Deck 23: Frontiers of Microeconomics

Question 1

Adverse selection is a problem that arises in markets where the seller knows more about the attributes of the good being sold than the buyer does.

Answer 1

True

Question 2

Arrow's impossibility theorem suggests that a voting system will be ideal if the properties of intransitivity and dependence of irrelevant alternatives are satisfied.

Answer 2

False

Question 3

An implication of asymmetric information in the insurance market is that people in average health may be encouraged to purchase health insurance.

Answer 3

False

Question 4

A difference in access to relevant knowledge is called information symmetry.

Question 5

The median voter theorem is used to explain why parties in a two-party political system tend to put forward very different policies.

Question 6

Signalling refers to actions taken by an informed party for the purpose of credibly revealing their private information.

Question 7

An implication of asymmetric information in the insurance market is that the price of health insurance may reflect the costs of a healthier-than-average person.

Question 8

The classic example of adverse selection is the market for oranges.

Question 9

The Condorcet paradox illustrates that majority voting by itself does not necessarily reveal what outcome society really wants.

Question 10

Given asymmetric information, car insurance companies might encourage risky drivers to identify themselves by offering a high-premium policy without a deductible.

Question 11

A way for employers to reduce shirking is to offer workers higher than equilibrium wages.

Question 12

One implication of the lemons problem is that many people have an incentive to buy vehicles in the used car market..

Question 13

If monitoring by a principal is imperfect, it is less likely that a moral hazard problem will arise.

Question 14

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

Question 15

In the moral hazard problem the principal tends to undertake less effort than the agent considers desirable.

Question 16

Signalling is motivated by the existence of asymmetric information.

Question 17

Arrow's impossibility theorem suggests that any voting system society adopts for aggregating the preferences of its members will be flawed.

Question 18

The median voter theorem suggests that democratic institutions will produce the outcome desired by the median voter, regardless of the preferences of the rest of the electorate.

Question 19

Suppose a voting system is implemented and this shows that B is preferred toA.
A third option C then becomes available. Independence of irrelevant outcomes means that the system would still prefer B toA.

Question 20

In the context of a voting system, independence of irrelevant alternatives means that the ranking between any two outcomes A and B should not depend on whether some third outcome C is also available.

Question 21

Loss aversion means that commitment strategies that generate potential losses are more likely to change behaviour than strategies that generate the equivalent money gain.

Question 22

Politicians are never motivated by self-interest.

Question 23

Behavioural economics suggest that people are frequently overconfident about their abilities.

Question 24

In the moral hazard problem the principal performs some task on behalf of the agent.

Question 25

The median voter is the voter exactly in the middle of a distribution.

Question 26

Insurance companies have perfect knowledge about the health problems of those who purchase insurance due to asymmetric information in the insurance market.

Question 27

Gift-giving can be explained through asymmetric information and signalling.

Question 28

The problem of asymmetric information is absent in the moral hazard problem.

Question 29

Experiments suggest that people tend to interpret evidence to confirm beliefs they already hold.

Question 30

The Condorcet paradox reinforces the notion that majority rule ensures transitive preferences for society..

Question 31

An implication of the median voter theorem is that, in a democratic voting system, minority views are given significant weight.

Question 32

Studies suggest that the passage of time makes no difference to individuals' choices between two options.

Question 33

Private insurance companies cannot do anything to reduce the impact of the moral hazard problem.

Question 34

Results of the ultimatum game suggest that considerations of fairness may play a role in economic behaviour.

Question 35

Private markets sometimes deal with asymmetric information through signalling and screening.

Question 36

Arrow identified unanimity and transitivity as desirable properties for a voting system.

Question 37

Given asymmetric information, car insurance companies might encourage risky drivers to identify themselves by distributing a driving history questionnaire.

Question 38

Herbert Simon suggested that people should be treated as satisficers rather than rational maximisers.

Question 39

People frequently interpret evidence in a way that conforms to their own prior beliefs.

Question 40

The lack of caution exhibited by individuals and families who are privately insured is an example of moral hazard.

Question 41

If signalling is applied to advertising:

A)a firm with a good product reaps a relatively small benefit from advertising
B)firms ignore the possibility of repeated customers
C)it is rational for a firm with a good product to pay for the cost of the signal
D)all firms have the same incentive to advertise

Question 42

In the moral hazard problem the:

A)agent performs some task on behalf of the principal
B)principal performs some task on behalf of the agent
C)the principal and the agent have the same goals and preferences
D)agent can perfectly monitor the principal's behaviour

Question 43

The classic example of adverse selection is the market for:

A)oranges
B)child safety equipment
C)used cars
D)crime novels

Question 44

In the moral hazard problem the:

A)agent tends to undertake more effort than the principal considers desirable
B)agent tends to undertake less effort than the principle considers desirable
C)problem of asymmetric information is absent
D)agent does not exhibit any 'undesirable' behaviour

Question 45

Employers can reduce the incentive of imperfectly monitored workers to shirk by:

A)better monitoring
B)lower wages
C)avoiding year-end bonuses
D)none of the above

Question 46

Private insurance companies:

A)have perfect information about how cautious homeowners are
B)have less than perfect information about how cautious homeowners are
C)do not face moral hazard problems
D)cannot do anything to reduce the impact of the moral hazard problem

Question 47

It is often difficult for a customer to know the quality of a 3-D television. If a television manufacturer advertises its 3-D televisions then:

A)this is a costless action that fails to signal the 3-D television is a good product
B)this is a costless action that succeeds in signalling that the 3-D television is a good product
C)this is a costly action that succeeds in signalling that the 3-D television is a good product
D)this is a costly action that fails to signal the 3-D television is a good product

Question 48

When applied to the labour market, the adverse selection model suggests that:

A)relatively talented workers are more likely to remain with a particular firm if the firm cuts the wages it pays
B)firms have perfect knowledge about the ability of workers
C)a firm may choose to pay an above-equilibrium wage to attract a better mix of workers
D)all workers have identical abilities

Question 49

The incentive of imperfectly monitored workers to shirk can be reduced by:

A)higher levels of monitoring and offering year-end bonuses
B)higher levels of monitoring and lower wages
C)lower levels of monitoring and offering year-end bonuses
D)lower levels of monitoring and lower wages

Question 50

An implication of asymmetric information in the insurance market is that:

A)insurance companies have perfect knowledge about the health problems of those who purchase insurance
B)the price of health insurance may reflect the costs of a healthier-than-average person
C)people with greater hidden health problems are more likely to buy health insurance than other people
D)people in average health are encouraged to purchase health insurance

Question 51

An implication of asymmetric information in the insurance market is that:

A)people in average health may be discouraged from purchasing health insurance
B)the price of health insurance may reflect the costs of a healthier-than-average person
C)people with greater hidden health problems have an incentive to signal their current state of health to health insurance companies
D)insurance companies have perfect knowledge about the health problems of those who purchase insurance

Question 52

For signalling to work to solve adverse selection then: (i) it cannot be possible for the signal to be copied by sellers of low quality products
(ii) it credibly informs an uninformed party that the product is high quality
(iii) it must be restricted to the education market

A)(i) only
B)(i) and (ii)
C)(i) and (iii)
D)(ii) and (iii)

Question 53

In the employment relationship, the employer:

A)and worker are both agents
B)and worker are both principals
C)is the principal and the worker is the agent
D)is the agent and the worker is the principal

Question 54

Which of the following statements are implications of the lemons problem in the used car market? (i) many people avoid buying vehicles in this market
(ii) used cars have a market value much less than that of new cars
(iii) buyers are just as aware of a used car's defects as sellers

A)(i) only
B)(i) and (ii)
C)(i) and (iii)
D)(ii) and (iii)

Question 55

Adverse selection is a problem that arises in markets where:

A)the seller knows more about the attributes of the good being sold than the buyer does
B)the buyer knows more about the attributes of the good being sold than the seller does
C)only used cars are bought and sold
D)both buyers and sellers have the same knowledge about the attributes of the good

Question 56

If signalling is applied to advertising:

A)a firm with a good product reaps a relatively large benefit from advertising
B)firms ignore the possibility of repeated customers
C)it is irrational for a firm with a good product to pay for the cost of the signal
D)firms with poor products can copy this signal easily

Question 57

If there is adverse selection in the health insurance market then this means that:

A)insurance companies can identify all the health problems facing its customers
B)the price of health insurance may be greater than the costs of covering the average person's health risks
C)people with severe but hidden health problems are less likely to buy health insurance than other people
D)people in average health are encouraged to purchase health insurance

Question 58

If signalling is applied to advertising:

A)a firm with a good product reaps a relatively small benefit from advertising
B)firms recognise the possibility of repeated customers
C)it is irrational for a firm with a good product to pay for the cost of the signal
D)all firms have the same incentive to advertise

Question 59

One implication of the lemons problem is that:

A)a used car only a few days old will often sell for less than a new car of the same type
B)many people have an incentive to buy vehicles in the used car market
C)used cars have a market value almost identical to that of new cars
D)buyers are just as aware of vehicle defects as the sellers of used cars

Question 60

Which of the following are examples of the moral hazard problem? (i) the employment relationship between a worker and an employer
(ii) an insured homeowner who buys too many fire extinguishers
(iii) homeowners who choose to live in a high flood risk area when the government bears the cost of disaster relief

A)(i) only
B)(i) and (ii)
C)(i) and (iii)
D)(ii) and (iii)

Question 61

Arrow identified which of the following as desirable properties for a voting system? (i) unanimity and transitivity
(ii) independence of irrelevant alternatives
(iii) a benevolent dictator

A)(i) only
B)(i) an (ii)
C)(i) and (iii)
D)(ii) and (iii)

Question 62

The Condorcet paradox illustrates how:

A)choice of voting order has no impact on the outcome of a democratic election
B)majority voting by itself can tell us what outcome of society really wants
C)choice of voting order can have an impact on the outcome of a democratic election
D)aggregating individual preferences into preferences for society as a whole is relatively straightforward.

