Question

Someone got a wonderful surprise and was allowed to be the new Chairman of the Federal Reserve Bank (the people who print the green dollars and oversee banks).

If he/she reached out to his friends and golfing buddies and put them in key positions at the Federal Reserve, then what would we call this?

Answer choices:

• Collective Action

• Regulatory Capture

• Rent Seeking Behavior

• The Bundled Choice Problem

  2) Diamonds are expensive and water is cheap. Yet water is essential for life but diamonds are not essential to live. What explains this?

• Answer Choices:

• Diamonds are rare and hard to find so this is why they are more expensive.

• Water is everywhere and plentiful and this is why water is cheap.

• In a normal marketplace if there is less supply, then the market price will be higher.

• All of the statements are correct.  

3) During 2008 to 2011, there was a Bay Area firm known as Solyndra that sold expensive solar cells. Even the company executives knew their product could not compete effectively in that market. Nevertheless, they made friends with corrupt politicians that got a few federal agencies to issue “government loan guarantees” for Solyndra. So if they went bankrupt, then it would be the taxpayers who would pay for the losses. Solyndra was very clever, they gave lots of money to the crooked politicians as payback for the favor. Sure enough Solyndra went bankrupt in 2011.

Answer Choices:

• This is an example of Regulatory Capture

• This is an example of Rent Seeking

• This is an example of an Earmark

• This is an example of Collective Action

Answer 1

1. Regulatory capture

Reason: This is a case of regulatory capture as the official is trying to capture all important official seats for his private gain

2.

Diamonds are rare and hard to find so this is why they are more expensive.

Water is everywhere and plentiful and this is why water is cheap.

Reason: This makes water cheap and diamonds expensive

3.

This is an example of rent seeking

Reason: Rent seeking occurs when an individual tries to maximize personal wealth without creating additional wealth for the society