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Chapter 22 Frontiers of Microeconomics

TRUE/FALSE 1. The science of economics is a finished jewel, perfect and unchanging. ANS: F DIF: 1 !F: ""#$ NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): economics *S(: Definitional ". In economics, a difference in access to rele+ant ,nowledge is called a -eha+ioral as%mmetr%. ANS: F DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Definitional .. Informational as%mmetr% ma% appl% to a hidden action or hidden characteristic where the informed part% ma% -e reluctant to re+eal rele+ant information. ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Applicati+e 0. An e1ample of as%mmetric information is when a seller of a house ,nows more than the -u%er a-out the house2s condition. ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Applicati+e 3. !conomists ha+e found that as%mmetric information is not +er% pre+alent. ANS: F DIF: " !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Interpreti+e 4. An e1ample of an information as%mmetr% is when a wor,er ,nows more than his emplo%er a-out his wor, effort. ANS: T DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Interpreti+e 5. The criminal actions of the top managers of corporations such as !nron, T%co, 6orld(om, and Adelphia are an e1ample of moral ha7ard. ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard *S(: Applicati+e 8. The pro-lem of moral ha7ard is a pro-lem of hidden action. ANS: T DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard *S(: Interpreti+e 9. The pro-lem that arises when one person performs a tas, on -ehalf of another person is called the lemons pro-lem. ANS: F DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard *S(: Interpreti+e 1$. 'ne of the things that emplo%ers can do to lessen the moral ha7ard pro-lem in+ol+ing their emplo%ees is to pa% them in ad+ance for their wor,. ANS: F DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard *S(: Interpreti+e

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In the emplo%er#wor,er relationship, the emplo%er is regarded as the ;principal; and the wor,er is regarded as the ;agent.; ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard *S(: Definitional 1". The moral ha7ard pro-lem and the desire of firms to lessen that pro-lem ser+e as a plausi-le e1planation for a firm pa%ing a-o+e#e<uili-rium wages to its wor,ers. ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard *S(: Interpreti+e 1.. The classic e1ample of ad+erse selection is the mar,et for used cars. ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 10. The two major pro-lems caused -% as%mmetric information are the moral#ha7ard pro-lem and the principal# agent pro-lem. ANS: F DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Interpreti+e 13. Signaling is an action ta,en -% an uninformed part% to induce an informed part% to re+eal information. ANS: F DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Screening = Signaling *S(: Definitional 14. An e1ample of signaling is a -o%friend gi+ing an e1pensi+e, romantic gift to his girlfriend to con+e% his lo+e for her. ANS: T DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Signaling *S(: Applicati+e 15. >alerie prefers A to ? and she prefers ? to (. If >alerie@s preferences are transiti+e, then she prefers A to (. ANS: T DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Transiti+it% *S(: Definitional 18. The (ondorcet +oting parado1 shows that outcomes -ased on dictatorial preferences do not alwa%s o-e% the propert% of transiti+it%. ANS: F DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e 19. The (ondorcet parado1 implies that the order in which items are +oted on under majorit% rule is unimportant. ANS: F DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e "$. (ondorcet e1plained his parado1 in a 1931 -oo, called Social Choice and Individual Values. ANS: F DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e "1. The (ondorcet parado1 demonstrates that the order in which people +ote on choices ma% influence the final outcome. ANS: T DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e

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"". ?orda count is a +oting method often used in polls that ran, sports teams. ANS: T DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?orda count *S(: Interpreti+e ".. Arrow2s impossi-ilit% theorem demonstrates the impossi-ilit% of the median +oter theorem. ANS: F DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e "0.

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Arrow@s impossi-ilit% theorem shows that it is impossi-le to find a -etter +oting s%stem than pairwise majorit% +oting. ANS: F DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e "3. *ajorit% rule will produce the outcome most preferred -% the median +oter. ANS: T DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Definitional "4. According to the median +oter theorem, majorit% rule will produce an outcome that is inconsistent with transiti+e preferences. ANS: F DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e "5. An implication of the median +oter theorem is that epu-licans and Democrats will tr% to align their +iews with those of the median +oter. ANS: T DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e "8. )olitical leaders are alwa%s aiming for an optimal com-ination of efficienc% and e<ualit%. ANS: F DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Interpreti+e "9. In the field of stud% called political econom%, economists ma,e use of insights from the field of ps%cholog%. ANS: F DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Definitional .$. A ;satisficer; is a person whose decisionma,ing is the same as that predicted -% mainstream economic models. ANS: F DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Definitional .1. esearchers ha+e found that the s%stematic mista,es that people ma,e in their decisionma,ing include a lac, of confidence in their own a-ilities. ANS: F DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .". *ost economic models incorporate the assumption of rational -eha+ior on the part of economic actors. ANS: T DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e

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Studies of human decision#ma,ing ha+e found that people do not gi+e enough weight to a small num-er of +i+id o-ser+ations. ANS: F DIF: " !F: ""#. NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): ?eha+ioral economics *S(: Interpreti+e .0. Studies of human decision ma,ing ha+e found that people are reluctant to change their minds. ANS: T DIF: " !F: ""#. NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): ?eha+ioral economics *S(: Interpreti+e .3. !+idence from e1periments in which real people pla% the ultimatum game supports the idea that people care a-out fairness as well as a-out ma1imi7ation of their personal wealth. ANS: T DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .4. ?ased on studies of human decision ma,ing, man% people care more a-out the fairness of a game than a-out their personal winnings. ANS: T DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .5. The tendenc% of man% people to procrastinate supports the +iew that people are consistent o+er time. ANS: F DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e SHORT ANSWER 1. !1plain what is meant -% ;as%mmetric information.; Identif% and e1plain the two -asic t%pes of pro-lems that arise when there is as%mmetric information.

ANS: As%mmetric information is present when there is a difference in access to rele+ant information. !1amples include information differences -etween A1B a wor,er and his emplo%er, A"B a -u%er and seller, and A.B an insured person and his insurer. The two -asic t%pes of pro-lems are A1B moral ha7ard, which is a pro-lem of hidden actions and ordinaril% in+ol+es a principal and an agent, and A"B ad+erse selection, which is a pro-lem of hidden characteristics or ;lemons.; DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *S(: Definitional ". As%mmetric information

!1plain how the presence of as%mmetric information in car insurance mar,ets ma% lead people who are good dri+ers or e+en a+erage dri+ers to choose not to -u% car insurance unless the law re<uires it.

ANS: Dri+ers A-u%ers and potential -u%ers of car insuranceB ,now more a-out their dri+ing ha-its than do the insurance companies Asellers of car insuranceB. The price of car insurance is li,el% to reflect the information as%mmetr% in that it incorporates more of a ris, component than is reall% necessar% to insure good and a+erage dri+ers. (onse<uentl%, good and a+erage dri+ers are priced out of the mar,et and the% rationall% choose not to -u% the insurance unless the% are re<uired to do so. DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *S(: Interpreti+e As%mmetric information

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.. !1plain the (ondorcet parado1. To which t%pe of +oting s%stem does it appl%C ANS: The (ondorcet parado1 applies directl% to pairwise majorit% +oting. It shows that e+en if indi+idual +oters@ preferences e1hi-it transiti+it%, that propert% does not follow through to outcomes of pairwise majorit% +oting. (onse<uentl%, the order in which choices are put up, in pairwise fashion, affects the final outcome. /sing choices A, ?, and (, it ma% -e the case, for e1ample, that under pairwise +oting +oters choose A o+er ? and ? o+er (, -ut then the% ma% choose ( o+er A. This result can o-tain e+en when indi+idual +oters@ preferences are transiti+eD hence, the parado1. DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *S(: Definitional 0. (ondorcet parado1

Assume there are two major political parties: the (onser+ati+es and the &i-erals. 6hat does the median +oter theorem impl% a-out the nature of the platforms Athat is, polic% stancesB of the (onser+ati+es and &i-eralsC

ANS: The median +oter theorem implies that political parties will set their platforms so as to appeal to the median A;middle of the distri-ution;B +oter. Therefore, rather than adopting e1treme +iews, the (onser+ati+es and &i-erals will -oth adopt platforms that are toward the ;middle of the road.; DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *S(: Interpreti+e *edian +oter theorem

3. Eow ha+e insights from the field of ps%cholog% influenced the thin,ing of economists in recent %earsC ANS: Insights from ps%cholog% ha+e led some economists to <uestion the assumption of rationalit% that per+ades mainstream economic models. !+idence from e1perimental economics does raise serious <uestions a-out the rationalit% assumption. For e1ample, most people ma% -e concerned with the fairness of outcomes, in addition to the impact of those outcomes on their own well#-eing. An open <uestion is: If the rationalit% assumption does not reall% reflect the -eha+ior of real economic actors, then how important is it that we model other moti+ations, such as the desire for fairness, the tendenc% to procrastinate, o+erconfidence, etc.C DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *S(: Interpreti+e ?eha+ioral economics

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MULT !LE CHO CE 1. 6hich of the following is not correctC a. !conomics is a stud% of the choices that people ma,e and the resulting interactions the% ha+e with one another. -. !conomists are not interested in finding new areas to stud% and new phenomena to e1plain. c. !conomists are tr%ing to e1pand their understanding of human -eha+ior and societ%. d. The economics of as%mmetric information, political econom%, and -eha+ioral economics are all topics at the frontier of microeconomics.

ANS: ? DIF: " !F: ""#$ NAT: Anal%tic &'(: The stud% of economics, and the definitions of economics T'): Frontiers of microeconomics *S(: Interpreti+e ". As%mmetric information, political econom%, and -eha+ioral economics a. are topics at the frontier of microeconomics. -. are topics that economists no longer research. c. are -eing studied as economists tr% to e1pand their understanding of human -eha+ior and societ%. d. -oth a and c are correct.

ANS: D DIF: 1 !F: ""#$ NAT: Anal%tic &'(: The stud% of economics, and the definitions of economics T'): Frontiers of microeconomics *S(: Interpreti+e

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6hen mar,ets fail, which of the following is trueC a. Fo+ernment inter+ention can alwa%s impro+e outcomes. -. Fo+ernment inter+ention can potentiall% impro+e outcomes. c. Fo+ernment inter+ention can ne+er impro+e outcomes. d. *ar,ets do not fail.

ANS: ? DIF: 1 !F: ""#$ NAT: Anal%tic &'(: The stud% of economics, and the definitions of economics T'): Frontiers of microeconomics *S(: Interpreti+e

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MULT !LE CHO CE 1. In economics, a difference in access to rele+ant ,nowledge is called aAnB a. rele+anc% frontier. -. ,nowledge gap. c. information as%mmetr%. d. information e<uili-rium.

ANS: ( DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Definitional ". Informational as%mmetr% is a difference in a. efficienc%. -. e<ualit%. c. rele+ant ,nowledge. d. signaling.

ANS: ( DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Definitional .. Information as%mmetr% refers to a. the tendenc% of a person who is imperfectl% monitored to engage in dishonest or otherwise undesira-le -eha+ior. -. the tendenc% for the mi1 of uno-ser+ed attri-utes to -ecome undesira-le from the standpoint of an uninformed part%. c. an action ta,en -% an informed part% to re+eal pri+ate information to an uninformed part%. d. a difference in access to rele+ant ,nowledge.

ANS: D DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Definitional 0. The "$$1 No-el pri7e in economics was awarded to Feorge A,erlof, *ichael Spence, and Goseph Stiglit7 for their wor, on a. as%mmetric information. -. political econom%. c. -eha+ioral economics. d. growth theor%.

ANS: A DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Interpreti+e 3. 6hich of the following relationships in+ol+es as%mmetric informationC a. An emplo%ee ,nows more than his emplo%er ,nows a-out his wor, effort. -. A -orrower ,nows more than the lender a-out his a-ilit% to repa% the loan. c. The seller of a .$#%ear#old house ,nows more than the -u%er a-out the condition of the house. d. All of the a-o+e are correct.

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ANS: D DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Anal%tical 4. 6hich of the following relationships in+ol+es as%mmetric informationC a. )atients can loo, up information regarding certain prescription drugs gi+ing them the same information as their doctors. -. (onsumer eports allows customers of D>D pla%ers to ,now as much a-out the <ualit% of +arious pla%ers as the store salesperson. c. (ar Fa1 allows car -u%ers to o-tain used#+ehicle histories pro+iding them with the same information as the dealership salesperson. d. The -atter in a -ase-all game must guess whether the pitcher is going to throw a fast-all, cur+e-all, or change#up.

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ANS: D DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Interpreti+e 5. A dri+er ,nows more than his auto insurer a-out how cautiousl% he dri+es. This is an e1ample of a. a hidden action. -. a hidden characteristic. c. ad+erse selection. d. the (ondorcet )arado1.

ANS: A DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Interpreti+e 8. Fre<uentl% it is the case that: A1B A wor,er ,nows more than his emplo%er a-out how much effort he puts into his jo-, and A"B the seller of a used car ,nows more than the -u%er a-out the car@s condition. a. Neither A1B nor A"B ser+es as an e1ample of as%mmetric information. -. ?oth A1B and A"B ser+e as e1amples of as%mmetric information. c. Neither A1B nor A"B ser+es as an e1ample of a hidden action. d. ?oth A1B and A"B ser+e as e1amples of hidden action.

ANS: ? DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Anal%tical 9. As%mmetric information a. is not an area of current research in economics. -. can ta,e the form of a hidden action or a hidden characteristic. c. e1plains Arrow2s impossi-ilit% theorem. d. is uncommon in corporate management.

ANS: ? DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Anal%tical 1$. Fo+ernment action in cases of as%mmetric information ma% not -e an ideal solution -ecause a. the pri+ate mar,et can sometimes deal with information as%mmetries on its own. -. the go+ernment tends to ha+e more information than pri+ate parties. c. -oth AaB and A-B. d. None of the a-o+e is correct.

