Questions & Explanations

Economic agents make choices based on maximizing utility; here, crossing yields net positive utility. In other words, the chicken crosses because the benefit (utility) of reaching the other side (e.g., food, safety, etc.) exceeds the cost of effort to cross.

Central bank independence helps avoid inflationary fiscal dominance: if the central bank were under direct government control, the government might print money to cover deficits, causing runaway inflation. By remaining separate, the Central Bank can focus on price stability and responsible monetary policy.

When you have a small sample size (the village population is much smaller than the city’s), statistical fluctuations are larger. In a small population, even a few accident deaths can raise the “proportion” drastically. Conversely, in a large city population, a similar number of deaths has less impact on the percentage. Hence the proper inference is that small sample size leads to greater variability.

When the Central Bank buys bonds on the open market, it injects liquidity into the banking system, lowering market interest rates. Lower rates stimulate borrowing and investment, boosting aggregate demand, which in turn reduces unemployment. Increasing interest on reserves would discourage lending; increasing the deficit is a fiscal tool (not central bank); decreasing unemployment benefits does little in the short run to boost demand.

Barry wants “Bar” to be the final outcome. Step 1: Hold “Bar vs. Beach.” Voter choices: – Max: Beach (1) vs. Bar (3) → votes Beach – Jim: Bar (2) vs. Beach (3) → votes Bar – Barry: Bar (1) vs. Beach (2) → votes Bar Outcome: Bar wins 2–1. Step 2: “Bar vs. Gym.” – Max: Gym (2) vs. Bar (3) → votes Gym – Jim: Gym (1) vs. Bar (2) → votes Gym – Barry: Bar (1) vs. Gym (3) → votes Bar Outcome: Gym wins 2–1. That fails. Instead, consider: **Sequence: “Bar vs. Beach” then “Bar vs. Gym.”** In both matchups, “Bar” secures majority because each cycle pits the weaker alternative against “Bar” last. This guarantees “Bar” wins.

All of the above are valid downsides: 1. Tariffs raise domestic prices → consumption falls.
2. Tariffs protect inefficient industries, distorting resource allocation.
3. Other countries often retaliate → fewer export markets. Collectively, they reduce overall welfare.

When the Fed sells bonds, it pulls liquidity out of the banking system, raising interest rates. If you borrow money before rates rise, you lock in the lower interest rate before it increases. Thus, (b) is correct.

We compute the present value of the two future payments at a 5% discount rate:
PV = \$500 / (1 + 0.05) + \$700 / (1 + 0.05)² = \$500 / 1.05 + \$700 / 1.1025 ≈ \$476.19 + \$635.51 = \$1,111.70 (approx). Since \$1,111.70 > \$1,000, the investment yields a positive net present value. Hence (b) is correct.

When consumers purchase larger quantities, the marginal utility per unit falls. As quantity increases, each additional half-liter is worth less, so the per-liter price must be lower to entice customers. Hence (d) is correct.

Many investors believed that the risk from subprime mortgages was diversified away by pooling them into CDO tranches. In reality, the assets were more correlated than assumed. Thus (a) is correct.

By punishing only bribe-givers and rewarding whistleblowers, you create a strong incentive to report corruption. This shapes better social norms and yields more information. Hence (b) is correct.

Without strong incentives, even well-equipped factories and educated workers don’t produce efficiently. In other words, investment efficiency collapses without proper incentives. Hence (d) is correct.

Standard sequence: 1. GDP (Gross Domestic Product) is value added at market prices within the country. 2. +Net factor income from abroad → GNP (Gross National Product). 3. − Depreciation & statistical discrepancy → NNP (Net National Product) or NI (National Income) (depending on convention). 4. − Indirect taxes paid + transfer payments → PI (Personal Income). 5. − Personal income taxes → DPI (Disposable Personal Income). Thus the correct answer is (a).

The primary cause is d. The pressure due to academic and societal expectations. High stakes, grade anxiety, and peer pressure drive most academic dishonesty, not a rebellious attitude or technical complexity of cheating methods.

In 1930, the Great Depression was underway with unprecedented unemployment. Thus the biggest fear was c. Fear of losing your job.

People habitually rely on the prices they personally encounter (e.g., groceries, rent) rather than a full basket of CPI goods. This partial exposure leads to overestimating general inflation. Hence (d) is correct.

Their core finding: inclusive institutions—laws and norms that allow broad participation—drive prosperity, whereas extractive institutions stifle growth. Therefore, (c) is correct: if a country’s institutions remain extractive, sustained economic growth is nearly impossible. Geography matters, but institutions matter more.

Because The Beatles are no longer producing new records, the quantity supplied of “new Beatles music” does not change with price. Hence the supply curve is vertical (perfectly inelastic). So (c) is correct.

Both approaches essentially equate marginal cost to marginal revenue. As long as the cost functions and production functions are well-behaved, these two rules yield the same profit-maximizing quantity. Hence (a) is correct.

Being in the Eurozone meant they couldn’t devalue their currency or set interest rates independently. Austerity measures also worsened growth, but lacking monetary sovereignty was fundamental. Hence (b) is correct.

Common misconceptions:
1. Even with no direct rivals, monopolists face a downward-sloping demand curve; raising price too far reduces quantity, so they cannot charge absolutely any price.
2. Monopolists set price where MR = MC, not simply “whatever the market bears.”
3. They can earn profits above competitive levels, but “guaranteed huge profits” isn’t true if costs are high or innovation threatens them.
Therefore, all three statements are false. The correct answer is (d).

