Question 1

Which of the following is not an example of moral hazard?

Accepted Answer

A)  a person with car insurance drives recklessly 
B)  a pet-sitter being paid to walk a dog for one hour per day only walks the dog for 20 minutes per day 
C)  a thief steals a car 
D)  All of the above are examples of moral hazard. 
A)  a person with car insurance drives recklessly 
B)  a pet-sitter being paid to walk a dog for one hour per day only walks the dog for 20 minutes per day 
C)  a thief steals a car 
D)  All of the above are examples of moral hazard.

Question 2

Suppose that residents of a town are asked to vote on the best way to improve the safety of an intersection.The three choices are: a stoplight,a 4-way stop,and a 2-way stop.When the mayor asks the residents to choose between a stoplight and a 4-way stop,the residents choose a 4-way stop.Then,when the mayor asks them to choose between a 4-way stop and a 2-way stop,they choose a 2-way stop.However,if the mayor firsts asks the residents to choose between a 4-way stop and a 2-way stop,they choose a 2-way stop.Then,when the mayor asks the residents to choose between a 2-way stop and a stoplight,they choose a stoplight.What does this example illustrate?

Accepted Answer

A)  Arrow's impossibility theorem 
B)  the Condorcet paradox 
C)  a Borda count 
D)  the median voter theorem 
A)  Arrow's impossibility theorem 
B)  the Condorcet paradox 
C)  a Borda count 
D)  the median voter theorem

Question 3

Which of the following statements is not correct?

Accepted Answer

A)  Majority rule explains why politicians appeal to the middle of the voting distribution. 
B)  Based on studies of human decision making,most people prefer to procrastinate,both in the immediate future and in the distant future. 
C)  Screening refers to an uninformed party trying to extract information from an informed party. 
D)  Advertising can be an example of a company signaling the quality of its products. 
A)  Majority rule explains why politicians appeal to the middle of the voting distribution. 
B)  Based on studies of human decision making,most people prefer to procrastinate,both in the immediate future and in the distant future. 
C)  Screening refers to an uninformed party trying to extract information from an informed party. 
D)  Advertising can be an example of a company signaling the quality of its products.

Question 4

Table 22-2
Three longtime friends-Fred,Barney,and Wilma-are deciding how they will spend their Sunday afternoon.They all agree that they should do one of three things: go to a movie,go to the beach,or go to a museum.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 22-2.If Fred,Barney,and Wilma use a Borda count,rather than pairwise majority voting,to decide how to spend their afternoon,then they will go

Accepted Answer

A)  to a movie. 
B)  to a concert. 
C)  out to dinner. 
D)  None of the above is correct;a Borda count fails to produce a winner in this instance. 
A)  to a movie. 
B)  to a concert. 
C)  out to dinner. 
D)  None of the above is correct;a Borda count fails to produce a winner in this instance.

Question 5

The Condorcet voting paradox demonstrates that democratic outcomes do not always obey the property of

Accepted Answer

A)  narrowness of preferences. 
B)  concavity of preferences. 
C)  asymmetry of preferences. 
D)  transitivity of preferences. 
A)  narrowness of preferences. 
B)  concavity of preferences. 
C)  asymmetry of preferences. 
D)  transitivity of preferences.

Question 6

Table 22-3
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 22-3.Which of the following statements is correct regarding the Condorcet paradox and the results of pairwise voting in Paradoxopolis?

Accepted Answer

A)  The paradox implies that pairwise voting never produces transitive preferences,and so the voting in Paradoxopolis fails to produce transitive preferences. 
B)  The paradox implies that pairwise voting sometimes (but not always)produces transitive preferences,and the voting in Paradoxopolis does produce transitive preferences. 
C)  The paradox implies that pairwise voting sometimes (but not always)fails to produce transitive preferences,and the voting in Paradoxopolis fails to produce transitive preferences. 
D)  The paradox does not apply to the case at hand,because the preferences of Type 3 voters are not individually transitive. 
A)  The paradox implies that pairwise voting never produces transitive preferences,and so the voting in Paradoxopolis fails to produce transitive preferences. 
B)  The paradox implies that pairwise voting sometimes (but not always)produces transitive preferences,and the voting in Paradoxopolis does produce transitive preferences. 
C)  The paradox implies that pairwise voting sometimes (but not always)fails to produce transitive preferences,and the voting in Paradoxopolis fails to produce transitive preferences. 
D)  The paradox does not apply to the case at hand,because the preferences of Type 3 voters are not individually transitive.

Question 7

One of the things that employers can do to lessen the moral hazard problem involving their employees is to pay them in advance for their work.

Accepted Answer

A) True 
 B)False

Question 8

Ed was recently hired as a salesman for a national consulting firm.His job responsibilities involve spending a significant portion of his time out of the office visiting prospects and attending conferences.Which of the following is strategy the consulting firm may employ to discourage Ed from shirking his responsibilities?

Accepted Answer

A)  Tell Ed that the shareholders want to earn a large profit this year. 
B)  Pay Ed commissions on what he sells after the work has been completed. 
C)  Allow Ed to set his own schedule and work from home frequently. 
D)  Pay Ed a lower wage than he would earn in a similar job at another firm. 
A)  Tell Ed that the shareholders want to earn a large profit this year. 
B)  Pay Ed commissions on what he sells after the work has been completed. 
C)  Allow Ed to set his own schedule and work from home frequently. 
D)  Pay Ed a lower wage than he would earn in a similar job at another firm.

