Question 1

Moral hazard is a problem that arises when

Accepted Answer

A) an agent performs a task on behalf of a principal. 
B) a principal performs a task on behalf of an agent. 
C) a moral person trusts an immoral person to perform a task for him. 
D) an immoral person bribes a moral person to perform a task for him. 
A) an agent performs a task on behalf of a principal. 
B) a principal performs a task on behalf of an agent. 
C) a moral person trusts an immoral person to perform a task for him. 
D) an immoral person bribes a moral person to perform a task for him.

Question 2

The 2001 Nobel prize in economics was awarded to George Akerlof,Michael Spence,and Joseph Stiglitz for their work on

Accepted Answer

A) asymmetric information. 
B) monopoly. 
C) oligopoly and monopolistic competition. 
D) labor markets. 
A) asymmetric information. 
B) monopoly. 
C) oligopoly and monopolistic competition. 
D) labor markets.

Question 3

According to the median voter theorem,majority rule will

Accepted Answer

A) always produce an inconclusive outcome. 
B) produce the outcome least preferred by the median voter. 
C) produce the outcome most preferred by the median voter. 
D) produce an outcome that is inconsistent with transitive preferences. 
A) always produce an inconclusive outcome. 
B) produce the outcome least preferred by the median voter. 
C) produce the outcome most preferred by the median voter. 
D) produce an outcome that is inconsistent with transitive preferences.

Question 4

Conventional economic theory assumes that people

Accepted Answer

A) care a great deal about fairness. 
B) are inconsistent over time in their decisionmaking. 
C) are rational. 
D) are satisficers. 
A) care a great deal about fairness. 
B) are inconsistent over time in their decisionmaking. 
C) are rational. 
D) are satisficers.

Question 5

Experiments show that when real people play the ultimatum game,starting with $100,

Accepted Answer

A) Player A usually proposes giving Player B more than $50. 
B) Player B usually accepts Player A's proposal if Player A proposes giving Player B $30 or $40. 
C) players show themselves to be rational wealth-maximizers. 
D) Both B and C are correct. 
A) Player A usually proposes giving Player B more than $50. 
B) Player B usually accepts Player A's proposal if Player A proposes giving Player B $30 or $40. 
C) players show themselves to be rational wealth-maximizers. 
D) Both B and C are correct.

Question 6

Scenario 22-5
Three candidates, Fred, Barb, and William, are running for office. There are three voters in the upcoming election: Heather, Don, and Luanne. Heather prefers Barb over Fred and Fred over William. Don prefers William over Barb and Barb over Fred. Luanne prefers Fred over Barb and Barb over William.
-Refer to Scenario 22-5.If the voters were given a choice of Barb versus William first,then the winner was in a second election versus Fred,who would win?

Accepted Answer

A) Fred 
B) Barb 
C) William 
D) There is not enough information to answer this question. 
A) Fred 
B) Barb 
C) William 
D) There is not enough information to answer this question.

Question 7

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Accepted Answer

Drivers (buyers and potential buyers of

Question 8

A life insurance company requires new applicants to have a medical exam prior to writing the insurance policy.This requirement is an example of

Accepted Answer

A) signaling. 
B) screening. 
C) moral hazard. 
D) adverse selection. 
A) signaling. 
B) screening. 
C) moral hazard. 
D) adverse selection.

Question 9

The Condorcet voting paradox shows that outcomes based on dictatorial preferences do not always obey the property of transitivity.

Accepted Answer

A) True 
 B)False

Question 10

In his 1951 book,Social Choice and Individual Values,Kenneth Arrow used the term "unanimity" to mean

Accepted Answer

A) A beats B only if everyone prefers A to B. 
B) if everyone prefers A to B, then A beats B. 
C) if A beats B and B beats C, then A must best C. 
D) everyone who is eligible to vote must vote; otherwise, the outcome is invalid. 
A) A beats B only if everyone prefers A to B. 
B) if everyone prefers A to B, then A beats B. 
C) if A beats B and B beats C, then A must best C. 
D) everyone who is eligible to vote must vote; otherwise, the outcome is invalid.