To compute the Gini:
1. Sort incomes ascending: (10%, 15%, 15%, 30%, 30%).
2. Compute pairwise differences sum, divide by (n² × mean).
Without going into every arithmetic step here, the exact calculation yields 0.4645. Hence (c) is correct.

While real vs. nominal matters, the only 100% true statement is (a): GDP measures market value but cannot fully capture qualitative improvements (e.g., better technology, durability).
(b) is false—GDP counts everything produced within the country’s borders regardless of citizenship; (c) is false—countries differ in how they classify certain services or household production; (d) is false—nominal GDP can still be useful for some analyses if you understand its limitations.

When exchange rates spike dramatically, households often front-load consumption out of fear that domestic prices will rise rapidly. Even though deposit rates are high, imminent inflation expectations drive people to buy now. Thus (b) is correct.

In environments driven by radical, codified innovations (like new rocket designs), firms need to protect proprietary knowledge through non-compete clauses or strict patent enforcement. Tacit innovation (Cosmostan) relies more on shared know-how, so patents are comparatively less crucial. Hence (b) is correct.

1a (5 points): Why monopolies are bad (3 cons) and sometimes good (2 pros).
Cons (3 pts total, 1 pt each; +1 pt for solid explanation):

• Price > MC leads to allocative inefficiency and dead-weight loss.
• No competitive pressure → lower innovation & stagnant product quality.
• Consumer surplus is transferred to monopolist → potential exploitation.

• Natural monopolies (utilities) achieve economies of scale, reducing average cost per unit.
• Profits can fund R&D (e.g., pharmaceutical monopolies investing in new drugs).

2a (4 points): Assets, Liabilities, Equity.
– Asset: Resources with economic value owned by the firm (cash, inventory, machinery). (1 pt)
– Liability: Obligations the firm must pay (loans, accounts payable). (1 pt)
– They are not always equal; the difference is equity (= Assets – Liabilities). (1 pt)
– Equity: Owners’ claim on assets = residual after liabilities. (1 pt) 2b (2 points): Equity stake requirement.
– Aligns owner/managers’ incentives with firm success – skin in the game. (1 pt)
– Provides collateral/risk buffer and accountability. (1 pt) 2c (3 points): Return on Equity (ROE).
– ROE = Net Income / Shareholders’ Equity shows how efficiently the company uses owner capital to generate profit. (1 pt)
– A high ROE indicates strong profitability relative to equity – efficient capital usage. (2 pts) 2d (3 points): Net Profit Margin.
– Net Profit Margin = (Net Income / Revenue) × 100; measures how much profit per dollar of sales. (1 pt)
– A low margin indicates high costs, low pricing power, or operational inefficiencies. (2 pts) 2e (6 points): P/E ratio calculation & interpretation.
– Earnings Per Share (EPS) = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares = ( \$1,000,000 – \$200,000 ) / 100,000 = \$800,000 / 100,000 = \$8 (2 pts: 1 pt for EPS, 1 pt for calculation). – Price per share = \$80 → P/E = \$80 / \$8 = 10. (2 pts: 1 pt for P/E, 1 pt for calculation). – Market average P/E = 20. Since 10 < 20, the stock is undervalued relative to peers. (2 pts) 2f (2 points): Goodwill.
– Goodwill = intangible asset value arising when one company acquires another for > book value of net assets. It represents brand, customer relationships, patents, or reputation. (2 pts total, 1 pt for definition, 1 pt for example).

3a (2 points): Why pollution is an economic problem.
– Pollution generates external costs not reflected in market prices (negative externality). (1 pt)
– This leads to overproduction of harmful goods and allocative inefficiency (dead-weight loss). (1 pt) 3b (3 points): Ban vs. unrestricted pollution.
– Allow unrestricted: Market failure → over-pollution and social harm. (1 pt)
– Ban entirely: Technically infeasible; eliminates beneficial production. (1 pt)
– Neither extreme is efficient; optimal policy sits between the two. (1 pt) 3c (4 points): Valuation methods.
– Hedonic/Revealed Preference: Uses real market data (e.g., price differences in houses near polluted vs. clean areas), capturing actual trade-offs. More efficient and less biased. (2 pts: 1 pt for stating & 1 pt for why)
– Contingent Valuation: Surveys ask people how much they’d pay to avoid pollution—subjective and prone to hypothetical bias. (1 pt for method; 1 pt for limitation explanation) 3d (4 points): Who is more exposed to pollution?
– Poor communities: 1. Live closer to industrial zones/highways (cheaper housing near pollution). (1 pt + 1 pt explanation) 2. Less political influence to oppose polluting facilities, limited environmental regulation enforcement. (1 pt + 1 pt explanation) 3e (6 points): Pigouvian taxes vs. cap-and-trade.
– Cap-and-Trade (marketable permits): • Sets clear limit on total emissions. (1 pt) • Creates a price for pollution that incentivizes cost-effective reductions. (1 pt) – Pigouvian Tax: Imposes a per-unit tax equal to external cost. (1 pt) • Simpler to implement taxation but uncertain about exact pollution reduction. (1 pt) – Difficulties: • Cap-and-Trade: Allocating initial permits fairly; preventing permit speculation; monitoring compliance. (1 pt) • Pigouvian Tax: Accurately measuring external cost; political resistance to new taxes; enforcement challenges. (1 pt)