Question 9

Suppose you are covered under health insurance or belong to a Health Maintenance Organization (HMO),and you are insured against all or most of the costs of visits to the doctor.As a result you are likely to make greater use of medical services of all kinds.This tendency of people with insurance to change their behavior in a way that leads to more claims against the insurance company is called

Accepted Answer

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

Question 10

In corporations,a principal-agent problem can arise when

Accepted Answer

A)  the shareholders are the principal and the managers are the agent. 
B)  the board of directors is the principal and the managers are the agent. 
C)  the shareholders are the principal and the board of directors is the agent. 
D)  All of the above are correct. 
A)  the shareholders are the principal and the managers are the agent. 
B)  the board of directors is the principal and the managers are the agent. 
C)  the shareholders are the principal and the board of directors is the agent. 
D)  All of the above are correct.

Question 11

Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its workers?

Accepted Answer

A)  It increases the probability that a worker who shirks will be caught. 
B)  It discourages workers from shirking out of fear of losing their high-paying job. 
C)  The Condorcet Paradox suggests that paying high wages will result in greater effort by employees. 
D)  By paying a high wage,employers solve this adverse selection problem and motivate the employees to work harder. 
A)  It increases the probability that a worker who shirks will be caught. 
B)  It discourages workers from shirking out of fear of losing their high-paying job. 
C)  The Condorcet Paradox suggests that paying high wages will result in greater effort by employees. 
D)  By paying a high wage,employers solve this adverse selection problem and motivate the employees to work harder.

Question 12

An implication of the median voter theorem is that

Accepted Answer

A)  minority views and majority views are given equal weight. 
B)  platforms of the major political parties will not differ greatly. 
C)  the logic of democracy is fundamentally flawed. 
D)  behavioral economics plays a signficant role in voting outcomes. 
A)  minority views and majority views are given equal weight. 
B)  platforms of the major political parties will not differ greatly. 
C)  the logic of democracy is fundamentally flawed. 
D)  behavioral economics plays a signficant role in voting outcomes.

Question 13

When markets fail,which of the following is true?

Accepted Answer

A)  Government intervention can always improve outcomes. 
B)  Government intervention can potentially improve outcomes. 
C)  Government intervention can never improve outcomes. 
D)  Markets do not fail. 
A)  Government intervention can always improve outcomes. 
B)  Government intervention can potentially improve outcomes. 
C)  Government intervention can never improve outcomes. 
D)  Markets do not fail.

Question 14

The Condorcet paradox shows that

Accepted Answer

A)  allocations of resources based on majority rule are always inefficient. 
B)  problems in counting votes can negate legitimate democratic outcomes. 
C)  the order on which things are voted can affect the result. 
D)  transitive preferences are inconsistent with rationality. 
A)  allocations of resources based on majority rule are always inefficient. 
B)  problems in counting votes can negate legitimate democratic outcomes. 
C)  the order on which things are voted can affect the result. 
D)  transitive preferences are inconsistent with rationality.

Question 15

The Condorcet paradox implies that the order in which items are voted on under majority rule is unimportant.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is not an example of signaling?

Accepted Answer

A)  screening 
B)  advertising 
C)  getting an education 
D)  gift giving 
A)  screening 
B)  advertising 
C)  getting an education 
D)  gift giving

Question 17

The Latin term caveat emptor,meaning "let the buyer beware," brings to mind the problem of

Accepted Answer

A)  hidden actions. 
B)  adverse selection. 
C)  principals and agents. 
D)  moral hazard. 
A)  hidden actions. 
B)  adverse selection. 
C)  principals and agents. 
D)  moral hazard.

Question 18

The moral hazard problem and the desire of firms to lessen that problem serve as a plausible explanation for a firm paying above-equilibrium wages to its workers.

Accepted Answer

A) True 
 B)False

Question 19

Table 22-1
Three friends -- Tricia,Sarah,and Katie -- are deciding where to go together for vacation.They all agree that they should go to one of three places: Ireland,Italy,or Greece.They also agree that they will have two pairwise votes to determine where to go on vacation,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.If the first vote pits Ireland against Greece and the second vote pits Italy against the winner of the first vote,then the outcome is as follows:

Accepted Answer

A)  Ireland wins the first vote and Italy wins the second vote,so they go to Italy. 
B)  Ireland wins the first vote and Ireland wins the second vote,so they go to Ireland. 
C)  Greece wins the first vote and Greece wins the second vote,so they go to Greece. 
D)  Greece wins the first vote and Italy wins the second vote,so they go to Italy. 
A)  Ireland wins the first vote and Italy wins the second vote,so they go to Italy. 
B)  Ireland wins the first vote and Ireland wins the second vote,so they go to Ireland. 
C)  Greece wins the first vote and Greece wins the second vote,so they go to Greece. 
D)  Greece wins the first vote and Italy wins the second vote,so they go to Italy.

Question 20

The problem of moral hazard is a problem of hidden action.

Accepted Answer

A) True 
 B)False

Exam 22: Frontiers of Microeconomics

Which of the following is not an example of moral hazard?

Which of the following statements is not correct?

The Condorcet voting paradox demonstrates that democratic outcomes do not always obey the property of

One of the things that employers can do to lessen the moral hazard problem involving their employees is to pay them in advance for their work.

In corporations,a principal-agent problem can arise when

Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its workers?

An implication of the median voter theorem is that

When markets fail,which of the following is true?

The Condorcet paradox shows that

The Condorcet paradox implies that the order in which items are voted on under majority rule is unimportant.

Which of the following is not an example of signaling?

The Latin term caveat emptor,meaning "let the buyer beware," brings to mind the problem of

The moral hazard problem and the desire of firms to lessen that problem serve as a plausible explanation for a firm paying above-equilibrium wages to its workers.

The problem of moral hazard is a problem of hidden action.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

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

Monopolistic Competition

Oligopoly

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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