Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.
What will be an ideal response?
Stock market bubbles can lead to the inefficient allocation of investment funds. Those companies that are positively affected by the bubble and see their stock prices increase will find it relatively less expensive to raise funds and consequently may over-invest. On the other hand, those firms who are not the object of stockholder euphoria will find it more expensive to attract funds and as a result may under-invest. For consumers, the bubbles can lead to increased wealth for some individuals who as a result may consume more, save less, buy expensive automobiles, homes, vacations etc. These individuals may even work less or retire early. When the bubble bursts these individuals are left trying to adjust, which can be not only inefficient but traumatic. Also, the companies that geared up to provide these luxury goods are left to adjust. So the result is the bubbles and their subsequent bursts result in real investment and spending that is inefficient.
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One necessary condition for effective price discrimination is:
a. identical tastes among buyers. b. difference in the price elasticity of demand among buyers. c. a single, homogeneous market. d. two or more markets with easy resale of products between them.
When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier:
a. also increases. b. decreases. c. remains unchanged. d. reacts unpredictably.
Which of the following statements is true?
A. Prais-Winsten and Cochrane-Orcutt transformations are consistent when explanatory variables are not strictly exogenous. B. The SC-robust standard errors cannot be estimated in models with lagged dependent variables. C. The SC-robust standard errors work better after quasi-differencing a time series that is expected to be serially correlated. D. Estimation of SC-robust standard errors is independent of the sample size.
A good is classified as inferior if:
a. consumers buy less when the price rises. b. consumers buy less when income rises. c. consumers buy less when the price falls. d. consumers buy more when income rises. e. better quality goods exist.