ANS: A DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Interpreti+e

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6hich of the following is an e1ample of informational as%mmetr%C a. A seller of a house ,nows more a-out its true condition than does a potential -u%er. -. A salesperson ,nows more a-out her efforts than does her manager. c. A child ,nows more a-out how much time he spent pla%ing +ideo games while he was alone in his -edroom than do his parents. d. All of the a-o+e are correct.

ANS: D DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Applicati+e 1". 6hen as%mmetric information affects a relationship -etween two parties, it is alwa%s the case that a. neither part% is well informed. -. one part% is -etter informed than the other part%. c. -oth parties are e<uall% well informed. d. the go+ernment is -etter informed than either of the two parties.

ANS: ? DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Interpreti+e 1.. 6hich of the following statements is correctC a. Eidden actions and hidden characteristics are -oth associated with the moral#ha7ard pro-lem. -. Eidden actions and hidden characteristics are -oth associated with the ad+erse#selection pro-lem. c. Eidden actions are associated with the moral#ha7ard pro-lem, whereas hidden characteristics are associated with the ad+erse#selection pro-lem. d. Eidden actions are associated with the ad+erse#selection pro-lem, whereas hidden characteristics are associated with the moral#ha7ard pro-lem.

ANS: ( DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): As%mmetric information *S(: Definitional 10. The pro-lem that arises when one person performs a tas, on -ehalf of another person is called a. the hidden characteristics pro-lem. -. the lemons pro-lem. c. moral ha7ard. d. ad+erse selection. DIF: 1 !F: ""#1 &'(: The Stud% of economics, and definitions in economics *S(: Definitional

ANS: ( NAT: Anal%tic T'): *oral ha7ard 13.

6hich of the following is not an e1ample of a principal#agent relationshipC a. a soccer pla%er and her coach -. a man and his neigh-or c. an construction wor,er and his foreman d. a dri+er and her insurance agent

ANS: ? DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )rincipalsD agents *S(: Applicati+e 14. 6hich of the following is not an e1ample of a principal tr%ing to sol+e the moral#ha7ard pro-lemC a. the principal conducts an e1tensi+e inter+iew of the agent -. the principal installs hidden cameras to monitor the agent2s -eha+ior c. the principal pa%s the agent efficienc% wages d. the principal pa%s the agent a %ear#end -onus DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: A NAT: Anal%tic T'): *oral ha7ard

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15. 6hich of the following would -e an e1ample of a principal tr%ing to deal with a moral ha7ard pro-lemC a. The parents of an infant secretl% place +ideo cameras in their house -efore the -a-%#sitter arri+es. -. An insurance compan% chec,s police records to determine if its polic%holders ha+e recei+ed traffic citations. c. An emplo%er e1amines his wor,ers@ output on a dail% -asis. d. All of the a-o+e are correct. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

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ANS: D NAT: Anal%tic T'): *oral ha7ard 18.

6hich of the following offers an e1planation as to wh% the principal#agent pro-lem e1ists for a firmC a. The firm cares less a-out profit and more a-out cost when there are man% competitors in the mar,et. -. The firm offers an emplo%ee#incenti+e program in which emplo%ees share in the firm2s profits. c. The firm operates in a mar,et with man% competitors forcing the firm to pa% its emplo%ees more to ,eep them from switching to another firm. d. The firm operates to ma1imi7e profit while the emplo%ees attempt to wor, as little as possi-le to earn their pa%chec,s. DIF: 1 !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): *oral ha7ard 19.

6hich of the following practices would indicate that an emplo%er is tr%ing to o+ercome a moral#ha7ard pro-lem with his emplo%eesC a. The emplo%er pa%s his wor,ers wages that are unusuall% high for the industr% and region. -. The emplo%er has +oluntaril% remo+ed +ideo cameras from the factor% floor. c. The emplo%er has discontinued the practice of gi+ing his emplo%ees@ %ear#end -onuses. d. ?oth A and ? are correct. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): *oral ha7ard "$.

6hich of the following is not an e1ample of moral ha7ardC a. a person with car insurance dri+es rec,lessl% -. a pet#sitter -eing paid to wal, a dog for one hour per da% onl% wal,s the dog for "$ minutes per da% c. a thief steals a car d. All of the a-o+e are e1amples of moral ha7ard. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ( NAT: Anal%tic T'): *oral ha7ard "1.

In the case of a moral#ha7ard pro-lem, which of the following is not a wa% for the principal to encourage the agent to act more responsi-l%C a. the principal could -etter monitor the agent -. the principal could pa% the agent a-o+e#e<uili-rium wages c. the principal could dela% pa%ment to the agent d. the principal could pa% the agent -elow#e<uili-rium wages DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): *oral ha7ard

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6hich of the following is not an e1ample of a moral ha7ard pro-lemC a. A manager sta%s late one e+ening so that her emplo%ee can lea+e earl% to attend his child2s music recital. -. A small child ta,es an e1tra coo,ie from the coo,ie jar when he thin,s his mom isn2t watching him closel%. c. An emplo%ee pla%s solitaire on her computer at 0:.$ p.m. on a Frida% when her -oss has left for the da%. d. A customer whose new e%eglasses come with a H4$#da% insurance polic% in case of -rea,ageI lea+es her glasses out where her new pupp% can chew on them. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: A NAT: Anal%tic T'): *oral ha7ard "..

*oral ha7ard occurs when a. an emplo%er closel% monitors an emplo%ee. -. two people consider a trade with each other and one person has rele+ant information a-out some aspect of the product@s <ualit% that the other person lac,s. c. an emplo%ee lac,s an incenti+e to promote the -est interests of the emplo%er, and the emplo%er cannot o-ser+e the actions of the emplo%ee. d. an emplo%ee closel% monitors the actions of her emplo%er. DIF: 1 !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Definitional

ANS: ( NAT: Anal%tic T'): *oral ha7ard "0.

The temptation of imperfectl%#monitored wor,ers to shir, their responsi-ilities is a. an e1ample of the moral ha7ard pro-lem. -. an e1ample of the ad+erse selection pro-lem. c. an e1ample of screening. d. an e1ample of signaling. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): *oral ha7ard "3.

!mplo%ers can tr% to o+ercome the moral#ha7ard pro-lem in+ol+ing their emplo%ees -% a. pa%ing their emplo%ees more often. -. pa%ing their emplo%ees -elow#e<uili-rium wages since the emplo%ees will li,el% shir, some of their responsi-ilities. c. -etter monitoring their emplo%ees@ wor, efforts. d. re<uiring their emplo%ees to ta,e a pre#emplo%ment wor, effort test. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): *oral ha7ard "4.

!d was recentl% hired as a salesman for a national consulting firm. Eis jo- in+ol+es spending a significant portion of his time out of the office +isiting prospects and attending conferences. Eis firm is pa%ing him a wage that is higher than the e<uili-rium wage, -ut he recei+es much of his income in <uarterl% -onuses -ased on how much he sells. a. The consulting firm is tr%ing to pre+ent ad+erse selection with its compensation strateg%. -. !d has an incenti+e to go golfing with his -uddies rather than conducting sales meetings. c. The consulting firm is responding to the moral ha7ard pro-lem with its compensation strateg%. d. !d should <uit this jo- and ta,e a jo- where he gets paid an e<uili-rium wage more fre<uentl%. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): *oral ha7ard

(hapter "":Frontiers of *icroeconomics


"5.

"13

!d was recentl% hired as a salesman for a national consulting firm. Eis jo- responsi-ilities in+ol+e spending a significant portion of his time out of the office +isiting prospects and attending conferences. 6hich of the following is strateg% the consulting firm ma% emplo% to discourage !d from shir,ing his responsi-ilitiesC a. Tell !d that the shareholders want to earn a large profit this %ear. -. )a% !d commissions on what he sells after the wor, has -een completed. c. Allow !d to set his own schedule and wor, from home fre<uentl%. d. )a% !d a lower wage than he would earn in a similar jo- at another firm. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ? NAT: Anal%tic T'): *oral ha7ard "8.

!mplo%ers ma% choose to pa% their wor,ers a wage that e1ceeds the e<uili-rium wage according to a. efficienc%#wage theories. -. e<uili-rium wage theories. c. screening theories. d. signaling theories. DIF: 1 !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Definitional

ANS: A NAT: Anal%tic T'): *oral ha7ard "9.

An efficienc% wage a. gi+es an emplo%ee an incenti+e to shir, his duties. -. is lower than the e<uili-rium wage for that position and region. c. is higher than the e<uili-rium wage for that position and region. d. -oth a and - are correct. DIF: 1 !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Definitional

ANS: ( NAT: Anal%tic T'): *oral ha7ard .$.

6hich of the following is a plausi-le e1planation for a firm pa%ing a-o+e#e<uili-rium wages to its wor,ersC a. It increases the pro-a-ilit% that a wor,er who shir,s will -e caught. -. It discourages wor,ers from shir,ing out of fear of losing their high#pa%ing jo-. c. The (ondorcet )arado1 suggests that pa%ing high wages will result in greater effort -% emplo%ees. d. ?% pa%ing a high wage, emplo%ers sol+e this ad+erse selection pro-lem and moti+ate the emplo%ees to wor, harder. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ? NAT: Anal%tic T'): *oral ha7ard .1.

Gason -u%s automo-ile insurance from No 6rec, Insurance (ompan%. If Gason a+oids ha+ing an accident for three %ears, No 6rec, will reduce the price he has to pa% for his insurance. Ne+ertheless, he routinel% dri+es fast and with rec,less a-andon. a. This is an ad+erse selection pro-lem which should -e corrected with go+ernment inter+ention. -. Gason is a principal and No 6rec, is an agent in this principal#agent pro-lem. c. This is a moral ha7ard pro-lem. d. There is no wa% for No 6rec, to determine whether Gason is a cautious or ris,% dri+er. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): *oral ha7ard .".

o-ert -orrowed some mone% from Franite ?an,, telling the loan officer that he intended to use the mone% to ma,e repairs to his home. After getting the loan, o-ert and his girlfriend immediatel% too, the mone% and headed to the nearest ri+er-oat casino for a wee,end of gam-ling and entertainment. a. This is an e1ample of ad+erse selection since -an,s ha+e difficult% selecting their customers. -. This is a t%pical e1ample of the (ondorcet )arado1. c. From the gi+en information, o-ert is the principal and his girlfriend is the agent. d. From the gi+en information, Franite ?an, is the principal and o-ert is the agent.

"14

(hapter "":Frontiers of *icroeconomics


DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): *oral ha7ard ...

6hen a night watchman onl% performs two wal,#throughs per night when he is -eing paid to perform fi+e wal,#throughs per night, it is an e1ample of a. -oth moral ha7ard and ad+erse selection. -. neither moral ha7ard nor ad+erse selection. c. moral ha7ard, -ut not ad+erse selection. d. ad+erse selection, -ut not moral ha7ard.

ANS: ( DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard = ad+erse selection *S(: Applicati+e .0. A radio stor% reported a stud% on the ma,es and models of cars that were o-ser+ed going through intersections in the 6ashington, D.(. area without stopping at the stop signs. According to the stor%, >ol+os were hea+il% o+errepresentedD the fraction of cars running stop signs that were >ol+os was much greater than the fraction of >ol+os in the total population of cars in the D.(. area. This is initiall% surprising -ecause >ol+o has -uilt a reputation as an especiall% safe car that appeals to sensi-le, safet%#conscious dri+ers. Eow is this o-ser+ation -est e1plainedC a. >ol+o dri+ers are not willing to ta,e ris,s that the% would ta,e in another, less safe car. Dri+ing a >ol+o leads to a propensit% to run stop signs. -. >ol+o dri+ers are not willing to ta,e ris,s that the% would ta,e in another, less safe car. Dri+ing a >ol+o reduces the propensit% to run stop signs. c. >ol+o dri+ers are willing to ta,e ris,s that the% would not ta,e in another, less safe car. Dri+ing a >ol+o reduces the propensit% to run stop signs. d. >ol+o dri+ers are willing to ta,e ris,s that the% would not ta,e in another, less safe car. Dri+ing a >ol+o leads to a propensit% to run stop signs. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: D NAT: Anal%tic T'): *oral ha7ard .3.

Suppose %ou are co+ered under health insurance or -elong to a Eealth *aintenance 'rgani7ation AE*'B, and %ou are insured against all or most of the costs of +isits to the doctor. As a result %ou are li,el% to ma,e greater use of medical ser+ices of all ,inds. This tendenc% of people with insurance to change their -eha+ior in a wa% that leads to more claims against the insurance compan% is called a. ad+erse selection. -. moral ha7ard. c. screening d. signaling. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ? NAT: Anal%tic T'): *oral ha7ard .4.

?ill owns a small -usiness in *ilwau,ee. Ee tra+els fre<uentl%, meeting with important customers, and attending conferences. ?ill hired Nicole to wor, in the *ilwau,ee office as the da%#to#da% general manager of the -usiness. a. This is a moral ha7ard pro-lem since Nicole ma% not wor, as hard as ?ill would li,e when she is not monitored. -. ?ill choosing to hire Nicole is an e1ample of ad+erse selection since it is possi-le that Nicole will not wor, as hard as ?ill e1pects. c. ?ill will most li,el% pa% Nicole a lower salar% than normal since ?ill will not -e there to monitor Nicole2s wor, effort, and since Nicole will not li,el% wor, hard ,nowing ?ill cannot monitor her effort. d. The (ondorcet )arado1 implies that Nicole will not wor, as hard as ?ill would li,e e+en though he will li,el% pa% her an a-o+e e<uili-rium wage. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): *oral ha7ard

(hapter "":Frontiers of *icroeconomics


.5. 6hen new professors are hired, their jo- performance is monitored closel%. If the% meet their institution@s standards, the% will e+entuall% recei+e tenure. After recei+ing tenure, professors@ jo- performance is less closel% monitored, and the% -ecome difficult to fire. Tenure thus creates a. ad+erse selection. -. a (ondorcet parado1. c. a screening pro-lem. d. moral ha7ard. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

"15

ANS: D NAT: Anal%tic T'): *oral ha7ard .8.

