Ngân hàng đề thi câu hỏi trắc nghiệm kinh tế vi mô chương 22 (principle of economics mankiw 2018)

Chapter 22/Frontiers of Microeconomics  205

Chapter 22
Frontiers of Microeconomics
TRUE/FALSE
1.
The science of economics is a finished jewel, perfect and unchanging.
ANS: F
DIF: 1
REF: 22-0
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: economics
MSC: Definitional
2.
In economics, a difference in access to relevant knowledge is called a behavioral asymmetry.
ANS: F
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional
3.

Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may
be reluctant to reveal relevant information.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic

LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Applicative
4.

An example of asymmetric information is when a seller of a house knows more than the buyer about the
house’s condition.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Applicative
5.
Economists have found that asymmetric information is not very prevalent.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Interpretive
6.

An example of an information asymmetry is when a worker knows more than his employer about his work
effort.
ANS: T
DIF: 1
REF: 22-1

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
7.

The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and Adelphia are an
example of moral hazard.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Applicative
8.
The problem of moral hazard is a problem of hidden action.
ANS: T
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
9.

The problem that arises when one person performs a task on behalf of another person is called the lemons
problem.
ANS: F
DIF: 1

REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
10.

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.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive


206  Chapter 22/Frontiers of Microeconomics
11.

In the employer-worker relationship, the employer is regarded as the "principal" and the worker is regarded as
the "agent."
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Definitional

12.

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.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard
MSC: Interpretive
13. The classic example of adverse selection is the market for used cars.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive
14.

The two major problems caused by asymmetric information are the moral-hazard problem and the principalagent problem.
ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive
15. Signaling is an action taken by an uninformed party to induce an informed party to reveal information.

ANS: F
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Screening | Signaling
MSC: Definitional
16.

An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to convey his love
for her.
ANS: T
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Signaling
MSC: Applicative
17. Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she prefers A to C.
ANS: T
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Transitivity
MSC: Definitional
18.

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

ANS: F
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
19. The Condorcet paradox implies that the order in which items are voted on under majority rule is unimportant.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
20. Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
21.

The Condorcet paradox demonstrates that the order in which people vote on choices may influence the final
outcome.
ANS: T
DIF: 2
REF: 22-2

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive


Chapter 22/Frontiers of Microeconomics  207
22. Borda count is a voting method often used in polls that rank sports teams.
ANS: T
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Borda count
MSC: Interpretive
23. Arrow’s impossibility theorem demonstrates the impossibility of the median voter theorem.
ANS: F
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
24.

Arrow's impossibility theorem shows that it is impossible to find a better voting system than pairwise majority
voting.
ANS: F
DIF: 2
REF: 22-2

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Arrow's impossibility theorem
MSC: Interpretive
25. Majority rule will produce the outcome most preferred by the median voter.
ANS: T
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Definitional
26.

According to the median voter theorem, majority rule will produce an outcome that is inconsistent with
transitive preferences.
ANS: F
DIF: 3
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
27.

An implication of the median voter theorem is that Republicans and Democrats will try to align their views
with those of the median voter.
ANS: T
DIF: 2
REF: 22-2

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Median voter theorem
MSC: Interpretive
28. Political leaders are always aiming for an optimal combination of efficiency and equality.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive
29. In the field of study called political economy, economists make use of insights from the field of psychology.
ANS: F
DIF: 1
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Definitional
30.

A "satisficer" is a person whose decisionmaking is the same as that predicted by mainstream economic
models.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics MSC:

Definitional
31.

Researchers have found that the systematic mistakes that people make in their decisionmaking include a lack
of confidence in their own abilities.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics MSC:
Interpretive
32. Most economic models incorporate the assumption of rational behavior on the part of economic actors.
ANS: T
DIF: 1
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics MSC:
Interpretive


208  Chapter 22/Frontiers of Microeconomics
33.

Studies of human decision-making have found that people do not give enough weight to a small number of
vivid observations.
ANS: F
DIF: 2
REF: 22-3

NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Behavioral economics MSC:
Interpretive
34. Studies of human decision making have found that people are reluctant to change their minds.
ANS: T
DIF: 2
REF: 22-3
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Behavioral economics MSC:
Interpretive
35.

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.
ANS: T
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics MSC:
Interpretive
36.

Based on studies of human decision making, many people care more about the fairness of a game than about
their personal winnings.
ANS: T
DIF: 2
REF: 22-3

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics MSC:
Interpretive
37. The tendency of many people to procrastinate supports the view that people are consistent over time.
ANS: F
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Behavioral economics MSC:
Interpretive
SHORT ANSWER
1.

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

ANS:
Asymmetric information is present when there is a difference in access to relevant information. Examples include
information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and
his insurer. The two basic types of problems are (1) moral hazard, which is a problem of hidden actions and
ordinarily involves a principal and an agent, and (2) adverse selection, which is a problem of hidden characteristics
or "lemons."
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models TOP:
MSC: Definitional
2.

Asymmetric information

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.

ANS:
Drivers (buyers and potential buyers of car insurance) know more about their driving habits than do the insurance
companies (sellers of car insurance). The price of car insurance is likely to reflect the information asymmetry in that
it incorporates more of a risk component than is really necessary to insure good and average drivers. Consequently,
good and average drivers are priced out of the market and they rationally choose not to buy the insurance unless they
are required to do so.
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models TOP:
MSC: Interpretive

Asymmetric information


Chapter 22/Frontiers of Microeconomics  209
3.
Explain the Condorcet paradox. To which type of voting system does it apply?
ANS:
The Condorcet paradox applies directly to pairwise majority voting. It shows that even if individual voters'
preferences exhibit transitivity, that property does not follow through to outcomes of pairwise majority voting.
Consequently, the order in which choices are put up, in pairwise fashion, affects the final outcome. Using choices A,
B, and C, it may be the case, for example, that under pairwise voting voters choose A over B and B over C, but then
they may choose C over A. This result can obtain even when individual voters' preferences are transitive; hence, the

paradox.
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models TOP:
MSC: Definitional
4.

Condorcet paradox

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?

ANS:
The median voter theorem implies that political parties will set their platforms so as to appeal to the median
("middle of the distribution") voter. Therefore, rather than adopting extreme views, the Conservatives and Liberals
will both adopt platforms that are toward the "middle of the road."
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models TOP:
MSC: Interpretive

Median voter theorem

5.
How have insights from the field of psychology influenced the thinking of economists in recent years?
ANS:
Insights from psychology have led some economists to question the assumption of rationality that pervades
mainstream economic models. Evidence from experimental economics does raise serious questions about the

rationality assumption. For example, most people may be concerned with the fairness of outcomes, in addition to the
impact of those outcomes on their own well-being. An open question is: If the rationality assumption does not really
reflect the behavior of real economic actors, then how important is it that we model other motivations, such as the
desire for fairness, the tendency to procrastinate, overconfidence, etc.?
DIF: 2
REF: 22-3
NAT: Analytic
LOC: Understanding and applying economic models TOP:
MSC: Interpretive

Behavioral economics

Sec00
MULTIPLE CHOICE

1.

Which of the following is not correct?
a.
b.
c.
d.

Economics is a study of the choices that people make and the resulting interactions they have with
one another.
Economists are not interested in finding new areas to study and new phenomena to explain.
Economists are trying to expand their understanding of human behavior and society.
The economics of asymmetric information, political economy, and behavioral economics are all
topics at the frontier of microeconomics.

ANS: B
DIF: 2
REF: 22-0
NAT: Analytic
LOC: The study of economics, and the definitions of economics
TOP: Frontiers of microeconomics
MSC: Interpretive

2.

Asymmetric information, political economy, and behavioral economics
a.
b.
c.
d.

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

ANS: D
DIF: 1
REF: 22-0
NAT: Analytic
LOC: The study of economics, and the definitions of economics
TOP: Frontiers of microeconomics
MSC: Interpretive

210  Chapter 22/Frontiers of Microeconomics
3.

When markets fail, which of the following is true?
a.
b.
c.
d.

Government intervention can always improve outcomes.
Government intervention can potentially improve outcomes.
Government intervention can never improve outcomes.
Markets do not fail.

ANS: B
DIF: 1
REF: 22-0
NAT: Analytic
LOC: The study of economics, and the definitions of economics
TOP: Frontiers of microeconomics
MSC: Interpretive

Sec01-Asymmetric Information
MULTIPLE CHOICE

1.

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

c.
d.

relevancy frontier.
knowledge gap.
information asymmetry.
information equilibrium.

ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional

2.

Informational asymmetry is a difference in
a.
b.
c.
d.

efficiency.
equality.
relevant knowledge.
signaling.

ANS: C

DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Definitional

3.

Information asymmetry refers to
a.
b.
c.
d.

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

ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional

4.

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

asymmetric information.
political economy.
behavioral economics.
growth theory.

ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Interpretive

5.

Which of the following relationships involves asymmetric information?
a.
b.
c.
d.

An employee knows more than his employer knows about his work effort.
A borrower knows more than the lender about his ability to repay the loan.
The seller of a 30-year-old house knows more than the buyer about the condition of the house.
All of the above are correct.


Chapter 22/Frontiers of Microeconomics  211
ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Analytical

6.

Which of the following relationships involves asymmetric information?
a.
b.
c.
d.

Patients can look up information regarding certain prescription drugs giving them the same
information as their doctors.
Consumer Reports allows customers of DVD players to know as much about the quality of various
players as the store salesperson.
Car Fax allows car buyers to obtain used-vehicle histories providing them with the same
information as the dealership salesperson.
The batter in a baseball game must guess whether the pitcher is going to throw a fastball, curveball,

or change-up.

ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive

7.

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

a hidden action.
a hidden characteristic.
adverse selection.
the Condorcet Paradox.

ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive

8.

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.
b.
c.
d.

Neither (1) nor (2) serves as an example of asymmetric information.
Both (1) and (2) serve as examples of asymmetric information.
Neither (1) nor (2) serves as an example of a hidden action.
Both (1) and (2) serve as examples of hidden action.

ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Analytical

9.

Asymmetric information
a.
b.
c.
d.

is not an area of current research in economics.
can take the form of a hidden action or a hidden characteristic.
explains Arrow’s impossibility theorem.
is uncommon in corporate management.

