Exam 9: Knowledge and Information

The past performance of a stock is the best guide to future performance.

The accompany diagram shows the market for gasoline,in which there are 1,000 consumers.Gasoline can be produced at a constant marginal cost of $2 per gallon.When the market is in equilibrium,the average consumer uses 15 gallons of gasoline per week. Suppose a war breaks out,temporarily limiting the amount of gasoline available for civilian use to 10,000 gallons per week.In the interest of fairness,the government allocates 10 gallons per week to each consumer,taxes each consumer $20 per week,and forbids barter in gasoline.Will the shaded area in the diagram accurately measure the loss in consumers' surplus? Why or why not?

A speculative bubble is characterized by systematic undervaluing of stocks.

Payments to a factor of production in excess of the minimum payments necessary to call it into existence constitute

According to Hayek,a social planner has no hope of matching the efficiency of a competitive pricing system because

Employers may choose to pay efficiency wages that are higher than the equilibrium wage because

A draft is better for society because it is less costly than a volunteer army.

An efficient market is one in which

The significant difference between adverse selection problems and moral hazard problems is

Because of adverse selection,no good used cars ever change hands.

Assume that the supply curve is horizontal because marginal cost is constant at $10.If John,Robert,and Jimmy each value one compact disc at $20 but only Jimmy values a second compact disc,then the total value in this market is $35 if

Assume that the supply curve is horizontal because marginal cost is constant at $10.John,Robert,and Jimmy each value one compact disc at $20 but only Jimmy and John value a second compact disc (Jimmy at $5 and John at $15).If a social planner dictates that two compact discs be produced and distributed to John,Robert,and Jimmy,then even if the compact discs are allocated based on demand,this market will lose out on $___ of value.

Most economists believe adverse selection played no role in the 2008 financial crisis.

To make the most accurate predictions about a stock's future price,one must look at both the past pattern of prices and the current price of the stock.

Adverse selection can cause insurance companies to limit the amount of insurance they provide to people who are "poor risks."

The Fabian argument that confiscation of rents would not lower social welfare overlooks the costs of resource misallocation.

The use of signals in an economy is both individually rational and socially efficient.

What is a principal-agent problem and why does it create inefficiency? What are efficiency wages and how can they help correct principal-agent problems?

A market price contains no more information about a good than a good social planner would be able to obtain.

In the moral hazard problem,people incur additional risks as a result of being insured.