(arlos, who ,nows nothing a-out construction, paid Goe to remodel a room in his house. Two %ears later, one wall in the remodeled room crum-led -ecause Goe used poor#<ualit% materials. This illustrates which economic pro-lemC a. Ad+erse selection -. Screening c. *oral ha7ard d. Signaling DIF: 1 !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): *oral ha7ard .9.

Gohn goes to wor, 8 hours per da%, -ut while he is at wor, he spends most of his time +isiting internet sites that pro+ide him with information on his fa+orite ho--%. This is an e1ample of a. the (ondorcet )arado1. -. signaling. c. moral ha7ard. d. screening. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): *oral ha7ard 0$.

In corporations, a principal#agent pro-lem can arise when a. the shareholders are the principal and the managers are the agent. -. the -oard of directors is the principal and the managers are the agent. c. the shareholders are the principal and the -oard of directors is the agent. d. All of the a-o+e are correct. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): *oral ha7ard 01.

In corporations, which of the following are agents -ut not principalsC a. shareholders -. the -oard of directors c. managers d. wor,ers DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): *oral ha7ard 0".

In corporations, which of the following are principals -ut not agentsC a. shareholders -. the -oard of directors c. managers d. wor,ers DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): *oral ha7ard

"18
0..

(hapter "":Frontiers of *icroeconomics


Insurance companies charge annual premiums to collect re+enue, which the% then use to pa% customers who file claims for damages the% incur. As a result of the moral ha7ard pro-lem A1B what is the percentage of polic% holders ma,ing claims, and A"B what is the a+erage premium charged when compared to a world with no moral ha7ard pro-lemC a. The percentage of polic% holders ma,ing claims is higherD a+erage annual premiums are lower. -. The percentage of polic% holders ma,ing claims is lowerD a+erage annual premiums are lower. c. The percentage of polic% holders ma,ing claims is higherD a+erage annual premiums are higher. d. The percentage of polic% holders ma,ing claims is lowerD a+erage annual premiums are higher. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: ( NAT: Anal%tic T'): *oral ha7ard 00.

Insurance companies charge annual premiums to collect re+enue, which the% then use to pa% customers who file claims for damages the% incur. ?ecause of the moral ha7ard pro-lem insurance companies separate customers into groups. Froup 1: customers who file few claims J Froup ": customers that file a lot of claims. After creating these groups, what happens to the a+erage annual premium within a groupC a. Froup 1: a+erage annual premium increases Froup ": a+erage annual premium increases -. Froup 1: a+erage annual premium decreases Froup ": a+erage annual premium increases c. Froup 1: a+erage annual premium increases Froup ": a+erage annual premium decreases d. Froup 1: a+erage annual premium decreases Froup ": a+erage annual premium decreases DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: ? NAT: Anal%tic T'): *oral ha7ard 03.

6hich of the following is a characteristic of a corporation -ut not of a small famil%#owned -usinessC a. The firm -u%s inputs in mar,ets for the factors of production. -. The firm sells output in mar,ets for goods and ser+ices. c. The firm is guided in its decisions -% the o-jecti+e of profit ma1imi7ation. d. The firm faces a principal#agent pro-lem created -% the separation of ownership and control. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): *oral ha7ard 04.

Ad+erse selection is a. the tendenc% of a person who is imperfectl% monitored to engage in dishonest or otherwise undesira-le -eha+ior. -. an action ta,en -% an uninformed part% to induce an informed part% to re+eal information. c. the failure of majorit% +oting to produce transiti+e preferences for societ%. d. the tendenc% for the mi1 of uno-ser+ed attri-utes to -ecome undesira-le from the standpoint of an uninformed part%.

ANS: D DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): Ad+erse selection *S(: Definitional 05. 6hen homeowners sell a house, part of the paperwor, the% complete is a statement of disclosure on which the homeowners are supposed to re+eal e+er%thing that the% ,now is wrong with the house. The purpose of the statement of disclosure is to tr% to sol+e the a. principal#agent pro-lem. -. moral#ha7ard pro-lem. c. ad+erse#selection pro-lem. d. signaling pro-lem.

ANS: ( DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Applicati+e

(hapter "":Frontiers of *icroeconomics


08.

"19

Ste+e is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to co+er up water stains from his lea,ing roof so that potential -u%ers will -e unaware of this pro-lem. This is an e1ample of a. moral ha7ard. -. screening. c. ad+erse selection. d. the principal#agent pro-lem.

ANS: ( DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 09. Ad+erse selection ma% lead to a. owners of used cars choosing to ,eep them rather than sell them at the low price that s,eptical -u%ers are willing to pa%. -. wages -eing stuc, a-o+e the le+el that -alances suppl% and demand, resulting in unemplo%ment. c. -u%ers with low ris, choosing to remain uninsured -ecause the policies the% are offered fail to reflect their true characteristics. d. All of the a-o+e are correct.

ANS: D DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 3$. 6hich of the following is not correctC a. An e1ample of ad+erse selection is man who tries to sell his used car without disclosing that it needs a new transmission. -. The Hin+isi-le handI of a free mar,et will alwa%s fi1 the pro-lems of ad+erse selection and moral ha7ard. c. An emplo%er ma% tr% to pre+ent a moral ha7ard pro-lem -% pa%ing her wor,ers an efficienc% wage. d. 'ne interpretation of gift gi+ing is that it reflects as%mmetric information and signaling.

ANS: ? DIF: . !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection, moral ha7ard, signaling *S(: Interpreti+e 31. The -u%er runs a ris, of -eing sold a good of low <ualit% when there is a. a principal#agent pro-lem. -. a moral#ha7ard pro-lem. c. a pro-lem in+ol+ing hidden actions. d. a pro-lem in+ol+ing hidden characteristics.

ANS: D DIF: " !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): Ad+erse selection *S(: Interpreti+e 3". 6hen a jeweler sells a low <ualit% diamond to a %oung man who -elie+es the diamond is the highest <ualit%, she is engaging in a. -oth moral ha7ard and ad+erse selection. -. neither moral ha7ard nor ad+erse selection. c. moral ha7ard, -ut not ad+erse selection. d. ad+erse selection, -ut not moral ha7ard.

ANS: D DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *oral ha7ard = ad+erse selection *S(: Applicati+e 3.. A life insurance compan% re<uires new applicants to ha+e a medical e1am prior to writing the insurance polic%. This re<uirement is an e1ample of a. signaling. -. screening. c. moral ha7ard. d. ad+erse selection.

""$

(hapter "":Frontiers of *icroeconomics

ANS: ? DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 30. 6hich of the following is an e1ample of an ad+erse selection pro-lemC a. A customer purchases four apples, two of which are inedi-le. -. A card shop puts its Ealloween merchandise on sale on No+em-er 1st. c. A %oung wor,er is fired after she is late for wor, three times in one month. d. A man whose father had a heart attac, wants to increase his life insurance co+erage.

ANS: D DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Applicati+e 33. The &atin term caveat emptor, meaning ;let the -u%er -eware,; -rings to mind the pro-lem of a. hidden actions. -. ad+erse selection. c. principals and agents. d. moral ha7ard.

ANS: ? DIF: " !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): Ad+erse selection *S(: Interpreti+e 34. 6hen the -u%er ,nows less than the seller a-out the characteristics of the good -eing sold, there is a. a principal#agent pro-lem. -. a moral ha7ard pro-lem. c. an ad+erse selection pro-lem. d. a signaling pro-lem.

ANS: ( DIF: 1 !F: ""#1 NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): Ad+erse selection *S(: Definitional 35. The classic e1ample of ad+erse selection is the a. mar,et for used cars. -. mar,et for new cars. c. relationship -etween shareholders and managers. d. relationship -etween a coach and an athlete.

ANS: A DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 38. The fact that someone with a high ris, of medical pro-lems is li,el% to -u% a large amount of health insurance is an e1ample of a. ad+erse selection. -. monitoring. c. moral ha7ard. d. screening.

ANS: A DIF: 1 !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 39. The ad+erse selection pro-lem is a li,el% e1planation for the fact that a. a few months after a new car is purchased, its +alue decreases +er% little. -. some corporate managers were recentl% sent to prison for enriching themsel+es at the e1pense of shareholders. c. people in a+erage health ma% -e discouraged from -u%ing health insurance -% the high price. d. gifts can -e interpreted as signals.

ANS: ( DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e

(hapter "":Frontiers of *icroeconomics


4$. ?ecause people with hidden health pro-lems are more li,el% to -u% health insurance than are other people, a. the price of health insurance reflects the costs of a sic,er#than#a+erage person. -. the price of health insurance is too low, relati+e to the sociall%#optimal price. c. people in a+erage health ma% -e encouraged to -u% too much health insurance, relati+e to the sociall%#optimal <uantit%. d. the (ondorcet )arado1 suggests that people who are sic,er than a+erage will ultimatel% -u% more health insurance.

""1

ANS: A DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 41. Se+ere ad+erse#selection pro-lems ma% result in a. too few good used cars -eing offered for sale. -. wages that are too low relati+e to e<uili-rium le+els. c. too man% good dri+ers -u%ing too much automo-ile insurance. d. people with a+erage health -u%ing too much health insurance.

ANS: A DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Ad+erse selection *S(: Interpreti+e 4". ;Signaling; refers to actions -% an informed part% for the sole purpose of a. telling another part% that the signaler has information to re+eal, without actuall% re+ealing that information. -. con+e%ing false information. c. confusing another part%. d. credi-l% re+ealing pri+ate information. DIF: 1 !F: ""#1 &'(: The Stud% of economics, and definitions in economics *S(: Definitional

ANS: D NAT: Anal%tic T'): Signaling 4..

!ffecti+e signals a. con+e% useful information from informed parties to uninformed parties. -. impose little or no cost on the signaler. c. cannot -e con+e%ed accuratel% when there is an information as%mmetr%. d. can -e used -% emplo%ers to alle+iate the moral ha7ard pro-lem in the wor,place. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): Signaling 40.

6hich of the following is not an e1ample of signalingC a. screening -. ad+ertising c. getting an education d. gift gi+ing DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: A NAT: Anal%tic T'): Signaling 43.

A woman gi+es her -o%friend a -irthda% present. The gift could -e +iewed -% the -o%friend as a a. moral ha7ard pro-lem. -. screening de+ice. c. signal of how much she cares for him. d. All of the a-o+e are correct. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): Signaling

"""
44.

(hapter "":Frontiers of *icroeconomics


A -rand of wine is priced at onl% K3 per -ottle, far -elow the mar,et price of most high <ualit% wines. ?efore an% reputation e1ists for the wine, consumers -u% +er% little of this ine1pensi+e wine -ecause the% interpret the low price to mean that the wine is of poor <ualit%. The compan% decides to change the la-el on the wine to show that it has won awards for <ualit%. This la-el change is an e1ample of a. signaling. -. screening. c. selecting. d. All of the a-o+e are correct. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): Signaling 45.

If the seller of a used car offers a limited warrant%, the warrant% is an e1ample of aAnB a. signal. -. screen. c. efficienc% wage. d. agent. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: A NAT: Anal%tic T'): Signaling 48.

A firm with a +er% good product a. has a higher cost of signaling Aad+ertisingB than does a firm with an inferior product. -. has more to gain -% signaling Aad+ertisingB than does a firm with an inferior product. c. does not need to signal Aad+ertiseB -ecause the product2s <ualit% spea,s for itself. d. will signal Aad+ertiseB effecti+el% if signaling is free. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ? NAT: Anal%tic T'): Signaling 49.

6hich of the following is an e1ample of signalingC a. Fraduates of highl%#respected uni+ersities highlight that fact on their resumes. -. *aga7ine ad+ertisements include the phrase ;as seen on T>.; c. Ad+ertisements for uni+ersities include the phrase ;full% accredited.; d. All of the a-o+e are correct. DIF: 1 !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): Signaling 5$.

6hich of the following e+ents -est e1emplifies the concept of signalingC a. A college student@s parents, ha+ing learned that their child is short of mone%, send her a chec, for K1,$$$. -. A woman, who is tr%ing to win the lo+e of a certain man, -u%s him a +er% personal gift. c. A grocer% store maintains a polic% of e1amining the dri+er@s license of e+er%one who writes a personal chec, to purchase his groceries. d. A uni+ersit% maintains a polic% of considering for admission onl% those students who graduated among the top ten percent of their high school class. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ? NAT: Anal%tic T'): Signaling 51.

Goe@s (omputers -uilds and sells computers for the local retail mar,et. Since Goe@s -usiness does not ha+e the name recognition of some of the -igger computer retailers, Goe ad+ertises a ;'ne#Lear *one% ?ac, Fuarantee; to indicate to -u%ers that his product is of high <ualit%. This guarantee is an e1ample of a. screening. -. signaling. c. the seller@s curse. d. the principal#agent pro-lem.

(hapter "":Frontiers of *icroeconomics


ANS: ? NAT: Anal%tic T'): Signaling 5". DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

"".