ANS: B
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Analytical

10. Government action in cases of asymmetric information may not be an ideal solution because
a.
b.
c.
d.

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

ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models

TOP: Asymmetric information
MSC: Interpretive


212  Chapter 22/Frontiers of Microeconomics
11. Which of the following is an example of informational asymmetry?
a.
b.
c.
d.

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

ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Applicative

12. When asymmetric information affects a relationship between two parties, it is always the case that
a.
b.
c.
d.

neither party is well informed.
one party is better informed than the other party.
both parties are equally well informed.
the government is better informed than either of the two parties.

ANS: B
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Interpretive

13. Which of the following statements is correct?
a.
b.
c.
d.

Hidden actions and hidden characteristics are both associated with the moral-hazard problem.
Hidden actions and hidden characteristics are both associated with the adverse-selection problem.
Hidden actions are associated with the moral-hazard problem, whereas hidden characteristics are
associated with the adverse-selection problem.
Hidden actions are associated with the adverse-selection problem, whereas hidden characteristics
are associated with the moral-hazard problem.

ANS: C
DIF: 1
REF: 22-1

NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Asymmetric information
MSC: Definitional

14. The problem that arises when one person performs a task on behalf of another person is called
a.
b.
c.
d.

the hidden characteristics problem.
the lemons problem.
moral hazard.
adverse selection.

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 1
REF: 22-1
LOC: The Study of economics, and definitions in economics
MSC: Definitional

15. Which of the following is not an example of a principal-agent relationship?
a.
b.
c.
d.

a soccer player and her coach
a man and his neighbor
an construction worker and his foreman
a driver and her insurance agent

ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Principals; agents
MSC: Applicative

16. Which of the following is not an example of a principal trying to solve the moral-hazard problem?
a.
b.
c.
d.

the principal conducts an extensive interview of the agent
the principal installs hidden cameras to monitor the agent’s behavior
the principal pays the agent efficiency wages
the principal pays the agent a year-end bonus

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 2

REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative


Chapter 22/Frontiers of Microeconomics  213
17. Which of the following would be an example of a principal trying to deal with a moral hazard
problem?
a.
b.
c.
d.

The parents of an infant secretly place video cameras in their house before the baby-sitter arrives.
An insurance company checks police records to determine if its policyholders have received traffic
citations.
An employer examines his workers' output on a daily basis.
All of the above are correct.

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

18. Which of the following offers an explanation as to why the principal-agent problem exists for a
firm?

a.
b.
c.
d.

The firm cares less about profit and more about cost when there are many competitors in the
market.
The firm offers an employee-incentive program in which employees share in the firm’s profits.
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.
The firm operates to maximize profit while the employees attempt to work as little as possible to
earn their paychecks.

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

19. Which of the following practices would indicate that an employer is trying to overcome a moralhazard problem with his employees?
a.
b.
c.
d.

The employer pays his workers wages that are unusually high for the industry and region.
The employer has voluntarily removed video cameras from the factory floor.

The employer has discontinued the practice of giving his employees' year-end bonuses.
Both A and B are correct.

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

20. Which of the following is not an example of moral hazard?
a.
b.
c.
d.

a person with car insurance drives recklessly
a pet-sitter being paid to walk a dog for one hour per day only walks the dog for 20 minutes per day
a thief steals a car
All of the above are examples of moral hazard.

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models

MSC: Applicative

21. 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.
b.
c.
d.

the principal could better monitor the agent
the principal could pay the agent above-equilibrium wages
the principal could delay payment to the agent
the principal could pay the agent below-equilibrium wages

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive


214  Chapter 22/Frontiers of Microeconomics
22. Which of the following is not an example of a moral hazard problem?
a.
b.
c.
d.

A manager stays late one evening so that her employee can leave early to attend his child’s music
recital.
A small child takes an extra cookie from the cookie jar when he thinks his mom isn’t watching him
closely.
An employee plays solitaire on her computer at 4:30 p.m. on a Friday when her boss has left for the
day.
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.

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative

23. Moral hazard occurs when
a.
b.
c.
d.

an employer closely monitors an employee.
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.
an employee lacks an incentive to promote the best interests of the employer, and the employer
cannot observe the actions of the employee.

an employee closely monitors the actions of her employer.

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Definitional

24. The temptation of imperfectly-monitored workers to shirk their responsibilities is
a.
b.
c.
d.

an example of the moral hazard problem.
an example of the adverse selection problem.
an example of screening.
an example of signaling.

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

25. Employers can try to overcome the moral-hazard problem involving their employees by
a.
b.
c.
d.

paying their employees more often.
paying their employees below-equilibrium wages since the employees will likely shirk some of
their responsibilities.
better monitoring their employees' work efforts.
requiring their employees to take a pre-employment work effort test.

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

26. 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.
b.
c.
d.

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

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive


Chapter 22/Frontiers of Microeconomics  215
27. 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.
b.
c.
d.

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

ANS: B
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

28. Employers may choose to pay their workers a wage that exceeds the equilibrium wage according to
a.
b.
c.
d.

efficiency-wage theories.
equilibrium wage theories.
screening theories.
signaling theories.

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Definitional

29. An efficiency wage
a.
b.
c.
d.

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

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Definitional

30. Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its
workers?
a.
b.
c.
d.

