BA 4309 – Regulation of Business, Fall 2002– Test 1. Peter Lewin.

Please read the following carefully:

Multiple Choice – 25 questions. Please use a 50 question scantron (882-ES) with a pencil. Hand in only the scantron (you may keep this question paper).

This is a closed book exam. Cheating will result in a zero (among other possible sanctions).

Among the possibilities given in each question select the best alternative.

Solution and grade distribution at end:

1. Which of the following is a Type II error?
1. the error of not allowing the development of beneficial drug treatments for certain diseases
2. the error of not convicting a guilty person
3. the error of convicting an innocent person
4. all of the above are Type II errors
5. a and b of the above are Type II errors

2. Consider the imposition of a minimum wage above the market wage in a market for unskilled labor. If the supply curve for unskilled labor is vertical, and the demand curve is downward sloping, this will imply
1. that there will be no effect on employment from the imposition of the minimum wage
2. that the minimum wage imposition will result in an increase in employment
3. that the minimum wage imposition will result in a decrease in employment
4. that the supply of labor will decrease as wages go up
5. c and d of the above

3. Which of the following is true?

1. since September 11, the cost of flying has gone up
2. the marginal costs of ensuring airline safety rise as more is spent
3. the marginal benefits of airline safety fall as more is spent
4. all of the above are true
5. b and c of the above

4. Which group suffers most from the spread of unions that acquire wage increases above the market wage?
1. the union members
2. comparable workers outside the union
3. employers
4. consumers
5. trade unions

5. According to Friedman, which of the following is the most important guarantee of free speech?
1. respect for private property
2. a constitutional guarantee
3. free trade
4. price controls
5. all of the above

6. Assessing the costs of terrorism in the wake of September 11, we should include
1. the loss of earnings of all those killed
2. the cost of the time of the rescue, rehabilitation and restoration workers
3. the increased opportunity cost of security precautions
4. all of the above should be included
5. a and c of the above (since b implies the creation of jobs)

7. Which of the following is NOT true?
1. the relevant costs and benefits of any action or policy are always the marginal ones
2. the relevant cost of any action is the value of the best alternative that is sacrificed
3. people respond to incentives
4. all economic policy actions have unintended costs
5. all economic policies have benefits

8. The policy of requiring automobiles to have airbags installed
1. is unnecessary because in its absence people would always choose to have them if they had the option
2. is an example of a policy with large unexpected (social) costs
3. is an example of a policy where the benefits clearly outweigh the costs
4. all of the above are true
5. b and c of the above are true

9. Which of the following is true?
1. Since the onset of the AIDS epidemic and the modification of the rules for approving drugs, the FDA has stopped committing any Type II errors
2. Since the onset of the AIDS epidemic and the modification of the rules for approving drugs, the FDA has stopped committing any Type I errors
3. Since the onset of the AIDS epidemic and the modification of the rules for approving drugs, the FDA still focuses on the avoidance of Type I errors
4. Since the onset of the AIDS epidemic and the modification of the rules for approving drugs, the FDA still focuses on the avoidance of Type II errors
5. The FDA ensures that it has sufficient information to minimize all errors

10. According to Friedman (Capitalism and Freedom) which is NOT a legitimate task of government in a free society
1. administration of the law equally to all citizens
2. protection from foreign invasion
3. prevention of the charging of excessively high prices
4. all of the above
5. a and b of the above

11. According to Friedman, the best kind of government will be one that
1. is limited in scope
2. in which government power is dispersed
3. that ensures that great works of art are produced
4. all of the above
5. a and b of the above

12. Under what circumstances can one avoid the trade-off of human lives against dollars when making policy decisions about safety?
1. never
2. always
3. when the consequences are known with certainty
4. when the consequences are unknown
5. a and b of the above

13. Which of the following does NOT affect the number of crimes in any given area?
1. the probability of being detected and apprehended
2. the probability of being charged when apprehended
3. the probability of being convicted when charged
4. all of the above most likely affect the number of crimes
5. a and b of the above

