Deck 22: Frontiers of Microeconomics

Question 1

Information asymmetry refers to

A) the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior.
B) the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party.
C) an action taken by an informed party to reveal private information to an uninformed party.
D) a difference in access to relevant knowledge.

Answer 1

D

Question 2

Which of the following relationships involves asymmetric information?

A) A recruiter for a college football team evaluates the performance of a high-school player.
B) A loan applicant knows more about the likelihood her business will be successful than the loan officer.
C) Someone considering buying running shoes looks at a number of online reviews by buyers.
D) All of the above are correct.

Answer 2

B

Question 3

Which of the following is an example of asymmetric information?

A) When someone is applying for a job, the employer checks references to determine the previous work habits of the applicant.
B) When an employee purchases group life insurance without taking a physical exam, she knows more about her health than does the insurance company.
C) When someone is considering buying a used car from a dealership, the potential buyer requests documentation of the repair history of the car.
D) All of the above are correct.

Answer 3

B

Question 4

The field of behavioral economics builds a more subtle and complex model of economic behavior using insights from

A) physics.
B) biology.
C) psychology.
D) anthropology.

Question 5

Which of the following is not correct?

A) Economics is a study of the choices that people make and the resulting interactions they have with one another.
B) In areas it has already studied, economists have found perfect and unchanging answers.
C) Economists are trying to expand their understanding of human behavior and society.
D) The economics of asymmetric information, political economy, and behavioral economics are all topics at the frontier of microeconomics.

Question 6

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

A) relevancy frontier.
B) knowledge gap.
C) information asymmetry.
D) information equilibrium.

Question 7

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 8

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 9

Bill would like to buy a gift for Ann to convey his love for her. Which of the following areas of economics would most likely study this type of decision?

A) asymmetric information
B) political economy
C) behavioral economics
D) industrial organization

Question 10

Which of the following is not an example of asymmetric information?

A) When someone is applying for a job, the employer checks references to determine the previous work habits of the applicant.
B) When an employee purchases group life insurance without taking a physical exam, she knows more about her health than does the insurance company.
C) When someone is considering buying a used car from a dealership, the dealer knows more about the true condition of the car than does the potential buyer.
D) All of the above are examples of asymmetric information.

Question 11

Asymmetric information, political economy, and behavioral economics

A) are topics at the frontier of microeconomics.
B) are topics that economists no longer research.
C) are being studied as economists try to expand their understanding of human behavior and society.
D) both a and c are correct.

Question 12

Which of the following relationships involves asymmetric information?

A) A potential employee knows more about his skills and motivations than potential employers.
B) The seller of a used car knows of mechanical problems that aren't easy for the average buyer to observe.
C) A real estate agent knows the lowest price a seller is willing to sell her house for, but does not reveal it to people he shows the house.
D) All of the above are correct.

Question 13

When markets fail, which of the following is true?

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

Informational asymmetry is a difference in

A) efficiency.
B) equality.
C) relevant knowledge.
D) signaling.

Question 15

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 16

Which of the following frontier fields of economics identifies that people do not always act rationally?

A) asymmetric information
B) political economy
C) behavioral economics
D) existential economics

Question 17

Which of the following is an example of informational asymmetry?

A) A seller of a house knows more about its true condition than does a potential buyer.
B) A salesperson knows more about her efforts than does her manager.
C) A child knows more about how much time he spent playing video games while he was alone in his bedroom than do his parents.
D) All of the above are correct.

Question 18

Which of the following frontier areas of economics incorporates some findings from psychology into the study of economic issues?

A) asymmetric information
B) political economy
C) behavioral economics
D) public economics

Question 19

When one party is better informed about an economic situation than another party, economists describe the problem as one of

A) asymmetric information.
B) moral hazard.
C) political economy.
D) behavioral economics

Question 20

A driver knows more than his auto insurer about how cautiously he drives. This is an example of

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

Question 21

Asymmetric information

A) is not an area of current research in economics.
B) can take the form of a hidden action or a hidden characteristic.
C) explains Arrow's impossibility theorem.
D) is uncommon in corporate management.

Question 22

When a corporation decides to include its own corporate stock as part of the compensation for its employees, it is trying to solve the

A) adverse selection problem.
B) principal-agent problem.
C) lemons problem.
D) signaling problem.

Question 23

Which of the following is an example of moral hazard?

A) a driver is arrested for drunk driving
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 24

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 employee­incentive 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 25

Which of the following practices are, at least in part, attempts to reduce moral hazard problems?

A) Parking ramps require customers to take a ticket with the time stamped on it from a machine in order to gain entrance.
B) Part of the income of waiters and waitresses is based on tips.
C) Both A and B are correct.
D) None of the above are correct.

Question 26

Rick goes to work 8 hours per day, but while he is at work he spends most of his time visiting internet sites monitoring his fantasy football teams. This is an example of

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

Question 27

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

A) an example of the moral hazard problem.
B) an example of the adverse selection problem.
C) an example of screening.
D) an example of signaling.

