Deck 9: Beyond Markets; Property and Contracts

Question 1

A legislature that fishing nets to have holes large enough for young fish to avoid capture is a regulatory change aimed at increasing the likelihood of reaching sustainable fish populations.

Answer 1

True

Question 2

Which of the following is true of property rights?

A)They are rights to use a public good without paying for it.
B)They usually specify the owner's alternatives.
C)The are associated with the exchange of commodities but not services.
D)They are often open-ended and do not exhaustively specify the owner's alternatives.

Answer 2

D

Question 3

To prevent radio interference and crowding of geostationary satellites, governments are working to replace the earlier first-come first-served system with auctions that will allocate
equipment and radio frequencies to high bidders.

Answer 3

True

Question 4

The farmer's association is a type of government with unlimited jurisdiction.

Question 5

Which of the following was an outcome of uncoordinated oil drilling in Huntington Beach, California?

A)The entire oil present underground had been extracted within few years.
B)Underground oil pressure had increased due to excessive drilling leading to an oil spill into the adjacent sea.
C)A majority of the oil could not be drilled out as low underground pressure prevented oil from reaching the surface.
D)The oil belt suffered frequent earthquakes as excessive drilling had loosened the soil bonding.

Question 6

If the costs of negotiating and enforcing contracts are high relative to the benefits, buyers and sellers will have incentives to make economically efficient arrangements that increase value.

Question 7

The unavailability of low-cost insurance contracts decreases the risks of liability for a traffic accident and increases the number of accidents.

Question 8

Inclusive property rights give an individual less options and lower incentives to avoid inefficient choices.

Question 9

Property rights specified in a contract are always open-ended and they exhaustively specify the owner's alternatives.

Question 10

Contracts are usually less costly to arrange and enforce than spot market transactions, and they bring benefits that are unobtainable in spot markets.

Question 11

The cash or concessions present in contract terms that parties agree to in order to share risks are called:

A)quid pro quos.
B)property rights.
C)flexible takes.
D)contract prices.

Question 12

Investments that are specific to a relationship (i.e.of lower value elsewhere) are considered risky and require:

A)an enforceable contract.
B)an efficient spot market.
C)high rates of return.
D)verbal commitments.

Question 13

A contract can help a seller to receive better creditors to finance his/her inventory.

Question 14

According to the Coase theorem, if the initial distribution of rights favors some party, market efficiency will ensure that the net benefits to that party are maximized.

Question 15

Although a LoJack benefits the community as a whole by lowering the incidence of theft, an individual car owner may prefer not to install it.

Question 16

_____ refers to an enforceable set of promises to take certain actions over the future.

A)A bond
B)A contract
C)A capitation fee
D)A collusion

Question 17

A contract between a bee keeper and an orchard farmer usually break because of the high cost of writing the contract.

Question 18

Sometimes a unitization contract between two oil field owners will require them to turn operations over to a third party because each owner has an incentive to secretly increase output.

Question 19

Sellers in a perfectly competitive market make special arrangements to deal with particular customers and stand to lose value if their relationship with those customers ends.

Question 20

To make agreements that create value and can be enforced, the parties' underlying rights must be clearly defined in the contract.

Question 21

Lawyer Ayres and economist Levitt considered the net benefits of installing a LoJack from the society's standpoint positive, because the annual installation and service charges on this equipment was:

A)more than the average loss per stolen car.
B)higher than the auto theft insurance paid by car owners
C)lower than the auto theft insurance paid by car owners.
D)less than the average loss per year due to deterred theft.

Question 22

The table given below represents the marginal valuation of a beekeeper (collecting honey) and an orchard farmer (producing mangoes).The beekeeper's opportunity cost reflects the loss in honey collection resulting from the usage of the same orchard again and again.
Table 9-1

Refer to Table 9-1.What will be the maximum number of days for which the orchard owner would prefer the beekeeper to stay in his orchard without having to pay any compensation?