It increases the probability that a worker who shirks will be caught.
It discourages workers from shirking out of fear of losing their high-paying job.
The Condorcet Paradox suggests that paying high wages will result in greater effort by employees.

By paying a high wage, employers solve this adverse selection problem and motivate the
employees to work harder.

ANS: B
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

31. 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.
b.
c.
d.

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

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 2

REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive


216  Chapter 22/Frontiers of Microeconomics
32. 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.
b.
c.
d.

This is an example of adverse selection since banks have difficulty selecting their customers.
This is a typical example of the Condorcet Paradox.
From the given information, Robert is the principal and his girlfriend is the agent.
From the given information, Granite Bank is the principal and Robert is the agent.

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

33. 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.
b.
c.
d.

both moral hazard and adverse selection.
neither moral hazard nor adverse selection.
moral hazard, but not adverse selection.
adverse selection, but not moral hazard.

ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard | adverse selection
MSC: Applicative

34. 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.
b.
c.
d.

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.
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.
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.
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.

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Analytical

35. 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.
b.
c.
d.

adverse selection.
moral hazard.

screening
signaling.

ANS: B
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive


Chapter 22/Frontiers of Microeconomics  217
36. Bill owns a small business in Milwaukee. He travels frequently, meeting with important customers,
and attending conferences. Bill hired Nicole to work in the Milwaukee office as the day-to-day
general manager of the business.
a.
b.
c.
d.

This is a moral hazard problem since Nicole may not work as hard as Bill would like when she is
not monitored.
Bill choosing to hire Nicole is an example of adverse selection since it is possible that Nicole will
not work as hard as Bill expects.
Bill will most likely pay Nicole a lower salary than normal since Bill will not be there to monitor
Nicole’s work effort, and since Nicole will not likely work hard knowing Bill cannot monitor her
effort.
The Condorcet Paradox implies that Nicole will not work as hard as Bill would like even though he

will likely pay her an above equilibrium wage.

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

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.
b.
c.
d.

adverse selection.
a Condorcet paradox.
a screening problem.
moral hazard.

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1

LOC: Understanding and applying economic models
MSC: Interpretive

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

Adverse selection
Screening
Moral hazard
Signaling

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

39. John goes to work 8 hours per day, but while he is at work he spends most of his time visiting
internet sites that provide him with information on his favorite hobby. This is an example of
a.
b.
c.

d.

the Condorcet Paradox.
signaling.
moral hazard.
screening.

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

40. In corporations, a principal-agent problem can arise when
a.
b.
c.
d.

the shareholders are the principal and the managers are the agent.
the board of directors is the principal and the managers are the agent.
the shareholders are the principal and the board of directors is the agent.
All of the above are correct.

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive


218  Chapter 22/Frontiers of Microeconomics
41. In corporations, which of the following are agents but not principals?
a.
b.
c.
d.

shareholders
the board of directors
managers
workers

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

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

b.
c.
d.

shareholders
the board of directors
managers
workers

ANS: A
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

43. 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 percentage of policy holders making claims, and (2) what is the average premium charged
when compared to a world with no moral hazard problem?
a.
b.
c.
d.

The percentage of policy holders making claims is higher; average annual premiums are lower.
The percentage of policy holders making claims is lower; average annual premiums are lower.
The percentage of policy holders making claims is higher; average annual premiums are higher.

The percentage of policy holders making claims is lower; average annual premiums are higher.

ANS: C
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Analytical

44. 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.
b.
c.
d.

Group 1: average annual premium increases
Group 2: average annual premium increases
Group 1: average annual premium decreases
Group 2: average annual premium increases
Group 1: average annual premium increases
Group 2: average annual premium decreases
Group 1: average annual premium decreases
Group 2: average annual premium decreases

ANS: B
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Analytical

45. Which of the following is a characteristic of a corporation but not of a small family-owned business?
a.
b.
c.
d.

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

ANS: D
NAT: Analytic
TOP: Moral hazard

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

Chapter 22/Frontiers of Microeconomics  219
46. Adverse selection is
a.
b.
c.
d.

the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise
undesirable behavior.
an action taken by an uninformed party to induce an informed party to reveal information.
the failure of majority voting to produce transitive preferences for society.
the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an
uninformed party.

ANS: D
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Definitional

47. 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.
b.
c.
d.

principal-agent problem.
moral-hazard problem.
adverse-selection problem.
signaling problem.

ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Applicative

48. Steve 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.
b.
c.
d.

moral hazard.
screening.
adverse selection.
the principal-agent problem.

ANS: C
DIF: 2
REF: 22-1
NAT: Analytic

LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

49. Adverse selection may lead to
a.
b.
c.
d.

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

ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

50. Which of the following is not correct?
a.
b.
c.
d.

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

ANS: B
DIF: 3
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection, moral hazard, signaling
MSC: Interpretive


220  Chapter 22/Frontiers of Microeconomics
51. The buyer runs a risk of being sold a good of low quality when there is
a.
b.
c.
d.

a principal-agent problem.
a moral-hazard problem.
a problem involving hidden actions.
a problem involving hidden characteristics.

