Deck 22: Frontiers in Microeconomics

Question 1

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

Answer 1

True

Question 2

The two major problems caused by asymmetric information are the moral-hazard problem and the principal-agent problem.

Answer 2

False

Question 3

Economists have found that asymmetric information is not very prevalent.

Answer 3

False

Question 4

In the employer-worker relationship, the employer is regarded as the "principal" and the worker is regarded as the "agent."

Question 5

Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may be reluctant to reveal relevant information.

Question 6

Screening is an action taken by an uninformed party to induce an informed party to reveal information.

Question 7

Signaling is an action taken by an uninformed party to induce an informed party to reveal information.

Question 8

An example of an information asymmetry is when a worker knows more than his employer about his work effort.

Question 9

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

Question 10

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.

Question 11

An example of asymmetric information is when a seller of a house knows more than the buyer about the house's condition.

Question 12

An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to convey his love for her.

Question 13

One way that employers respond to the moral-hazard problem is by monitoring their employees.

Question 14

Moral hazard and adverse selection are similar asymmetric information problems but moral hazard involves hidden actions while adverse selection involves hidden characteristics.

Question 15

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.

Question 16

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

Question 17

The classic example of adverse selection is the market for used cars.

Question 18

In economics, a difference in access to relevant knowledge is called a behavioral asymmetry.

Question 19

In a moral hazard problem, the agent is unable to perfectly monitor the principal's behavior so the principal applies less effort than the agent considers desirable.

Question 20

The science of economics is a finished jewel, perfect and unchanging.

Question 21

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

Question 22

The Condorcet paradox tells us that, even though it is impossible to satisfy all of Arrow's properties of a desirable voting system, pairwise majority voting will always satisfy transitivity.

Question 23

Arrow's impossibility theorem illustrates the difficulties in creating the perfect voting system.

Question 24

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

Question 25

Arrow's impossibility theorem shows that it is impossible to find a better voting system than pairwise majority voting.

Question 26

Arrow's impossibility theorem demonstrates the impossibility of the median voter theorem.

Question 27

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

Question 28

Political leaders are always aiming for an optimal combination of efficiency and equality.

Question 29

Majority rule will produce the outcome most preferred by the median voter.

Question 30

Arrow's impossibility theorem states that the majority rule fails to produce transitive preferences for society.

Question 31

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

Question 32

The Condorcet paradox shows that there is no scheme for aggregating individual preferences into a valid set of social preferences.

Question 33

The Condorcet paradox demonstrates that the order in which people vote on choices may influence the final outcome.

Question 34

Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.

Question 35

Borda count is a voting method often used in polls that rank sports teams.

Question 36

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

Question 37

An example of screening is a company spending a large sum on advertising to convey the high quality of its product.

Question 38

In the field of study called political economy, economists make use of insights from the field of psychology.

Question 39

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

Question 40

According to the median voter theorem, majority rule will produce an outcome that is inconsistent with transitive preferences.

Question 41

Researchers have found that the systematic mistakes that people make in their decision making include a lack of confidence in their own abilities.

Question 42

Adverse selection can only occur when there is asymmetric information​.

Question 43

Evidence from experiments in which real people play the ultimatum game supports the idea that people care about fairness as well as about maximization of their personal wealth.

Question 44

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

Question 45

People are willing to give up monetary rewards to promote fairness.​

Question 46

The median voter theorem states that majority-rule political systems will produce policies that are most preferable for the median voter.​

Question 47

A "satisficer" is a person whose decision making is the same as that predicted by mainstream economic models.

Question 48

Studies of human decision-making have found that people do not give enough weight to a small number of vivid observations.

Question 49

The problem that results from an agent, who is imperfectly monitored by the principal, engaging in dishonest or otherwise undesirable behavior is called

Question 50

The tendency of many people to procrastinate supports the view that people are consistent over time.

Question 51

When an individual purchases health insurance and knows more about her family medical history than the insurance company, this is an example of adverse selection​.​

Question 52

Studies of human decision making have found that people are reluctant to change their minds.