Question 28

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

A) A manager stays late one evening so that her employee can leave early to attend his child's music recital.
B) A small child takes an extra cookie from the cookie jar when he thinks his mom isn't watching him closely.
C) An employee plays solitaire on her computer at 4:30 p.m. on a Friday when her boss has left for the day.
D) A customer whose new eyeglasses come with a "60­day insurance policy in case of breakage" leaves her glasses out where her new puppy can chew on them.

Question 29

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 30

Which of the following practices are, at least in part, attempts to reduce moral hazard problems?

A) Cashiers at movie theaters are required to give customers tickets.
B) An employer pays below equilibrium wages because he thinks his employees are not working as hard as they could be.
C) Both A and B are correct.
D) None of the above are correct.

Question 31

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 her employer.

Question 32

Government action in cases of asymmetric information may not be an ideal solution because

A) the private market can sometimes deal with information asymmetries on its own.
B) the government tends to have more information than private parties.
C) both (a) and (b).
D) None of the above is correct.

Question 33

Which of the following is not an example of a principal-agent relationship?

A) a soccer player and her coach
B) a man and his neighbor
C) an construction worker and his foreman
D) a driver and her insurance agent

Question 34

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

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

Question 35

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 rarely has more information than the private parties.
B) Private markets can sometimes deal with information asymmetries on their own.
C) The government is itself an imperfect institution.
D) All of the above are valid concerns.

Question 36

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 pays his employees year-end bonuses depending to how well the business does and his observations of the employees' efforts.
C) The employer has voluntarily removed video cameras from the factory floor.
D) Both A and B are correct.

Question 37

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) a moral hazard problem.

Question 38

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.

Question 39

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 40

Which of the following is not an example of a principal trying to solve the moral-hazard problem? The principal

A) calls the agent's references.
B) installs hidden cameras to monitor the agent's behavior.
C) pays the agent efficiency wages.
D) pays the agent a year-end bonus.

Question 41

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

Question 42

Which of the following is not a common response to the moral hazard problem that employers face?

A) offering all employees some funding for additional education
B) paying efficiency wages
C) requiring employees to provide itemized receipts for reimbursable expenses
D) paying year-end bonuses rather than higher monthly earnings

Question 43

Kim owns a small business in Denver. She travels frequently, meeting with important customers, and attending conferences. Kim hired Matt to work in the Denver office as the day-to-day general manager of the business.

A) This is a moral hazard problem since Matt may not work as hard as Kim would like when he is not monitored.
B) Kim choosing to hire Matt is an example of adverse selection since it is possible that Matt will not work as hard as Kim expects.
C) Kim will most likely pay Matt a lower salary than normal since Kim will not be there to monitor Matt's work effort, and since Matt will not likely work hard knowing Kim cannot monitor his effort.
D) Kim is the agent and Matt is the principal.

Question 44

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

A) Tell Peter that the shareholders want to earn a large profit this year.
B) Stop paying Peter bonuses based on how much he's sold.
C) Allow Peter to set his own schedule and work from home frequently.
D) Pay Peter an above-equilibrium wage.

Question 45

When a night watchman only performs two walk-throughs per night when he is being paid to perform five walk- throughs per night, it is an example of

A) both moral hazard and adverse selection.
B) neither moral hazard nor adverse selection.
C) moral hazard, but not adverse selection.
D) adverse selection, but not moral hazard.

Question 46

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

A) efficiency-wage theories.
B) equilibrium wage theories.
C) screening theories.
D) signaling theories.

Question 47

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 48

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

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

Question 49

An efficiency wage

A) gives an employee an incentive to shirk his duties.
B) is lower than the equilibrium wage for that position and region.
C) is higher than the equilibrium wage for that position and region.
D) both a and b are correct.

Question 50

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. His firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his income in quarterly bonuses based on how much he sells.

A) The consulting firm is trying to prevent adverse selection with its compensation strategy.
B) Peter has an incentive to go golfing with his buddies rather than conducting sales meetings.
C) The consulting firm is responding to the moral hazard problem with its compensation strategy.
D) Peter should quit this job and take a job where he gets paid an equilibrium wage more frequently.

Question 51

Susan buys automobile insurance from Provident Insurance Company. If Susan avoids having an accident for three years, Provident will reduce the premiums she has to pay for her insurance. Nevertheless, she routinely drives while eating or texting and speeds up to try to make it through yellow lights.

A) This is an adverse selection problem which should be corrected with government intervention.
B) Susan is a principal and Provident is an agent in this principal-agent problem.
C) This is a moral hazard problem.
D) There is no way for Provident to determine whether Susan is a cautious or risky driver.

Question 52

Studies show that during the March Madness college basketball tournament, the productivity of the average company in the US falls considerably. This is an example of

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

Question 53

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. In this example, you are the

A) principal and the your employee is the agent.
B) agent and the your employee is the principal.
C) signaler and the your employee is the screener.
D) screener and the owner of the coffee ship is the signaler.

Question 54

A college professor hires a student to babysit her children and pays the student an efficiency-wage. Which of the following is correct about the wage the student earns?