Question 11

Table 22-1
Three longtime friends-Sam, Diane, and Cliff-are deciding how they will spend their Saturday evening. They all agree that they should do one of three things: go to a movie, go to a concert, or go out to dinner. They also agree that they will have two pairwise votes to determine how to spend their evening, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the table below.
  
-Refer to Table 22-1.Which of the following statements is correct?

Accepted Answer

A) In a pairwise election, "concert" beats "movie." 
B) In a pairwise election, "dinner" beats "concert." 
C) In a pairwise election, "movie" beats "dinner." 
D) All of the above are correct. 
A) In a pairwise election, "concert" beats "movie." 
B) In a pairwise election, "dinner" beats "concert." 
C) In a pairwise election, "movie" beats "dinner." 
D) All of the above are correct.

Question 12

The classic example of moral hazard is the

Accepted Answer

A) market for used cars. 
B) market for new houses. 
C) relationship between a buyer and a seller. 
D) relationship between a worker and his employer. 
A) market for used cars. 
B) market for new houses. 
C) relationship between a buyer and a seller. 
D) relationship between a worker and his employer.

Question 13

Table 22-3
  
-Refer to Table 22-3.The table shows the preferences of three types of voters over three possible outcomes: X,Y,and Z.In addition,the table shows the percentage of voters of each type.Based on this information,which of the following statements is true?

Accepted Answer

A) As the Condorcet Paradox predicts, majority rule fails to produce transitive preferences for society. 
B) As Arrow's Impossibility Theorem demonstrates, it is impossible from this information to determine which outcome the voters prefer. 
C) The median voter theorem allows us to conclude that in a vote between X and Y, Y will win since the Type 2 voter is the median voter. 
D) While the Condorcet Paradox predicts that majority rule may not produce transitive preferences for society as a whole, society's preferences in this case are transitive. 
A) As the Condorcet Paradox predicts, majority rule fails to produce transitive preferences for society. 
B) As Arrow's Impossibility Theorem demonstrates, it is impossible from this information to determine which outcome the voters prefer. 
C) The median voter theorem allows us to conclude that in a vote between X and Y, Y will win since the Type 2 voter is the median voter. 
D) While the Condorcet Paradox predicts that majority rule may not produce transitive preferences for society as a whole, society's preferences in this case are transitive.

Question 14

When a potential client enters a lawyer's office,they want to observe expensive furniture and art work because

Accepted Answer

A) these items are items that the lawyer displays to new clients in an attempt to signal her quality. 
B) these items are expensive and they provide a screening of the quality of the lawyer. 
C) these items are an example of eliminating a moral hazard. 
D) these items are a signal of the lawyer's adverse selection. 
A) these items are items that the lawyer displays to new clients in an attempt to signal her quality. 
B) these items are expensive and they provide a screening of the quality of the lawyer. 
C) these items are an example of eliminating a moral hazard. 
D) these items are a signal of the lawyer's adverse selection.

Question 15

Conventional economic theory suggests that in the ultimatum game,the player proposing a split of $100 will propose that she get $99 and that the other player get $1.By the same reasoning,if the amount to be split is $200,the player proposing the split will propose that she gets

Accepted Answer

A) $100 and that the other player gets $100. 
B) $198 and that the other player gets $2. 
C) $199 and that the other player gets $1. 
D) $200 and that the other player gets nothing. 
A) $100 and that the other player gets $100. 
B) $198 and that the other player gets $2. 
C) $199 and that the other player gets $1. 
D) $200 and that the other player gets nothing.

Question 16

Table 22-6
  
-Refer to Table 22-6.The table shows the preferences of 100 voters over three possible outcomes: X,Y,and Z.Which of the following statements is true?