6hich of the following is an e1ample of signalingC a. Gohn is considering the purchase of a used car. ?efore ma,ing the purchase he has the car chec,ed -% an auto mechanic. -. Ste+e is appl%ing for a new life insurance polic%. ?efore writing the polic%, the insurance compan% re<uires Ste+e to -e e1amined -% a doctor. c. Traci is appl%ing for a new jo-. ?efore hiring her, the firm re<uires Traci to ta,e a drug test. d. a% is planning to as, for Eonna@s hand in marriage. ?efore as,ing her, he -u%s her a -o1 of her fa+orite chocolates and ta,es her to dinner at her fa+orite restaurant. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): Signaling 5..

Screening occurs when a. an informed part% acts to re+eal his pri+ate information. -. an informed part% acts to conceal his pri+ate information. c. an uninformed part% acts to induce the informed part% to re+eal pri+ate information. d. one informed part% acts to pre+ent another informed part% from re+ealing pri+ate information. DIF: 1 !F: ""#1 &'(: The Stud% of economics, and definitions in economics *S(: Definitional

ANS: ( NAT: Anal%tic T'): Screening 50.

An insurance compan% that writes automo-ile policies tries to separate safe dri+ers from ris,% dri+ers -% offering policies that feature different deducti-les and different premiums. This practice is -est descri-ed as an e1ample of a. screening. -. -eha+ioral economics. c. the (ondorcet )arado1. d. signaling. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): Screening 53.

A safe dri+er would li,el% choose an auto insurance polic% with a a. low premium and a high deducti-le. -. high premium and a high deducti-le. c. high premium and a low deducti-le. d. high premium and no deducti-le. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): Screening 54.

An unhealth% person would li,el% choose a medical insurance polic% with a a. low premium and a high deducti-le. -. high premium and a high deducti-le. c. high premium and no deducti-le. d. The unhealth% person would choose not to -e insured. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): Screening

""0
55.

(hapter "":Frontiers of *icroeconomics


An airline ,nows that -usiness tra+elers ha+e more inelastic demand for tra+el than +acationers. That is, -usiness tra+elers are often willing to pa% more for airline tic,ets than +acationers. The airline also ,nows that -usiness tra+elers do not li,e to tra+el o+er wee,ends. 6hen customers re<uest airline tic,ets that do not in+ol+e tra+el o+er a wee,end, the airline determines that a tra+eler is li,el% a -usiness tra+eler and charges a higher price. This is an e1ample of a. moral ha7ard. -. signaling. c. screening. d. ad+erse selection. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): Screening 58.

Suppose that an economics department is offering a student e1change program with a uni+ersit% in *oscow, ussia. If the department re<uires students to su-mit an essa% in order to -e considered for the program, the essa% ma% -e an e1ample of aAnB a. signal. -. screen. c. efficienc% wage. d. principal. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ? NAT: Anal%tic T'): Screening 59.

'n car insurance policies, State anch Insurance (ompan% offers dri+ers an option: )olic% 1 features a deducti-le of K1,$$$, and it re<uires a dri+er to pa% an annual premium of K3$$. )olic% " features a deducti-le of K3$$, and it re<uires a dri+er to pa% an annual premium of K53$. a. In offering these two policies, State anch is engaging in illegal price discrimination. -. In offering these two policies, State anch is screening dri+ers. c. )olic% 1 is more of a -urden for safe dri+ers than it is for ris,% dri+ers. d. In offering these two policies, State anch is signaling their <ualit% to dri+ers. DIF: " !F: ""#1 &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: ? NAT: Anal%tic T'): Screening 8$.

In +iew of the possi-le need for go+ernment action in mar,ets where as%mmetric information is a pro-lem, which of the following is a +alid concernC a. The go+ernment rarel% has more information than the pri+ate parties. -. )ri+ate mar,ets can sometimes deal with information as%mmetries on their own. c. The go+ernment is itself an imperfect institution. d. All of the a-o+e are +alid concerns.

ANS: D DIF: " !F: ""#1 NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): As%mmetric information *S(: Interpreti+e

Sec02#!o%itica% Econom$
MULT !LE CHO CE 1. The field of political econom% a. casts aside most of the standard methods of economic anal%sis. -. is also referred to as the field of pu-lic choice. c. is also referred to as the field of macroeconomics. d. produces the conclusion that democratic principles rarel% lead to desira-le economic outcomes.

ANS: ? DIF: 1 !F: ""#" NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): )olitical econom% *S(: Definitional

(hapter "":Frontiers of *icroeconomics


". 6hich of the following sets of preferences can not satisf% the propert% of transiti+it%C a. )lan A is preferred to plan D. )lan D is preferred to plan ?. )lan ( is preferred to plan ?. -. )lan A is preferred to plan ?. )lan ? is preferred to plan (. )lan A is preferred to plan (. c. )lan ( is preferred to plan A. )lan ? is preferred to plan A. )lan ( is preferred to plan ?. d. )lan D is preferred to plan (. )lan ( is preferred to plan ?. )lan ? is preferred to plan D. DIF: " !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

""3

ANS: D NAT: Anal%tic T'): Transiti+it% ..

The (ondorcet parado1 a. demonstrates that the order in which one +otes on options ma% influence the outcome. -. demonstrates that majorit% +oting -% itself ma% not re+eal the outcome that societ% wants. c. dispro+es Arrow2s impossi-ilit% theorem. d. ?oth a and - are correct.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e 0. Suppose that residents of a town are as,ed to +ote on the -est wa% to impro+e the safet% of an intersection. The three choices are: a stoplight, a 0#wa% stop, and a "#wa% stop. 6hen the ma%or as,s the residents to choose -etween a stoplight and a 0#wa% stop, the residents choose a 0#wa% stop. Then, when the ma%or as,s them to choose -etween a 0#wa% stop and a "#wa% stop, the% choose a "#wa% stop. Eowe+er, if the ma%or firsts as,s the residents to choose -etween a 0#wa% stop and a "#wa% stop, the% choose a "#wa% stop. Then, when the ma%or as,s the residents to choose -etween a "#wa% stop and a stoplight, the% choose a stoplight. 6hat does this e1ample illustrateC a. Arrow2s impossi-ilit% theorem -. the (ondorcet parado1 c. a ?orda count d. the median +oter theorem

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 3. Suppose that residents of a town are as,ed to +ote on the -est da% to impro+e the safet% of an intersection. The three choices are: a stoplight, a 0#wa% stop, and a "#wa% stop. The ma%or as,s the residents to assign . points to their first choice, " points to their second choice, and 1 point to their last choice. The intersection will -e controlled -% the method that recei+es the most points. This +oting scheme is called a. Arrow2s impossi-ilit% theorem. -. the (ondorcet parado1. c. a ?orda count. d. the median +oter theorem. DIF: 1 !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ( NAT: Anal%tic T'): ?orda counts 4.

6hich of the following sets of preferences satisfies the propert% of transiti+it%C a. (oo,ies are preferred to -rownies. ?rownies are preferred to ice cream. Ice cream is preferred to coo,ies. -. (oo,ies are preferred to pie. ?rownies are preferred to pie. )ie is preferred to coo,ies. c. (oo,ies are preferred to ice cream. Ice cream is preferred to -rownies. (oo,ies are preferred to -rownies. d. (oo,ies are preferred to pie. Ice cream is preferred to coo,ies. )ie is preferred to ice cream. DIF: " !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ( NAT: Anal%tic T'): Transiti+it%

""4

(hapter "":Frontiers of *icroeconomics

Table 22-1 Three friends ## Tricia, Sarah, and Matie ## are deciding where to go together for +acation. The% all agree that the% should go to one of three places: Ireland, Ital%, or Freece. The% also agree that the% will ha+e two pairwise +otes to determine where to go on +acation, with the majorit% determining the outcome on each +ote. The first, second, and third choices for each person are as indicated in the ta-le -elow. Tricia Ireland Ital% Freece Sarah Ital% Freece Ireland &atie Freece Ireland Ital%

First choice Secon' choice Thir' choice 5.

Refer to Ta(%e 22#") If the first +ote pits Ireland against Ital% and the second +ote pits Freece against the winner of the first +ote, then the outcome is as follows: a. Ireland wins the first +ote and Freece wins the second +ote, so the% go to Freece. -. Ireland wins the first +ote and Ireland wins the second +ote, so the% go to Ireland. c. Ital% wins the first +ote and Ital% wins the second +ote, so the% go to Ital%. d. Ital% wins the first +ote and Freece wins the second +ote, so the% go to Freece.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 8. Refer to Ta(%e 22#") If the first +ote pits Ireland against Freece and the second +ote pits Ital% against the winner of the first +ote, then the outcome is as follows: a. Ireland wins the first +ote and Ital% wins the second +ote, so the% go to Ital%. -. Ireland wins the first +ote and Ireland wins the second +ote, so the% go to Ireland. c. Freece wins the first +ote and Freece wins the second +ote, so the% go to Freece. d. Freece wins the first +ote and Ital% wins the second +ote, so the% go to Ital%.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 9. Refer to Ta(%e 22#") If the first +ote pits Ital% against Freece and the second +ote pits Ireland against the winner of the first +ote, then the outcome is as follows: a. Ital% wins the first +ote and Ireland wins the second +ote, so the% go to Ireland. -. Ital% wins the first +ote and Ital% wins the second +ote, so the% go to Ital%. c. Freece wins the first +ote and Freece wins the second +ote, so the% go to Freece. d. Freece wins the first +ote and Ireland wins the second +ote, so the% go to Ireland.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 1$. Refer to Ta(%e 22#") Depending on the order of the pairwise +oting, a. the friends could go to either Ireland, Freece, or Ital%. -. the friends could go to either Ireland or Freece, -ut the% will not go to Ital%. c. the friends could go to either Freece or Ital%, -ut the% will not go to Ireland. d. the friends could go to either Ireland or Ital%, -ut the% will not go to Freece.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 11. Refer to Ta(%e 22#") If the friends change their minds and decide to choose a +acation destination using a ?orda count, then a. the friends will go to Ireland. -. the friends will go to Ital%. c. the friends will go to Freece. d. A ?orda count will not result in a single winner in this case.

(hapter "":Frontiers of *icroeconomics


ANS: D NAT: Anal%tic T'): ?orda counts 1". DIF: " !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

""5

6hich of the following is not correctC a. )airwise +oting ne+er produces transiti+e preferences. -. The order of pairwise +oting can affect the result. c. *ajorit% +oting -% itself does not tell us what outcome a societ% reall% wants. d. No +oting s%stem can satisf% all of the following properties: unanimit%, transiti+it%, independence of irrele+ant alternati+es, and no dictators.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Interpreti+e 1.. The field of political econom% a. applies the methods of political science to microeconomics. -. applies the methods of political science to macroeconomics. c. is rele+ant to the issue of how acti+e go+ernment should -e in economic matters. d. integrates ps%chological insights to -etter understand indi+idual choices.

ANS: ( DIF: 1 !F: ""#" NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): )olitical econom% *S(: Interpreti+e 10. ecent de+elopments in political econom% a. render much of the traditional field of political science o-solete. -. render much of the traditional field of economics o-solete. c. illustrate the resolute nature of democrac%. d. point to the fact that go+ernment is a less#than#perfect institution.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): )olitical econom% *S(: Interpreti+e 13. The (ondorcet +oting parado1 applies to situations in which +oters a. decide -etween e1actl% two possi-le outcomes. -. decide among more than two possi-le outcomes. c. as a group ha+e transiti+e preferences. d. choose the inferior candidate e+en though the majorit% preferred the -etter candidate.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e 14. The (ondorcet parado1 a. pro+ed that the Arrow impossi-ilit% theorem is wrong. -. was pro+ed wrong -% the Arrow impossi-ilit% theorem. c. ser+es as an e1ample of the Arrow impossi-ilit% theorem. d. pertains to +oting s%stems, whereas Arrow@s Impossi-ilit% Theorem does not.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e 15. Normall%, we e1pect +oters@ preferences to e1hi-it a propert% called a. transiti+it%. -. trans+ersalit%. c. normalit%. d. uni+ersalit%. DIF: 1 !F: ""#" &'(: The Stud% of economics, and definitions in economics *S(: Interpreti+e

ANS: A NAT: Anal%tic T'): Transiti+it%

""8
18.

(hapter "":Frontiers of *icroeconomics


If preferences e1hi-it the propert% of transiti+it%, then a. the preferences are irrational. -. indi+iduals prefer more go+ernment in+ol+ement in pri+ate mar,ets than do people whose preferences are not transiti+e. c. preferences change o+er time more <uic,l% than when preferences are not transiti+e. d. preferences satisf% one of the properties assumed to -e desirea-le -% Menneth Arrow in Social Choice and Individual Values. DIF: " !F: ""#" &'(: The Stud% of economics, and definitions in economics *S(: Interpreti+e

ANS: D NAT: Anal%tic T'): Transiti+it% 19.

6hich of the following statements captures the meaning of transiti+it% of preferencesC a. If A is preferred to ?, then ? is less preferred than A. -. If A is preferred to ?, and ? is preferred to (, then A is preferred to (. c. If A is preferred to ? and ? is preferred to (, then the preference for A o+er ? is stronger than the preference for ? o+er (. d. If A is preferred to (, then there e1ists ? such that A is preferred to ? and ( is preferred to A. DIF: " !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Definitional

ANS: ? NAT: Anal%tic T'): Transiti+it% "$.

