1999 Economics Challenge Play-off
ECONOMIC APPLICATIONS AND CURRENT EVENTS
Round IV

1. Unemployment insurance is often criticized because workers can extend the amount of time they are unemployed and thus increase the cost of the program. This phenomenon is best described as
   1. rent-seeking behavior.
   2. moral hazard.
   3. free riding.
   4. public good.
   5. externality generating.

    

2. What is the most likely consequence when people's preference for current consumption rises in relation to future consumption?
   1. Interest rates will fall, and the rate of extraction of exhaustible (nonrenewable) natural resources will decrease.
   2. Interest rates will fall, and the rate of extraction of exhaustible (nonrenewable) natural resources will increase.
   3. Interest rates will rise, and the rate of extraction of exhaustible (nonrenewable) natural resources will decrease.
   4. Interest rates will rise, and the rate of extraction of exhaustible (nonrenewable) natural resources will increase.
   5. Interest rates will fall, and there will be no effect on the rate of extraction of exhaustible (nonrenewable) natural resources.

    

3. Which of the following is not an important source of revenue for the Federal government?
   1. Corporate income taxes.
   2. Property taxes.
   3. Payroll taxes.
   4. Personal income taxes.
    
4. For a good or service that incurs an external cost,
   1. we likely get more of the product after the costs are internalized.
   2. we likely have to pay a higher price after the costs are internalized.
   3. we likely have to pay a lower price after the costs are internalized.
   4. None of the above.

    

5. A bankruptcy procedure is a species of government intervention. The economic case in favor must therefore point to market failure of some kind. Sure enough, in a textbook-perfect world, though firms would still go bust, there would be no need for bankruptcy rules or for a court to enforce them. With clear property rights, and full and equal information on both sides, contracts could be redrawn to mutual satisfaction in the event of default. In the real world, this renegotiation will be long and enormously costly -- because property rights may be in dispute, and because debtors know more than creditors about their economic condition.
   -- The Economist October 3, 1998

   Consider a firm that is solvent (its assets exceed its liabilities) but illiquid (it is short of cash and needs to borrow to pay its bills). The bankruptcy court is responsible for

   1. uncovering information, so that lenders know what is going on in the firm.
   2. compelling creditors to act in their collective best interests, rather than trying to pursue their individual advantage.
   3. ensuring that solvent but illiquid firms are reorganized, but stay in business.
   4. all of the above.
   5. a and c only.

   

   Figure 1

    

6. In Figure 1, which panel depicts a union suffering unemployment during a recession rather than allowing the wage to fall?
   1. 1
   2. 2
   3. 3
   4. 4

    

7. Who was recently nominated as the Secretary of the United States Treasury?
   1. Alan Greenspan
   2. Alan Blinder
   3. Lawrence Summers
   4. Robert Rubin
   Table 1

   Labor	Total Product
   0	0
   1	2
   2	16
   3	40
   4	58

8. In Table 1, assume that the resource and output markets are perfectly competitive. If the wage rate were $72 per unit of labor and the output price were $6 per unit, the marginal-revenue product of the third laborer would be
   1. 96 units.
   2. 4 units.
   3. 24 units.
   4. $144.
   5. $248.

    

9. According to Say's Law:
   1. supply creates its own demand.
   2. household income equals household consumption.
   3. business purchases of resources equal business sales of goods.
   4. demand creates its own supply.
   5. "gluts" or recessions will occur frequently.

    

10. The Internet has changed how businesses advertise and sell their services. For example, Northwest Airlines offers reduced fares to destinations through "Cyberfares" via their Web site on Wednesdays. This ensures that empty seats will be filled the following weekend. Economists call this
    1. oligopoly.
    2. monopolistic competition.
    3. monopoly pricing.
    4. moral hazard.
    5. price discrimination.

     

11. The new euro, the common currency for 11 European nations, came into use on January 4, 1999. Which of the following countries is NOT one of the participating 11 countries?
    1. Italy
    2. Ireland
    3. the Netherlands
    4. Finland
    5. Switzerland

     

12. The number of unemployed persons was largest during the recession of
    1. 1980-1982.
    2. 1974-1975.
    3. 1987-1989.
    4. 1960-1962.

     

13. The Justice Department and the 19 states that are suing Microsoft in an antitrust trial are devising a set of remedies to curb the software giant without crippling it. Some experts argue for structural remedies, such as breaking up the company or forcing it to auction off its Windows operating system's programming code to 2 to 4 companies. Other experts argue against these structural remedies because
    1. Microsoft could use simple price discrimination as a tactic to level the playing field of operating systems.
    2. Microsoft is a natural monopoly. For example, it is in the best interest of consumers and businesses to have an industry-standard operating system.
    3. moral hazard will tend to increase as the number of companies that produce operating systems increases.
    4. there isn't a precedent for courts to break-up large companies.

     

14. Argentina has let it be known that it is considering abandoning its currency, the peso, altogether, and adopting the American dollar instead. What makes Argentina's case so interesting is that on paper it is not a very strong candidate for the currency-board approach (let alone for full currency union with the United States). Currency boards come in different shapes and sizes but the basic idea is that they issue domestic currency only in exchange for the reserve currency--in Argentina's case, pesos are issued in exchange for dollars. The chief advantage is that
    -- The Economist January 23, 1999
    1. this outlaws any national discretion in the conduct of monetary policy: interest rates and the money supply adjust automatically to changes in economic circumstances, with the exchange rate totally fixed.
    2. seigniorage revenues will increase.
    3. All the above are true.

     

15. The Conference Board's index of leading economic indicators rose 0.1 percent in March, the sixth monthly increase in a row. Which of the indicators listed below are included in the leading indicators index?
    1. Initial unemployment claims.
    2. Orders for consumer goods.
    3. Building permits.
    4. All of the above.

Macroeconomics Test
Microeconomics Test
International Economics Test
Economic Applications and Current Events Test

Economics Challenge