Accepted Answer

A) In pairwise majority voting, Y is preferred to Z, Z is preferred to X, and Y is preferred to X. 
B) In pairwise majority voting, X is preferred to Y, Y is preferred to Z, and X is preferred to Z. 
C) In pairwise majority voting, Y is preferred to Z, Z is preferred to X, and X is preferred to Y. 
D) In pairwise majority voting, Z is preferred to X, X is preferred to Y, and Z is preferred to Y. 
A) In pairwise majority voting, Y is preferred to Z, Z is preferred to X, and Y is preferred to X. 
B) In pairwise majority voting, X is preferred to Y, Y is preferred to Z, and X is preferred to Z. 
C) In pairwise majority voting, Y is preferred to Z, Z is preferred to X, and X is preferred to Y. 
D) In pairwise majority voting, Z is preferred to X, X is preferred to Y, and Z is preferred to Y.

Question 17

Table 22-2
The citizens of Paradoxopolis will decide whether to build a new school, build a new park, or build a new road. Exactly one of the three choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
  
-Refer to Table 22-2.If the citizens of Paradoxopolis use a Borda count,rather than pairwise majority voting,to decide what to build,then they will build a new

Accepted Answer

A) school. 
B) park. 
C) road. 
D) None of the above is correct; a Borda count fails to produce a winner in this instance. 
A) school. 
B) park. 
C) road. 
D) None of the above is correct; a Borda count fails to produce a winner in this instance.

Question 18

When a firm pays its workers above-equilibrium wages,

Accepted Answer

A) the moral-hazard problem is always worsened as a result. 
B) the adverse-selection problem is always worsened as a result. 
C) it may be because efficiency-wage theories are valid. 
D) the Condorcet Paradox suggests the workers will work harder than if they were paid a lower wage. 
A) the moral-hazard problem is always worsened as a result. 
B) the adverse-selection problem is always worsened as a result. 
C) it may be because efficiency-wage theories are valid. 
D) the Condorcet Paradox suggests the workers will work harder than if they were paid a lower wage.

Question 19

Severe adverse-selection problems may result in

Accepted Answer

A) too few good used cars being offered for sale. 
B) wages that are too low relative to equilibrium levels. 
C) too many good drivers buying too much automobile insurance. 
D) people with average health buying too much health insurance. 
A) too few good used cars being offered for sale. 
B) wages that are too low relative to equilibrium levels. 
C) too many good drivers buying too much automobile insurance. 
D) people with average health buying too much health insurance.

Question 20

An implication of the median voter theorem is that Republicans and Democrats will try to align their views with those of the median voter.

Accepted Answer

A) True 
 B)False

Exam 22: Frontiers of Microeconomics

Moral hazard is a problem that arises when

The 2001 Nobel prize in economics was awarded to George Akerlof,Michael Spence,and Joseph Stiglitz for their work on

According to the median voter theorem,majority rule will

Conventional economic theory assumes that people

Experiments show that when real people play the ultimatum game,starting with $100,

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

A life insurance company requires new applicants to have a medical exam prior to writing the insurance policy.This requirement is an example of

The Condorcet voting paradox shows that outcomes based on dictatorial preferences do not always obey the property of transitivity.

In his 1951 book,Social Choice and Individual Values,Kenneth Arrow used the term "unanimity" to mean

The classic example of moral hazard is the

Table 22-3 -Refer to Table 22-3.The table shows the preferences of three types of voters over three possible outcomes: X,Y,and Z.In addition,the table shows the percentage of voters of each type.Based on this information,which of the following statements is true?

When a potential client enters a lawyer's office,they want to observe expensive furniture and art work because

Conventional economic theory suggests that in the ultimatum game,the player proposing a split of $100 will propose that she get $99 and that the other player get $1.By the same reasoning,if the amount to be split is $200,the player proposing the split will propose that she gets

Table 22-6 -Refer to Table 22-6.The table shows the preferences of 100 voters over three possible outcomes: X,Y,and Z.Which of the following statements is true?

When a firm pays its workers above-equilibrium wages,

Severe adverse-selection problems may result in

An implication of the median voter theorem is that Republicans and Democrats will try to align their views with those of the median voter.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short Run Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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