Deck 23: Frontiers of Microeconomics

Question 1

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

Answer 1

True

Question 2

In markets with informational asymmetries, the more informed party will never want to reveal their informational advantage.

Answer 2

False

Question 3

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 3

False

Question 4

Both adverse selection and signalling are linked to the problem of asymmetric information.

Question 5

Efficiency wages increase the cost of shirking.

Question 6

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

Question 7

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.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

Information asymmetries do not impede the efficient functioning of markets.

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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

Question 18

The signalling power of giving a gift is of most value when the asymmetry of information is greatest.

Question 19

The Borda count voting method satisfies the independence of irrelevant alternatives property.

Question 20

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 21

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

Question 22

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

Question 23

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

Question 24

Politicians are never motivated by self-interest.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

The insights of behavioural economics suggest that assuming rational behaviour of consumers is not always correct.

Question 31

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 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

People tend to underestimate their own abilities.

Question 40

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

Question 41

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:

Question 42

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

Question 43

Which of the following is an example of adverse selection?

Question 44

Adverse selection is a problem that arises in markets where:

Question 45

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

Question 46

When a uniformed party takes action to reveal private information, this action is called:

Question 47

Which of the following situations is likely to lead to moral hazard?
(i) a self-employed tradesperson working on her own job site
(ii) the government requiring all insurers to offer flood insurance
(iii) laws requiring all drivers to wear seatbelts

Question 48

The tendency for a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour is known as:

Question 49

In the moral hazard problem the:

Question 50

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

Question 51

Which of the following is an example of signalling?
(i) department stores buying extra advertising space before an upcoming sale
(ii) a student obtaining a university degree in philosophy
(iii) wearing specific brands and styles of clothing out on a Saturday night

Question 52

Which of the following can help solve the moral hazard inherit in the employer-employee relationship:
(i) higher wages
(ii) more monitoring
(iii) division of employee responsibilities:

Question 53

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

Question 54

If signalling is applied to advertising:

Question 55

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

Question 56

When a seller of a good knows more about the quality of a product than the buyer, this is known as:

Question 57

If signalling is applied to advertising:

Question 58

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

Question 59

One implication of the lemons problem is that:

Question 60

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

Question 61

The median voter theorem can:

Question 62

Results of the ultimatum game suggests that:

Question 63

The Condorcet paradox illustrates how:

Question 64

Studies suggest that:

Question 65

Table 23 - 1
$\begin{array}{|l|l|l|l|}\hline \text { Rank }&\text { Brent's preferences } & \text { Frida's preferences } & \text { Jess's preferences } \\\hline 1^{\text {st }} \text { choice }&\text { Daft Punk } & \text { Najwa Karam } & \text { Paul Kelly } \\\hline 2^{1 \mathrm{nd}} \text { choice }&\text { Paul Kelly } & \text { Daft Punk } & \text { Najwa Karam } \\\hline 3^{\text {rd }} \text { choice }&\text { Najwa Karam } & \text { Paul Kelly } & \text { Daft Punk } \\\hline\end{array}$

-Refer to Table 23-1.With pairwise voting, and starting with a comparison between Paul Kelly and Najwa Karam, which album will they listen to?

A)Daft PunK
B)Paul Kelly
C)Najwa Karam
D)it cannot be determined

Question 66

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:

Question 67

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

Question 68

The median voter is:

Question 69

Table 23 - 1
$\begin{array}{|l|l|l|l|}\hline \text { Rank }&\text { Brent's preferences } & \text { Frida's preferences } & \text { Jess's preferences } \\\hline 1^{\text {st }} \text { choice }&\text { Daft Punk } & \text { Najwa Karam } & \text { Paul Kelly } \\\hline 2^{1 \mathrm{nd}} \text { choice }&\text { Paul Kelly } & \text { Daft Punk } & \text { Najwa Karam } \\\hline 3^{\text {rd }} \text { choice }&\text { Najwa Karam } & \text { Paul Kelly } & \text { Daft Punk } \\\hline\end{array}$

-Refer to Table 23-1.With pairwise voting, and starting with a comparison between Daft Punk and Najwa Karam, which album will they listen to?

A)Daft PunK
B)Paul Kelly
C)Najwa Karam
D)it cannot be determined

Question 70

Table 23 - 1
$\begin{array}{|l|l|l|l|}\hline \text { Rank }&\text { Brent's preferences } & \text { Frida's preferences } & \text { Jess's preferences } \\\hline 1^{\text {st }} \text { choice }&\text { Daft Punk } & \text { Najwa Karam } & \text { Paul Kelly } \\\hline 2^{1 \mathrm{nd}} \text { choice }&\text { Paul Kelly } & \text { Daft Punk } & \text { Najwa Karam } \\\hline 3^{\text {rd }} \text { choice }&\text { Najwa Karam } & \text { Paul Kelly } & \text { Daft Punk } \\\hline\end{array}$

-Refer to Table 23-1.The situation that arises from pairwise voting with these preference is called:

A)inconsistent preferences
B)the pairwaise paradox
C)the Condorcet voting paradox
D)the democratic preferences paradox

Question 71

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

Question 72

Arrow's impossibility theorem suggests that:

Question 73

Table 23 - 1
$\begin{array}{|l|l|l|l|}\hline \text { Rank }&\text { Brent's preferences } & \text { Frida's preferences } & \text { Jess's preferences } \\\hline 1^{\text {st }} \text { choice }&\text { Daft Punk } & \text { Najwa Karam } & \text { Paul Kelly } \\\hline 2^{1 \mathrm{nd}} \text { choice }&\text { Paul Kelly } & \text { Daft Punk } & \text { Najwa Karam } \\\hline 3^{\text {rd }} \text { choice }&\text { Najwa Karam } & \text { Paul Kelly } & \text { Daft Punk } \\\hline\end{array}$

-Refer to Table 23-1.With pairwise voting, and starting with a comparison between Daft Punk and Paul Kelly, which album will they listen to?

A)Daft Punls
B)Paul Kelly
C)Najwa Karam
D)it cannot be determined

Question 74

Arrow's impossibility theorem suggests that:

Question 75

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

Question 76

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

Question 77

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

Question 78

Suppose an insurance company wishes to separate out drivers based on whether they are high-risk or low-risk drivers.It can do this by offering two different pricing schemes: one the appeals to low-risk drivers and another that appeals to high risk drivers.Which of the following pricing schemes would best appeal to a high-risk driver? NB: a deductable is the amount that the driver would have to pay in the event of a claim:

Question 79

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

Question 80

If signalling is applied to advertising: