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intermediate microeconomics
Study Guide For N. Gregory Mankiw's Principles Of Microeconomics 5th Edition David R. Hakes - Solutions
1. What is moral hazard? What steps might a firm take to avoid moral hazard in the employment relationship?
3. Answer the questions regarding the Condorcet paradox for the three sets of voting preferences below. Case 1 Voter Type Type 1 Type 2 Type 3 Percent of Electorate 15 40 45 First Choice C A B Second Choice A B C Third Choice B C Aa. If voters must choose between A and B, what are the percentages
2. For each of the following situations, describe the information asymmetry involved, name the type of action that has been taken to reduce adverse selection (signaling or screening), and explain how adverse selection has been reduced.a. McDonald's only hires high school students with good gradesb.
1. For each of the following situations, identify the principal and the agent, describe the information asymmetry involved, and explain how moral hazard has been reduced. Dental insurance companies offer free annual checkupsa. b. Firms compensate traveling salespersons with commissions (a
Explain why people are willing to sign contracts that require them to contribute a portion oftheir paychecks to a retirement savings program
Generate an example ofthe Condorcet voting paradox
Explain why insurance companies screen potential customers
Describe the information asymmetry in the labor market
20. Which of the following is not true regarding the outcome of a consumer's optimi- zation process?a. The consumer has reached his highest indifference curve subject to his budget constraint.b. The marginal utility per dollar spent on each good is the same.c. The consumer is indifferent between
19. If consumption when young and when old are both normal goods, an increase in the interest ratea. will always increase the quantity of saving.b. will always decrease the quantity of saving. C. will increase the quantity of saving if the substitution effect outweighs the income effect.d. will
18. If leisure is a normal good, an increase in the wagea. will always increase the quantity of labor supplied.b. will always decrease the amount of labor supplied. C.d. will increase the amount of labor supplied if the income effect outweighs the substitution effect. will increase the amount of
17. If income and prices were both to double, the budget line woulda. shift outward in a parallel fashion.b. shift inward in a parallel fashion.c. stay the same.d. rotate inward. C. rotate outward.
16. The change in consumption that results when a price change moves the consumer along a given indifference curve is known as thea. complementary effect.b. normal effect.c. income effect.d. substitution effect.c. inferior effect.
15. A pair of socks isa. b.c. d. an inferior good. a normal good. a Giffen good. none of the above.
14. Suppose that the price of a pair of socks falls from $5 to $2. The income effect is represented by the movement from pointa. y to point x.b. x to point y.c. z to point x.d. x to point z.
13. Suppose that the price of a pair of socks falls from $5 to $2. The substitution effect is represented by the movement from pointa. y to point x. 10 Quantity of Beltsb. C.d. x to point y. z to point x. x to point z.
12. If the price of a belt is $10 and the price of a pair of socks is $5, the consumer will choose to buy the commodity bundle represented by point 2.b. C. x. y. z.d. The optimal point cannot be determined from this graph.
11. If an increase in a consumer's income causes the consumer to decrease her quantity demanded of a good, then the good isa. an inferior good.b. a normal good.c. a substitute good.d. a complementary good. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the
10. If an increase in a consumer's income causes the consumer to increase his quantity demanded of a good, then the good isa. an inferior good.b. a normal good. C. a substitute good.d. a complementary good.
. Suppose we measure the quantity of good X on the horizontal axis and the quantity of good Y on the vertical axis. If indifference curves are bowed inward, as we move from having an abundance of good X to having an abundance of good Y, the marginal rate of substitution of good Y for good X (the
8. Which of the following is true about the consumer's optimum consumption bundle? At the optimum,a. the indifference curve is tangent to the budget constraint.b. the slope of the indifference curve equals the slope of the budget constraint.c. the relative prices of the two goods equals the
7. The consumer's optimal purchase of any two goods is the point wherea. the consumer reaches the highest indifference curve subject to remaining on the budget constraint.b. the consumer has reached the highest indifference curve.c. the two highest indifference curves cross.d. the budget constraint
6. Which of the following statements is tlOt true with regard to the standard properties of indifference curves?a. b.c. d. Indifference curves are dov,lllward sloping. Indifference curves do not cross each other. Higher indifference curves are preferred to lower ones. Indifference curves are bowed
5. The slope at any point on an indifference curve is known asa. the trade-off rate.b. the marginal rate of substitution.c. the marginal rate of trade-off.d. the marginal rate of indifference.
