Deck 22: Frontiers of Microeconomics

Question 1

Employers can try to overcome the moral-hazard problem involving their employees by

A)paying their employees more often.
B)paying their employees below-equilibrium wages since the employees will likely shirk some of their responsibilities.
C)better monitoring their employees' work efforts.
D)requiring their employees to take a pre-employment work effort test.

Answer 1

C

Question 2

Which of the following relationships involves asymmetric information?

A)An employee knows more than his employer knows about his work effort.
B)A borrower knows more than the lender about his ability to repay the loan.
C)The seller of a 30-year-old house knows more than the buyer about the condition of the house.
D)All of the above are correct.

Answer 2

D

Question 3

Which of the following would be an example of a principal trying to deal with a moral hazard problem?

A)The parents of an infant secretly place video cameras in their house before the baby-sitter arrives.
B)An insurance company checks police records to determine if its policyholders have received traffic citations.
C)An employer examines his workers' output on a daily basis.
D)All of the above are correct.

Answer 3

D

Question 4

Shawn buys automobile insurance from Safe-T Insurance Company.If Shawn avoids having an accident for three years,Safe-T will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.

A)This adverse selection problem could be fixed by reducing Shawn's insurance rates now. By doing this, Shawn will drive more carefully now to prevent his rates being increased after an accident.
B)Safe-T has an ongoing adverse selection problem with Shawn and other customers since it is difficult for Safe-T to select good customers.
C)This is a typical principal-agent problem.
D)Both A and C are correct.

Question 5

In the worker-employer relationship,"inappropriate" or "immoral" behavior

A)generally takes the form of workers shirking their responsibilities.
B)generally takes the form of employers being unfair to their workers.
C)is not regarded as a significant problem.
D)is regarded as a significant problem, but it does not arise from asymmetric information.

Question 6

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

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

Question 7

Robert borrowed some money from Granite Bank,telling the loan officer that he intended to use the money to make repairs to his home.After getting the loan,Robert and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment.

A)This is an example of adverse selection since banks have difficulty selecting their customers.
B)This is a typical example of the Condorcet Paradox.
C)From the given information, Robert is the principal and his girlfriend is the agent.
D)From the given information, Granite Bank is the principal and Robert is the agent.

Question 8

Which of the following practices would indicate that an employer is trying to overcome a moral-hazard problem with his employees?

A)The employer pays his workers wages that are unusually high for the industry and region.
B)The employer has voluntarily removed video cameras from the factory floor.
C)The employer has discontinued the practice of giving his employees' year-end bonuses.
D)Both A and B are correct.

Question 9

Which of the following statements is correct?

A)The moral-hazard problem is a problem involving hidden actions.
B)Adverse selection is a problem involving hidden actions.
C)Adverse selection is a problem involving principals and agents.
D)Moral hazard always involves asymmetric information; asymmetric information always involves adverse selection.

Question 10

Tom owns a small business in Sioux Falls.He travels frequently,meeting with important customers,attending conferences,and the like.Tom hired Susan to work in the Sioux Falls office as the day-to-day general manager of the business.

A)This is a moral hazard problem since Susan may not work as hard as Tom would like.
B)Tom choosing to hire Susan is an example of adverse selection since it is possible that Susan will not work as hard as Tom expects.
C)Tom will most likely pay Susan a lower salary than normal since Tom will not be there to monitor Susan's work effort, and since Susan will not likely work hard knowing Tom cannot monitor her effort.
D)The Condorcet Paradox implies that Susan will not work as hard as Tom would like even though he will likely pay her an above equilibrium wage.

Question 11

When asymmetric information affects a relationship between two parties,it is always the case that

A)neither party is well informed.
B)one party is better informed than the other party.
C)both parties are equally well informed.
D)the government is better informed than either of the two parties.

Question 12

Moral hazard is a problem that arises when

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 13

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

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

Question 14

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

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

Question 15

Which of the following relationships involves asymmetric information?

A)Patients can look up information regarding certain prescription drugs giving them the same information as their doctors.
B)Consumer Reports allows customers of DVD players to know as much about the quality of various players as the store salesperson.
C)Car Fax allows car buyers to obtain used-vehicle histories providing them with the same information as the dealership salesperson.
D)The batter in a baseball game must guess whether the pitcher is going to throw a fastball, curveball, or change-up.

