Explain why in situations where the Coase Theorem applies, bargaining power does not influence whether the efficient outcome is reached, but affects the distribution of gains
What will be an ideal response?
The Coase Theorem applies when parties can negotiate at zero cost. If they can negotiate at zero cost then they should always choose the efficient outcome since the efficient outcome maximizes the sum of their benefits from an agreement. Bargaining power determines how the sum of the benefits is divided between the two parties. In the divorce example in this chapter, Adam and Barb should decide not to divorce since not divorcing maximizes the sum of their benefits. The Coase Theorem predicts they will not divorce regardless of how the divorce law in their state is written. The divorce law will, however, be a factor in how the gains from remaining married are divided between them.
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Starting from long-run equilibrium, a large tax cut will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. expansionary; higher; higher B. expansionary; higher; potential C. recessionary; higher; potential D. recessionary; lower; lower
"Banks hold about 50 percent of their assets as reserves." Is the previous statement correct or not?
What will be an ideal response?
The above figure shows the short-run production function for Albert's Pretzels. The average product of labor
A) increases first and then decreases. B) decreases first and then increases. C) decreases throughout. D) increases throughout.
When economists describe the theory of consumer choice, they
a. portray people as simple and methodical with perfectly predictable patterns of behavior. b. assert that consumer's decisions are based on which goods and services give them the greatest utility within their limited incomes. c. point out that consumers rarely consider utility in their purchase decisions; they look at other factors like convenience, peer behavior, and price. d. assert that the retail price is the only variable consumers really consider in making their purchasing decisions. e. admit that consumer behavior is random and there is no credible economic theory to explain the phenomenon.