The (ondorcet +oting parado1 demonstrates that democratic outcomes do not alwa%s o-e% the propert% of a. narrowness of preferences. -. conca+it% of preferences. c. as%mmetr% of preferences. d. transiti+it% of preferences.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e "1. The (ondorcet parado1 shows that a. allocations of resources -ased on majorit% rule are alwa%s inefficient. -. pro-lems in counting +otes can negate legitimate democratic outcomes. c. the order on which things are +oted can affect the result. d. transiti+e preferences are inconsistent with rationalit%.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e "". /nder majorit% rule, the order in which items are +oted on is a. unimportant, and this is a lesson of the (ondorcet parado1. -. unimportant, and this is a lesson of Arrow2s impossi-ilit% theorem. c. important, and this is a lesson of the (ondorcet parado1. d. important, and this is a lesson of Arrow2s impossi-ilit% theorem.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e Table 22-2 Three longtime friends#Fred, ?arne%, and 6ilma#are deciding how the% will spend their Sunda% afternoon. The% all agree that the% should do one of three things: go to a mo+ie, go to the -each, or go to a museum. The% also agree that the% will ha+e two pairwise +otes to determine how to spend their e+ening, with the majorit% determining the outcome on each +ote. The first, second, and third choices for each person are as indicated in the ta-le -elow. Fre' *useum ?each *o+ie *arne$ ?each *o+ie *useum Wi%ma *o+ie *useum ?each

First choice Secon' choice Thir' choice

(hapter "":Frontiers of *icroeconomics


"..

""9

Refer to Ta(%e 22#2. If A1B the first +ote pits ;museum; against ;mo+ie,; and A"B the second +ote pits ;-each; against the winner of the first +ote, then the outcome is as follows: a. ;*useum; wins the first +ote and ;museum; wins the second +ote, so the% go to a museum. -. ;*useum; wins the first +ote and ;-each; wins the second +ote, so the% go to the -each. c. ;*o+ie; wins the first +ote and ;mo+ie; wins the second +ote, so the% go to a mo+ie. d. ;*o+ie; wins the first +ote and ;-each; wins the second +ote, so the% go to the -each.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e "0. Refer to Ta(%e 22#". If A1B the first +ote pits ;museum; against ;-each,; and A"B the second +ote pits ;mo+ie; against the winner of the first +ote, then a. ;*useum; wins the first +ote and ;museum; wins the second +ote, so the% go to a museum. -. ;*useum; wins the first +ote and ;mo+ie; wins the second +ote, so the% go to a mo+ie. c. ;?each; wins the first +ote and ;-each; wins the second +ote, so the% go to the -each. d. ;?each; wins the first +ote and ;mo+ie; wins the second +ote, so the% go to a mo+ie.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e "3. Refer to Ta(%e 22#2. 6hich of the following statements is correctC a. In a pairwise election, ;mo+ie; -eats ;-each.; -. In a pairwise election, ;-each; -eats ;museum.; c. In a pairwise election, ;museum; -eats ;mo+ie.; d. None of the a-o+e is correct.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e "4. Refer to Ta(%e 22#". 6hich of the following statements is correctC a. In a pairwise election, ;-each; -eats ;mo+ie.; -. In a pairwise election, ;museum; -eats ;-each.; c. In a pairwise election, ;mo+ie; -eats ;museum.; d. All of the a-o+e are correct.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e "5. Refer to Ta(%e 22#2. 6hich of the following statements is correct regarding the (ondorcet parado1 and the results of pairwise +oting -% Fred, ?arne%, and 6ilmaC a. The parado1 implies that pairwise +oting ne+er produces transiti+e preferences, and so the +oting -% Fred, ?arne%, and 6ilma fails to produce transiti+e preferences. -. The parado1 implies that pairwise +oting sometimes A-ut not alwa%sB produces transiti+e preferences, and the +oting -% Fred, ?arne%, and 6ilma does produce transiti+e preferences. c. The parado1 implies that pairwise +oting sometimes A-ut not alwa%sB fails to produce transiti+e preferences, and the +oting -% Fred, ?arne%, and 6ilma fails to produce transiti+e preferences. d. The parado1 does not appl% to the case at hand, -ecause ?arne%@s preferences are not indi+iduall% transiti+e.

ANS: ( DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e "8. Refer to Ta(%e 22#2. If Fred, ?arne%, and 6ilma use a ?orda count, rather than pairwise majorit% +oting, to decide how to spend their afternoon, then the% will go a. to a mo+ie. -. to a concert. c. out to dinner. d. None of the a-o+e is correctD a ?orda count fails to produce a winner in this instance.

".$

(hapter "":Frontiers of *icroeconomics


DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: D NAT: Anal%tic T'): ?orda counts Table 22-3

The citi7ens of )arado1opolis will decide whether to -uild a new school, -uild a new par,, or -uild a new road. !1actl% one of the three choices will pre+ail, and the choice will -e made -% wa% of pairwise +oting, with the majorit% determining the outcome on each +ote. The preferences of the +oters are summari7ed in the ta-le -elow. +oter T$pe T$pe 2 .3 )ar, oad School

!ercent of E%ectorate First choice Secon' choice Thir' choice "9.

T$pe " "3 School )ar, oad

T$pe , 0$ oad School )ar,

Refer to Ta(%e 22#,. If A1B the first +ote pits ;school; against ;par,,; and A"B the second +ote pits ;road; against the winner of the first +ote, then the outcome is as follows: a. ;School; wins the first +ote and ;school; wins the second +ote, so the% -uild a school. -. ;School; wins the first +ote and ;road; wins the second +ote, so the% -uild a road. c. ;)ar,; wins the first +ote and ;par,; wins the second +ote, so the% -uild a par,. d. ;)ar,; wins the first +ote and ;road; wins the second +ote, so the% -uild a road.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e .$. Refer to Ta(%e 22#,. If A1B the first +ote pits ;school; against ;road,; and A"B the second +ote pits ;par,; against the winner of the first +ote, then the outcome is as follows: a. ;School; wins the first +ote and ;school; wins the second +ote, so the% -uild a school. -. ;School; wins the first +ote and ;par,; wins the second +ote, so the% -uild a par,. c. ; oad; wins the first +ote and ;road; wins the second +ote, so the% -uild a road. d. ; oad; wins the first +ote and ;par,; wins the second +ote, so the% -uild a par,.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e .1. Refer to Ta(%e 22#,. 6hich of the following statements is correctC a. In a pairwise election, ;school; -eats ;road.; -. In a pairwise election, ;road; -eats ;par,.; c. In a pairwise election, ;school; -eats ;par,.; d. All of the a-o+e are correct. " !F: ""#" *S(: Applicati+e

ANS: ( DIF: T'): (ondorcet parado1 .".

Refer to Ta(%e 22#,. 6hich of the following statements is correctC a. In a pairwise election, ;road; -eats ;school.; -. In a pairwise election, ;school; -eats ;par,.; c. In a pairwise election, ;par,; -eats ;road.; d. All of the a-o+e are correct.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e

(hapter "":Frontiers of *icroeconomics


...

".1

Refer to Ta(%e 22#,. 6hich of the following statements is correct regarding the (ondorcet parado1 and the results of pairwise +oting in )arado1opolisC a. The parado1 implies that pairwise +oting ne+er produces transiti+e preferences, and so the +oting in )arado1opolis fails to produce transiti+e preferences. -. The parado1 implies that pairwise +oting sometimes A-ut not alwa%sB produces transiti+e preferences, and the +oting in )arado1opolis does produce transiti+e preferences. c. The parado1 implies that pairwise +oting sometimes A-ut not alwa%sB fails to produce transiti+e preferences, and the +oting in )arado1opolis fails to produce transiti+e preferences. d. The parado1 does not appl% to the case at hand, -ecause the preferences of T%pe . +oters are not indi+iduall% transiti+e.

ANS: ( DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e .0. Refer to Ta(%e 22#,. If the citi7ens of )arado1opolis use a ?orda count, rather than pairwise majorit% +oting, to decide what to -uild, then the% will -uild a new a. school. -. par,. c. road. d. None of the a-o+e is correctD a ?orda count fails to produce a winner in this instance. DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ( NAT: Anal%tic T'): ?orda counts .3.

As an alternati+e to pairwise majorit% +oting, each +oter could -e as,ed to ran, the possi-le outcomes, gi+ing 1 point to her lowest choice, " points to her second#lowest choice, . points to her third#lowest choice, and so on. This +oting method is called aAnB a. median +ote. -. pairwise minorit% +ote. c. ?orda count. d. Arrow count. DIF: 1 !F: ""#" &'(: The Stud% of economics, and definitions in economics *S(: Definitional

ANS: ( NAT: Anal%tic T'): ?orda counts .4.

!conomist Menneth Arrow wrote a famous -oo, in 1931 in which he too, up the <uestion, a. Is there a perfect +oting s%stemC -. Are preferences transiti+eC c. Is a dictatorship a good form of go+ernmentC d. Should the president of the /nited States -e elected to a single, si1#%ear termC

ANS: A DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e .5. In his 1931 -oo,, Social Choice and Individual Values, Menneth Arrow defined a ;perfect; +oting s%stem. That s%stem includes which of the following featuresC a. unanimit% -. transiti+it% c. a-sence of a dictator d. All of the a-o+e are correct.

ANS: D DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Definitional .8. In his 1931 -oo,, Social Choice and Individual Values, Menneth Arrow used the term ;unanimit%; to mean a. A -eats ? onl% if e+er%one prefers A to ?. -. if e+er%one prefers A to ?, then A -eats ?. c. if A -eats ? and ? -eats (, then A must -est (. d. e+er%one who is eligi-le to +ote must +oteD otherwise, the outcome is in+alid.

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ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Definitional .9. Arrow2s impossi-ilit% theorem shows that no +oting s%stem can satisf% which of the following propertiesC a. unanimit% and transiti+it% onl% -. transiti+it% and independence of irrele+ant alternati+es onl% c. no dictators and transiti+it% onl% d. unanimit%, transiti+it%, independence of irrele+ant alternati+es, and no dictators

ANS: D DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Definitional 0$. 'ne propert% of Menneth Arrow@s ;perfect; +oting s%stem is that the ran,ing -etween an% two outcomes A and ? should not depend on whether some third outcome ( is also a+aila-le. Arrow called this propert% a. transiti+it%. -. pairwise perfection. c. independence of irrele+ant alternati+es. d. irrele+ance of social choices.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Definitional 01. Menneth Arrow pro+ed that the +oting s%stem that satisfied all of the properties of his ;perfect; +oting s%stem was a. one in which a single person Aa ;dictator;B imposes his preferences on e+er%one else. -. pairwise majorit% +oting. c. majorit% +oting that is not pairwise. d. None of the a-o+e is correct. Arrow pro+ed that no +oting s%stem can satisf% all of the properties of his ;perfect; s%stem.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e 0". The ?orda count fails to satisf% which of Menneth Arrow@s properties of a ;perfect; +oting s%stemC a. no dictator -. unanimit% c. transiti+it% d. independence of irrele+ant alternati+es

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e 0.. The Arrow impossi-ilit% theorem shows that a. democrac% should -e a-andoned as a form of go+ernment. -. it is impossi-le to impro+e upon democratic +oting methods as a mechanism for social choice. c. all +oting s%stems are flawed as a mechanism for social choice. d. the median +oter2s preferences will alwa%s win in a two#wa% +ote.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e 00. *ajorit% rule will produce the outcome most preferred -% the median +oter, as demonstrated -% the a. Arrow impossi-ilit% theorem. -. (ondorcet parado1. c. pairwise +oting proposition. d. median +oter theorem.

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ANS: D DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e 03. 6hen each +oter has a most#preferred outcome for the e1penditure on a particular go+ernment program, majorit% rule will produce the outcome a. preferred -% the mean Aa+erageB +oter. -. preferred -% the median +oter. c. that causes the political part% in power to increase its power. d. defined -% Arrow2s Impossi-ilit% Theorem.

"..

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e 04. Assume there are nine +oters in a certain small town and let 1 N the preferred num-er of dollars spent per person per month on gar-age collection. For >oters 1, ", and ., 1 N K1$D for >oter 0, 1 N K13D for >oter 3, 1 N K18D and for >oters 4, 5, 8 and 9, 1 N K"$. The median +oter is a. >oter .. -. >oter 0. c. >oter 3. d. >oter 4.

ANS: ( DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e 05. The median +oter a. is the +oter e1actl% in the middle of the distri-ution. -. is the +oter whose preferred outcome -eats an% other proposal in a two#wa% race. c. alwa%s has more than half the +otes on his side in a two#wa% race. d. All of the a-o+e are correct.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Definitional 08. If the median +oter theorem holds, a. a ?orda count will +iolate the principle of transiti+it%. -. the (ondorcet parado1 also holds. c. minorit% +iews will not recei+e much consideration. d. All of the a-o+e are correct.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e 09. The assertion that the median +oter is ;,ing; refers directl% to the result esta-lished -% the a. Arrow impossi-ilit% theorem. -. (ondorcet parado1. c. median +oter theorem. d. ?orda mechanism.

ANS: ( DIF: 1 !F: ""#" NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): *edian +oter theorem *S(: Definitional 3$. According to the median +oter theorem, majorit% rule will a. alwa%s produce an inconclusi+e outcome. -. produce the outcome least preferred -% the median +oter. c. produce the outcome most preferred -% the median +oter. d. produce an outcome that is inconsistent with transiti+e preferences.

