Deck 22: Frontiers in Microeconomics

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

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

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 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

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

Question 17

Economists have found that asymmetric information is not very prevalent.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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 43

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

Question 44

Economists use basic psychological insights in the field of study called

A)psychological economics.
B)transitional economics.
C)behavioral economics.
D)social economics.

Question 45

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

Question 46

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

Question 47

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 48

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

Question 49

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

Question 50

Most economic models

A)incorporate the assumption of rational behavior on the part of economic actors.
B)incorporate the notion that people are usually reluctant to change their minds.
C)are meant to precisely duplicate reality.
D)assume that people often make sub-optimal choices.

Question 51

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

Question 52

Behavioral economics

A)integrates psychological insights into economic models.
B)relies on the assumption that homo economicus describes economic decision-making.
C)assumes that economic agents have full information about the conditions surrounding their decisions.
D)All of the above are correct.

Question 53

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

Question 54

When economists assume that people are rational, they assume that

A)consumers maximize profits.
B)firms maximize revenues.
C)consumers maximize utility.
D)firms maximize output.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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 61

Studies of human decision-making have detected systematic mistakes that people make. Which of the following have been detected?

A)people are overconfident
B)people give too much weight to a small number of vivid observations
C)people are reluctant to change their minds
D)All of the above are correct.

Question 62

Evidence from studies of workers' choices on whether to participate in 401(k) plans suggests that the workers' behavior appears to exhibit

A)indifference.
B)ignorance.
C)inertia.
D)indecision.

Question 63

Some of the systematic mistakes that people make include

A)being overconfident.
B)placing too much weight on events that are more vivid compared to those with greater statistical probability.
C)being generally unwilling to change their minds.
D)All of the above are correct.

Question 64

Herbert Simon, one of the first social scientists to combine the study of economics and psychology, suggested that humans should be viewed as

A)rational maximizers.
B)satisficers.
C)independent thinkers.
D)signalers.

Question 65

Herbert Simon suggested that people are not rational maximizers but satisficers, meaning that they choose a course of action that is

A)personally satisfying, with a greater emphasis on personal consumption than on fairness.
B)socially satisfying, with a greater emphasis on fairness than on personal consumption.
C)good enough.
D)risk averse.

Question 66

A person who makes decisions that are "merely good enough" is called a(n)

A)optimizer.
B)rational person.
C)satisficer.
D)maxi-minimizer.

Question 67

Which of the following students exhibits satisficing behavior?

A)Mick studies his economics notes every night so that he can be sure to earn a perfect score on his exam.
B)Bill studies his economics notes for a few hours the night before the test because he will be satisfied with a C on his exam.
C)Marguerite studies extensively as she will only be satisfied with a very high score.
D)None of these students exhibits satisficing behavior.

Question 68

Studies of human decision making reveal several systematic mistakes people make. Which of the following is not an example of one of these mistakes?

A)Tom tells everyone he's sure he can run a 5K in twenty-five minutes, but then tries a couple of times and takes over thirty minutes.
B)Kate hears a news report about five people dying from a tornado in Kansas and decides to cancel her plans to visit her aunt there.
C)Randi is a strong proponent of raising the minimum wage. She reads a research report on the effects of increasing the minimum wage and begins to doubt her previous thinking.
D)Jenny is shopping for a new car and has found that Hondota cars consistently get high quality ratings. Her friend had trouble with her Hondota, so Jenny decides not to purchase a Hondota.

Question 69

A survey of 1,500 frequent restaurant patrons revealed that, Chang Cheng, a local Chinese restaurant, offers high-quality food at low prices. Based on one dining experience, a restaurant critic gave Chang Cheng a poor review, saying the food was not very good. As a result, you decide not to dine at Chang Cheng. This decision is an example of which of the following systematic mistakes that people make when making decisions?

A)People are overconfident.
B)People give too much weight to a small number of vivid observations.
C)People are reluctant to change their minds.
D)All of the above are correct.

Question 70

Studies of human decision-making show that

A)firms are less likely to maximize profits than consumers are to maximize utility.
B)firms are more likely to maximize profits than consumers are to maximize utility.
C)people are irrational more often than they are rational.
D)people are reluctant to change their minds.

Question 71

Sam needs to have his car serviced. There is an auto repair shop located nearby that does a lot of business and has an online rating of 4 out of 5 stars. Sam takes his car to be serviced and thinks the service person is grumpy and that his car is still not running as well as it could be. Sam then makes a point of telling his friends not to use the repair shop. Sam's actions illustrate which of the following systematic mistakes that people make when making decisions?

A)People are overconfident.
B)People give too much weight to a small number of vivid observations.
C)People are reluctant to change their minds.
D)All of the above are correct.

Question 72

Conventional economic theory assumes that people

A)care a great deal about fairness.
B)are inconsistent over time in their decisionmaking.
C)are rational.
D)are satisficers.

Question 73

Riley travels a great deal, and over the past several years he has read dozens of reviews of hotel chains, all of which rave about the clean rooms and great service at Comeon Inns. Last month, Riley checked into a room at a Comeon Inn for the first time, only to find the room filthy and the service lousy. He decided the Comeon Inn chain is inferior to other hotel chains.

A)Riley was irrational to have believed the reviews that he had read.
B)Riley was rational to have changed his mind about Comeon Inns based on his one experience.
C)Riley is an example of someone who gives too much weight to a small number of vivid observations.
D)Riley is an example of someone who is reluctant to change his mind.

Question 74

Juanita is preparing to study for her economics final exam. She tells her friend that she will be happy if she just gets a B, even though she could likely earn an A if she studied harder. Juanita is what Herbert Simon would call a

A)rational maximizer.
B)satisficer.
C)homo economicus.
D)screener.

Question 75

A "satisficer" is a person who

A)always chooses the best course of action.
B)often chooses the worst course of action.
C)makes decisions that are merely good enough.
D)studies both economics and psychology.

Question 76

Economic theory assumes people are always rational. Yet observation indicates that people do not always behave rationally. Which of the following is not a systematic mistake people make in their decisionmaking?

A)People often interpret information to fit beliefs already held.
B)People place too much emphasis in their decisionmaking on a few extreme situations of which they are aware.
C)People tend to view current prices differently than they view future prices.
D)People are too sure of their own abilities.

Question 77

Your city newspaper publishes a "Best of" poll that lists its readers' favorite restaurants. Mundo Bar and Grill is ranked as the best casual restaurant. Your best friend had dinner at Mundo Bar and Grill last week and commented that the food was mediocre and the service was slow. You decide not to have dinner at Mundo Bar and Grill based on your friend's experience. Your decision illustrates that people

A)are reluctant to change their minds.
B)are overconfident.
C)give too much weight to a small number of vivid observations.
D)are satisficers.

Question 78

The suggestion that people are "satisficers" is similar to the view that people

A)are wealth-maximizers.
B)exhibit "bounded rationality."
C)go to a lot of trouble to weigh costs and benefits before choosing a course of action.
D)change their minds often.

Question 79

Which of the following is an example of satisficing behavior?

A)You continue studying for your economics exam until you believe you'll get a score that's good enough.
B)You spend time looking over the lettuce at the grocery store in order to make sure you get the best head of lettuce.
C)You clean your room to the point where you think it's clean enough that further time can be used for more productive purposes.
D)You carefully plan your day in order to get "the most out of life."

Question 80

Based on the studies of human decision making, which of the following statements is correct?

A)Most people are not bothered by perceived unfairness as long as they receive some compensation, even if the amount is very small.
B)Most people are very willing to change their minds.
C)Many people's preferences are inconsistent over time.
D)All of the above are correct.