True/False: The economy is in a recession phase after a peak and before a trough.
Answer:
True. By definition
Thursday, May 7, 2015
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.
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