Question 16

Frequently it is the case that: (1)A worker knows more than his employer about how much effort he puts into his job,and (2)the seller of a used car knows more than the buyer about the car's condition.

A)Neither (1) nor (2) serves as an example of asymmetric information.
B)Both (1) and (2) serve as examples of asymmetric information.
C)Neither (1) nor (2) serves as an example of a hidden action.
D)Both (1) and (2) serve as examples of hidden action.

Question 17

Asymmetric information

A)is rare in economic transactions.
B)can take the form of a hidden action or a hidden characteristic.
C)is the underlying problem with the Condorcet Paradox.
D)Both B and C are correct.

Question 18

A worker knows more than his employer about how much effort he puts into his job.This is an example of

A)a hidden action.
B)a hidden characteristic.
C)adverse selection.
D)the Condorcet Paradox.

Question 19

In economics,a difference in access to relevant knowledge is called a(n)

A)behavioral gap.
B)frontier gap.
C)information asymmetry.
D)access imperfection.

Question 20

The temptation of imperfectly-monitored workers to shirk their responsibilities is

A)an example of the adverse-selection problem.
B)an example of the "lemons" problem.
C)an example of the principal-agent problem.
D)an example of signaling.

Question 21

"Signaling" refers to actions by an informed party for the sole purpose of

A)telling another party that the signaler has information to reveal, without actually revealing that information.
B)conveying false information.
C)confusing another party.
D)credibly revealing private information.

Question 22

The classic example of adverse selection is the

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

Question 23

Which of the following events best exemplifies the concept of signaling?

A)A college student's parents, having learned that their child is short of money, send her a check for $1,000.
B)A woman, who is trying to win the love of a certain man, buys him a very personal gift.
C)A grocery store maintains a policy of examining the driver's license of everyone who writes a personal check to purchase their groceries.
D)A university maintains a policy of considering for admission only those students who graduated among the top ten percent of their high school class.

Question 24

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

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

Question 25

Screening occurs when

A)an informed party acts to reveal his private information.
B)an informed party acts to conceal his private information.
C)an uninformed party acts to induce the informed party to reveal private information.
D)one informed party acts to prevent another informed party from revealing private information.

Question 26

Severe adverse-selection problems may result in

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 27

When the buyer knows less than the seller about the characteristics of the good being sold,there is

A)a principal-agent problem.
B)a moral hazard problem.
C)an adverse selection problem.
D)a signaling problem.

Question 28

On car insurance policies,State Ranch Insurance Company offers drivers an option: Policy 1 features a deductible of $1,000,and it requires a driver to pay an annual premium of $500.Policy 2 features a deductible of $500,and it requires a driver to pay an annual premium of $750.

A)In offering these two policies, State Ranch is engaging in illegal price discrimination.
B)In offering these two policies, State Ranch is screening drivers.
C)Policy 1 is more of a burden for safe drivers than it is for risky drivers.
D)In offering these two policies, State Ranch is signaling their quality to drivers.

Question 29

The "lemons" problem is a likely explanation for the fact that

A)for several months after it is new, the price of a car falls very little.
B)almost no one favors government-provided health insurance.
C)people in average health may be discouraged from buying health insurance by the high price.
D)employers are reluctant to monitor the activities of their workers, fearing that some of the workers may take legal action against the employers.

Question 30

The traditional year-end bonus paid to workers

A)is evidence of the validity of efficiency-wage theories.
B)may be a response by employers to the moral-hazard problem.
C)may be a response by employers to an adverse-selection problem.
D)is a remedy to the moral-hazard problem suggested by Arrow's Theorem.

Question 31

Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to what are called

A)efficiency-wage theories.
B)shortage-wage theories.
C)monitoring theories.
D)signaling theories.

Question 32

Effective signals

A)convey useful information from informed parties to uninformed parties.
B)impose little or no cost on the signaler.
C)cannot be conveyed accurately when there is an information asymmetry.
D)can be used by employers to alleviate the moral hazard problem in the workplace.

Question 33

Which of the following is an example of signaling?

