional issue can be manipulated by an agenda setter only if voter tastes are not single-peaked.
A)True
B)False
Q3) In settings where the policy space is single dimensional,non-single peaked preferences by some implies there is no Condorcet winner.
A)True
B)False
Q4) If a coalition D is decisive over a pair of social outcomes (x,y)under a social choice process that satisfies Arrow's axioms,then another coalition C (that differs from D)cannot be decisive over a different pair (a,b)of social outcomes.
A)True
B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) Comment on the following: "Present-biased people are impatient,but impatient people don't necessarily have to be present-biased."
Q2) Do you agree or disagree with the following statement: "If,in the neoclassical model of decision making,the discount factor changes over time,the predictions of the beta-delta model could be mimicked in the neoclassical model." Explain.
Q3) Of all the constant elasticity of substitution social welfare function,only the one with elasticity of infinity will always choose the efficient outcome from a second-best consumption possibility frontier.
A)True
B)False
Q4) If social indifference curves are straight lines with slope of -1,the ethical standard for judging outcomes places all weight on the sum of outcomes and no weight on the distribution of outcomes.
A)True
B)False
Q5) What do you think of the following statement: To the extent to which individuals are aware of their self-control problems,markets can address the issue successfully.
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