A) The wage is higher than the wage the student could earn working a similar job elsewhere.
B) The wage is the same as the wage the student could earn working a similar job elsewhere.
C) The wage is lower than the wage the student could earn working a similar job elsewhere.
D) The wage is likely to result in the student shirking responsibilities.

Question 55

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 56

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This is an example of

A) a moral hazard problem.
B) adverse selection.
C) behavioral economics.
D) signaling.

Question 57

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.

Question 58

You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. If you want your employee to stop giving larger scoops to friends and relatives, which of the following is not a good approach?

A) Make visits to the store at the same time each day.
B) Pay employees an above equilibrium wage.
C) Give your employees a monthly bonus based on profits.
D) None of the above are good approaches.

Question 59

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.

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.

Question 60

In the case of a moral-hazard problem, which of the following is not a way for the principal to encourage the agent to act more responsibly? The principal could

A) better monitor the agent.
B) pay the agent above-equilibrium wages.
C) delay payment to the agent.
D) stop paying bonuses.

Question 61

Adverse selection may lead to

A) owners of used cars choosing to keep them rather than sell them at the low price that skeptical buyers are willing to pay.
B) wages being stuck above the level that balances supply and demand, resulting in unemployment.
C) buyers with low risk choosing to remain uninsured because the policies they are offered fail to reflect their true characteristics.
D) All of the above are correct.

Question 62

Which of the following is not an example of an adverse selection problem?

A) A homeowner purchases a refrigerator that the seller knows has a history of leaking.
B) A highly productive worker quits her job after a salary cut knowing that she can make more at a different job.
C) A major league baseball player performs poorly in his second season after signing a multi-million dollar contract.
D) A contractor uses low quality materials for construction but charges for higher quality materials.

Question 63

Bob 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 64

Which of the following is not correct?

A) An example of adverse selection is man who tries to sell his used car without disclosing that it needs a new transmission.
B) The "invisible hand" of a free market will always fix the problems of adverse selection and moral hazard.
C) An employer may try to prevent a moral hazard problem by paying her workers an efficiency wage.
D) One interpretation of gift giving is that it reflects asymmetric information and signaling.

Question 65

In corporations, which of the following are agents but not principals?

A) shareholders
B) the board of directors
C) managers
D) workers

Question 66

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 67

A street vendor sells a replica of a pair of designer shoes to a young woman who believes the shoes are authentic. The street vendor is engaging in

A) both moral hazard and adverse selection.
B) neither moral hazard nor adverse selection.
C) moral hazard, but not adverse selection.
D) adverse selection, but not moral hazard.

Question 68

Life insurance companies usually require applicants to have physicals and disclose information on their health. This practice is designed to address

A) a principal-agent problem.
B) a moral-hazard problem.
C) a problem involving hidden characteristics.
D) all of the above are correct.

Question 69

Which of the following is a characteristic of a corporation but not of a small family-owned business?

A) The corporation buys inputs in markets for the factors of production.
B) The corporation sells output in markets for goods and services.
C) The corporation is guided in its decisions by the objective of profit maximization.
D) The corporation faces a principal-agent problem created by the separation of ownership and control.

Question 70

The state of Massachusetts requires all citizens to purchase medical insurance or face a monetary penalty when filing their taxes. The penalty is significantly less than the average annual insurance premium. Moreover, the state requires insurance companies to issue policies to anyone who applies, regardless of their health at the time of application. Which of the following examples describes the inherent adverse selection problem?

A) Tricia purchases an insurance policy through her employer and visits her doctor for annual check-ups.
B) Sue purchases insurance only after learning that she has cancer.
C) Mike pays the penalty rather than purchasing insurance because it is cheaper for him than paying insurance premiums and he is generally in good health.
D) Both b and c are correct.

Question 71

Which of the following is an example of an adverse selection problem?

A) A customer purchases four apples, two of which are bruised.
B) A card shop puts its Halloween merchandise on sale on November 1st.
C) A young job applicant fails to reveal that she was fired from her last job because she was incompetent.
D) A man rents a car and then drives it less carefully and fills it with cheaper gas than he would if he owned it.

Question 72

In corporations, a principal-agent problem can arise when

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 73

In corporations, which of the following are principals but not agents?

A) shareholders
B) the board of directors
C) managers
D) workers

Question 74

When homeowners sell a house, part of the paperwork they complete is a statement of disclosure on which the homeowners are supposed to reveal everything that they know is wrong with the house. The purpose of the statement of disclosure is to try to solve the

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

Question 75

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 76

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 77

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 78

When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is engaging in

A) both moral hazard and adverse selection.
B) neither moral hazard nor adverse selection.
C) moral hazard, but not adverse selection.
D) adverse selection, but not moral hazard.

Question 79

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 effect on the percentage of policy holders making claims, and (2) what is the effect on 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 80

Adverse selection

A) occurs when the overall quality of choices facing a consumer is very low.
B) is a greater problem for employees than employers.
C) occurs more frequently in the market for new cars than used cars.
D) is not easily remedied by free markets.