ANS: D

DIF: 2
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Interpretive

52. 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.
b.
c.
d.

both moral hazard and adverse selection.
neither moral hazard nor adverse selection.
moral hazard, but not adverse selection.
adverse selection, but not moral hazard.

ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Moral hazard | adverse selection
MSC: Applicative

53. A life insurance company requires new applicants to have a medical exam prior to writing the
insurance policy. This requirement is an example of
a.

b.
c.
d.

signaling.
screening.
moral hazard.
adverse selection.

ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

54. Which of the following is an example of an adverse selection problem?
a.
b.
c.
d.

A customer purchases four apples, two of which are inedible.
A card shop puts its Halloween merchandise on sale on November 1st.
A young worker is fired after she is late for work three times in one month.
A man whose father had a heart attack wants to increase his life insurance coverage.

ANS: D
DIF: 2

REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Applicative

55. The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of
a.
b.
c.
d.

hidden actions.
adverse selection.
principals and agents.
moral hazard.

ANS: B
DIF: 2
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Interpretive

56. When the buyer knows less than the seller about the characteristics of the good being sold, there is
a.
b.
c.
d.

a principal-agent problem.
a moral hazard problem.
an adverse selection problem.
a signaling problem.

ANS: C
DIF: 1
REF: 22-1
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Adverse selection
MSC: Definitional


Chapter 22/Frontiers of Microeconomics  221
57. The classic example of adverse selection is the
a.
b.
c.
d.

market for used cars.
market for new cars.
relationship between shareholders and managers.
relationship between a coach and an athlete.

ANS: A
DIF: 1
REF: 22-1

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

58. 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.
b.
c.
d.

adverse selection.
monitoring.
moral hazard.
screening.

ANS: A
DIF: 1
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

59. The adverse selection problem is a likely explanation for the fact that
a.
b.
c.
d.

a few months after a new car is purchased, its value decreases very little.
some corporate managers were recently sent to prison for enriching themselves at the expense of
shareholders.
people in average health may be discouraged from buying health insurance by the high price.
gifts can be interpreted as signals.

ANS: C
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

60. Because people with hidden health problems are more likely to buy health insurance than are other
people,
a.
b.
c.
d.

the price of health insurance reflects the costs of a sicker-than-average person.
the price of health insurance is too low, relative to the socially-optimal price.
people in average health may be encouraged to buy too much health insurance, relative to the
socially-optimal quantity.
the Condorcet Paradox suggests that people who are sicker than average will ultimately buy more
health insurance.

ANS: A

DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

61. Severe adverse-selection problems may result in
a.
b.
c.
d.

too few good used cars being offered for sale.
wages that are too low relative to equilibrium levels.
too many good drivers buying too much automobile insurance.
people with average health buying too much health insurance.

ANS: A
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Adverse selection
MSC: Interpretive

62. "Signaling" refers to actions by an informed party for the sole purpose of
a.
b.
c.

d.

telling another party that the signaler has information to reveal, without actually revealing that
information.
conveying false information.
confusing another party.
credibly revealing private information.


222  Chapter 22/Frontiers of Microeconomics
ANS: D
NAT: Analytic
TOP: Signaling

DIF: 1
REF: 22-1
LOC: The Study of economics, and definitions in economics
MSC: Definitional

63. Effective signals
a.
b.
c.
d.

convey useful information from informed parties to uninformed parties.
impose little or no cost on the signaler.
cannot be conveyed accurately when there is an information asymmetry.
can be used by employers to alleviate the moral hazard problem in the workplace.

ANS: A
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

64. Which of the following is not an example of signaling?
a.
b.
c.
d.

screening
advertising
getting an education
gift giving

ANS: A
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative

65. A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

a.
b.
c.
d.

moral hazard problem.
screening device.
signal of how much she cares for him.
All of the above are correct.

ANS: C
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

66. A brand of wine is priced at only $5 per bottle, far below the market price of most high quality
wines. Before any reputation exists for the wine, consumers buy very little of this inexpensive wine
because they interpret the low price to mean that the wine is of poor quality. The company decides
to change the label on the wine to show that it has won awards for quality. This label change is an
example of
a.
b.
c.
d.

signaling.

screening.
selecting.
All of the above are correct.

ANS: A
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

67. If the seller of a used car offers a limited warranty, the warranty is an example of a(n)
a.
b.
c.
d.

signal.
screen.
efficiency wage.
agent.

ANS: A
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1

LOC: Understanding and applying economic models
MSC: Applicative

68. A firm with a very good product
a.
b.
c.
d.

has a higher cost of signaling (advertising) than does a firm with an inferior product.
has more to gain by signaling (advertising) than does a firm with an inferior product.
does not need to signal (advertise) because the product’s quality speaks for itself.
will signal (advertise) effectively if signaling is free.


Chapter 22/Frontiers of Microeconomics  223
ANS: B
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

69. Which of the following is an example of signaling?
a.
b.
c.
d.

Graduates of highly-respected universities highlight that fact on their resumes.
Magazine advertisements include the phrase "as seen on TV."
Advertisements for universities include the phrase "fully accredited."
All of the above are correct.