4. Suppose a consumer must choose between the consumption of sandwiches and pizza. If we measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the vertical axis, and if the price of a pizza is $10 and the price of a sandwich is $5, then the slope of the budget
3. Indifference curves for perfect substitutes area. straight lines.b. bowed inward.c. bowed outward.d. right angles.e. nonexistent.
2. A change in the relative prices of which of the following pairs of goods would likely cause the smallest substitution effect?a. gasoline from 7-Eleven and gasoline from Quick Stopb. right shoes and left shoesc. Coca-Cola and Pepsid. Bud Light and Coors Light
1. The limit on the consumption bundles that a consumer can afford is known asa. an indifference curve.b. the marginal rate of substitution.c. the budget constraint.d. the consumption limit.
8. Some people argue that the tax rate should be reduced on interest earned from saving because it will increase the after-tax return to saving, increase the quantity of saving supplied, and increase economic growth. Are we certain that a decrease in the tax rate on interest earned from saving will
7. Suppose there are only two goods available to you, apples and oranges. Suppose that the prices of apples and oranges double and that your income also doubles. What will happen to the amount of apples and oranges that you choose to consume? Explain. (Hint: What has happened to the slope of the
6. Suppose there are two goods available to the consumer-coffee and tea. Suppose that the price of coffee decreases. What impact will the substitution effect and income effect have on the quantity demanded of coffee if coffee is a normal good? Explain. What impact will the substitution effect and
5. Referring to question 4 above, what is the shape of the indifference curves that you would expect each pair of goods to generate, straight-line or right-angle? For which pair of goods would you observe the greatest substitution effect if the relative prices of the two goods were to change? Why?
4. Consider the following two pairs of goods: Graduation caps and graduation gowns Gasoline at an Exxon station and gasoline at a Shell station Which of the pairs of goods above is likely to be nearly perfect substitutes, and which is likely to be nearly perfect complements? Explain.
3. Why are most indifference curves bowed inward?
2. If we measure "goods" on each axis, is an indifference curve positively (upward) sloped or negatively (downward) sloped? Why? If we measure a "good" on one axis but a "bad" (such as pollution) on the other axis, what type of slope do you think an indifference curve would have? Why?
1. Suppose that there are two goods available to the consumer-pens and pencils. Suppose that the price of a pen is $2.00 while the price of a pencil is $0.50. If we measure the quantity of pens on the horizontal axis and the quantity of pencils on the vertical axis, what is the slope of the budget
2. Use Exhibit 2 to answer the following questions.a. Suppose the price of a magazine is $2, the price of a book is $10, and the con- sumer's income is $100. Which point on the graph represents the consumer's optimum-x, y, or 2? What are the optimal quantities of books and magazines this individual
1. Suppose a consu onsumer only buys two goods-hot dogs and hamburgers. Suppose the price of hot dogs is $1, the price of hamburgers is $2, and the consumer's income is $20.a. Plot the consumer's budget constraint in Exhibit 1. Measure the quantity of hot dogs on the vertical axis and the quantity
Show why someone's labor-supply curve might be backward sloping
Demonstrate the income and substitution effect on a graph using indifference curves and budget constraints
Shift the budget constraint when the price ofa good increases
Explain why indifference curves must slope downward ifthe two products considered are "goods"
3. How does this system affect a welfare recipient's incentive to work? Is a welfare recipient necessarily lazy if they turn down a part-time job?
2. What is the effective tax rate on their additional income if they were to lose $1 in benefits for each dollar of additional income?
