ECNM 592
Question Bank 1: Introduction, Choices, Scarcity
Fall 2023
Problem Set
• Explain your answers/show your work, even for the multiple choice questions.
Multiple Choice Questions
1. (3 pts) Froeb MC 1.1 Why might performance compensation caps be bad?
A. Different pay rates promote dissent.
B. Compensation caps can discourage employees from being productive after the cap.
C. Compensation caps can discourage employees from being productive be- fore the cap.
D. Both b and c
2. (3 pts) Froeb MC 1.4 Why might it be bad for hotels to not charge higher prices when rooms are in higher demand?
A. Arbitrageurs might establish a black market by reserving rooms and then selling the reservations to customers.
B. Rooms maybe rationed.
C. Without the profit from these high demand times, hotels would have less of an incentive to build or expand, making the long-run scarcity problem even worse.
D. All of the above
3. (3 pts) Froeb MC 1.9 What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the month?
A. It may sell the remaining cars at huge discounts to hit the quota.
B. It creates an incentive to sell cars from different manufacturers.
C. It would ruin the relationship between dealer and manufacturer.
4. (3 pts) Recall our discussion of Wells Fargo’s fraudulent-account scandal. Why did the sales associates make bad decisions? (NB: If you don’t remember, Wells Fargo opened millions of accounts for people that didn’task for them).
A. They had bad incentives: they were likely told to open extra accounts to keep their jobs.
B. They had bad incentives: they were paid more if customers were happy with all their new accounts.
C. They had bad information: they didn’t know how to correctly open an ac- count.
D. They had bad information: they didn’t have access to consumer’s credit scores.
5. (3 pts) Froeb MC 2.3 Wealth-creating transactions are more likely to occur
A. with private property rights.
B. with strong contract enforcement.
C. with black markets.
D. All of the above.
6. (3 pts) Froeb MC 2.4 Government regulation
A. provides incentives to conduct business in an illegal black market.
B. plays no role in generating wealth.
C. is the best way to eliminate poverty.
D. does not enforce property rights.
7. (3 pts) Froeb MC 2.10 Efficiency implies opportunity,
A. always.
B. never.
C. only if accompanied by secure property rights.
D. none of the above.
8. (3 pts) A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate:
A. No surplus
B. $4,000 worth of seller surplus and unknown amount of buyer surplus
C. $6,000 worth of buyer surplus and $4,000 of seller surplus
D. $6,000 worth of buyer surplus and unknown amount of seller surplus
9. (3 pts) The difference between the maximum price the consumer is willing to pay and the price the consumer actually pays for a product is referred to as:
A. market surplus.
B. market shortage.
C. consumer surplus.
D. producer surplus.
10. (3 pts) An advantage of capitalism is that
A. It allows the market to self-regulate and clear itself
B. It allows a person to follow his or her own self interest
C. It allows voluntary transactions, which create wealth
D. All of the above
11. (3 pts) Government can
A. Create wealth by not interfering in the markets in anyway what so ever
B. Not affect wealth in the markets
C. Create wealth by enforcing property rights and contracts
D. Create wealth by making choice decisions for the market
12. (3 pts) Subsidies can destroy wealth because
A. subsidies move assets from lower- to higher- valued uses
B. subsidies move assets from higher- to lower- valued uses
C. subsidies help producers only
D. subsidies help consumers only
13. (3 pts) Its lunchtime, you are hungry and would like to have some pizza. By the law of diminishing marginal value,
A. you would pay more for your first slice of pizza than your second
B. you would pay more for your second slice of pizza than your first
C. you would pay an equal amount of money for both the slices since they are identical
D. none of the above
14. (3 pts) Philosophers draw a distinction between positive statements, which describe the world as it is,and s, which describe how the world should be.
A. normative statement
B. budget constraint
C. trade-off
D. opportunity cost
15. (3 pts) The slope of the is determined by the relative price of the two goods, which is calculated by taking the price of one good and dividing it by the price of the other good.
A. personal preference
B. utility level
C. budget constraint
D. opportunity set
16. (3 pts) Gomer decides to spend an hour playing basketball rather than studying. His opportunity cost is:
A. nothing, because he enjoys playing basketball more than studying.
B. the increase in skill he obtains from playing basketball for that hour.
C. the benefit to his grades from studying for an hour
D. nothing, because he had a free pass into the sports complex to play basket- ball.
17. (3 pts) The opportunity cost of attending university is likely to include all except which of the following?
A. the cost of haircuts received during the school term
B. the income you forgo in order to attend classes
C. tuition fees
D. the cost of required textbooks
18. (3 pts) Referring to the Table: A student has only a few hours to prepare for two dif- ferent exams this afternoon. The above table shows alternative possible exam scores with three alternative uses of the student’s time. The opportunity cost of scoring a 94 on the economics exam rather than a 77 is:
|
Possibility A |
Economics |
History |
|
I |
94 |
76 |
|
II |
87 |
84 |
|
III |
77 |
91 |
A. 8 points on the history exam.
B. 15 points on the history exam.
C. 14 points on the history exam.
D. 17 points on the history exam.
19. (3 pts) The lesson of is to forget about the money that’s irretrievably gone and instead to focus on the marginal costs and benefits of future options.
A. marginal utility
B. sunk costs
C. marginal analysis
D. budget constraints
Essay Questions
20. (5 points) Froeb IP 01.1
The owners of a small manufacturing concern have hired a Vice President to run the company with the expectation that he will buy the company after five years. Com- pensation of the new VicePresident is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.
(a) Assume the VP has a base salary of $50K. Plot the annual compensation of the vicepresident as a function of annual profit.
(b) Assume the company will be worth $10Min five years. Plot the profit of buying the company as a function of average annual profit.
21. (5 points) Froeb IP 01.2
(This problem can be solved with intuition,i.e not much math) The owners of a small manufacturing concern have hired a Vice President to run the company with the ex- pectation that he will buy the company after five years. Compensation of the new Vice President is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.
Does this contract align the incentives of the new vicepresident with the profitability goals of the owners?
22. (5 points) Froeb IP 01.3
The owners of a small manufacturing concern have hired a Vice President to run the company with the expectation that he will buy the company after five years. Com- pensation of the new VicePresident is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.
Re-design the contract to better align the incentives of the new vicepresident with the profitability goals of the owners.
23. (5 points) Froeb IP 02.4
In 2013, France’s labor unions won a case against Sephora to prevent the retailer from staying open late, and forcing its workers to work “antisocial hours”. The cosmetic store does about 20 percent of its business after 9 p.m., and the 50 sales staff who work the late shift are paid an hourly rate that is 25 percent higher than the day shift. Many of them are students or part time workers, who are put out of work by these new laws. Identify the inefficiency, and figure out a way to profit from it.
24. (60 points) Froeb the rest
Try the rest of Froeb Ch 1,2 problems
25. (4 points) openstax Chapter Question 02.14
What are diminishing marginal returns?
26. (4 points) openstax Chapter Question 02.19
Suppose Alphonso’s town raises the price of bus tickets from $0.50 to $1 and the price of burgers rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso’s weekly spending money increases from $10 to $20. How is his budget constraint affected from all three changes? Explain.
27. (4 points) Movie Time
ConsiderEdgar who pays $8 to see a movie, but after watching the film for 30 minutes he knows that it’s truly terrible. Should he stay and watch the rest of the movie because he paid $8, or should he leave?