HM Treasury
Microeconomics Level 2: Module 3 Assessment
Mar 2005
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Your answers are due by 6 p.m.Friday, 25March. It would be helpful if you can submit your answers electronically, as an attached file. Please email your answers to
with “Microeconomics 2, Mar 2005” in the Subject line
Thanks
Sandeep
Microeconomics Level 2, Module 3
You must attempt all 15 multiple-choice questions (report your answers as number followed by your choice of letter) and only ONE of the two essay-type questions.
1An outcome is Pareto efficient if
(a) all individuals are equally happy, and no one can be made happier
(b) no one can be made worse off without making someone better off
(c) all markets are in equilibrium
(d) none of the above
2Public goods are those
(a) supplied by the public sector
(b) society thinks should be available to all members of the public
(c) necessarily consumed in equal amounts by everyone
(d) none of the above
3Merit goods are those
(a) supplied by the public sector
(b) society thinks should be available to all members of the public
(c) necessarily consumed in equal amounts by everyone
(d) none of the above
4Monopoly results in social loss because a monopolist
(a) over-produces in order to obtain extra profit
(b) is able to set any price it wants, regardless of consumer demand
(c) will tend to produce at a level where the marginal social benefit of an additional unit exceeds the marginal cost of producing it
(d) all of the above
5The theory of the second best suggests that
(a) we must try to remove distortions wherever it is possible
(b) free unregulated markets are not entirely efficient
(c) unavoidable distortions in some markets can be countered with deliberate distortions in others
(d) all of the above
6Market failure describes situations in which
(a) markets fail to equate demand and supply
(b) markets fail to achieve an equitable allocation of goods
(c) markets fail to achieve an efficient allocation of goods
(d) all of the above
7The economic idea behind a pollution tax is
(a) to eliminate pollution
(b) to help pay for cleaning up pollution
(c) to eliminate the divergence between social and private costs
(d) all of the above
8A natural monopoly has declining average costs in the relevant range of demand. Efficient prices for a natural monopoly will result in
(a) positive profits
(b) zero profits
(c) a loss
(d) any of the above
9 The free market mechanism never allocates resources efficiently when
(a) the rate of inflation is high or very variable
(b) people are not fully compensated for costs others impose on them
(c) there are large disparities in income or wealth
(d) all of the above
10 The more inelastic is the demand for labour by firms
(a) the more of a given payroll tax they will bear
(b) the less of a given payroll tax they will bear
(c) the more a payroll tax reduces their labour demand
(d) none of the above
11Moral hazard in insurance markets refers to the fact that:
(a) insured persons become more careless
(b) people tend to lie when buying insurance
(c) careless persons seek more insurance
(d) none of the above
12Risk is optimally allocated among participants of a contract
(a) if it is evenly distributed.
(b) if it is allocated to those who don’t mind it so much
(c) if it is allocated to those who can reduce the risk by exerting greater care
(d) both (b) and (c).
13When calculating the net present value of a positive revenue stream, the use of a higher rate of discount
(a) decreases the net present value
(b) increases the net present value
(c) has no effect on the net present value
(d) could increase or decrease the net present value
14In cost-benefit analysis, uncertainty about future costs of disposing nuclear waste
(a) should be incorporated by increasing the discount rate
(b) should be analysed by making alternative assumptions about key parameters
(c) should be ignored because in the long run technological solutions will be found
(d) none of the above
15Social cost benefit analysis differs from private investment appraisal in that
(a) it ignores all private profit received from an investment project
(b) it always uses a lower discount factor
(c) it takes account of the possible externalities of the project
(d) it considers ‘bygones to be bygones’
Answer ONE of the following questions, briefly but clearly.
16‘The welfare state faces a growing conflict between insuring people against risks beyond their control and maintaining incentives for individuals to minimise risks within their control.’ Provide two illustrative examples of such conflict, and suggest appropriate policy solutions.
17‘If a university degree has any worth, individuals will be prepared to pay for it. This makes a case for more private finance in higher education.’ Discuss.
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