1. What happens to a welfare recipient's benefits if they increase their earnings?
20. Temporary Assistance for Needy Familiesa. has eliminated poverty in the United States.b. provides almost no disincentive to work because the benefits are very gradually reduced as a recipient's income from work increases.c. may lead to the breakup of families because fathers may not be in the
19. The greatest advantage of a negative income tax is that ita. reduces the cost to the government of fighting poverty.b. generates a smaller disincentive to work than most alternative antipoverty programs.c. would not provide benefits to lazy people.d. ensures that the poor actually receive what
18. Current antipoverty programs discourage work becausea. they make recipients more comfortable than most middle-class Americans.b. benefits are reduced at such a high rate when recipients earn more income that there is little or no incentive to work once one is receiving benefits.c. antipoverty
7. An increase in the minimum wage will cause a relatively large increase in unem- ployment amonga. C. unskilled workers if the demand for labor is relatively elastic.b. unskilled workers if the demand for labor is relatively inelastic. skilled workers if the demand for labor is relatively
16. To which of the following policies is the Earned Income Tax Credit most closely related?a. minimum-wage lawsb. welfarec. negative income taxid. in-kind transfers
15. Utilitarianism suggests that the government should choose policies that maximize the total utility of everyone in society bya. allowing each individual to maximize their own utility without interference from the government.b. redistributing income from rich to poor because, due to the
14. Rank utilitarianism, liberalism, and libertarianism in sequence from the political philosophy that would redistribute income the greatest to the one that would redistribute income the least.a. utilitarianism, liberalism, libertarianismb. libertarianism, liberalism, utilitarianismc. liberalism,
13. The maximin criterion suggested by Rawls' theory of justice argues that the gov- ernment should aim toa. minimize the difference between the rich and poor.b. maximize the total utility of society. C. minimize the well-being of the best-off person in society.d. maximize the well-being of the
12. Jill earns more than Bob and she came by her income fairly and honestly. Which of the following political philosophies would argue against the redistribution of income from Jill to Bob?a. utilitarianismb. liberalismc. libertarianismd. all of the abovec. none of the above
11. If people can borrow and lend to perfectly smooth out their lifetime living standards, then current annual income is a good measure of the distribution of living standards.b. permanent income is a good measure of the distribution of living standards.c. transitory income is a good measure of the
10. Because people's incomes vary over the life cycle and because there are transitory shocks to people's incomes, the standard measures of income distributiona. exaggerate the inequality of living standards.b. understate the inequality of living standards.c. accurately represent the true
9. Permanent income isa. Social Security income of the elderly and disabled.b. equal to the minimum wage. C. a person's normal, or average, income.d. wages fixed by a union or other labor contract.e. none of the above.
8. Because in-kind transfers are not accounted for in standard measures of income distribution, the standard measures of income distributiona. exaggerate the inequality of living standards.b. understate the inequality of living standards.c. accurately represent the true inequality of living
7. Since 1935, the income distribution in the United States hasa. been unchanged.b. narrowed slightly from 1935 to 1970 and then widened slightly from 1970 to today.c. widened slightly from 1935 to 1970 and then narrowed slightly from 1970 to today.d. slowly widened.e. slowly narrowed.
6. Which of the following statements about poverty rates is not true?a. Blacks and Hispanics are three times more likely to live in poverty than whites,b. c.d. Children are more likely than average to live in poverty. The elderly are more likely than average to live in poverty. Families headed by
5. In the United States, the top fifth of the income distribution carns about 3. what the bottom fifth earns.b. two times what the bottom fifth earns. C. five times what the bottom fifth earns.d. twelve times what the bottom fifth earns.e. twenty times what the bottom fifth earns.
4. Which of the following is not an explanation for the slight widening of the income distribution in the United States since 1970?a. The increase in technology has decreased the demand for unskilled workers and increased the demand for skilled workers, causing the gap between their wages to
3. Compared to other countries, the income distribution in the United States isa. about average. a little narrower than most.b. C. the most equal.d. the most unequal.
2. The poverty line is set ata. two times the price of a new car.b. five times the value of average rent. C. three times the cost of providing an adequate diet.d. one-third of average family income.
1. In the United States, the top 5 percent of the income distribution earnsa. more than the bottom 40 percent of the income distribution.b. about twelve times what the bottom fifth of the income distribution earns.c. about the same as the bottom fifth of the income distribution.d. about half of all
8. What are some examples of in-kind transfers? Why do some people prefer that the government provide cash payments to the needy instead of in-kind transfers?
7. How could welfare programs exacerbate the problems they are supposed to cure?
Suppose there is a minimum wage. Under which of the following conditions is employment of unskilled workers reduced by the greatest amount: when labor demand is relatively inelastic or when labor demand is relatively elastic? Why? Is labor demand likely to be more elastic or inelastic in the long
5. Why don't the political philosophies of utilitarianism and liberalism suggest that income be completely equalized across the population?
4. Of the three political philosophies discussed in your text, which one differs the most from the other two and why? What does each school of thought suggest about income redistribution?
3. If the poverty rate is 12 percent, does it mean that about 12 percent of the population live their entire lives in poverty? Explain.
2. Does poverty affect all groups within the population the same? Explain.
1. How does the income distribution in the United States compare with the income distribution in other countries? Explain.