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ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Definitional 31. Arrow@s impossi-ilit% theorem is ;distur-ing; in the sense that it pro+es that a. no +oting s%stem is perfect. -. onl% a dictator can produce a desira-le social outcome. c. the preferences of the wealth% should -e gi+en more weight than the preferences of the poor. d. the centuries#old (ondorcet parado1 was not a parado1 after all.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e 3". The median +oter@s preferred outcome is the same as the a. a+erage preferred outcome. -. outcome preferred -% the greatest num-er of +oters. c. outcome produced -% majorit% rule. d. outcome preferred -% Arrow2s HperfectI +oter.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e Scenario 22-1 At issue in a particular cit% +ote is how much to spend, per person, on road repair ne1t %ear. Among the 1$,$$$ +oters, 1,3$$ prefer to spend K.$$ per person, -ut no moreD ",8$$ prefer to spend K03$ per person, -ut no moreD .,3$$ prefer to spend K8$$ per person, -ut no moreD and ","$$ prefer to spend K13$$ per person, -ut no more. 3.. Refer to Scenario 22#". The median +oter is one who prefers to spend a. K.$$. -. K03$. c. K8$$. d. K13$$.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e 30. Refer to Scenario 22#". If there is a +ote on whether to spend K4$$ per person or K8$$ per person, the median +oter will +ote to spend a. K4$$ per person and the +oting outcome will -e K4$$ per person. -. K4$$ per person and the +oting outcome will -e K8$$ per person. c. K8$$ per person and the +oting outcome will -e K4$$ per person. d. K8$$ per person and the +oting outcome will -e K8$$ per person.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e 33. Refer to Scenario 22#". If there is a +ote on whether to spend K8$$ per person or K11$$ per person, the median +oter will +ote to spend a. K8$$ per person and the +oting outcome will -e K8$$ per person. -. K8$$ per person and the +oting outcome will -e K11$$ per person. c. K11$$ per person and the +oting outcome will -e K8$$ per person. d. K11$$ per person and the +oting outcome will -e K11$$ per person.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e

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34. An implication of the median +oter theorem is that, in a race -etween epu-licans and Democrats, a. if epu-licans want to win, the% will ta,e a Hmiddle#of#the#roadI stance on man% issues. -. if Democrats want to win, the% will ta,e an e1treme stance on man% issues. c. epu-licans and Democrats go to e1tremes to differentiate themsel+es from one another. d. epu-licans and Democrats wor, hard to identif% the fringe +oters.

".3

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e 35. 6hen epu-licans and Democrats offer similar platforms in an election campaign, a li,el% e1planation is the a. Arrow impossi-ilit% theorem. -. (ondorcet parado1. c. median +oter theorem. d. fact that politicians are more interested in the national interest than their own self#interest.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e 38. In American politics, we often o-ser+e that during a campaign, the Democratic and epu-lican positions on man% issues are similar, which illustrates a. Arrow2s impossi-ilit% theorem. -. the (ondorcet parado1. c. a ?orda count. d. the median +oter theorem.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e 39. An implication of the median +oter theorem is that a. minorit% +iews and majorit% +iews are gi+en e<ual weight. -. platforms of the major political parties will not differ greatl%. c. the logic of democrac% is fundamentall% flawed. d. -eha+ioral economics pla%s a signficant role in +oting outcomes.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e Table 22-4 Fi+e +oters must choose from among four options: A, ?, (, or D. !ach +oter2s preferences are summari7ed in the ta-le -elow. 'ptions higher in the ta-le are more preferred -% the +oter. !references "st Choice 2n' Choice ,r' Choice -th Choice 4$. +oter " D A ? ( +oter 2 ( ? A D +oter , ? A D ( +oter ( D ? A +oter . A D ( ?

Refer to Ta(%e 22#-. If the +ote were conducted according to a ?orda count s%stem where each person@s first choice recei+es 0 points, second choice . points, third choice " points and fourth choice 1 point, the result would -e a. that A would win. -. that ? would win. c. that ( would win. d. a tie -etween A and D. DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: D NAT: Anal%tic T'): ?orda counts

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Refer to Ta(%e 22#-. If the +ote were conducted according to a modified ?orda count s%stem where each person@s first choice recei+es 1$ points, second choice 3 points, third choice . points and fourth choice 1 point, the result would -e a. that A would win. -. that ? would win. c. that ( would win. d. that D would win. DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ( NAT: Anal%tic T'): ?orda counts 4".

Refer to Ta(%e 22#-. 6hich pairwise +oting scheme would result in outcome ?C a. First, choose -etween A and ?. Second, +oters choose -etween the winner of the first +ote and (. Third, +oters choose -etween the winner of the second +ote and D. -. First, choose -etween ? and (. Second, +oters choose -etween the winner of the first +ote and A. Third, +oters choose -etween the winner of the second +ote and D. c. First, choose -etween ? and D. Second, +oters choose -etween the winner of the first +ote and (. Third, +oters choose -etween the winner of the second +ote and A. d. First, choose -etween ( and D. Second, +oters choose -etween the winner of the first +ote and A. Third, +oters choose -etween the winner of the second +ote and ?.

ANS: D DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )airwise +oting *S(: Applicati+e 4.. Refer to Ta(%e 22#-. 6hich pairwise +oting scheme would result in outcome DC a. First, choose -etween A and ?. Second, +oters choose -etween the winner of the first +ote and (. Third, +oters choose -etween the winner of the second +ote and D. -. First, choose -etween ? and D. Second, +oters choose -etween the winner of the first +ote and (. Third, +oters choose -etween the winner of the second +ote and A. c. First, choose -etween ( and D. Second, +oters choose -etween the winner of the first +ote and A. Third, +oters choose -etween the winner of the second +ote and ?. d. First, choose -etween ( and D. Second, +oters choose -etween the winner of the first +ote and ?. Third, +oters choose -etween the winner of the second +ote and A.

ANS: A DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )airwise +oting *S(: Applicati+e 40. Refer to Ta(%e 22#-. 6hich pairwise +oting scheme would result in outcome AC a. First, choose -etween A and ?. Second, +oters choose -etween the winner of the first +ote and (. Third, +oters choose -etween the winner of the second +ote and D. -. First, choose -etween A and (. Second, +oters choose -etween the winner of the first +ote and ?. Third, +oters choose -etween the winner of the second +ote and D. c. First, choose -etween ? and D. Second, +oters choose -etween the winner of the first +ote and (. Third, +oters choose -etween the winner of the second +ote and A. d. First, choose -etween ( and D. Second, +oters choose -etween the winner of the first +ote and A. Third, +oters choose -etween the winner of the second +ote and ?.

ANS: ( DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )airwise +oting *S(: Applicati+e

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Table 22-5 The 3$$ +oters of Appleton are deciding -% majorit% rule how much to spend on a new li-rar%. Num-er of +oters who most prefer this amount of spending 43 4$ 1$$ 53 "$$

".5

K$ K1 million K" million K. million K0 million 43.

Refer to Ta(%e 22#.) The median +oter prefers to spend a. K" million. -. K".35 million. c. K. million. d. K0 million.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e Table 22-6 +oter T$pe T$pe 2 "3 L P O

!ercent of e%ectorate First choice Secon' choice Thir' choice 44.

T$pe " 33 O L P

T$pe , "$ P L O

Refer to Ta(%e 22#/) The ta-le shows the preferences of three t%pes of +oters o+er three possi-le outcomes: O, L, and P. In addition, the ta-le shows the percentage of +oters of each t%pe. ?ased on this information, which of the following statements is trueC a. As the (ondorcet )arado1 predicts, majorit% rule fails to produce transiti+e preferences for societ%. -. As Arrow@s Impossi-ilit% Theorem demonstrates, it is impossi-le from this information to determine which outcome the +oters prefer. c. The median +oter theorem allows us to conclude that in a +ote -etween O and L, L will win since the T%pe " +oter is the median +oter. d. 6hile the (ondorcet )arado1 predicts that majorit% rule ma% not produce transiti+e preferences for societ% as a whole, societ%@s preferences in this case are transiti+e.

ANS: D DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 45. Refer to Ta(%e 22#/) The ta-le shows the preferences of three t%pes of +oters o+er three possi-le outcomes: O, L, and P. The ta-le also shows the percentage of +oters of each t%pe. ?ased on this information, which +oter t%pe is the median +oterC a. T%pe 1 -. T%pe " c. T%pe . d. The median +oter cannot -e determined without ,nowing the pair of outcomes from which the +oters will -e choosing.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Anal%tical

".8
48.

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Refer to Ta(%e 22#/) The ta-le shows the preferences for three t%pes of +oters o+er three possi-le outcomes: O, L, and P. The ta-le also shows the percentage of +oters of each t%pe. ?ased on this information, which of the following statements is trueC a. In a +ote -etween O and L, O loses since onl% the T%pe 1 +oters prefer O to L. -. In a +ote -etween L and P, L wins getting 8$Q of the total +ote. c. In a +ote -etween O and P, O loses getting onl% 03Q of the total +ote. d. ?oth a and -.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e Table 22-7 N0m(er of !eop%e 0 5 1$ 1. 13 "4 49. !referre' *0'1et K"$ K.$ K $ K0$ K1$ K3$

Refer to Ta(%e 22#2) The ta-le shows the most preferred -udget of 53 +oters. In an election, each +oter will select the -udget closest to his or her most preferred -udget. /sing this information, what is the most preferred -udget of the median +oterC a. K1$ -. K"$ c. K.$ d. K0$

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Anal%tical 5$. Refer to Ta(%e 22#2) The ta-le shows the most preferred -udget of 53 +oters. In an election, each +oter will select the -udget closest to his or her most preferred -udget. 6hich of the following statements regarding this information is trueC a. In an election -etween a K.. -udget and a K.5 -udget, the K.. -udget will win. -. Since the median +oter theorem implies that the -udget of the median +oter will win the election, we would e1pect the o+erall -est -udget to -e K"3, the median of the a+aila-le -udgets. c. In an election -etween a K1$ -udget and a K0$ -udget, the K0$ -udget will win. d. ?oth - and c.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Anal%tical Table 22-8 +oter T$pe T$pe 2 T$pe , "$ 13 O P P 6 6 L L O

!ercent of e%ectorate First choice Secon' choice Thir' choice Fo0rth choice

T$pe " ." 6 O L P

T$pe .. L 6 P O

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51.

".9

Refer to Ta(%e 22#3) The ta-le shows the preferences of four t%pes of +oters o+er four possi-le outcomes: 6, O, L, and P. In addition, the ta-le shows the percentage of +oters of each t%pe. ?ased on this information, which of the following statements is falseC a. 'utcome 6 is preferred to outcome O o+erall. -. 'utcome O is preferred to outcome L o+erall. c. 'utcome L is preferred to outcome 6 o+erall. d. 'utcome 6 is preferred to outcome P o+erall.

ANS: ( DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Anal%tical 5". Refer to Ta(%e 22#3) The ta-le shows the preferences of four t%pes of +oters o+er four possi-le outcomes: 6, O, L, and P. In addition, the ta-le shows the percentage of +oters of each t%pe. Suppose a ?orda count election is held in which each +oter ran,s the four outcomes, gi+ing 1 point to last place, " points to second to last, . points to the second -est, and 0 points to the -est. In this case, which outcome would winC a. 6 -. O c. L d. P DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: A NAT: Anal%tic T'): ?orda counts 5..

Refer to Ta(%e 22#3) The ta-le shows the preferences of four t%pes of +oters o+er four possi-le outcomes: 6, O, L, and P. In addition, the ta-le shows the percentage of +oters of each t%pe. Suppose that, for some reason, 6 is eliminated as a possi-le option. /sing a ?orda count election, with . points for the -est choice, " points for the second -est choice, and 1 point for the last choice, which outcome would win this electionC a. O -. L c. P d. There would -e a three#wa% tie. DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: ? NAT: Anal%tic T'): ?orda counts Table 22-9

4 +oters First choice Secon' choice Thir' choice 50.

T$pe " 0$ ( ? A

+oter T$pe T$pe 2 13 ? A (

T$pe , 03 A ( ?

Refer to Ta(%e 22#5) The ta-le shows the preferences of 1$$ +oters o+er three possi-le outcomes: A, ?, and (. If a ?orda count election were held among these +oters, gi+ing three points to each +oter@s first choice, two points to the second choice, and one point to the last choice, which outcome would win the electionC a. 'utcome A -. 'utcome ? c. 'utcome ( d. !ither outcome A or outcome ( since these ha+e the same total score. DIF: " !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: ( NAT: Anal%tic T'): ?orda counts

"0$
53.

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Refer to Ta(%e 22#5) The ta-le shows the preferences of 1$$ +oters o+er three possi-le outcomes: A, ?, and (. 6hich of the following statements is trueC a. In pairwise majorit% +oting, ? is preferred to A, A is preferred to (, and ? is preferred to (. -. In pairwise majorit% +oting, ( is preferred to ?, ? is preferred to A, and ( is preferred to A. c. In pairwise majorit% +oting, ? is preferred to A, A is preferred to (, and ( is preferred to ?. d. In pairwise majorit% +oting, A is preferred to (, ( is preferred to ?, and A is preferred to ?.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Anal%tical 54. Suppose that in a ?orda count election, outcome O is preferred to outcome L, and outcome L is preferred to outcome P, when outcomes O, L, and P are all a+aila-le options. 6hen L is remo+ed as an option, howe+er, outcome P is preferred to outcome O. This would +iolate Arrow@s assumption that +oting s%stems should satisf% a. unanimit%. -. transiti+it%. c. the independence of irrele+ant alternati+es. d. no dictators.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Interpreti+e 55. 6hich of the following would +iolate transiti+it%C a. Gohn li,es A more than ?, ( more than ?, and ( more than A. -. Ste+e li,es ( more than ?, A more than ?, ? more than D, and ( more than D. c. Sarah li,es ( more than A, ? more than D, A more than ?, and D more than (. d. *itch li,es ( more than ?, ( more than D, and ? more than D. DIF: " !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Anal%tical

ANS: ( NAT: Anal%tic T'): Transiti+it% 58.

Suppose that there are 153 +oters in an election and that 8$ of them prefer a K1$$ -udget while the remainder prefer a K13$ -udget. 6hich of the following statements is trueC a. The (ondorcet )arado1 predicts that the K1$$ -udget will win e+en though fewer people prefer that -udget. -. The median +oter theorem predicts that the winning -udget will -e K1"3, the median of the preferences of the two t%pes of +oters. c. Arrow@s impossi-ilit% theorem sa%s that the winning -udget cannot -e determined in this election since there is no unanimit%. d. None of the a-o+e.

