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ECO 102 Exam 6 26 questions worth 4 points each: Perfect Exam = 104%
 
1) Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. What is the expected value of the game?
A) -$6
B) $0
C) $6
D) $30
 
Refer to the information in Figure 17.1 below to answer the questions that follow.
 
 Figure 17.1
 
2) Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is the expected value of John’s income for each job offer?
A) $50,000 for the first offer and $80,000 for the second offer
B) $50,000 for the first offer and $50,000 for the second offer
C) $50,000 for the first offer and $30,000 for the second offer
D) $25,000 for the first offer and $50,000 for the second offer
 
3) Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is John’s expected utility for each job offer?
A) expected utility of 200 for the first offer and expected utility of 218 for the second offer
B) expected utility of 200 for the first offer and expected utility of 110 for the second offer
C) expected utility of 200 for the first offer and expected utility of 164 for the second offer
D) expected utility of 100 for the first offer and expected utility of 164 for the second offer
 
4) Refer to Figure 17.1. Suppose John’s utility from income is given in the figure. From this we would say that John is ________.
A) risk neutral
B) risk averse
C) risk loving
D) a risk taker
 
5) Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility
and is risk loving, which job offer will he choose?
A) Mark will take the first offer.
B) Mark will take the second offer.
C) Mark is indifferent between the offers — both yield the same expected utility.
D) Indeterminate from the given information.
 
Refer to the information provided in Figure 17.2 below to answer the questions that follow.
 
Figure 17.2
 
6) Refer to Figure 17.2. Suppose Sam’s utility from income is given in the diagram. From this we would say that Sam is ________.
A) risk neutral
B) risk loving
C) risk averse
D) a risk taker
 
7) All of the following statements about asymmetric information are true EXCEPT:
A) Asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have.
B) Asymmetric information creates market failures because it makes it harder for individuals to engage in transactions that would take place in the presence of perfect information.
C) Asymmetric information can only be solved through government intervention.
D) Asymmetric information occurs in the market for used cars and in the insurance market. 

8) You are in the market for a used 2006 Honda Accord. You know that half of the 2006 Accords are lemons and half are peaches. If you could be assured that the Accord you were buying was a peach, you would be willing to pay up to $10,000. On the other hand, you would only be willing to pay $2,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or a peach. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $1,500 or more and peach sellers will be willing to sell their cars for $8,500 or more. You are willing to offer _____ for a car of unknown quality and _______ are willing to sell you their car.
A) $2,000; lemon owners only
B) $5,000; lemon owners only
C) $6,000; lemon owners only
D) $8,500; both lemon and peach owners
 
9) As a result of adverse selection problems in the health insurance market, it is likely that over time
A) fewer healthy people will be insured.
B) fewer unhealthy people will be insured.
C) fewer healthy and unhealthy people will be insured.
D) more healthy people will be insured.
 
10) You cause an automobile liability insurance company to face a moral hazard problem when you take ________ driving precautions ________ you buy automobile liability insurance from the company.
A) fewer; after
B) more; after
C) fewer; before
D) the same; before and after
 
11) A tax whose burden, expressed as a percentage of income, falls as income increases is a
A) regressive tax.
B) progressive tax.
C) proportional tax.
D) benefits-received tax.
 
12) The excise tax is ________.
A) progressive
B) regressive
C) proportional
D) an ability-to-pay tax
 
13) A theory of fairness that holds that taxpayers should contribute to the government in proportion to the benefits they receive from public expenditures is the
A) ability-to-pay principle.
B) equity principle.
C) benefits-received principle.
D) equality-for-all principle. 
 
14) The benefits-received principle of taxation is not often used because
A) if tax payments are linked to the benefits received, taxpayers tend to overstate the benefits that they receive from public goods.
B) it leads to an overproduction of public goods.
C) it is difficult to determine the values individual taxpayers place on goods and services that are produced using tax revenue.
D) it leads to less equality in the after-tax distribution of income.
 
15) A theory of taxation that states that citizens should bear tax burdens in line with their ability
to pay taxes is the
A) ability-to-pay principle.
B) equity principle.
C) benefits-received principle.
D) equal payment principle.
 
16) The progressive income tax is a tax based on the
A) benefits-received principle.
B) tax equity principle.
C) efficiency tax principle.
D) ability-to-pay principle.
 
17) Tax incidence is the ________.
A) behavior of shifting the tax to another party
B) ultimate distribution of a taxʹs burden
C) structure of the tax
D) measure of the impact the tax has on employment and output
 
18) Firms may react to a payroll tax by
A) substituting labor for capital.
B) increasing their output.
C) shifting to more capital intensive techniques.
D) always increasing worker’s wages by the total amount of the tax.
 
Refer to the information provided in Figure 19.1 below to answer the questions that follow.
 
Figure 19.1
19) Refer to Figure 19.1. Prior to the imposition of a payroll tax, this labor market was in equilibrium at a wage of ________ and employment of ________ workers.
A) $5.00; 500
B) $7.00; 800
C) $10.00; 700
D) $12.00; 650
 
20) Refer to Figure 19.1. The payroll tax imposed is ________ per unit of labor.
A) $2
B) $3
C) $5
D) $10
 
21) Refer to Figure 19.1. After firms can respond to the payroll tax, the per-hour wage paid by firms equals
A) $12.
B) $10.
C) $7.
D) $5.
 
22) Refer to Figure 19.1. After firms can respond to the payroll tax, the workers will take home a wage of
A) $12.
B) $10.
C) $7.
D) $5. 

23) If labor supply is very elastic, the payroll tax is
A) borne mostly by the employer.
B) borne entirely by the employer.
C) borne mostly by the workers.
D) split evenly between the employer and the workers.
 
24) The ________ states that all else equal, taxes that are neutral with respect to economic decisions are generally preferable to taxes that distort economic decisions.
A) the principle of neutrality.
B) the principle of second best.
C) the principle of excess burden.
D) the law of tax incidence.
 
25) Which of the following taxes would impose the smallest excess burden on an individual?
A) a tax on Diet Pepsi
B) a tax on all diet beverages
C) a tax on all soft drinks
D) a tax on all types of beverages including water
 
26) What circumstances favor nonneutral taxes?
A) only the presence of externalities
B) only the presence of other distortionary taxes
C) both the presences of externalities and other distorting taxes
D) both inelastic demand and the presence of externalities