BA 4309 – Regulation of Business, Fall 2003 – Test 1. Peter Lewin.

Please read the following carefully:

Multiple Choice – 25 questions. Please use a 50 question scantron 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 an accurate statement?

a. economic freedom is necessary for political freedom

b. political freedom is necessary for economic freedom

c. both of the above

d. none of the above

2. Which of the following is and accurate statement?

a. prosperity depends on democracy

b. prosperity depends on free trade

c. both of the above

d. none of the above

3. Consider the following statement: “Regulatory outcomes are strongly influenced by the personal costs and benefits facing the regulators.” This statement is consistent with which of the following approaches to regulation theory?

a. the public choice approach

b. the public interest approach

c. the public welfare approach

d. all of the above

e. none of the above

4. Relaxing the standards by which the FDA decides whether a drug is safe or not will result in which of the following?

a. a decrease in Type I errors

b. an increase in Type I errors

c. an increase in Type two errors

d. a and b of the above

e. band c of the above

5. In our current system of criminal justice, which of the following is a Type I error?

a. acquitting a guilty person

b. convicting a guilty person

c. acquitting an innocent person

d. convicting an innocent person

6. Which of the following is most likely true? At current levels of expenditure, the marginal costs ____________ the marginal benefits of airline safety.

a. exceeds

b. fall short of

c. is equal to

d. cannot be compared to

7. Every regulatory policy must deal with which of the following problems?

a. the knowledge problem

b. the incentive problem

c. both of the above

d. none of the above.

8. In which of the following did regulation cause exactly the consequence it wished to avoid by the regulation?

a. mandating additional airline safety checks

b. mandating additional airline security measures

c. requiring all cars to have passenger airbags installed

d. allowing the FDA to fast track the approval of some drugs

9. Which of the following policies will have no effect?

a. the setting of a minimum wage below the market wage

b. the setting of a maximum rent above the market rent

c. both of the above

d. none of the above – both will have effects.

10. Which of the following are the most likely supporters of minimum wage laws?

a. employers

b. trade unions

c. unskilled workers

d. owners of capital

11. Doubling the level of the minimum wage will have which of the following effects?

a. it will increase the level of employment

b. it will increase the degree of poverty in the economy

c. both of the above

d. none of the above

12. Which of the following are possible consequences of rent control?

a. abandoned houses

b. rent controlled apartments that are in short supply and effectively very expensive

c. both of the above

d. none of the above

13. Price fixing, if it has any effects, always has effects that are ________ what is intended.

a. an exaggeration of

b. equal to

c. the opposite of

d. less than

14. Considering the terrorist attacks of 9/11, which of the following were the largest category of losses sustained?

a. physical capital

b. human capital

c. commercial capital

d. transportation capital

15. Which of the following is a correct statement?

a. one benefit of the 9/11 attacks was the jobs that it created for clean up and construction

b. an important cost of the 9/11 attacks was the opportunity cost of those doing the clean up and construction associated with them

c. both a and b above are correct in part

d. none of the above is correct

16. Which of the following is “the single most powerful proposition in all of economics?”

a. the lower the price of a good, the greater the quantity of that good demanded by purchasers

b. the higher the price of a good, the greater will be the quantity of that good supplied

c. the more apples one eats the less each apple adds to ones benefits

d. an apple a day keeps the doctor away

17. Criminalizing the production and sale of drugs, provides those with skills as criminals

a. an absolute advantage

b. a suggestive advantage

c. a comparative advantage

d. a chance to do good

18. Addictive drugs are likely to have a demand curve that indicates

a. a high degree of price sensitivity

b. a low degree of price sensitivity

c. no sensitivity to price whatsoever

d. it is impossible to say

19. To derive the maximum net benefit from any action which of the following conditions must apply?

a. marginal costs must be zero

b. marginal benefits musts be zero

c. both must be zero

d. marginal benefit minus marginal cost must be zero

e. costs must be minimized

20. As we engage in more of any activity the marginal _______ of that activity eventually __________. In contrast, the marginal ______ of an activity eventually ________ as we engage in more of it.

a. benefits, fall, costs, fall

b. benefits, fall, costs, rise

c. costs, fall, benefits, rise.

d. costs, rise, benefits, rise

e. none of the above

21. The cost of any action is

a. the value of the best alternative sacrificed

b. the value of the worst alternative sacrificed

c. the expense incurred in doing it

d. the time and effort it requires

e. c and d above

22. Decriminalizing the production and sale of illegal drugs would most likely result in

a. an increase in demand for and increase in supply for them

b. an decrease in demand for and increase in supply for them

c. an increase in demand for and decrease in supply for them

d. an decrease in demand for and decrease in supply for them

e. no change in the demand and supply for them

23. Which of the following is not an example of a victimless crime?

a. extortion (pressuring people to part with their money under threat of violence)

b. a drug deal

c. the sale of prostitution services

d. illegal gambling

e. legal gambling

24. When it comes to airline safety the really difficult problem is to decide

a. whether we think safety is important or not

b. how much and what kind of safety we want

c. whose side we are on

d. why we shouldn’t make air travel absolutely safe, since life is priceless

25. Which of the following episodes is associated with Type II errors?

a. the thalidomide episode

b. the benzene episode

c. the AIDS epidemic

d. a and b of the above

e. none of the above

GRADE DISTRIBUTION:

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

24	A+
20	A
19	A-
17	B+
16	B
15	C+
10	C
ELSE	C-

Solution:

1. a

2. b

3. a

4. b

5. d

6. a

7. c

8. c

9. c

10. b

11. b

12. c

13. c

14. b

15. b

16. a

17. c

18. b

19. d

20. b

21. a

22. a

23. a

24. b

25. c