Sample test for second exam----Enjoy!

**IMPORTANT NOTE** this test is designed to give you
an idea of the form of the questions and should serve
as a good way to see how well you HAVE studied.  DO NOT
base your study solely on this test, as the coverage is too
selective and you will miss important topics.

STUDY FIRST, THEN TAKE THIS AND SEE IF YOU STUDIED THE RIGHT WAY
(not the right stuff....)



Match the market on the left with the most likely
form of market failure on the right.  Do not use an answer 
more than once.

Highways at rush hour                             Negative Externality
Market for high quality used appliances           Positive Externality
Low-emission cars                                 Incomplete Market



Each of the following statements is wrong in some way.  
Provide a counter-argument based on economic rationale.

Taxes always lead to a dead weight loss.

Monopolies will always lead to economic inefficiency.

Individuals always follow the tenants of rational choice making.




Provide the most likely economic explanation for why we see the following
phenomena (answers should be one, reasonable sized line for each!):

Why might General Electric sell its own brand of washing machine while
simultaneously allowing Sears to sell the identical machine under the
"Kenmore" brand?

Why might forcing insurance companies to cover any individuals who apply for
insurance at the same rate benefit society?

Why do we have "lemon laws" for used car buyers?

Why might allowing a company to pollute an amount equal to the total
emissions from all current pollution sources be better than
allowing each source to not exceed its current level?

Why might forcing a manufacturer who uses and pollutes water from
a neighboring stream to intake their water from downstream of the
outtake be a good policy?



Provide short answers to each of the following questions.

Auto insurance companies often offer different levels of
coverage by setting different deductibles.  Levels that offer
less insurance are cheaper to the consumer.

What information problem do auto insurance companies confront
relative to the care that drivers take to avoid accidents?

How might this deductible policy alleviate this problem?



Consider an industry with, say, ten competing firms.
If the firms were to get together and act as a single
firm, could they all be better off?

Why (provide a simple proof)?


Given the above result, why don't we see this happening
more often?  (Assume for your answer that it is not illegal to
do so.)