A)Graduates of highly-respected universities highlight that fact on their resumes.
B)Magazine advertisements include the phrase "as seen on TV."
C)Advertisements for universities include the phrase "fully accredited."
D)All of the above are correct.

Question 34

Which of the following statements is correct?

A)Hidden actions and hidden characteristics are both associated with the moral-hazard problem.
B)Hidden actions and hidden characteristics are both associated with the adverse-selection problem.
C)Hidden actions are associated with the moral-hazard problem, whereas hidden characteristics are associated with the adverse-selection problem.
D)Hidden actions are associated with the adverse-selection problem, whereas hidden characteristics are associated with the moral-hazard problem.

Question 35

When a firm pays its workers above-equilibrium wages,

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 36

The classic example of moral hazard is the

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 37

Because people with hidden health problems are more likely to buy health insurance than are other people,

A)the price of health insurance reflects the costs of a sicker-than-average person.
B)the price of health insurance is too low, relative to the socially-optimal price.
C)people in average health may be encouraged to buy too much health insurance, relative to the socially-optimal quantity.
D)the Condorcet Paradox suggests that people who are sicker than average will ultimately buy more health insurance.

Question 38

A firm with a very good product

A)does not likely suffer from any moral hazard problem.
B)has more to gain by signaling (advertising) than does a firm with an inferior product.
C)does not need to signal (advertise) because the product's quality speaks for itself.
D)will signal (advertise) only if the cost of signaling is very low.

Question 39

An insurance company that writes automobile policies tries to separate safe drivers from risky drivers by offering policies that feature different deductibles and different premiums.This practice is best described as an example of

A)screening.
B)behavioral economics.
C)the Condorcet Paradox.
D)signaling.

Question 40

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

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 41

Steve is planning to sell his home.In preparation for the sale,he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem.This is an example of

A)moral hazard.
B)screening.
C)adverse selection.
D)the principal-agent problem.

Question 42

When new professors are hired,their job performance is monitored closely.If they meet their institution's standards,they will eventually receive tenure.After receiving tenure,professors' job performance is less closely monitored,and they become difficult to fire.Tenure thus creates

A)adverse selection.
B)a Condorcet paradox.
C)a screening problem.
D)moral hazard.

Question 43

Insurance companies charge annual premiums to collect revenue,which they then use to pay customers who file claims for damages they incur.As a result of the moral hazard problem (1)what is the percentage of policy holders making claims,and (2)what is the average premium charged when compared to a world with no moral hazard problem?

A)The percentage of policy holders making claims is higher; average annual premiums are lower.
B)The percentage of policy holders making claims is lower; average annual premiums are lower.
C)The percentage of policy holders making claims is higher; average annual premiums are higher.
D)The percentage of policy holders making claims is lower; average annual premiums are higher.

Question 44

Moral hazard occurs when

A)an employer closely monitors an employee.
B)two people consider a trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks.
C)an employee lacks an incentive to promote the best interests of the employer, and the employer cannot observe the actions of the employee.
D)an employee closely monitors the actions of their employer.

Question 45

Joe's Computers builds and sells computers for the local retail market.Since Joe's business does not have the name recognition of some of the bigger computer retailers,Joe advertises a "One-Year Money Back Guarantee" to indicate to buyers that his product is of high quality.This guarantee is an example of

A)screening.
B)signaling.
C)the seller's curse.
D)the principal-agent problem.

Question 46

A radio story reported a study on the makes and models of cars that were observed going through intersections in the Washington,D.C.area without stopping at the stop signs.According to the story,Volvos were heavily overrepresented;the fraction of cars running stop signs that were Volvos was much greater than the fraction of Volvos in the total population of cars in the D.C.area.This is initially surprising because Volvo has built a reputation as an especially safe car that appeals to sensible,safety-conscious drivers.How is this observation best explained?

A)Volvo drivers are not willing to take risks that they would take in another, less safe car.Driving a Volvo leads to a propensity to run stop signs.
B)Volvo drivers are not willing to take risks that they would take in another, less safe car.Driving a Volvo reduces the propensity to run stop signs.
C)Volvo drivers are willing to take risks that they would not take in another, less safe car.Driving a Volvo reduces the propensity to run stop signs.
D)Volvo drivers are willing to take risks that they would not take in another, less safe car.Driving a Volvo leads to a propensity to run stop signs.

