Ch23 Test Questions & Answers Frontiers Of Microeconomics - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 23 – Frontiers of microeconomics
TRUE/FALSE
1. In the moral hazard problem the principal tends to undertake less effort than the agent considers desirable.
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
2. If monitoring by a principal is imperfect, it is less likely that a moral hazard problem will arise.
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
3. Efficiency wages increase the cost of shirking.
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
4. Adverse selection is a problem that arises in markets where the seller knows more about the attributes of the good being sold than the buyer does.
DIF: Moderate TOP: Hidden characteristics: Adverse selection and the lemons problem
5. Both adverse selection and signalling are linked to the problem of asymmetric information.
DIF: Moderate TOP: Hidden characteristics: Adverse selection and the lemons problem
6. Information asymmetries do not impede the efficient functioning of markets.
DIF: Moderate TOP: Asymmetric information and public policy
7. Screening is an action taken by an uninformed party to induce an informed party to reveal information.
DIF: Moderate TOP: Screening to induce information revelation
8. An implication of asymmetric information in the insurance market is that people in average health may be encouraged to purchase health insurance.
DIF: Moderate TOP: Screening to induce information revelation
9. The signalling power of giving a gift is of most value when the asymmetry of information is greatest.
DIF: Moderate TOP: Case Study: Gifts as signals
10. Given asymmetric information, car insurance companies might encourage risky drivers to identify themselves by offering a high-premium policy without a deductible.
DIF: Moderate TOP: Asymmetric information and public policy
11. The Condorcet paradox illustrates that majority voting by itself does not necessarily reveal what outcome society really wants.
DIF: Moderate TOP: The Condorcet voting paradox
12. Arrow’s impossibility theorem suggests that any voting system society adopts for aggregating the preferences of its members will be flawed.
DIF: Moderate TOP: Arrow’s impossibility theorem
13. The median voter theorem is used to explain why parties in a two-party political system tend to put forward very different policies.
DIF: Moderate TOP: The median voter is king
14. The Borda count voting method satisfies the independence of irrelevant alternatives property.
DIF: Difficult TOP: Arrow’s impossibility theorem
15. A difference in access to relevant knowledge is called information symmetry.
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
16. The median voter theorem suggests that democratic institutions will produce the outcome desired by the median voter, regardless of the preferences of the rest of the electorate.
DIF: Moderate TOP: The median voter is king
17. An implication of the median voter theorem is that, in a democratic voting system, minority views are given significant weight.
DIF: Moderate TOP: The median voter is king
18. The Condorcet paradox reinforces the notion that majority rule ensures transitive preferences for society.
DIF: Moderate TOP: The Condorcet voting paradox
19. Experiments suggest that people tend to interpret evidence to confirm beliefs they already hold.
DIF: Moderate TOP: People aren’t always rational
20. Gift-giving can be explained through asymmetric information and signalling.
DIF: Easy TOP: Signalling to convey private information
21. Loss aversion means that commitment strategies that generate potential losses are more likely to change behaviour than strategies that generate the equivalent money gain.
DIF: Difficult TOP: In the news: Use money to commit to a diet
22. Studies suggest that the passage of time makes no difference to individuals’ choices between two options.
DIF: Moderate TOP: People are inconsistent over time
23. Results of the ultimatum game suggest that considerations of fairness may play a role in economic behaviour.
DIF: Moderate TOP: People care about fairness
24. People tend to underestimate their own abilities.
DIF: Moderate TOP: Behavioural economics
25. Private insurance companies cannot do anything to reduce the impact of the moral hazard problem.
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
26. The lack of caution exhibited by individuals and families who are privately insured is an example of moral hazard.
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
27. The insights of behavioural economics suggest that assuming rational behaviour of consumers is not always correct.
DIF: Easy TOP: Behavioural economics
28. Arrow identified unanimity and transitivity as desirable properties for a voting system.
DIF: Moderate TOP: Arrow’s impossibility theorem
29. Herbert Simon suggested that people should be treated as satisficers rather than rational maximisers.
DIF: Moderate TOP: People aren’t always rational
30. The problem of asymmetric information is absent in the moral hazard problem.
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
MULTIPLE CHOICE
1. The tendency for a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour is known as:
A | asymmetric information |
B | moral hazard |
C | moral delinquency |
D | adverse selection |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
2. In the moral hazard problem the:
A | agent tends to undertake more effort than the principal considers desirable |
B | agent tends to undertake less effort than the principle considers desirable |
C | problem of asymmetric information is absent |
D | agent does not exhibit any ‘undesirable’ behaviour |
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
3. The incentive of imperfectly monitored workers to shirk can be reduced by:
A | higher levels of monitoring and offering year-end bonuses |
B | higher levels of monitoring and lower wages |
C | lower levels of monitoring and offering year-end bonuses |
D | lower levels of monitoring and lower wages |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
4. Adverse selection is a problem that arises in markets where:
A | the seller knows more about the attributes of the good being sold than the buyer does |
B | the buyer knows more about the attributes of the good being sold than the seller does |
C | only used cars are bought and sold |
D | both buyers and sellers have the same knowledge about the attributes of the good |
DIF: Moderate TOP: Hidden characteristics: Adverse selection and the lemons problem