Question 63

The median voter theorem suggests that democratic institutions will produce the outcome desired by:

A)individuals with hidden characteristics
B)only well-informed voters
C)the median voter only if it is consistent with the preferences of the rest of the electorate
D)the median voter, regardless of the preferences of the rest of the electorate

Question 64

Screening takes place when an:

A)uninformed party takes actions to induce an informed party to reveal private information
B)informed party takes actions to reveal his or her private information
C)informed party takes actions to induce an uninformed party to reveal private information
D)informed party takes actions to reveal his or her publicly available information

Question 65

Experiments suggest that people: (i) accurately estimate their own abilities
(ii) give an appropriate weight to a small number of vivid observations
(iii) interpret evidence to confirm beliefs they already have

A)(i) and (ii)
B)(i) and (iii)
C)(ii) and (iii)
D)(iii) only

Question 66

Studies suggest that:

A)the passage of time makes no difference to individuals' choices between two options
B)individuals' choices may be inconsistent over time
C)individuals' choices are always consistent over time
D)none of the above

Question 67

The median voter theorem can:

A)explain why the parties in a two-party political system tend to put forward very different policies
B)explain why the parties in a two-party political system tend to adopt rather extreme political platforms.
C)explain why the parties in a two-party political system are similar to each other
D)none of the above

Question 68

The median voter is:

A)any voter in a democratic system
B)the voter at the start of a distribution
C)the voter at the end of a distribution
D)the voter exactly in the middle of a distribution

Question 69

Experiments suggest that people: (i) lack confidence in their own abilities
(ii) give too much weight to a small number of vivid observations
(iii) interpret evidence to confirm beliefs they already have

A)(i) only
B)(i) and (ii)
C)(i) and (iii)
D)(ii) and (iii)

Question 70

An implication of the median voter theorem is that, in a democratic voting system:

A)minority views are not given much weight
B)minority views are given significant weight
C)the intensity of minority preferences play a central role in determining the outcome
D)the outcome can best be described as a compromise that takes into account diverse preferences

Question 71

Experiments suggest that people: (i) are over-confident about their own abilities
(ii) give too little weight to a small number of vivid observations
(iii) interpret evidence to confirm beliefs they already have

A)(i) only
B)(i) and (ii)
C)(i) and (iii)
D)(ii) and (iii)

Question 72

The Condorcet paradox reinforces the notion that:

A)majority rule ensures transitive preferences for society
B)democratic institutions will produce the outcome desired by the median voter
C)governments make better choices than markets
D)majority rule does not ensure transitive preferences for society

Question 73

If signalling is applied to advertising:

A)not all firms have the same incentive to advertise
B)firms ignore the possibility of repeated customers
C)it is irrational for a firm with a good product to pay for the cost of the signal
D)a firm with a good product reaps a relatively small benefit from advertising

Question 74

Suppose an insurance company successfully screens drivers by offering two contracts. One contract is a policy with high premiums and comprehensive coverage, and the other a policy with low premiums and $1500 excess on each claim. This means that:

A)risky drivers and safe drivers would both select the high premium contract
B)risky drivers would select the high premium contract and safe drivers would select the low premium contract
C)risky drivers would select the low premium contract and safe drivers would select the high premium contract
D)risky drivers and safe drivers would both select the low premium contract

Question 75

Results of the ultimatum game suggests that:

A)considerations of fairness may play a role in economic behaviour
B)considerations of fairness play no role in economic behaviour
C)economists should abandon assumptions of individual self-interest in their models
D)none of the above

Question 76

Private markets sometimes deal with asymmetric information through:

A)behavioural economics
B)command and control
C)signalling and screening
D)political economy

Question 77

Arrow's impossibility theorem suggests that:

A)a voting system will be ideal if the properties of intransitivity and dependence of irrelevant alternatives are satisfied
B)a voting system will be ideal if some form of dictatorship is allowed
C)under certain conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences
D)none of the above

Question 78

Parties in a two-party political system tend to put forward similar policies because:

A)of the median voter theorem
B)of the average voter theorem
C)politicians find it hard to think of new policies
D)voters don't like things to change

Question 79

Arrow's impossibility theorem suggests that:

A)any voting system society adopts for aggregating the preferences of its members will be flawed
B)a voting system will be ideal if some form of dictatorship is allowed
C)a voting system will be ideal if the properties of intransitivity and dependence of irrelevant alternatives are satisfied
D)none of the above

Question 80

According to the median voter theorem, majority rule will produce the outcome:

A)least preferred by the voter exactly in the middle of a distribution
B)that represents everyone's preferences equally
C)most preferred by the voter at an extreme end of the distribution
D)most preferred by the voter exactly in the middle of a distribution