ANS: D
NAT: Analytic
TOP: Signaling

DIF: 1
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

70. Which of the following events best exemplifies the concept of signaling?
a.
b.
c.
d.

A college student's parents, having learned that their child is short of money, send her a check for
$1,000.
A woman, who is trying to win the love of a certain man, buys him a very personal gift.
A grocery store maintains a policy of examining the driver's license of everyone who writes a
personal check to purchase his groceries.
A university maintains a policy of considering for admission only those students who graduated
among the top ten percent of their high school class.

ANS: B

NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

71. Joe's Computers builds and sells computers for the local retail market. Since Joe's business does not
have the name recognition of some of the bigger computer retailers, Joe advertises a "One-Year
Money Back Guarantee" to indicate to buyers that his product is of high quality. This guarantee is an
example of
a.
b.
c.
d.

screening.
signaling.
the seller's curse.
the principal-agent problem.

ANS: B
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

72. Which of the following is an example of signaling?
a.
b.
c.
d.

John is considering the purchase of a used car. Before making the purchase he has the car checked
by an auto mechanic.
Steve is applying for a new life insurance policy. Before writing the policy, the insurance company
requires Steve to be examined by a doctor.
Traci is applying for a new job. Before hiring her, the firm requires Traci to take a drug test.
Ray is planning to ask for Honna's hand in marriage. Before asking her, he buys her a box of her
favorite chocolates and takes her to dinner at her favorite restaurant.

ANS: D
NAT: Analytic
TOP: Signaling

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

73. Screening occurs when
a.
b.
c.
d.

an informed party acts to reveal his private information.
an informed party acts to conceal his private information.
an uninformed party acts to induce the informed party to reveal private information.
one informed party acts to prevent another informed party from revealing private information.

ANS: C
NAT: Analytic
TOP: Screening

DIF: 1
REF: 22-1
LOC: The Study of economics, and definitions in economics
MSC: Definitional


224  Chapter 22/Frontiers of Microeconomics
74. An insurance company that writes automobile policies tries to separate safe drivers from risky
drivers by offering policies that feature different deductibles and different premiums. This practice is
best described as an example of
a.
b.
c.
d.

screening.
behavioral economics.
the Condorcet Paradox.
signaling.

ANS: A

NAT: Analytic
TOP: Screening

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

75. A safe driver would likely choose an auto insurance policy with a
a.
b.
c.
d.

low premium and a high deductible.
high premium and a high deductible.
high premium and a low deductible.
high premium and no deductible.

ANS: A
NAT: Analytic
TOP: Screening

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

76. An unhealthy person would likely choose a medical insurance policy with a
a.

b.
c.
d.

low premium and a high deductible.
high premium and a high deductible.
high premium and no deductible.
The unhealthy person would choose not to be insured.

ANS: C
NAT: Analytic
TOP: Screening

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

77. An airline knows that business travelers have more inelastic demand for travel than vacationers.
That is, business travelers are often willing to pay more for airline tickets than vacationers. The
airline also knows that business travelers do not like to travel over weekends. When customers
request airline tickets that do not involve travel over a weekend, the airline determines that a traveler
is likely a business traveler and charges a higher price. This is an example of
a.
b.
c.
d.

moral hazard.
signaling.

screening.
adverse selection.

ANS: C
NAT: Analytic
TOP: Screening

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Interpretive

78. Suppose that an economics department is offering a student exchange program with a university in
Moscow, Russia. If the department requires students to submit an essay in order to be considered
for the program, the essay may be an example of a(n)
a.
b.
c.
d.

signal.
screen.
efficiency wage.
principal.

ANS: B
NAT: Analytic
TOP: Screening

DIF: 2

REF: 22-1
LOC: Understanding and applying economic models
MSC: Applicative


Chapter 22/Frontiers of Microeconomics  225
79. On car insurance policies, State Ranch Insurance Company offers drivers an option: Policy 1
features a deductible of $1,000, and it requires a driver to pay an annual premium of $500. Policy 2
features a deductible of $500, and it requires a driver to pay an annual premium of $750.
a.
b.
c.
d.

In offering these two policies, State Ranch is engaging in illegal price discrimination.
In offering these two policies, State Ranch is screening drivers.
Policy 1 is more of a burden for safe drivers than it is for risky drivers.
In offering these two policies, State Ranch is signaling their quality to drivers.

ANS: B
NAT: Analytic
TOP: Screening

DIF: 2
REF: 22-1
LOC: Understanding and applying economic models
MSC: Analytical

80. 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.
b.
c.
d.

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

ANS: D
DIF: 2
REF: 22-1
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Asymmetric information
MSC: Interpretive

Sec02-Political Economy
MULTIPLE CHOICE

1.

The field of political economy
a.
b.
c.
d.

casts aside most of the standard methods of economic analysis.

is also referred to as the field of public choice.
is also referred to as the field of macroeconomics.
produces the conclusion that democratic principles rarely lead to desirable economic outcomes.

ANS: B
DIF: 1
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Political economy
MSC: Definitional

2.

Which of the following sets of preferences can not satisfy the property of transitivity?
a.
b.
c.
d.

Plan A is preferred to plan D.
Plan A is preferred to plan B.
Plan C is preferred to plan A.
Plan D is preferred to plan C.

ANS: D
NAT: Analytic
TOP: Transitivity

3.

