Question

1. Which of the following statements regarding asset price bubbles is correct?

a. For a bubble to occur, market participants must disagree about the fundamental value of the asset.

b. Some economists believe that bubbles do not exist.

c. According to the efficient market hypothesis, bubbles occur when the market misprices the value of an asset.

d. The market can easily know that is it in a bubble by comparing the market price with the fundamental value of the asset.

(The answer for 1 is NOT a)

2. The UK introduced a national minimum wage in 1998. Which of the following statements regarding minimum wages is correct?

a. A minimum age would not always lead to increased unemployment.

b. Instead of a minimum wage, the government can promote increased labor participation to encourage higher wages.

c. A minimum wage is a form of price ceiling.

d. The introduction of a minimum wage would always lead to a fall in the demand for labor by firms.

3. Consider two countries: CarWise and Haven'tGotAClue. In CarWise, the second-hand car salesmen know the values of the cars that they are selling, while in Haven'tGotAClue they only know the distribution of the quality of the cars - how many cars are of which quality, but not the quality of any particular car. The buyers only know the quality distribution in both countries. Based on this information, which of the following statements is correct?

a. In both countries, the second-hand car market suffers from adverse selection.

b. In CarWise, only the worst quality cars will be offered for sale.

c. No cars will be sold in Haven'tGotAClue.

d. All cars will be sold in CarWise.

Answer 1

1. b. Some economists believe that bubbles do not exist.
(Bubbles occur because of differences in actual and current values while some economists believe that bubbles do not exist.)

2. a. A minimum age would not always lead to increased unemployment.
(If it is set low enough, then it would not increase unemployment.)

3. b. In CarWise, only the worst quality cars will be offered for sale.
(As the salesmen know the quality so he will only offer low quality cars for sale.)