Question 47

Suppose that you major in physics because potential employers perceive that it is harder than other majors.Assuming education has no real value,your majoring in physics provides potential employers with

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

Question 48

Which of the following is an example of signaling?

A)John is considering the purchase of a used car.Before making the purchase he has the car checked by an auto mechanic.
B)Steve is applying for a new life insurance policy.Before writing the policy, the insurance company requires Steve to be examined by a doctor.
C)Traci is applying for a new job.Before hiring her, the firm requires Traci to take a drug test.
D)Ray is planning to ask for Honna's hand in marriage.Before asking her, he buys her a box of her favorite chocolates and takes her to dinner at her favorite restaurant.

Question 49

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

A)Condorcet paradox.
B)moral hazard.
C)screening
D)signaling.

Question 50

The fact that someone with a high risk of medical problems is likely to buy a large amount of health insurance is an example of

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

Question 51

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

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

Question 52

John goes to work 8 hours per day,but while he is at work he spends most of his time visiting internet sites that provide him with information on his favorite hobby.This is an example of

A)the Condorcet Paradox.
B)signaling.
C)moral hazard.
D)screening.

Question 53

ABC Inc.is concerned about the work effort of its employees.To minimize this problem,which of the following would be an effective policy for ABC to implement?

A)Pay the employees a wage in excess of the wage the employees would earn elsewhere.
B)Secretly install videocameras to monitor employees, and fire employees who shirk their responsibilities.
C)Eliminate profit-sharing programs since these tend to give employees the incentive to shirk their duties until the year-end bonus is paid.
D)Both a and b are correct.

Question 54

Carlos,who knows nothing about construction,paid Joe to remodel a room in his house.Two years later,one wall in the remodeled room crumbled because Joe used poor-quality materials.This illustrates which economic problem?

A)Adverse selection
B)Screening
C)Moral hazard
D)Signaling

Question 55

Adverse selection is

A)the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior.
B)an action taken by an uninformed party to induce an informed party to reveal information.
C)the failure of majority voting to produce transitive preferences for society.
D)the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party.

Question 56

Insurance companies charge annual premiums to collect revenue,which they then use to pay customers who file claims for damages they incur.Because of the moral hazard problem insurance companies separate customers into groups.Group 1: customers who file few claims & Group 2: customers that file a lot of claims.After creating these groups,what happens to the average annual premium within a group?

A)Group 1: average annual premium increases
Group 2: average annual premium increases
B)Group 1: average annual premium decreases
Group 2: average annual premium increases
C)Group 1: average annual premium increases
Group 2: average annual premium decreases
D)Group 1: average annual premium decreases
Group 2: average annual premium decreases

Question 57

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

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 58

Moral hazard is a problem in which it is difficult to observe a

A)hidden characteristic.
B)hidden action.
C)hidden budget constraint.
D)hidden set of preferences.

Question 59

In view of the possible need for government action in markets where asymmetric information is a problem,which of the following is a valid concern?

A)The government almost always has more information than the private parties.
B)Private markets have no means of dealing with information asymmetries on their own.
C)The government is itself an imperfect institution.
D)Legally, the government can rarely intervene in markets.

Question 60

Asymmetric information is a problem that

A)always arises from government intervention in private markets.
B)serves as a possible rationale for government intervention in private markets.
C)always amounts to a moral-hazard problem.
D)forced economists to break the field of economics into two sub-fields: microeconomics and macroeconomics.

Question 61

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?

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 62

The field of political economy

A)casts aside most of the standard methods of economic analysis.
B)is also referred to as the field of public choice.
C)is also referred to as the field of macroeconomics.
D)produces the conclusion that democratic principles rarely lead to desirable economic outcomes.

Question 63

The field of political economy

A)applies the methods of political science to microeconomics.
B)applies the methods of political science to macroeconomics.
C)is relevant to the issue of how active government should be in economic matters.
D)integrates psychological insights to better understand individual choices.

Question 64

Normally,we expect voters' preferences to exhibit a property called

A)transitivity.
B)transversality.
C)normality.
D)universality.

Question 65

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 regarding the Condorcet paradox and the results of pairwise voting by Sam,Diane,and Cliff?