Plan D is preferred to plan B.
Plan B is preferred to plan C.
Plan B is preferred to plan A.
Plan C is preferred to plan B.

Plan C is preferred to plan B.
Plan A is preferred to plan C.
Plan C is preferred to plan B.
Plan B is preferred to plan D.

DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative

The Condorcet paradox
a.
b.
c.
d.

demonstrates that the order in which one votes on options may influence the outcome.
demonstrates that majority voting by itself may not reveal the outcome that society wants.
disproves Arrow’s impossibility theorem.
Both a and b are correct.

ANS: D
DIF: 2
REF: 22-2

NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive


226  Chapter 22/Frontiers of Microeconomics
4.

Suppose that residents of a town are asked to vote on the best way to improve the safety of an
intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. When the mayor
asks the residents to choose between a stoplight and a 4-way stop, the residents choose a 4-way stop.
Then, when the mayor asks them to choose between a 4-way stop and a 2-way stop, they choose a 2way stop. However, if the mayor firsts asks the residents to choose between a 4-way stop and a 2way stop, they choose a 2-way stop. Then, when the mayor asks the residents to choose between a
2-way stop and a stoplight, they choose a stoplight. What does this example illustrate?
a.
b.
c.
d.

Arrow’s impossibility theorem
the Condorcet paradox
a Borda count
the median voter theorem

ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox

MSC: Applicative

5.

Suppose that residents of a town are asked to vote on the best day to improve the safety of an
intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. The mayor asks the
residents to assign 3 points to their first choice, 2 points to their second choice, and 1 point to their
last choice. The intersection will be controlled by the method that receives the most points. This
voting scheme is called
a.
b.
c.
d.

Arrow’s impossibility theorem.
the Condorcet paradox.
a Borda count.
the median voter theorem.

ANS: C
NAT: Analytic
TOP: Borda counts

6.

DIF: 1
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative

Which of the following sets of preferences satisfies the property of transitivity?
a.
b.
c.
d.

Cookies are preferred to brownies. Brownies are preferred to ice cream. Ice cream is preferred to
cookies.
Cookies are preferred to pie. Brownies are preferred to pie. Pie is preferred to cookies.
Cookies are preferred to ice cream. Ice cream is preferred to brownies. Cookies are preferred to
brownies.
Cookies are preferred to pie. Ice cream is preferred to cookies. Pie is preferred to ice cream.

ANS: C
NAT: Analytic
TOP: Transitivity

DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative

Table 22-1
Three friends -- Tricia, Sarah, and Katie -- are deciding where to go together for vacation. They all agree that they
should go to one of three places: Ireland, Italy, or Greece. They also agree that they will have two pairwise votes to
determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and
third choices for each person are as indicated in the table below.

First choice
Second choice

Third choice

7.

Tricia
Ireland
Italy
Greece

Sarah
Italy
Greece
Ireland

Katie
Greece
Ireland
Italy

Refer to Table 22-1. If the first vote pits Ireland against Italy and the second vote pits Greece
against the winner of the first vote, then the outcome is as follows:
a.
b.
c.
d.

Ireland wins the first vote and Greece wins the second vote, so they go to Greece.
Ireland wins the first vote and Ireland wins the second vote, so they go to Ireland.
Italy wins the first vote and Italy wins the second vote, so they go to Italy.
Italy wins the first vote and Greece wins the second vote, so they go to Greece.

Chapter 22/Frontiers of Microeconomics  227
ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative

8.

Refer to Table 22-1. If the first vote pits Ireland against Greece and the second vote pits Italy
against the winner of the first vote, then the outcome is as follows:
a.
b.
c.
d.

Ireland wins the first vote and Italy wins the second vote, so they go to Italy.
Ireland wins the first vote and Ireland wins the second vote, so they go to Ireland.
Greece wins the first vote and Greece wins the second vote, so they go to Greece.
Greece wins the first vote and Italy wins the second vote, so they go to Italy.

ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models

TOP: Condorcet paradox
MSC: Applicative

9.

Refer to Table 22-1. If the first vote pits Italy against Greece and the second vote pits Ireland
against the winner of the first vote, then the outcome is as follows:
a.
b.
c.
d.

Italy wins the first vote and Ireland wins the second vote, so they go to Ireland.
Italy wins the first vote and Italy wins the second vote, so they go to Italy.
Greece wins the first vote and Greece wins the second vote, so they go to Greece.
Greece wins the first vote and Ireland wins the second vote, so they go to Ireland.

ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative

10. Refer to Table 22-1. Depending on the order of the pairwise voting,
a.
b.
c.
d.

the friends could go to either Ireland, Greece, or Italy.
the friends could go to either Ireland or Greece, but they will not go to Italy.
the friends could go to either Greece or Italy, but they will not go to Ireland.
the friends could go to either Ireland or Italy, but they will not go to Greece.

ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative

11. Refer to Table 22-1. If the friends change their minds and decide to choose a vacation destination
using a Borda count, then
a.
b.
c.
d.

the friends will go to Ireland.
the friends will go to Italy.
the friends will go to Greece.
A Borda count will not result in a single winner in this case.

