Question 1

The buyer runs a risk of being sold a good of low quality when there is

Accepted Answer

A)  a principal-agent problem. 
B)  a moral-hazard problem. 
C)  a problem involving hidden actions. 
D)  a problem involving hidden characteristics.

Question 2

Domingo is a contestant on a trivia quiz show. For every state capital he can correctly identify, he will win $1,000. However, before identifying any capitals, he must decide how many he thinks he can correctly identify. If he cannot identify as many as he has wagered, Domingo will not win any money. Suppose Domingo says that he can correctly identify 42 state capitals for a potential payoff of $42,000. According to studies of human decision-making, what is most likely to happen?

Accepted Answer

A)  Domingo will be able to identify 42 state capitals and he will win $42,000. 
B)  Domingo will be able to identify fewer than 42 state capitals and will not win any money. 
C)  Domingo will not be able to identify any state capitals and will not win any money. 
D)  Domingo will choose to save all of the money he wins on the quiz show for his retirement.

Question 3

The classic example of adverse selection is the

Accepted Answer

A)  market for used cars. 
B)  market for new cars. 
C)  relationship between shareholders and managers. 
D)  relationship between a coach and an athlete.

Question 4

Table 22-4
The fortunate residents of Anytown have a budget surplus. The mayor decided that it is only fair to have the residents vote on what to do with the surplus. The mayor has narrowed the options down to three possible projects: a playground, a library, or a swimming pool. The voters fall into three categories and have preferences as illustrated in the table. 
-Refer to Table 22-4. If the mayor asks the residents to choose between the playground and the swimming pool using pairwise voting,

Accepted Answer

A)  the playground wins by 10%. 
B)  the playground wins by 45%. 
C)  the swimming pool wins by 10%. 
D)  the swimming pool wins by 55%.

Question 5

Scenario 22-6
Shana owns a boutique that sells high­end women's clothing and accessories. Katie works part-time at the boutique and frequently is the only employee in this small store. Shana pays Katie a wage that is higher than the market wage for this type of job. When the store is not full of customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda is a customer in the store who asks Katie's opinion on the quality of some jeans she is considering purchasing. Katie tells her the quality is great even though she's had several other customers return them due to flaws. Magda is another customer who is returning a necklace without volunteering that a gem is missing.
-Refer to Scenario 22-6. Why do you suppose Shana pays Katie a wage higher than the market wage?

Accepted Answer

The answer of Scenario 22-6
Shana owns a boutique that sells...

Question 6

The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and Adelphia are an example of moral hazard.

Accepted Answer

A) True 
 B)False

Question 7

Ed promises his wife that he will mow the lawn on Saturday morning, but when Saturday morning arrives he changes his mind and says he will do it on Sunday. What insight about human behavior can be deduced from Ed's decision?

Accepted Answer

The answer of Ed promises his wife that he will...

Question 8

An action taken by an informed party to reveal private information to an uninformed party is called

Accepted Answer

The answer of An action taken by an informed party...

Question 9

If A is preferred to B and C is preferred to D, then B must be preferred to C to satisfy transitivity.

Accepted Answer

A) True 
 B)False

Question 10

The unanimity property states that the ranking between any two outcomes should not depend on whether some third outcome is available.

Accepted Answer

A) True 
 B)False

Question 11

Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she prefers A to C.

Accepted Answer

A) True 
 B)False

Question 12

A home has been on the market for an extended amount of time without much interest from buyers. The sellers decide to purchase and include a home warranty insuring against major defects with the home. The warranty is an example of a(n)

Accepted Answer

A)  signal. 
B)  screen. 
C)  moral hazard. 
D)  adverse selection.

Question 13

Table 22-2
Three longtime friends-Allen, Brian, and Cody-are deciding how they will spend their Sunday afternoon. They all agree that they should do one of three things: go to a movie, play golf, or go to a baseball game. They also agree that they will have two pairwise votes to determine how to spend their afternoon, 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. Which of the following statements is correct regarding the Condorcet paradox and the results of pairwise voting by Allen, Brian, and Cody?

Accepted Answer

A)  The paradox implies that pairwise voting never produces transitive preferences, and so the voting by Allen, Brian, and Cody fails to produce transitive preferences. 
B)  The paradox implies that pairwise voting sometimes (but not always) produces transitive preferences, and the voting by Allen, Brian, and Cody does produce transitive preferences. 
C)  The paradox implies that pairwise voting sometimes (but not always) fails to produce transitive preferences, and the voting by Allen, Brian, and Cody fails to produce transitive preferences. 
D)  The paradox does not apply to the case at hand, because Brian's preferences are not individually transitive.

Question 14

Table 22-11
Five voters must choose from among four options: A, B, C, or D. Each voter's preferences are summarized in the table below. Options higher in the table are more preferred by the voter. 
-Refer to Table 22-11. Which pairwise voting scheme would result in outcome B?