ANS: D DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Anal%tical Scenario 22-2 The following ta-le shows the preferences for the fi+e +oters in a cit% regarding how to deal with the cit%2s diseased trees. +oter 4 "st choice 2n' choice ,r' choice -th choice " ? ( D A 2 ? ( A D , ( D A ? D ( A ? . A ( D ?

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A N do nothing ? N Follow the e1pert@s ad+ice to remo+e e+er% tree ( N remo+e e+er% 0th tree now and perhaps more later D N use an untested spra%ing alternati+e 59.

"01

Refer to Scenario 22#2. (onsider the pu-lic polic% for dealing with the diseased trees. /sing pairwise majorit% +oting with A +ersus ?, then the winner of that +ote +ersus (, then the winner of that +ote +ersus D, which polic% winsC a. A -. ? c. ( d. D DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ( NAT: Anal%tic T'): >oting 8$.

6hat is the name of the mathematical result showing that no +oting s%stem can simultaneousl% satisf% the properties of unanimit%, transiti+it%, independence of irrele+ant alternati+es, and no dictatorsC a. The fundamental theorem of -eha+ioral economics -. Arrow@s impossi-ilit% theorem c. The fundamental theorem of +oting d. The median +oter theorem

ANS: ? DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): Arrow@s impossi-ilit% theorem *S(: Definitional 81. 'ne implication of the (ondorcet parado1 is a. that the order in which things are +oted on can affect the result. -. that the order in which things are +oted on is irrele+ant. c. that %ou do not want to -e in charge of arranging which items are +oted upon first. d. that when there are onl% two items -eing +oted on the order matters.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e 8". 6hich +oter is the +oter whose +iews on a polic% issue are in the middle of the spectrum, with half of the +oters on one side of this +oter@s +iew and half on the other side. a. A+erage +oter -. *ean +oter c. *odal +oter d. *edian +oter

ANS: D DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Definitional 8.. A communit% has fi+e +oters who are interested in onl% one issue: the go+ernment2s spending on local par,s. If Anthon% would li,e the go+ernment to spend K1",$$$ on par,s, ?o- prefers K5,$$$, (are% prefers K0,$$$, Diane prefers K",$$$, and !laine prefers K$, how much spending would a politician see,ing to win the election select when running against one opponentC a. K",$$$ -. K0,$$$ c. K5,$$$ d. K1",$$$

ANS: ? DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Anal%tical

"0"
80.

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The median#+oter theorem e1plains wh% a. politicians ta,e e1treme stands on issues. -. +oters are attracted to political outsiders. c. two opposing politicians tend to ta,e opposite sides of each issues. d. politicians tend to ta,e middle#of#the#road positions.

ANS: D DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Interpreti+e Scenario 22-3 Three candidates, Fran,, ?rian, and 6anda, are running for office. There are three +oters in the upcoming election: Eenr%, Diane, and &inda. Eenr% prefers ?rian o+er Fran, and Fran, o+er 6anda. Diane prefers 6anda o+er ?rian and ?rian o+er Fran,. &inda prefers Fran, o+er ?rian and ?rian o+er 6anda. 83. Refer to Scenario 22#,. If the +oters were gi+en a choice of Fran, +ersus ?rian first, then the winner was in a second election +ersus 6anda, who would winC a. Fran, -. ?rian c. 6anda d. There is not enough information to answer this <uestion.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 84. Refer to Scenario 22#,. If the +oters were gi+en a choice of Fran, +ersus 6anda first, then the winner was in a second election +ersus ?rian, who would winC a. Fran, -. ?rian c. 6anda d. There is not enough information to answer this <uestion.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e 85. Refer to Scenario 22#,. If the +oters were gi+en a choice of ?rian +ersus 6anda first, then the winner was in a second election +ersus Fran,, who would winC a. Fran, -. ?rian c. 6anda d. There is not enough information to answer this <uestion.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Applicati+e Scenario 22-4 Suppose that residents of a town are as,ed to +ote on the -est wa% to impro+e the safet% of an intersection. The three choices are: a stoplight, a 0#wa% stop, and a "#wa% stop. The +oters are di+ided into three groups -ased on their preferences. +oter T$pe T$pe " T$pe 2 T$pe , !ercent of E%ectorate 0$ 0$ "$ "st Choice 0#wa% stop stoplight "#wa% stop 2n' Choice "#wa% stop 0#wa% stop 0#wa% stop ,r' Choice stoplight "#wa% stop stoplight

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88.

"0.

Refer to Scenario 22#-) If the first +ote pits a stoplight against a 0#wa% stop and the second +ote pits a "#wa% stop against the winner of the first +ote, then the outcome is as follows: a. 0#wa% stop wins the first +ote and 0#wa% stop wins the second +ote, so the town installs a 0#wa% stop. -. 0#wa% stop wins the first +ote and "#wa% stop wins the second +ote, so the town installs a "#wa% stop. c. Stoplight wins the first +ote and stoplight wins the second +ote, so the town installs a stoplight. d. Stoplight wins the first +ote and "#wa% stop wins the second +ote, so the town installs a "#wa% stop.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )airwise +oting *S(: Applicati+e 89. Refer to Scenario 22#-) If the first +ote pits a "#wa% stop against a 0#wa% stop and the second +ote pits a stoplight against the winner of the first +ote, then the outcome is as follows: a. "#wa% stop wins the first +ote and "#wa% stop wins the second +ote, so the town installs a "#wa% stop. -. "#wa% stop wins the first +ote and stoplight wins the second +ote, so the town installs a stoplight. c. 0#wa% stop wins the first +ote and 0#wa% stop wins the second +ote, so the town installs a 0#wa% stop. d. 0#wa% stop wins the first +ote and stoplight wins the second +ote, so the town installs a stoplight.

ANS: ( DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )airwise +oting *S(: Applicati+e 9$. Refer to Scenario 22#-) If the first +ote pits a "#wa% stop against a stoplight and the second +ote pits a 0#wa% stop against the winner of the first +ote, then the outcome is as follows: a. "#wa% stop wins the first +ote and "#wa% stop wins the second +ote, so the town installs a "#wa% stop. -. "#wa% stop wins the first +ote and 0#wa% stop wins the second +ote, so the town installs a 0#wa% stop. c. Stoplight wins the first +ote and stoplight wins the second +ote, so the town installs a stoplght. d. Stoplight wins the first +ote and 0#wa% stop wins the second +ote, so the town installs a 0#wa% stop.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )airwise +oting *S(: Applicati+e 91. Refer to Scenario 22#-. 6hich of the following statements is correct regarding the (ondorcet parado1 and the results of pairwise +oting on how to impro+e the safet% of the intersectionC a. The parado1 implies that pairwise +oting ne+er produces transiti+e preferences, and so the +oting in the town fails to produce transiti+e preferences. -. The parado1 implies that pairwise +oting sometimes A-ut not alwa%sB fails to produce transiti+e preferences, -ut the +oting in the town does produce transiti+e preferences. c. The parado1 implies that pairwise +oting sometimes A-ut not alwa%sB fails to produce transiti+e preferences, and the +oting in the town fails to produce transiti+e preferences. d. The parado1 implies that pairwise +oting alwa%s produces transiti+e preferences, and so the +oting in the town produces transiti+e preferences.

ANS: ? DIF: . !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): (ondorcet parado1 *S(: Interpreti+e 9". Refer to Scenario 22#-. If the +ote were conducted according to a ?orda count s%stem where each person@s first choice recei+es . points, second choice " points, and third choice 1 point, the result would -e a. a "#wa% stop. -. a 0#wa% stop. c. a stoplight d. a tie -etween a "#wa% stop and a stoplight.

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DIF: . !F: ""#" &'(: /nderstanding and appl%ing economic models *S(: Applicati+e

ANS: ? NAT: Anal%tic T'): ?orda counts 9..

Refer to Scenario 22#-) ?ased on the information in the ta-le, which of the following statements is trueC a. In a +ote -etween a "#wa% stop and a stoplight, stoplight wins -ecause 0$Q of +oters ha+e stoplight as their 1st choice. -. In a +ote -etween a "#wa% stop and a 0#wa% stop, the 0#wa% stop wins getting 8$Q of the total +ote. c. In a +ote -etween a 0#wa% stop and a stoplight, there is a tie -ecause each gets 0$Q of the +ote. d. None of the a-o+e are true.

ANS: ? DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): *edian +oter theorem *S(: Applicati+e 90. !conomic polic% that appears to -e ideal in an economics te1t-oo, ma% not -e the final polic% that is appro+ed -% elected politicians -ecause a. sometimes a politician2s self interest ma% conflict with the national interest. -. economics professors ha+e a notoriousl% low +oting rate. c. onl% policies ad+ocated -% the )resident2s (ouncil of !conomic Ad+isors recei+e enough national attention to interest politicians. d. !conomists cannot e1plain wh% politicians do not implement the ideas from their te1t-oo,s.

ANS: A DIF: " !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Interpreti+e 93. !conomic theor% assumes that +oters, politicians, and other political participants are largel% moti+ated -% a. personal self#interest. -. altruism. c. a desire to promote the general welfare. d. a desire to promote allocati+e economic efficienc%.

ANS: A DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Interpreti+e 94. 6hich of the following statements is not true a-out the "$$" Farm Securit% ActC a. The Act pro+ides funding to impro+e national securit%. -. The stated purpose of the Act is to pro+ide farmers with price sta-ilit%. c. The HfarmersI recei+ing mone% from the Act include Ted Turner and (harles Schwa-. d. The Act pro+ides su-sidies to farmers of mohair, chic,peas, and lentils.

ANS: A DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Interpreti+e 95. 'ne li,el% moti+ation for politicians to pass the "$$" Farm Securit% Act was a. to impro+e national securit%. -. to pro+ide price sta-ilit% for farmers. c. +otes from constituents who -enefit from the Act. d. ?oth - and c are correct.

ANS: ( DIF: 1 !F: ""#" NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): )olitical econom% *S(: Interpreti+e

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"03

Sec0,#*eha6iora% Economics
MULT !LE CHO CE 1. !conomists use -asic ps%chological insights in the field of stud% called a. ps%chological economics. -. transitional economics. c. -eha+ioral economics. d. social economics.

ANS: ( DIF: 1 !F: ""#. NAT: Anal%tic &'(: The Stud% of economics, and definitions in economics T'): ?eha+ioral economics *S(: Definitional ". *ost economic models a. incorporate the assumption of rational -eha+ior on the part of economic actors. -. incorporate the notion that people are usuall% reluctant to change their minds. c. are meant to precisel% duplicate realit%. d. assume that people often ma,e su-#optimal choices.

ANS: A DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .. 6hen economists assume that people are rational, the% assume that a. consumers ma1imi7e profits. -. firms ma1imi7e re+enues. c. consumers ma1imi7e utilit%. d. firms ma1imi7e output.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 0. (on+entional economic theor% assumes that people a. care a great deal a-out fairness. -. are inconsistent o+er time in their decisionma,ing. c. are rational. d. are satisficers.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 3. Eer-ert Simon suggested that people are not rational ma1imi7ers -ut satisficers, meaning that the% choose a course of action that is a. personall% satisf%ing, with a greater emphasis on personal consumption than on fairness. -. sociall% satisf%ing, with a greater emphasis on fairness than on personal consumption. c. good enough. d. ris, a+erse. DIF: " !F: ""#. &'(: /nderstanding and appl%ing economic models *S(: Definitional

ANS: ( NAT: Anal%tic T'): Satisficers 4.

A ;satisficer; is a person who a. alwa%s chooses the -est course of action. -. often chooses the worst course of action. c. ma,es decisions that are merel% good enough. d. studies -oth economics and ps%cholog%.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Definitional

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5.

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A person who ma,es decisions that are ;merel% good enough; is called aAnB a. optimi7er. -. rational person. c. satisficer. d. ma1i#minimi7er.

ANS: ( DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Definitional 8. The suggestion that people are ;satisficers; is similar to the +iew that people a. are wealth#ma1imi7ers. -. e1hi-it ;-ounded rationalit%.; c. go to a lot of trou-le to weigh costs and -enefits -efore choosing a course of action. d. change their minds often.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 9. 6hich of the following is an e1ample of satisficing -eha+iorC a. Lou continue stud%ing for %our economics e1am until %ou -elie+e %ou2ll get a perfect score. -. Lou spend time loo,ing o+er the lettuce at the grocer% store in order to ma,e sure %ou get the -est head of lettuce. c. Lou -riefl% clean %our room -ecause that@s all it ta,es to get it ;clean enough.; d. Lou carefull% plan %our da% in order to get ;the most out of life.;

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 1$. 6hich of the following students e1hi-its satisficing -eha+iorC a. Ale1 studies his economics notes e+er% night so that he can -e sure to earn a perfect score on his e1am. -. ?rod% studies his economics notes for a few hours the night -efore the test -ecause he will -e satisfied with a ( on his e1am. c. (amilla studies e1tensi+el% as she will onl% -e satisfied with a +er% high score. d. None of these students e1hi-its satisficing -eha+ior.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 11. Studies of human decision#ma,ing show that a. firms are less li,el% to ma1imi7e profits than consumers are to ma1imi7e utilit%. -. firms are more li,el% to ma1imi7e profits than consumers are to ma1imi7e utilit%. c. people are irrational more often than the% are rational. d. people are reluctant to change their minds.