3. Suppose the government has to choose between two antipoverty programs. Each program guarantees that every family has at least $15,000 of income. One scheme establishes a negative income tax where: Taxes (0.50 of income) $15,000. The other scheme is for the government to guarantee every family at
2. Susan earns five times as much as Joe.a. What would the political philosophy of utilitarianism, liberalism, and liber- tarianism likely suggest should be done in this situation? Explain.b. Compare the degree of redistribution each suggests.
1. Use Table 2 from Chapter 20 in your text to answer this question.a. In the most recent year available, what percent of income did the bottom fifth of the income distribution carn? What percent of income did the top fifth of the distribution carn? Roughly, what is the relationship between what
Explain the concept ofa negative income tax
Compare and contrast utilitarianism, liberalism, and libertarianism
distribution to exaggerate the degree ofincome inequality
Name some factors that cause the measurement of income
Explain why the gap in earnings between skilled and unskilled workers is growing in the United States
3. Suppose it is true that the skills and education required to do each job in question 1 are, in fact, nearly identical. What explanation would an economist likely propose to explain why the equilibrium wage differs by $10,000 across these markets?
2. What would happen to the level of effort and natural ability of the workers available in each market in question 1? What would happen to the quality of work generated in each market?
1. Suppose a secretary and a truck driver are judged to require the same level of ed- ucation and skills, yet a secretary earns $30,000 while a truck driver earns $40,000. What would happen to the quantities supplied and demanded in the market for secretaries and truck drivers if the wage for these
20. Which of the following could result in women being paid less than men?a. b.c. d.c. customers preferring to deal with men women preferring to work in pleasant, clean, safe, workplaces women entering and leaving the labor force to care for children women obtaining less human capital because they
19. Which of the following explanations of wage differentials is not likely to be true?a. Men have more human capital than women.b. Whites have more human capital than blacks.c. Employers in competitive markets are bigots.d. Men have more job experience than women.
18. Which of the following is likely to generate a compensating differential?a. One employee is more attractive than another.b. One employee works harder than another.c. One employee is willing to work the night shift while another is not.d. One employee is more educated than another.c. All of the
17. Which of the following is not a reason why some workers are paid above the equilibrium wage?a. minimum-wage lawsb. beauty C. unionsd. efficiency wages
16. A wage differential among groups may not by itself be evidence of discrimination in the labor maket because different groups havea. different levels of education.b. different preferences for the type of work they are willing to do.c. different levels of job experience.d. all of the above.
15. Competitive markets tend toa. reduce labor market discrimination because nondiscriminating firms will employ cheaper labor, earn more profits, and drive discriminating firms out of the market.b. have no impact on labor market discrimination.c. increase labor market discrimination because
14. Which of the following statements regarding discrimination is true?a. Discrimination cannot exist in a competitive labor market.b. Discrimination can only persist in a competitive labor market if customers are willing to pay to maintain the discriminatory practice or the government requires
13. In order for a market to support superstars, it must have which of the following characteristics?a. It must be involved in professional athletics.b. Every customer must want the good supplied by the best producer, and the technology must exist for the best producer to supply every customer at
12. It is not considered discrimination when an employer offers different opportunities to individuals that differ only by theira. .b. sex.c. productivity.d. age.
11. Which of the following professionals is most likely to be able to generate the income of a superstar?a. the best medical doctorb. the best professorc. the best accountantd. the best writere. All of the above participate in markets that could generate a superstar.
10. The relative wage of unskilled workers has fallen in the United States likely as a result of a relativea. increase in the number of unskilled workers available because workers are more poorly educated.b. increase in the number of unskilled workers available due to immigration into the United
9. Which of the following is true regarding the earnings of attractive versus unattractive workers?a. Attractive people tend to earn less because attractive people are viewed as shallow and more self-absorbed and, therefore, as less productive.b. Attractive people tend to earn less because
8. In the last 25 years, the gap between the wages of skilled and unskilled workers in the United States hasa. decreased.b. increased.c. stayed the same.d. first increased and is now decreasing.
7. If two jobs require the same amount of skills and experience, the job that pays the most is most likely to be the one that isa. unpleasant.b. safe. C. easy.d. fun.c. all of the above.
6. In a competitive market, which of the following is least likely to be the source of a persistent discriminatory wage differential?a. the customerb. the government C. the employerd. All of the above could be the source of a persistent discriminatory wage differential.
5. All of the following would tend to increase a worker's wage excepta. more education.b. working the night shift.c. doing a job that is fun.d. having a greater amount of natural ability.e. working harder.
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