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Questions and Answers
The costs of a market activity paid for by an individual NOT engaged in the market activity are ____ costs.
The costs of a market activity paid for by an individual NOT engaged in the market activity are ____ costs.
Which of the following is true of a negative externality?
Which of the following is true of a negative externality?
The Coase theorem suggests that private parties ____.
The Coase theorem suggests that private parties ____.
Implicit costs are ____.
Implicit costs are ____.
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In an experiment, children were given a marshmallow and were promised a second marshmallow if they could wait 15 minutes to eat the first one. Only about one-third of the children earned the second marshmallow. What does this experiment illustrate about children's rationality?
In an experiment, children were given a marshmallow and were promised a second marshmallow if they could wait 15 minutes to eat the first one. Only about one-third of the children earned the second marshmallow. What does this experiment illustrate about children's rationality?
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If 12 consecutive tosses of a fair coin have all been tails, some individuals tend to think that the next one “must be heads.” This is an example of the ____ fallacy.
If 12 consecutive tosses of a fair coin have all been tails, some individuals tend to think that the next one “must be heads.” This is an example of the ____ fallacy.
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A risk-neutral consumer ____.
A risk-neutral consumer ____.
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Write an example of a common-resource good.
Write an example of a common-resource good.
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Study Notes
Exam 2 - Instructions
- Calculator permitted, but no outside notes.
- Points earned require a logical explanation of answers.
- Clearly label graphs.
- Practice questions focus on Chapter 16 and behavioral economics.
Question 1 - Costs of Market Activity
- External costs: Costs incurred by parties not directly involved in the market activity. (e.g., pollution affecting nearby residents)
Question 2 - Negative Externalities
- Externality: Actions of individuals or firms imposing costs on others.
- Government Solutions: Can involve taxes or regulations to internalize the externality.
- Coase Theorem: Private negotiations can lead to efficient outcomes, especially with clear property rights and low transaction costs.
Question 3 - Coase Theorem
- Correcting Negative Externalities: Private parties can negotiate solutions in the absence of high transaction costs and clear property rights.
- Government Intervention: Not always necessary, but a solution if negotiation is not possible.
Question 4 - Implicit Costs
- Definition: Foregone opportunities of using resources in other alternatives.
- Calculation: Not always expressed in dollar amounts.
- Relationship to Explicit Costs: Can be less than or greater than explicit costs. Explicit costs are directly paid out in dollars.
Question 5 - Marshmallow Experiment
- Rationality of Children: The experiment illustrates difficulties with balancing present rewards with future rewards (intertemporal decision-making).
Question 6 - Gambler's Fallacy
- Definition: The mistaken belief that past independent events affect the probability of future events. (E.g., assuming a coin flip result influences future tosses).
Question 7 - Risk-Neutral Consumer
- Definition: A consumer who values only the expected value of a gamble and is indifferent to risk.
Question 8 - Common Resource Goods
- Example: Fisheries, grazing lands
- Characteristics: Rivalrous (one person's use reduces availability for others) and non-excludable (difficult to prevent others from using the resource).
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Description
Test your understanding of Chapter 16 in behavioral economics with this quiz. It covers external costs, negative externalities, and the Coase theorem, encouraging logical explanations for each answer. Prepare to apply economic theories to real-world scenarios.