ANS: D DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 1". ?ased on the studies of human decision ma,ing, which of the following statements is correctC a. *ost people are not -othered -% percei+ed unfairness as long as the% recei+e some compensation, e+en if the amount is +er% small. -. *ost people are +er% willing to change their minds. c. *an% people2s preferences are inconsistent o+er time. d. All of the a-o+e are correct.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e

(hapter "":Frontiers of *icroeconomics


1.. Studies of human decision#ma,ing ha+e detected s%stematic mista,es that people ma,e. 6hich of the following ha+e -een detectedC a. people are o+erconfident -. people gi+e too much weight to a small num-er of +i+id o-ser+ations c. people are reluctant to change their minds d. All of the a-o+e

"05

ANS: D DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 10. Some of the s%stematic mista,es that people ma,e include a. -eing o+erconfident. -. placing too much weight on e+ents that are more +i+id compared to those with greater statistical pro-a-ilit%. c. -eing generall% unwilling to change their minds. d. All of the a-o+e are correct.

ANS: D DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 13. !conomic theor% assumes people are alwa%s rational. Let o-ser+ation indicates that people do not alwa%s -eha+e rationall%. 6hich of the following is not a s%stematic mista,e people ma,e in their decisionma,ingC a. )eople often interpret information to fit -eliefs alread% held. -. )eople place too much emphasis in their decisionma,ing on a few e1treme situations of which the% are aware. c. )eople tend to +iew current prices differentl% than the% +iew future prices. d. )eople are too sure of their own a-ilities. DIF: " !F: ""#. &'(: /nderstanding and appl%ing economic models *S(: Interpreti+e

ANS: ( NAT: Anal%tic T'): ationalit% 14.

Den7el tra+els a great deal, and o+er the past se+eral %ears he has read do7ens of re+iews of hotel chains, all of which ra+e a-out the clean rooms and great ser+ice at Sta% Eere hotels. &ast month, Den7el chec,ed into a room at a Sta% Eere hotel for the first time, onl% to find the room filth% and the ser+ice lous%. Ee decided the Sta% Eere chain is inferior to other hotel chains. a. Den7el was irrational to ha+e -elie+ed the re+iews that he had read. -. Den7el was rational to ha+e changed his mind a-out Sta% Eere hotels -ased on his one e1perience. c. Den7el is an e1ample of someone who gi+es too much weight to a small num-er of +i+id o-ser+ations. d. Den7el is an e1ample of someone who is reluctant to change his mind.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 15. A sur+e% of 1,3$$ fre<uent restaurant patrons re+ealed that, Gulio2s, a local *e1ican restaurant offers high# <ualit% food at low prices. ?ased on one dining e1perience, a restaurant critic ga+e Gulio2s a poor re+iew, sa%ing the food was not +er% good. As a result, %ou decide not to dine at Gulio2s. This decision is an e1ample of which of the following s%stematic mista,es that people ma,e when ma,ing decisionsC a. )eople are o+erconfident. -. )eople gi+e too much weight to a small num-er of +i+id o-ser+ations. c. )eople are reluctant to change their minds. d. All of the a-o+e.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e

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(hapter "":Frontiers of *icroeconomics

18. !+idence from studies of wor,ers@ choices on whether to participate in 0$1A,B plans suggests that the wor,ers@ -eha+ior appears to e1hi-it a. indifference. -. ignorance. c. inertia. d. indecision. ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e 19. Neuro#economists a. stud% how emotions influence peoples2 choices. -. ha+e found that people are more li,el% to ta,e a foolish ris, when the% are in a Hpositi+e arousal state.I c. ha+e found that -rains assess ris, and return separatel%. d. All of the a-o+e are correct.

ANS: D DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "$. The frontier field of economics that studies how emotions influence peoples2 choices is ,nown as a. emoti+e#economics. -. neuro#economics. c. -rain#economics. d. feeling#economics.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "1. )eople interpret e+idence to confirm -eliefs the% alread% hold. This statement is an e1ample of which of the following s%stematic mista,es that people ma,eC a. people are o+erconfident -. people gi+e too much weight to a small num-er of +i+id o-ser+ations c. people are reluctant to change their minds d. All of the a-o+e

ANS: ( DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "". ?o- is a contestant on a tri+ia <ui7 show. For e+er% state capital he can correctl% identif%, he will win K1,$$$. Eowe+er, -efore identif%ing an% capitals, he must decide how man% he thin,s he can correctl% identif%. If he cannot identif% as man% as he has wagered, ?o- will not win an% mone%. Suppose ?o- sa%s that he can correctl% identif% 0" state capitals for a potential pa%off of K0",$$$. According to studies of human decision# ma,ing, what is most li,el% to happenC a. ?o- will -e a-le to identif% 0" state capitals and he will win K0",$$$. -. ?o- will -e a-le to identif% fewer than 0" state capitals and will not win an% mone%. c. ?o- will not -e a-le to identif% an% state capitals and will not win an% mone%. d. ?o- will choose to sa+e all of the mone% he wins on the <ui7 show for his retirement.

ANS: ? DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e

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"..

"09

Suppose a group of people read an article on capital punishment. )rior to reading the article, 4$Q of the mem-ers of the group were opposed to capital punishment, while 0$Q of the mem-ers of the group were in fa+or of capital punishment. According to studies of human decision#ma,ing, which of the following is li,el%C a. After reading the article, all mem-ers of the group oppose capital punishment. -. After reading the article, all mem-ers of the group are in fa+or of capital punishment. c. After reading the article, 4$Q of the mem-ers of the group are opposed and 0$Q of the mem-ers of the group are in fa+or of capital punishment. d. The mem-ers of the group would elect a representati+e in fa+or of capital punishment.

ANS: ( DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "0. Students of microeconomic principles often sa% the% are going to stud% ;tonight,; -ecause the onl% wa% to pass the e1am is to stud% some e+er% night. 6hen ;tonight; comes, some students choose to do something else. (ome e1am#da%, these students do not do well on their e1am. This o-ser+ation is an e1ample of how people a. are inconsistent o+er time. -. are consistent o+er time. c. are mainl% interested in fairness. d. are rational.

ANS: A DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "3. (on+entional economic theor% suggests that in the ultimatum game, the pla%er proposing a split of K1$$ will propose that she get K99 and that the other pla%er get K1. ?% the same reasoning, if the amount to -e split is K"$$, the pla%er proposing the split will propose that she gets a. K1$$ and that the other pla%er gets K1$$. -. K198 and that the other pla%er gets K". c. K199 and that the other pla%er gets K1. d. K"$$ and that the other pla%er gets nothing.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "4. The results of the ultimatum game illustrate the fact that a. people@s -eha+ior is often dri+en -% an innate sense of fairness. -. homo economicus is a good description of people@s -eha+ior. c. self#interest -rings out the most efficient economic outcome. d. ?oth - and c are correct.

ANS: A DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "5. !1periments show that when real people pla% the ultimatum game, starting with K1$$, a. )la%er A usuall% proposes gi+ing )la%er ? more than K3$. -. )la%er ? usuall% accepts )la%er A@s proposal if )la%er A proposes gi+ing )la%er ? K.$ or K0$. c. pla%ers show themsel+es to -e rational wealth#ma1imi7ers. d. ?oth ? and ( are correct.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "8. !+idence points to the fact that, in the real world, people appear to care a-out fairness a. onl% when it coincides with their own self#interest. -. onl% when it coincides with their determination to -e consistent o+er time. c. e+en when it does not coincide with their own self#interest. d. not at all.

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ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e "9. !+idence from e1periments in which real people pla% the ultimatum game supports the idea that people a. are rational wealth#ma1imi7ers. -. tend to -e dri+en -% fairness, without regard for their own self#interest. c. are dri+en -% -oth fairness and self#interest. d. ha+e trou-le calculating their own le+els of wealth.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .$. Suppose that an economics professor selects two students, ud% and honda, to participate in a classroom e1periment. The professor gi+es ud% ten K1 -ills. ud% must pic, an allocation of the ten K1 -ills to offer to honda. If honda accepts the allocation, each student ,eeps his or her portion of the mone%. If honda rejects the allocation, the professor ,eeps the K1$, and each student recei+es nothing. ud% selects K9 for himself and K1 for honda. ?ased on the studies of human decision ma,ing, which of the following statements is correctC a. If honda accepts the offer, she is -eha+ing rationall%. -. If honda rejects the offer, she ma% +alue fairness more than K1. c. If honda rejects the offer, ud% made a -ad choice -% tr%ing to ,eep K9 for himself. d. An% of the a-o+e could -e correct.

ANS: D DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .1. ?rian and Andrea are pla%ing the ultimatum game, starting with K1$$. The coin flip results in ?rian -eing the one to propose a di+ision of the K1$$. ?rian proposes that he gets K99 and Andrea gets K1. a. ?ecause the 99#1 split isn2t fair, ?rian should not ma,e this offer. -. (on+entional economic theor% predicts that ?rian will propose a 99#1 split, just as he did. c. !1perimental e+idence suggests that Andrea will accept the 99#1 split -ecause, e+en though it isn2t fair, it2s -etter than nothing. d. !conomic theor% predicts that ?rian should choose a 4$#0$ split to ma1imi7e his pa%off.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Anal%tical .". !li and )e%ton are pla%ing the ultimatum game, starting with K1$$. The coin flip results in !li -eing the one to propose a di+ision of the K1$$. If !li acts as economic theor% assumes, he should propose that a. he gets K.$ and )e%ton gets K5$. -. he gets K3$ and )e%ton gets K3$. c. he gets K4$ and )e%ton gets K0$. d. he gets K99 and )e%ton gets K1.

ANS: D DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Anal%tical ... The ultimatum game re+eals that a. it does not ma,e sense to tr% to ma1imi7e profits. -. people ma% ha+e an innate sense of fairness that economic theor% does not capture. c. offering someone a wildl% unfair outcome is usuall% o, since people tend to ma,e decisions using a ;something is -etter than nothing; philosoph%. d. ?oth a and -.

ANS: ? DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): /ltimatum game *S(: Interpreti+e

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In a dictator game, pla%er A must di+ide K1$$ -etween pla%er A and pla%er ?. In this game, pla%er ? does not ha+e the opportunit% to reject an offer R the% go home with whate+er pla%er A offers. !1periments ha+e o-ser+ed that when pla%er A splits the K1$$, he or she consistentl% offers o+er K1$ to pla%er ?. 6hich of the following comments fits -est. a. Although pla%er A is acting as economic theor% usuall% assumes, he or she ma,es such offers -ecause the% seem more fair. -. Although pla%er A is acting as economic theor% usuall% assumes, he or she ma,es such offers although the% are not fair. c. Although pla%er A is not acting as economic theor% usuall% assumes, he or she ma,es such offers -ecause the% seem more fair. d. Although pla%er A is not acting as economic theor% usuall% assumes, he or she ma,es such offers -ecause the% are not fair.

ANS: ( DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .3. ?ett% ,nows that she needs to sa+e "$Q of her annual income for retirement. Eowe+er, she spends 9$Q of her income each %ear. This is an indication that ?ett%@s preferences are a. irrational. -. inconsistent o+er time. c. satisficing rather than ma1imi7ing. d. undefined.

ANS: ? DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .4. According to one sur+e% 54 percent of Americans said the% were not sa+ing enough for retirement. This e1ample of inconsistenc% o+er time a. is rational -eha+ior. -. li,el% occurs -ecause sa+ing re<uires a sacrifice in the present for a reward in the distant future. c. li,el% occurs -ecause Americans don2t care a-out retirement. d. definitel% would not happen if Americans earned a greater return on their in+estments.

ANS: ? DIF: 1 !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .5. ?eha+ioral economics a. integrates ps%chological insights into economic models. -. relies on the assumption that homo economicus descri-es economic decision#ma,ing. c. assumes that economic agents ha+e full information a-out the conditions surrounding their decisions. d. All of the a-o+e are correct.

ANS: A DIF: " !F: ""#. NAT: Anal%tic &'(: /nderstanding and appl%ing economic models T'): ?eha+ioral economics *S(: Interpreti+e .8. 6hich of the following statements is correctC a. ?ased on studies of human decision ma,ing, most people are o+erconfident in their own a-ilities. -. Arrow2s impossi-ilit% theorem dispro+es the median +oter theorem. c. omantic gifts are an e1ample of ad+erse selection. d. An efficienc% wage encourages wor,ers to shir,. A DIF: " !F: ""#., ""#", ""#1 Anal%tic &'(: /nderstanding and appl%ing economic models ?eha+ioral economics, political econom%, as%mmetric information Anal%tical

ANS: NAT: T'): *S(:

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6hich of the following statements is not correctC a. ?ased on studies of human decision ma,ing, most people +alue fairness. -. ?ased on studies of human decision ma,ing, some people2s preference are inconsistent o+er time. c. Fo+ernment inter+ention is the -est remed% for the pro-lems caused -% as%mmetric information. d. Ad+ertising can -e an e1ample of a compan% signaling the <ualit% of its products. ( DIF: " !F: ""#., ""#", ""#1 Anal%tic &'(: /nderstanding and appl%ing economic models ?eha+ioral economics, political econom%, as%mmetric information Anal%tical

ANS: NAT: T'): *S(: 0$.

6hich of the following statements is not correctC a. *ajorit% rule e1plains wh% politicians appeal to the middle of the +oting distri-ution. -. ?ased on studies of human decision ma,ing, most people prefer to procrastinate, -oth in the immediate future and in the distant future. c. Screening refers to an uninformed part% tr%ing to e1tract information from an informed part%. d. Ad+ertising can -e an e1ample of a compan% signaling the <ualit% of its products. ? DIF: " !F: ""#., ""#", ""#1 Anal%tic &'(: /nderstanding and appl%ing economic models ?eha+ioral economics, political econom%, as%mmetric information Anal%tical

ANS: NAT: T'): *S(:

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