A)3 days
B)6 days
C)1 day
D)5 days

Question 23

Farmers can avoid the free rider problem associated with the benefits received from beekeepers by:

A)forming local associations who contract with beekeepers.
B)excluding non payers from using the services provided by beekeepers.
C)fixing a low charge for the service provided by beekeepers.
D)contracting with selective beekeepers and giving them a share of farm output.

Question 24

Jeanie Reuter and Ruth Oslen are tenants in first and second floor apartments.Jeanie practices her piano lessons in the morning, while Ruth practices aerobics on drum beats at the same time.Further assume that the value of the practice to Jeanie is $10 while the value of aerobic exercises to Ruth is $6.Which of the following is a feasible solution to the problem if the cost of negotiation is zero?

A)Ruth will pay Jeanie $6 to make her change the time for piano practice.
B)Ruth will pay Jeanie $10 to make her change the time for piano practice.
C)Jeanie will pay Ruth $4 to make her change the time for aerobics exercises.
D)Jeanie will pay Ruth $6 to make her change the time for aerobics exercises.

Question 25

Government has the power to reduce the _____ associated with air pollution by automobiles because it can force changes in car design, can impose taxes on drivers, and has the power to punish those who fail to comply.

A)private cost
B)transaction cost
C)opportunity cost
D)positive externality

Question 26

In a society, if negotiation among parties leads to a politically unsatisfactory distribution of income:

A)the legislature can enact laws to redistribute this income.
B)the society can on its own reallocate resources to bring about a politically satisfactory outcome.
C)the parties will renegotiate until they reach a politically satisfactory outcome.
D)the parties will refuse to carry out future transactions.

Question 27

The _____ is both a forum where farmers decide what their dues will purchase, and an organization that informally coerces payments from them.

A)beekeeper's cooperative
B)government cooperative
C)beekeeper's association
D)farmer's association

Question 28

Which of the following activities can create a beneficial externality?

A)Parking cars on the road in front of your house.
B)Encouraging children to play on the field opposite a hospital.
C)Planting colorful flowers in your garden.
D)Practicing and playing drums in the morning hours.

Question 29

Under low-cost contracting like that between beekeepers and farmers, the agreement between the two parties is not self-enforcing because:

A)the terms of contract are laid down by a third party.
B)the initial distribution of rights between the two parties is unequal.
C)services and payments take place over a span of time, and either might choose to default on his obligations at some point.
D)the contract distributes gross revenue between the two parties unequally.

Question 30

Which of the following is an example of an obligation associated with a right?

A)Providing adequate notice period to your tenants to vacate your house.
B)Allowing your kids to play with other children in the neighborhood.
C)Allowing neighbors to use your lawn to maintain healthy public relations.
D)Providing proper education and adequate nutrition to your children.

Question 31

According to economists, an individual who tries to derive utility from the consumption of a good without paying for it is called:

A)a utility maximizer.
B)a free rider.
C)an opportunist.
D)a profit maximizer.

Question 32

An externality can occur when:

A)a voluntary transaction between two individuals creates economic value.
B)a person's action affects another's wealth either positively or negatively.
C)a self-interested individual tries to maximize his/her profits.
D)a voluntary transaction between two individuals creates economic loss.

Question 33

Jeanie Reuter and Janet Rothman are tenants in first and second floor apartments.Jeanie practices her piano lessons in the morning, while Janet practices aerobics on drum beats at the same time.Further assume that the value of practice to Jeanie is $10 while the value of aerobic exercises to Janet is $6.If Jeanie has the right to practice piano peacefully, which of the following will be a feasible solution to the problem?

A)Janet will choose a different time for practicing aerobics.
B)Janet will pay Jeanie $6 to make her change the time for piano practice.
C)Janet will pay Jeanie $10 to make her change the time for piano practice.
D)Jeanie will pay Janet $4 to make her change the time for aerobics exercises.

Question 34

Which of the following statements about Coasian reasoning is true?

A)Coasian reasoning lacks symmetry, it does not provide a starting point for negotiations toward an efficient outcome.
B)Coasian reasoning emphasizes on the benefits received by the person having more rights compared to the others in the group.
C)Coasian reasoning explains how the costs and benefits of a transaction are distributed among the parties.
D)Coasian reasoning provides a starting point for negotiations toward an efficient outcome, if the cost of negotiation is low.

Question 35

How can the government cut the cost of negotiation among car owners regarding LoJack installation?

A)The government can impose a quota on the import of LoJacks.
B)The government can invite public opinion on LoJacks.
C)The government can limit the number of companies producing LoJacks.
D)The government can randomly select cars to install LoJacks.

Question 36

Which of the following remedies can be used to prevent the beekeeper and the farmer from breaking the contract?

A)Separating the ownership and management of the bees and trees.
B)Merging the ownership and management of the bees and the trees.
C)Providing the farmer a larger share of the net benefit received from the contract.
D)Providing the bee keeper a larger share of the net benefit received from the contract.

Question 37

According to Coasian reasoning, if negotiation is costless:

A)irrespective of the initial distribution of rights, the efficient outcome will minimize the net benefit of the group.
B)the efficient outcome will minimize the net benefit of the individual who has more rights compared to the others in the group.
C)irrespective of the initial distribution of rights, the efficient outcome will maximize the net benefit of the group.
D)the efficient outcome will maximize the net benefit of the individual who has more rights compared to the others in a group.

Question 38

The table given below represents the marginal valuation of a beekeeper (collecting honey) and an orchard farmer (producing mangoes).The beekeeper's opportunity cost reflects the loss in honey collection resulting from the usage of the same orchard again and again.
Table 9-1

Refer to Table 9-1.What will be the maximum number of days for which the beekeeper would like to stay in the orchard without being compensated for his stay by the orchard owner?

A)1 day
B)6 days
C)3 days
D)4 days

Question 39

The table given below represents the marginal valuation of a beekeeper (collecting honey) and an orchard farmer (producing mangoes).The beekeeper's opportunity cost reflects the loss in honey collection resulting from the usage of the same orchard again and again.
Table 9-1

Refer to Table 9-1.What would be the maximum number of days for which the orchard owner would wish to keep the beekeeper in the orchard by paying him a compensation which is sufficient to cover the latter's opportunity cost?

A)5 days
B)7 days
C)More than 7 days
D)3 days

Question 40

Which of the following activities can create an external cost?

A)Honking continuously while driving past a hospital.
B)Reducing the use of plastic carry bags while shopping.
C)Burying garbage under the soil and planting trees on it.
D)Using smog controls on private cars.

Question 41

Value-creating contracts require underlying laws that:

A)clearly define the rights and obligations of the parties.
B)discriminate between the rights of the different income groups.
C)describe the final distribution of rights among the transacting parties.
D)create equal distribution of wealth.

Question 42

NetJets, which is the first time-share program for aircraft, cuts transaction costs by:

A)providing economic service to its passengers.
B)being responsible for crews, maintenance, and compliance with Federal regulation.
C)reducing the time taken for traveling between destinations.
D)allowing owners to transfer their shares, change the size of their shares, and purchase shares of other planes.

Question 43

Inclusive property rights provide an investor:

A)more options and greater incentives to avoid inefficient choices.
B)an insight to future earnings and revenue generation.
C)a definite return on the investment.
D)cost effective techniques of production leading to economies of scale.

Question 44

The _____ gives a hunter ownership rights on a bird killed by him while it was flying over his property.

A)unitization contract
B)Coasian reasoning
C)rule of first possession.
D)rule of reason

Question 45

Which of the following is a new law on fishing imposed by the government to increase the total supply of fish?

A)Holders of fishing rights are not allowed to resell them to others.
B)Governments have issued licenses that limit catches and fishing seasons.
C)Quotas have enforced higher catches in coastal areas.
D)Governments around the world have reduced their offshore jurisdictions.

