Deck 22: Frontiers of Microeconomics

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

Economists have found that asymmetric information is not very prevalent.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may be reluctant to reveal relevant information.

Question 18

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 19

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

Question 20

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

Question 21

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

Question 22

Explain the Condorcet paradox.To which type of voting system does it apply?

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Question 31

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

Question 32

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

Question 33

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 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information.

Question 39

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

Question 40

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

Question 41

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 42

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 43

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 44

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 45

How have insights from the field of psychology influenced the thinking of economists in recent years?

Question 46

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 47

Assume there are two major political parties: the Conservatives and the Liberals.What does the median voter theorem imply about the nature of the platforms (that is,policy stances)of the Conservatives and Liberals?

Question 48

Informational asymmetry is a difference in

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

Question 49

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

A) asymmetric information.
B) political economy.
C) behavioral economics.
D) growth theory.

Question 50

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.

Question 51

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) Economists are not interested in finding new areas to study and new phenomena to explain.
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 52

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 53

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 54

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 55

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.

Question 56

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 57

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 58

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 59

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 60

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 61

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 62

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

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

Question 63

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

A) a person with car insurance drives recklessly
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 64

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 65

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 66

Ed 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) Ed 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) Ed should quit this job and take a job where he gets paid an equilibrium wage more frequently.

Question 67

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 68

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?

A) the principal could better monitor the agent
B) the principal could pay the agent above-equilibrium wages
C) the principal could delay payment to the agent
D) the principal could pay the agent below-equilibrium wages

Question 69

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 70

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 71

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 72

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 73

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 74

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 75

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 76

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 "60-day insurance policy in case of breakage" leaves her glasses out where her new puppy can chew on them.

Question 77

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 78

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 79

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

A) the principal conducts an extensive interview of the agent
B) the principal installs hidden cameras to monitor the agent's behavior
C) the principal pays the agent efficiency wages
D) the principal pays the agent a year-end bonus

Question 80

Jason buys automobile insurance from No Wreck Insurance Company.If Jason avoids having an accident for three years,No Wreck will reduce the price he has to pay for his insurance.Nevertheless,he routinely drives fast and with reckless abandon.

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