Consider estimating a consumption function from a large cross-section sample of households. Assume that households at lower income levels do not have as much discretion for consumption variation as households with high income levels
After all, if you live below the poverty line, then almost all of your income is spent on necessities, and there is little room to save. On the other hand, if your annual income was $1 million, you could save quite a bit if you were a frugal person, or spend it all, if you prefer. Sketch what the scatterplot between consumption and income would look like in such a situation. What functional form do you think could approximate the conditional variance var(ui Inome)?
What will be an ideal response?
Answer: See the accompanying figure. var(ui Inome) could be a + b × Income or a + b × Income2. Hence there would be heteroskedasticity.
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Which of the following statements regarding the marginal product curve is FALSE?
A) Increasing marginal returns occur only when the total product increases as the number of workers increases. B) Increasing marginal returns is due to greater efficiency from specialization in the production process. C) The law of diminishing returns applies in the short run. D) Along the marginal product curve, increasing marginal returns occur first and then diminishing marginal returns.
Answer the following statements true (T) or false (F)
1) If managers holding an auction release more information about the value of the item, they will reduce their profit. 2) Regardless of whether an auction's purpose is to sell a product or buy one, providing more information about the value of the auctioned item can benefit the auction's managers because bidders will have more confidence in their valuations. 3) Regardless of what policies a manager creates, it is unlikely that the manager can completely solve the principal-agent problem. 4) If restaurant managers have a policy that servers' tips are to be combined and then shared equally at the end of the day, this will incentivize all servers to to take the best care of their customers. 5) In general, if managers are able to make a job more appealing to an employee, this helps managers as it reduces labor turnover.
Suppose that the economy is currently at full employment. All other things being equal, if the government implements expansionary fiscal policy, then the appropriate monetary policy is
A. no change from the current policy. B. reduce the growth of the money supply. C. constant growth of the money supply. D. increase the growth of the money supply.
When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through
a. sales of government bonds, which reduces interest rates and causes people to hold less money. b. purchases of government bonds, which reduces interest rates and causes people to hold less money. c. purchases of government bonds, which reduces interest rates and causes people to hold more money. d. sales of government bonds, which reduces interest rates and causes people to hold more money.