Question 46

The following matrix represents the payoffs to oil well owners Mike and Frasel.Each of the owners know the exact amount of oil in the pool and the market price of oil.
Table 9-2

Refer to Table 9-2.What will be the payoff to each producer in the presence of a unitization contract?

A)Each producer will earn $10
B)Frasel will earn $6 while Mike will earn $16
C)Frasel will earn $16 while Mike will earn $6
D)Each well owner will earn $14.

Question 47

Assume that the market for executive travel is perfectly competitive.If the availability of time-sharing reduces transaction costs and the owner's cost of negotiating for a single trip, which of the following situations must occur?

A)The hours of flight available will increase.
B)The hours of flight available will decrease.
C)The cost of flying will remain steady.
D)The cost of flying will increase.

Question 48

All of the following are mentioned in a unitization contract between two oil well owners, EXCEPT:

A)how many wells each party owns.
B)where the wells can be located.
C)when the wells can be operated.
D)total investment made by each party in the oil well.

Question 49

Mention some of the remedies to prevent violation of a low-cost contract between farmers and beekeepers.

Question 50

Suppose an individual discovers the mouth of a previously unknown cave (expected to contain a single large diamond) on his property that extends under land owned by others.To arrive at an economically efficient outcome with low transaction cost, the law will:

A)award the diamond to the person who locates the diamond first.
B)award the diamond and cave to the person whose land it opens into.
C)award the diamond to the owner of the land above it.
D)award the diamond to each of the owners under whose land the cave passes.

Question 51

For which of the following investment activities does the law clearly define the parties' underlying rights?

A)Construction of a swimming and boating club on a deserted lake.
B)Planting apple trees in a public garden.
C)Using scrap from neighborhood trash disposal site to create wrought iron furniture.
D)Construction of a multi-storied building on an inherited property.

Question 52

Define a contract.

Question 53

Which of the following exemplifies inefficient legal assignment of rights with high transaction costs?

A)Agreement between an orchard farmer and a beekeeper.
B)LoJack installation in cars to prevent car theft.
C)The Huntington Beach oil wells.
D)Installation of smog control in cars.

Question 54

If the costs of negotiating and enforcing contracts are _____ relative to the benefits, buyers and sellers have incentives to make economically efficient arrangements that _____ value.

A)high; increase
B)low; increase
C)high, decrease
D)low; decrease

Question 55

What are property rights?

Question 56

Why are the net benefits of a LoJack installation in a car considered to be positive for the society as a whole?

Question 57

Which of the following is an example of a possessory property right?

A)The right to use a public park for morning walk.
B)The right to park your car in your garage.
C)The right to enjoy the fragrance of the flowers planted in your neighborhood.
D)The right to travel in public transport.

Question 58

What do property rights usually depend on?

Question 59

The following matrix represents the payoffs to oil well owners Mike and Frasel.Each of the owners know the exact amount of oil in the pool and the market price of oil.
Table 9-2

Refer to Table 9-2.What will be the payoff to each producer in the absence of a unitization contract?

A)Each producer will earn $10
B)Frasel will earn $6 while Mike will earn $16
C)Frasel will earn $16 while Mike will earn $6
D)Each of the well owners will earn $14

Question 60

Which of the following is an aim of a price-fixing agreement?

A)Reducing entry barriers
B)Increasing profit
C)Reducing price
D)Increasing demand

Question 61

Define a contract and explain with examples.

Question 62

State one important consequence of Coasian reasoning on the analysis of contracts.

Question 63

Discuss the Coasian reasoning with an example.

Question 64

Why are inclusive property rights considered to be sources of wealth?

Question 65

What are the fundamentals of Coasian reasoning?

Question 66

Who is considered to be a free rider according to economists?

Question 67

Why do some unitization contracts require landowners to turn operations to a third party?