Question

Q1 Choose the correct option

A)Is there a problem, from an efficiency standpoint, of rationing a good via lottery?

        1. no, random, luck-of-the-draw ensures the good goes to the person who values it the most

        2. yes, nothing productive is done to get the good

        3. yes, but lotteries have never been used to ration something in the United States

        4. no, all rationing methods are equally good, from an efficiency standpoint

B)Suppose that after the Federal government requires cares to be equipped with airbags, people respond to airbags by not wearing their seatbelts. After all, seatbelts are uncomfortable! As a result of this, deaths in traffic accidents actually increased following the air bag mandate. This is an example of

        1. incentives do not influence individual behavior.

        2. demand curves sloping down.
3. the law of unintended consequences.      
4. people failing to consider make decisions "on the margin" (comparing marginal benefit with marginal cost).

C) Which method of rationing is the most efficient?

1. price   
2. waiting-in-line
3. lottery
4. rationing via the political process (voting)

D) Adam Smith coined something called the "diamond-water paradox" which says it is weird that diamonds cost more than water. After all, diamonds are a luxury good whereas water is a necessity. Using our guideposts to economic thinking, what can explain this paradox?

1.Producers of diamonds have more market power than producers of water
2; The opportunity cost of water is lower than the opportunity cost of diamonds.   
3. The marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.
4. Water prices are held low by governments, since water is necessary for life.

Answer 1

C) Which method of rationing is the most efficient?

1. price
It leads to social optimum when P = MC.

D) Adam Smith coined something called the "diamond-water paradox" which says it is weird that diamonds cost more than water. After all, diamonds are a luxury good whereas water is a necessity. Using our guideposts to economic thinking, what can explain this paradox?

3. The marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

At equilibrium, MU1/P1 = MU2/P2. Since price of diamonds is more, the marginal utilty is also more.

Please post the other questions separately.