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.

True/False: Suppose a farmer faces the risk of a natural disaster destroying his rice paddies. If the farmer is risk averse, then the farmer will always take up an insurance contract when offered.

Answer:
False. The farmer may not take up an insurance contract if the premium is too expensive.

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.

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.

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.

True/False: The economy is in a recession phase after a peak and before a trough.

Answer:
True. By definition

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)