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

Question 66

Recent developments in political economy

A)render much of the traditional field of political science obsolete.
B)render much of the traditional field of economics obsolete.
C)reaffirm the good qualities of democracy.
D)point to the fact that government is a less-than-perfect institution.

Question 67

Which of the following offers an explanation as to why the principal-agent problem exists for a firm?

A)The firm cares less about profit and more about cost when there are many competitors in the market.
B)The firm offers an employee-incentive program in which employees share in the firm's profits..
C)The firm operates in a market with many competitors forcing the firm to pay its employees more to keep them from switching to another firm.
D)The firm operates to maximize profit while the employees attempt to work as little as possible to earn their paychecks.

Question 68

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 (1)the first vote pits "school" against "park," and (2)the second vote pits "road" against the winner of the first vote,then the outcome is as follows:

A)"School" wins the first vote and "school" wins the second vote, so they build a school.
B)"School" wins the first vote and "road" wins the second vote, so they build a road.
C)"Park" wins the first vote and "park" wins the second vote, so they build a park.
D)"Park" wins the first vote and "road" wins the second vote, so they build a road.

Question 69

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.If Sam,Diane,and Cliff use a Borda count,rather than pairwise majority voting,to decide how to spend their evening,then they will go

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 70

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.If (1)the first vote pits "dinner" against "concert," and (2)the second vote pits "movie" against the winner of the first vote,then

A)"Dinner" wins the first vote and "dinner" wins the second vote, so they go to dinner.
B)"Dinner" wins the first vote and "movie" wins the second vote, so they go to a movie.
C)"Concert" wins the first vote and "concert" wins the second vote, so they go to a concert.
D)"Concert" wins the first vote and "movie" wins the second vote, so they go to a movie.

Question 71

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

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

Question 72

The principal-agent problem is more serious in large firms than in small firms because

A)monitoring employee activity in large firms is generally more difficult.
B)employees in large firms have less information.
C)profits increase with the size of the firm.
D)customers expect better treatment from small firms and they usually get it.

Question 73

The Condorcet voting paradox applies to situations in which voters

A)decide between exactly two possible outcomes.
B)decide among more than two possible outcomes.
C)as a group have transitive preferences
D)choose the inferior candidate even though the majority preferred the better candidate.

Question 74

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?

A)In a pairwise election, "movie" beats "concert."
B)In a pairwise election, "concert" beats "dinner."
C)In a pairwise election, "dinner" beats "movie."
D)None of the above is correct.

Question 75

The Condorcet paradox shows that

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 76

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.If (1)the first vote pits "dinner" against "movie," and (2)the second vote pits "concert" against the winner of the first vote,then the outcome is as follows:

A)"Dinner" wins the first vote and "dinner" wins the second vote, so they go to dinner.
B)"Dinner" wins the first vote and "concert" wins the second vote, so they go to a concert.
C)"Movie" wins the first vote and "movie" wins the second vote, so they go to a movie.
D)"Movie" wins the first vote and "concert" wins the second vote, so they go to a concert.

Question 77

If preferences exhibit the property of transitivity,then

A)the preferences are irrational.
B)individuals prefer more government involvement in private markets than do people whose preferences are not transitive.
C)preferences change over time more quickly than when preferences are not transitive.
D)preferences satisfy one of the properties assumed to be desireable by Kenneth Arrow in Social Choice and Individual Values.

Question 78

Under majority rule,the order in which items are voted on is

A)unimportant, and this is a lesson of the Condorcet paradox.
B)unimportant, and this has nothing to do with the Condorcet paradox.
C)important, and this is a lesson of the Condorcet paradox.
D)important, and this has nothing to do with the Condorcet paradox.

Question 79

Which of the following is an example of a principal-agent relationship?

A)Car dealer and potential customer
B)Business consultant and client
C)Retail store manager and potential customer
D)Both A and C are correct.

Question 80

Which of the following statements captures the meaning of transitivity of preferences?

A)If A is preferred to B, then B is less preferred than a.
B)If A is preferred to B, and B is preferred to C, then A is preferred to C.
C)If A is preferred to B and B is preferred to C, then the preference for A over B is stronger than the preference for B over C.
D)If A is preferred to C, then there exists B such that A is preferred to B and B is preferred to C.