Question 53

Most economic models incorporate the assumption of rational behavior on the part of economic actors.

Question 54

Economic experiments show that people care more about winning a game than about its intrinsic fairness.

Question 55

Smoking cessation tools (e.g., nicotine gum) provide evidence that people behave in a time inconsistent manner.

Question 56

The field of behavioral economics applies the methods of economics to study how government works.

Question 57

The field of economics in which the tools of economics are used to understand the functioning of government is

Question 58

The field of economics that combines the study the psychology of human behavior and economic issues is

Question 59

When some people are better informed than others and the imbalance affects the choices they make, economists say there is

Question 60

Based on studies of human decision making, many people care more about the fairness of a game than about their personal winnings.

Question 61

Table 22-24
The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. 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 22-24. If the town administrator asks voters to choose first between hockey and basketball and then between the winner of the first vote and football, which sport will win the final vote?

Question 62

Brandon is considering buying a used car but he first downloads a report from the internet that shows the history of accidents and major repairs conducted on the car. This action is called

Question 63

Table 22-23
The town of Franklin is facing a severe budget shortage. The town administrator has proposed four options to balance the budget: increase property taxes (taxes), cut the school arts budget (arts), turn off half of the streetlights in the town (streetlights), reduce police patrols (police). Exactly one of the four 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 22-23. If a Borda count is used, which option will win?

Question 64

People with hidden health problems are more likely to buy health insurance than other people. As a result, people in average health may observe the high prices of insurance and decide not to buy it. This is an example of

Question 65

The failure of majority rule to produce transitive preferences for society is called the

Question 66

Scenario 22-6
​
Shana owns a boutique that sells high-end 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. What is the name for the problem Katie creates by lying about the quality of the jeans?

Question 67

Scenario 22-6
​
Shana owns a boutique that sells high-end 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. What is the term for the type of wage Shana pays Katie?

Question 68

Table 22-24
The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. 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 22-24. If the town administrator asks voters to choose first between basketball and football and then between the winner of the first vote and hockey, which sport will win the final vote?

Question 69

State one reason why government intervention may not be a good solution to an asymmetric information problem.

Question 70

Table 22-23
The town of Franklin is facing a severe budget shortage. The town administrator has proposed four options to balance the budget: increase property taxes (taxes), cut the school arts budget (arts), turn off half of the streetlights in the town (streetlights), reduce police patrols (police). Exactly one of the four 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 22-23. If the town administrator asks the people to first choose between cutting the arts program and turning off half of the streetlights, and then choose between the winner of the first election and reducing police patrols, and then choose between the winner of the second election and increasing taxes, which option will win each vote?

Question 71

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

Question 72

If A is preferred to B and B is preferred to C, then we would expect A to be preferred to C. This property is called

Question 73

A travel agency offers a money-back guarantee for vacationers taking their first cruise in case they do not enjoy the experience. This guarantee is an example of

Question 74

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

Question 75

Scenario 22-6
​
Shana owns a boutique that sells high-end 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. Suppose Shana is tired of all of the problems with the brand of jeans she carries and decides to carry a different, higher quality brand instead. She is concerned that her customers will not trust the quality of the new brand so she offers a 60 day money-back guarantee. The action taken by Shana is called

Question 76

Scenario 22-6
​
Shana owns a boutique that sells high-end 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 22-2. Why do you suppose Shana pays Katie a wage higher than the market wage?

Question 77

Maria and Jose installed a "nanny-camera" in their home so that they can view how the nanny is interacting with their children while they are at work. What type of problem are they trying to combat?

Question 78

Scenario 22-6
​
Shana owns a boutique that sells high-end 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. Which of the ladies, if any, is committing a moral hazard?

Question 79

Pete owns a small store. He has noticed that when he is not at the store monitoring his employees, his revenue goes down. What are two changes Pete could make to wages he pays his employees to correct this problem?

Question 80

Scenario 22-5
A wireless telephone service provider offers three service plans to its consumers.
Refer to Scenario 22-5. By offering consumers these choices and allowing them to select the plan that best meets their needs, the wireless service provider is engaging in