True/False: Consider a standard Hotelling beach model, where consumers are scattered along a one mile beach. These consumers have perfectly inelastic demand as well as positive linear transportation costs. Firms set their location, but price is fixed by the government. The Nash equilibrium location choices will be different from choices that maximize total surplus.
Answer:
True. Nash equilibrium strategy is for both firms to locate at the center of the road (1/2 mile point). The socially optimal strategy, which maximizes total surplus, is for one firm to locate at the 1/4 mile point and for another to locate at the 3/4 mile point.
Tuesday, May 12, 2015
Saturday, May 9, 2015
True/False: You are doing econometric analysis. If your dependent variable only takes on values of zero or one (for "no" and "yes"), and your independent variable has a continuous distribution, then regressing the dependent variable on the independent variable will unbiased coefficient and standard error estimates.
Answer:
False. There are many problems with such regressions. For example, the model will very likely suffer from severe heteroskedasticity, making standard error estimates biased.
Answer:
False. There are many problems with such regressions. For example, the model will very likely suffer from severe heteroskedasticity, making standard error estimates biased.
Thursday, May 7, 2015
True/False: Suppose you are analyzing panel data and are unsure whether the fixed effect and independent variables are correlated. Then, it is best to use fixed effect models.
Answer:
True. Random effects models impose the strong assumption that the fixed effect and independent variables are uncorrelated. These coefficients may be biased if the assumptions does not hold. Therefore, it is best to play safe and use fixed effects model. You potentially sacrifice some efficiency if your assumption is not correct, but your estimates are unbiased if all other assumptions are met.
Answer:
True. Random effects models impose the strong assumption that the fixed effect and independent variables are uncorrelated. These coefficients may be biased if the assumptions does not hold. Therefore, it is best to play safe and use fixed effects model. You potentially sacrifice some efficiency if your assumption is not correct, but your estimates are unbiased if all other assumptions are met.
True/False: When a monopolist is a perfect price discriminator, total surplus can be increased by changing the price (either lowering or raising the price).
Answer:
False. Perfect price discrimination allows a monopolist to produce at the socially efficient level. Therefore, changing the price would only lower total surplus.
Answer:
False. Perfect price discrimination allows a monopolist to produce at the socially efficient level. Therefore, changing the price would only lower total surplus.
True/False: Even in the presence of externalities, we know from the First Welfare Theorem that markets generate Pareto efficient outcomes, or at least outcomes that are close to efficient.
Answer:
False. The First Welfare Theorem assumes there are no externalities. Therefore, the theorem can't be applied when there are externalities. (It could well be true that the market will still generate a Pareto efficient outcome, it's just not guaranteed)
True/False: Last December, oil prices tumbled. Assume all other prices stayed the same. One can reasonably expect that the Consumer Price Index will overstate the change in the cost of living.
Answer:
False. The CPI should understate cost of living changes when prices decrease. Consider that people substitute towards products which use oil as an input. However, the CPI does not take this into account. (The general principle is that CPI does not take into account substitution effects.) What is true is that if the price of oil increased, the CPI would overstate the change in the cost of living.
True/False: Heteroskedasticity causes OLS coefficient estimates to be biased.
Answer:
False. OLS standard errors are biased, but not OLS coefficient estimates. These are still unbiased (although OLS is no longer BLUE, meaning it no longer is the best linear unbiased estimator. In other words, if errors are heteroskedastic, there exist other linear unbiased estimators that have lower variance than OLS. Consider generalized least squares)
Answer:
False. OLS standard errors are biased, but not OLS coefficient estimates. These are still unbiased (although OLS is no longer BLUE, meaning it no longer is the best linear unbiased estimator. In other words, if errors are heteroskedastic, there exist other linear unbiased estimators that have lower variance than OLS. Consider generalized least squares)
True/False: Under Leontief preferences, there is no substitution effect as prices change.
Answer:
True. Leontief preferences mean that a consumer treats goods as though they were perfect complements (e.g. left shoes and right shoes). Intuitively, changes in price do not cause consumers to substitute left shoes for right shoes. In fact, the only effect is an income effect: real income goes down when prices increase, and real income increases when prices decrease.
Answer:
True. Leontief preferences mean that a consumer treats goods as though they were perfect complements (e.g. left shoes and right shoes). Intuitively, changes in price do not cause consumers to substitute left shoes for right shoes. In fact, the only effect is an income effect: real income goes down when prices increase, and real income increases when prices decrease.
True/False: All games have a Nash equilibrium in pure strategies.
Answer:
False. Matching pennies has no pure strategy Nash equilibrium.
Answer:
False. Matching pennies has no pure strategy Nash equilibrium.
True/False: If a game does not have a Nash equilibrium in pure strategies, then it must have a Nash equilibrium in mixed strategies.
Answer:
True. This is because all games have a Nash equilibrium. (By an advanced mathematical concept known as Kakutani's fixed point theorem. However, it's unlikely you need to know this as an undergraduate).
Answer:
True. This is because all games have a Nash equilibrium. (By an advanced mathematical concept known as Kakutani's fixed point theorem. However, it's unlikely you need to know this as an undergraduate).
True/False: With Cobb-Douglas preferences, the cross-price elasticity between any two goods is zero.
Answer:
True. Notice that with Cobb-Douglas preferences, total expenditure on any good is fixed regardless of the good's price. (To verify this, do the Lagrangian.) Hence changes in the price of a good would only lead to changes in quantity demand for that good, and not other goods.
Answer:
True. Notice that with Cobb-Douglas preferences, total expenditure on any good is fixed regardless of the good's price. (To verify this, do the Lagrangian.) Hence changes in the price of a good would only lead to changes in quantity demand for that good, and not other goods.
Welcome!
This blog contains a list of true/false questions in economics. It is useful to:
1. students, who wish to prepare for quizzes and tests
2. instructors, who want some inspiration in setting questions
3. anyone who wishes to learn more about economics.
1. students, who wish to prepare for quizzes and tests
2. instructors, who want some inspiration in setting questions
3. anyone who wishes to learn more about economics.
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