Accepted Answer

A)  First, choose between A and B. Second, voters choose between the winner of the first vote and C. Third, voters choose between the winner of the second vote and D. 
B)  First, choose between B and C. Second, voters choose between the winner of the first vote and A. Third, voters choose between the winner of the second vote and D. 
C)  First, choose between B and D. Second, voters choose between the winner of the first vote and C. Third, voters choose between the winner of the second vote and A. 
D)  First, choose between C and D. Second, voters choose between the winner of the first vote and A. Third, voters choose between the winner of the second vote and B.

Question 15

The problem that arises in markets in which the seller knows more about the characteristics of the good being sold than the buyer knows is

Accepted Answer

The answer of The problem that arises in markets in...

Question 16

A person's tendency to smoke a cigarette after promising himself that he will quit is an example of the behavioral economics insight that people are inconsistent over time

Accepted Answer

A) True 
 B)False

Question 17

The problem that arises when one person performs a task on behalf of another person is called

Accepted Answer

A)  the hidden characteristics problem. 
B)  the lemons problem. 
C)  moral hazard. 
D)  adverse selection.

Question 18

Scenario 22-4
Three members of the DiCarlo family, Vinny, Maria, and Franki, are choosing the entree for a large family reunion. Their options are: spaghetti, ravioli, lasagne, and pizza. Vinny prefers spaghetti over lasagne, lasagne over ravioli, and ravioli over pizza. Maria prefers ravioli over spaghetti, spaghetti over pizza, and pizza over lasagne. Frankie prefers pizza over ravioli, ravioli over lasagne, and lasagne over spaghetti.
-Refer to Scenario 22-4. Vinny recommends using a vote by majority rule and wants to be sure that his first choice becomes the winner. Which order should he should propose to use for pairwise voting to ensure his desired outcome?

Accepted Answer

A)  first choosing between ravioli and spaghetti, then choosing between the winner of the first vote and pizza, and finally choosing between the winner of the second vote and lasagne 
B)  first choosing between pizza and spaghetti, then choosing between the winner of the first vote and lasagne, and finally choosing between the winner of the second vote and ravioli 
C)  first choosing between lasagne and pizza, then choosing between the winner of the first vote and ravioli, and finally choosing between the winner of the second vote and spaghetti 
D)  None of the proposed voting orders will result in Vinny's first choice winning the vote.

Question 19

Anthony and Addie are playing the ultimatum game, starting with $100. The coin flip results in Anthony being the one to propose a division of the $100. Anthony proposes that he gets $99 and Addie gets $1. Which of the following statements is correct?

Accepted Answer

A)  Because the 99­1 split isn't fair, Anthony should not make this offer. 
B)  Conventional economic theory predicts that Anthony will propose a 99-1 split, just as he did. 
C)  Experimental evidence suggests that Addie will accept the 99­1 split because, even though it isn't fair, it's better than nothing. 
D)  Economic theory predicts that Anthony should choose a 60-40 split to maximize his payoff.

Question 20

Steve borrowed some money from Summit Bank, telling the loan officer that he intended to use the money to remodel his restaurant. After getting the loan, Steve and his girlfriend immediately took the money and went gambling in Vegas.

Accepted Answer

A)  This is an example of adverse selection since banks have difficulty selecting their customers. 
B)  This example does not involve asymmetric information. 
C)  From the given information, Steve is the principal and Summit Bank is the agent. 
D)  None of the above are correct.

Exam 22: Frontiers of Microeconomics

The buyer runs a risk of being sold a good of low quality when there is

The classic example of adverse selection is the

The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and Adelphia are an example of moral hazard.

Ed promises his wife that he will mow the lawn on Saturday morning, but when Saturday morning arrives he changes his mind and says he will do it on Sunday. What insight about human behavior can be deduced from Ed's decision?

An action taken by an informed party to reveal private information to an uninformed party is called

If A is preferred to B and C is preferred to D, then B must be preferred to C to satisfy transitivity.

The unanimity property states that the ranking between any two outcomes should not depend on whether some third outcome is available.

Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she prefers A to C.

A home has been on the market for an extended amount of time without much interest from buyers. The sellers decide to purchase and include a home warranty insuring against major defects with the home. The warranty is an example of a(n)

Table 22-11 Five voters must choose from among four options: A, B, C, or D. Each voter's preferences are summarized in the table below. Options higher in the table are more preferred by the voter. -Refer to Table 22-11. Which pairwise voting scheme would result in outcome B?

The problem that arises in markets in which the seller knows more about the characteristics of the good being sold than the buyer knows is

A person's tendency to smoke a cigarette after promising himself that he will quit is an example of the behavioral economics insight that people are inconsistent over time

The problem that arises when one person performs a task on behalf of another person is called

Anthony and Addie are playing the ultimatum game, starting with $100. The coin flip results in Anthony being the one to propose a division of the $100. Anthony proposes that he gets $99 and Addie gets $1. Which of the following statements is correct?

Steve borrowed some money from Summit Bank, telling the loan officer that he intended to use the money to remodel his restaurant. After getting the loan, Steve and his girlfriend immediately took the money and went gambling in Vegas.