University of the Philippines

SCHOOL OF ECONOMICS

Economics 190.2
Monetary, fiscal, and development policy

N. B. Del Castillo 2nd Semester AY 2017-2018

PROBLEM SET # 2

GENERAL INSTRUCTIONS: Answer the following items on yellow sheet/s of paper and submit it on
Tuesday, April 17, 2018, 11:30 AM at SE 127. Don’t forget to write your name, section and the date of
submission on your answer sheets.

I. Choose the letter of the best answer. Each item is equivalent to 1 point.

1. The following are roles of the government in the economy EXCEPT

a. increasing efficiency. d. discouraging equity.
b. ensuring economic stability. e. None of the others.
c. pursuing macroeconomic growth.

2. If Adam Smith is to laissez faire, ___ is to communism.

a. Karl Marx c. Jose Ma. Sison e. Che Guevarra
b. Friedrich von Hayek d. John Maynard Keynes

3. Consider the following statements: (i) Privatization is the opposite of nationalization.

(ii) Nationalization reduces government’s role in the economy while privatization promotes
public provision of private goods.
a. Both statements are true.
b. Both statements are false.
c. The first statement is true while the second statement is false.
d. The first statement is false while the second statement is true.
e. Both statements are illogical.

4. Which of the following is NOT an example of a market failure?

a. monopoly c. market for lemons e. None of the others.
b. unemployment d. pollution

5. In a perfectly-competitive market, firms can earn profit ___.

a. when P = MC c. when P > AC e. All of the above
b. only in the long run d. Both B and C

6. To address asymmetric information, the government may do the following EXCEPT

a. require firms to properly label their products.
b. give standardized exams for aspiring professionals.
c. set-up conditional cash transfer program for equal opportunity.
d. All of the above.
e. None of the above.
 7. The tragedy of the commons is an example of which market failure?
a. Externality d. Imperfect competition
b. Free rider problem e. None of the others.
c. Asymmetric information

8. If Pigouvian tax addresses externality, Coasean bargaining solves ___.

a. collective action problem c. government inefficiency e. None of the others.
b. free rider problem d. transactions cost

9. An efficient tax minimizes ___ per revenue raised.

a. cost c. leakages e. None of the others.
b. welfare loss d. corruption

10. If the government wants to maximize revenue but promote consumer welfare, then it will tax
goods with ___.
a. elastic demand and elastic supply d. inelastic demand and inelastic supply
b. elastic demand and inelastic supply e. None of the others.
c. inelastic demand and elastic supply

II. Perform as indicated.

Suppose that a consumer is eating either rice or bread only. The government decides to impose a
tax on bread consumption. Using indifference curves:

a. illustrate and explain the impact of the tax on bread consumption (5 pts); and

b. show the deadweight loss generated by the tax (5 pts).