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ECN100B Final Sample Questions

The document contains multiple choice and short answer questions related to economic concepts such as externalities, public goods, adverse selection, and investment risk. It includes scenarios to analyze the effects of negative externalities, the characteristics of public goods, and the implications of risk aversion in investment decisions. Additionally, it presents quantitative questions that require calculations to determine optimal quantities and welfare-maximizing taxes.

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哲铭 奚
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3 views6 pages

ECN100B Final Sample Questions

The document contains multiple choice and short answer questions related to economic concepts such as externalities, public goods, adverse selection, and investment risk. It includes scenarios to analyze the effects of negative externalities, the characteristics of public goods, and the implications of risk aversion in investment decisions. Additionally, it presents quantitative questions that require calculations to determine optimal quantities and welfare-maximizing taxes.

Uploaded by

哲铭 奚
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MULTIPLE CHOICE QUESTIONS:

1. Suppose a firm generates a negative externality in its production process. According to the Pigouvian tax principle, the tax
should be set equal to:
(a) The marginal private cost.
(b) The marginal social cost.
(c) The marginal external cost.
(d) The total external cost.

2. Consider a monopoly that generates a positive externality in its production process. How will deadweight loss with the
positive externality compare to what deadweight loss would be without the externality.
(a) Deadweight loss will be less
(b) Deadweight loss with be greater
(c) Deadweight loss would be the same
(d) Deadweight loss would be equal to zero with the positive externality

3. Which of the following characteristics distinguishes public goods from private goods?
(a) Public goods are non-rivalrous, meaning one person's use does not diminish another's.
(b) Public goods are inferior goods.
(c) Public goods can be freely disposed of.
(d) Public goods have no cost.

4. What is the term for the problem where individuals have no incentive to pay for their consumption of a public good, leading
to underprovision of the good?
(a) Tragedy of the commons.
(b) Free rider problem.
(c) Prisoner's dilemma.
(d) Negative externality.

5. What is a potential solution to the overuse of common pool resources, also known as the "tragedy of the commons"?
(a) Encourage cooperative use of the resource.
(b) Encouraging free access to the resource.
(c) Increasing the quantity of the resource.
(d) Ignoring the problem.

6. Which of the following is typically considered a common pool resource?


(a) A shopping mall.
(b) A fishery.
(c) A public park.
(d) A private garden.

7. If a common pool resource is overused, this leads to:


(a) A positive externality.
(b) A negative externality.
(c) No externality.
(d) A neutral externality.

8. Why might a risk-averse investor choose to diversify their investment portfolio?


(a) To increase the potential return on their investment.
(b) To reduce the risk associated with their investment without necessarily reducing the expected return.
(c) To increase the risk associated with their investment to achieve a higher return.
(d) Diversification does not benefit a risk-averse investor.
9. Why would a risk-averse individual be more likely to purchase insurance?
(a) To increase their potential for profits.
(b) To shift risk to the insurer, creating more certainty about their own future financial state.
(c) To take on additional risk for the chance of a high return.
(d) Risk-aversion does not affect an individual's decision to purchase insurance.

10. Adverse selection is a problem that can occur in markets due to:
(a) The actions of buyers or sellers after a transaction has occurred.
(b) Asymmetric information, where one party has more or better information than the other.
(c) An abundance of low-quality goods or services.
(d) The overproduction of a certain good or service.

11. Which of the following could be a potential solution to the problem of adverse selection in insurance markets?
(a) Increasing the price of insurance policies.
(b) Implementing mandatory insurance coverage for everyone.
(c) Decreasing the coverage of insurance policies.
(d) None of the above.

12. Moral hazard arises when …


(a) a firm that generates a negative externality doesn’t consider the impacts of its actions.
(b) a party takes on excessive risks or acts irresponsibly because the costs will be borne by someone else.
(c) firms overuse or deplete a common-pool resource.
(d) firms selling low quality goods exploit an inability by buyers to distinguish good from bad products.
Short Answer Questions:

1. Briefly explain the idea of product differentiation and provide an example. Why firms might want to differentiate
their products from those of their competitors?

2. Your friend makes the following argument: Pigouvian taxes address externalities because they force the firm to use
the marginal social cost curve to make their decision. Is your friend correct? Briefly explain why or why not.

3. What are externalities and why do they create deadweight loss if unregulated?

4. Briefly explain adverse selection, provide an example and explain adverse selection can lead to market failure.
Question 1:
Consider a market in which a firm produces a good that creates a negative externality. The marginal private cost (MPC) is given
by MPC = 20 + Q, the demand (marginal private benefit, MPB) is given by P = 80 - Q, and the marginal external cost (MEC) from
pollution is given by MEC = Q.

(a) Identify the socially optimal quantity and the quantity in the unregulated market.

(b) Quantify the deadweight loss from the unregulated market.

(c) Determine the welfare-maximizing Pigouvian tax.


Question 2:

Consider a small community consisting of two individuals who enjoy listening to a public radio station. The station is funded by
donations from two listeners. The utility of each listener from the radio station is given by U = 15 - Q, where Q is the number of
hours the radio station operates per day. Each hour of operation costs the radio station $10.

(a) How much radio will be demanded in the unregulated market, where each listener decides individually how much to
donate?

(b) What is the socially optimal quantity of radio?

(c) Explain why the quantity demanded in the unregulated market and the socially optimal quantity are different.
Question 3:
Consider a risky investment with two possible outcomes. With a probability of 0.6, the investment returns $400; with a
probability of 0.4, it returns $900. The utility function of a risk-averse investor is U = sqrt(X), where X is the return from the
investment.

(a) Calculate the expected value (EV) of the investment for a risk-neutral investor.

(b) Calculate the expected utility (EU) of the investment for a risk-averse investor.

(c) Calculate the certainty equivalent for both the risk-neutral and the risk-averse investor.

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(d) Briefly discuss why the certainty equivalent for a risk-averse investor is different than that for a risk-neutral investor.

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