ANS: D
NAT: Analytic
TOP: Borda counts

DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Applicative

12. Which of the following is not correct?
a.
b.
c.
d.

Pairwise voting never produces transitive preferences.
The order of pairwise voting can affect the result.
Majority voting by itself does not tell us what outcome a society really wants.
No voting system can satisfy all of the following properties: unanimity, transitivity, independence
of irrelevant alternatives, and no dictators.

ANS: A
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Political economy
MSC: Interpretive

13. The field of political economy
a.
b.
c.
d.

applies the methods of political science to microeconomics.
applies the methods of political science to macroeconomics.
is relevant to the issue of how active government should be in economic matters.
integrates psychological insights to better understand individual choices.


228  Chapter 22/Frontiers of Microeconomics
ANS: C
DIF: 1
REF: 22-2
NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Political economy
MSC: Interpretive

14. Recent developments in political economy
a.
b.
c.
d.

render much of the traditional field of political science obsolete.
render much of the traditional field of economics obsolete.
illustrate the resolute nature of democracy.
point to the fact that government is a less-than-perfect institution.

ANS: D
DIF: 2
REF: 22-2

NAT: Analytic
LOC: The Study of economics, and definitions in economics
TOP: Political economy
MSC: Interpretive

15. The Condorcet voting paradox applies to situations in which voters
a.
b.
c.
d.

decide between exactly two possible outcomes.
decide among more than two possible outcomes.
as a group have transitive preferences.
choose the inferior candidate even though the majority preferred the better candidate.

ANS: B
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive

16. The Condorcet paradox
a.
b.
c.
d.

proved that the Arrow impossibility theorem is wrong.
was proved wrong by the Arrow impossibility theorem.
serves as an example of the Arrow impossibility theorem.
pertains to voting systems, whereas Arrow's Impossibility Theorem does not.

ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive

17. Normally, we expect voters' preferences to exhibit a property called
a.
b.
c.
d.

transitivity.
transversality.
normality.
universality.

ANS: A
NAT: Analytic
TOP: Transitivity

DIF: 1
REF: 22-2

LOC: The Study of economics, and definitions in economics
MSC: Interpretive

18. If preferences exhibit the property of transitivity, then
a.
b.
c.
d.

the preferences are irrational.
individuals prefer more government involvement in private markets than do people whose
preferences are not transitive.
preferences change over time more quickly than when preferences are not transitive.
preferences satisfy one of the properties assumed to be desireable by Kenneth Arrow in Social
Choice and Individual Values.

ANS: D
NAT: Analytic
TOP: Transitivity

DIF: 2
REF: 22-2
LOC: The Study of economics, and definitions in economics
MSC: Interpretive

19. Which of the following statements captures the meaning of transitivity of preferences?
a.
b.
c.
d.

If A is preferred to B, then B is less preferred than A.
If A is preferred to B, and B is preferred to C, then A is preferred to C.
If A is preferred to B and B is preferred to C, then the preference for A over B is stronger than the
preference for B over C.
If A is preferred to C, then there exists B such that A is preferred to B and C is preferred to A.


Chapter 22/Frontiers of Microeconomics  229
ANS: B
NAT: Analytic
TOP: Transitivity

DIF: 2
REF: 22-2
LOC: Understanding and applying economic models
MSC: Definitional

20. The Condorcet voting paradox demonstrates that democratic outcomes do not always obey the
property of
a.
b.
c.
d.

narrowness of preferences.
concavity of preferences.
asymmetry of preferences.
transitivity of preferences.

ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive

21. The Condorcet paradox shows that
a.
b.
c.
d.

allocations of resources based on majority rule are always inefficient.
problems in counting votes can negate legitimate democratic outcomes.
the order on which things are voted can affect the result.
transitive preferences are inconsistent with rationality.

ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive

22. Under majority rule, the order in which items are voted on is
a.
b.

c.
d.

unimportant, and this is a lesson of the Condorcet paradox.
unimportant, and this is a lesson of Arrow’s impossibility theorem.
important, and this is a lesson of the Condorcet paradox.
important, and this is a lesson of Arrow’s impossibility theorem.

ANS: C
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Interpretive
Table 22-2
Three longtime friends-Fred, Barney, and Wilma-are deciding how they will spend their Sunday afternoon. They all
agree that they should do one of three things: go to a movie, go to the beach, or go to a museum. They also agree
that they will have two pairwise votes to determine how to spend their evening, with the majority determining the
outcome on each vote. The first, second, and third choices for each person are as indicated in the table below.

First choice
Second choice
Third choice

Fred
Museum
Beach
Movie

Barney
Beach
Movie
Museum

Wilma
Movie
Museum
Beach

23. Refer to Table 22-2. If (1) the first vote pits "museum" against "movie," and (2) the second vote pits
"beach" against the winner of the first vote, then the outcome is as follows:
a.
b.
c.
d.

"Museum" wins the first vote and "museum" wins the second vote, so they go to a museum.
"Museum" wins the first vote and "beach" wins the second vote, so they go to the beach.
"Movie" wins the first vote and "movie" wins the second vote, so they go to a movie.
"Movie" wins the first vote and "beach" wins the second vote, so they go to the beach.

ANS: D
DIF: 2
REF: 22-2
NAT: Analytic
LOC: Understanding and applying economic models
TOP: Condorcet paradox
MSC: Applicative