14. Which of the following is true?
1. the criminalization of the drug trade has resulted in the sale and use of more potent drugs
2. the criminalization of the drug trade has resulted in the entry into the business of more violent individuals
3. decriminalization of the drug trade would solve all the social problems connected to drug use
4. the criminalization of the drug trade most probably has resulted in a rise in the price
5. all of the above are true

15. Which of the following is NOT true?
1. water is a necessity and therefore its price is not determined simply by supply and demand
2. the price of water is always determined by the supply of it and the demand for it
3. there is enough water in the world to meet the needs of everyone
4. a shortage of water means that the price is too low
5. farmers is California pay less per gallon of water than do water users in Los Angeles

16. Which of the following is true? The policy to redeem slaves in the Sudan
1. has increased the demand for slaves
2. has resulted in an increase in the number of people enslaved
3. has resulted in a decrease in the number of people enslaved
4. had resulted in a decrease in the price of slaves
5. a and b of the above

17. Which of the following is NOT true?
1. criminalizing abortion will cause the price of abortions to go up
2. criminalizing abortion will result in more dangerous abortions
3. criminalizing abortion will reduce the amount of abortions demanded
4. criminalizing abortion ensure that abortion is not used as a form of contraception
5. effectively criminalizing abortion will require the use of more law enforcement resources

18. Which of the following is NOT true?
1. the elasticity of demand for cigarettes in the current price range is high
2. the elasticity of demand for cigarettes in the current price range is low
3. cigarettes are a politically attractive item to use to for increased tax revenues
4. cigarettes are smuggled across state lines
5. cigarettes are addictive

19. Cigarette smuggling is sensitive to which of the following?
1. the level of state tax on cigarettes in any state
2. the level of state tax on cigarettes in any state relative to the tax in states close by
3. the level of state tax on cigarettes in any state relative to the federal tax on cigarettes
4. all of the above
5. b and c of the above

20. In a world where transportation costs are zero, what effect do you think distance from the point of production might be expected to have on the size of the tax that a state would find appropriate to levy on a pack of cigarettes?
1. none
2. it would raise it
3. it would lower it
4. it would first lower it and then raise it
5. it would first raise it and then lower it

21. Which of the following is true? Imposing a maximum rent in a particular district will most likely
1. increase the availability of housing in that district
2. increase the rate of return to investing in housing in that district
3. reduce the rate of return to investing in housing in that district
4. lower the cost of housing in that district
5. a and b of the above

22. Studying for this exam and enjoying a good book suggests which of the following? (pick the closest association)
1. revenue to cost
2. trade off to opportunity cost
3. life to death
4. night and day
5. sometimes to always

23. Minimum wage laws and rent controls are both examples of
1. non-price rationing
2. price fixing
3. policies with unintended consequences
4. all of the above
5. a and c of the above

24. The optimum amount to be spent on any policy will occur where
1. the marginal benefit is equal to the marginal cost
2. the marginal benefit less the marginal cost is equal to zero
3. the marginal benefit less the marginal cost is maximized
4. a and b of the above
5. none of the above is always true

25. Economic freedom is important for which of the following reasons?
1. it is a component of freedom more generally and, therefore, is desired for its own sake
2. it is an indispensable means toward the achievement of political freedom
3. it is a way to ensure that people always make the right choices
4. all of the above
5. a and b of the above.

GRADE DISTRIBUTION:

If you score is greater than or equal to: your grade is

16	A
15	B+
14	B
13	C+
ELSE	C

SOLUTION

1. e

2. c

3. d

4. b

5. a

6. d

7. e

8. b

9. c

10. c

11. e

12. a

13. d

14. have to throw this question out because of a typo – the omission of the word NOT (as in “NOT true”). c would be correct.

15. a

16. e

17. d

18. a or b

19. b

20. a

21. c

22. b

23. d

24. d

25. e