5. Which of the following is an example of adverse selection?
A | employees shirking because they believe they can get away with reduced work |
B | a traveller who is prone to forgetting her bags purchasing full-comprehensive travel insurance |
C | a well-informed IT expert purchasing a new laptop |
D | a petrol station displaying its prices alongside a busy highway |
DIF: Moderate TOP: Hidden characteristics: Adverse selection and the lemons problem
6. One implication of the lemons problem is that:
A | a used car only a few days old will often sell for less than a new car of the same type |
B | many people have an incentive to buy vehicles in the used car market |
C | used cars have a market value almost identical to that of new cars |
D | buyers are just as aware of vehicle defects as the sellers of used cars |
DIF: Moderate TOP: Hidden characteristics: Adverse selection and the lemons problem
7. When applied to the labour market, the adverse selection model suggests that:
A | relatively talented workers are more likely to remain with a particular firm if the firm cuts the wages it pays |
B | firms have perfect knowledge about the ability of workers |
C | a firm may choose to pay an above-equilibrium wage to attract a better mix of workers |
D | all workers have identical abilities |
DIF: Easy TOP: Hidden characteristics: Adverse selection and the lemons problem
8. If there is adverse selection in the health insurance market then this means that:
A | insurance companies can identify all the health problems facing its customers |
B | the price of health insurance may be greater than the costs of covering the average person’s health risks |
C | people with severe but hidden health problems are less likely to buy health insurance than other people |
D | people in average health are encouraged to purchase health insurance |
DIF: Difficult TOP: Hidden characteristics: Adverse selection and the lemons problem
9. An implication of asymmetric information in the insurance market is that:
A | insurance companies have perfect knowledge about the health problems of those who purchase insurance |
B | the price of health insurance may reflect the costs of a healthier-than-average person |
C | people with greater hidden health problems are more likely to buy health insurance than other people |
D | people in average health are encouraged to purchase health insurance |
DIF: Difficult TOP: Hidden characteristics: Adverse selection and the lemons problem
10. When a seller of a good knows more about the quality of a product than the buyer, this is known as:
A | asymmetric information |
B | moral hazard |
C | moral delinquency |
D | adverse selection |
DIF: Easy TOP: Hidden characteristics: Adverse selection and the lemons problem
11. It is often difficult for a customer to know the quality of a 3-D television. If a television manufacturer advertises its 3-D televisions then:
A | this is a costless action that fails to signal the 3-D television is a good product |
B | this is a costless action that succeeds in signalling that the 3-D television is a good product |
C | this is a costly action that succeeds in signalling that the 3-D television is a good product |
D | this is a costly action that fails to signal the 3-D television is a good product |
DIF: Easy TOP: Signalling to convey private information
12. If signalling is applied to advertising:
A | a firm with a good product reaps a relatively small benefit from advertising |
B | firms ignore the possibility of repeated customers |
C | it is rational for a firm with a good product to pay for the cost of the signal |
D | all firms have the same incentive to advertise |
DIF: Moderate TOP: Signalling to convey private information
13. When a uniformed party takes action to reveal private information, this action is called:
A | screening |
B | signalling |
C | adverse selection |
D | information asymmetry |
DIF: Easy TOP: Signalling to convey private information
14. If signalling is applied to advertising:
A | a firm with a good product reaps a relatively small benefit from advertising |
B | firms recognise the possibility of repeated customers |
C | it is irrational for a firm with a good product to pay for the cost of the signal |
D | all firms have the same incentive to advertise |
DIF: Moderate TOP: Signalling to convey private information
15. If signalling is applied to advertising:
A | not all firms have the same incentive to advertise |
B | firms ignore the possibility of repeated customers |
C | it is irrational for a firm with a good product to pay for the cost of the signal |
D | a firm with a good product reaps a relatively small benefit from advertising |
DIF: Moderate TOP: Signalling to convey private information
16. Suppose an insurance company wishes to separate out drivers based on whether they are high-risk or low-risk drivers. It can do this by offering two different pricing schemes: one the appeals to low-risk drivers and another that appeals to high risk drivers. Which of the following pricing schemes would best appeal to a high-risk driver? NB: a deductable is the amount that the driver would have to pay in the event of a claim:
A | a high premium but low deductable |
B | a low premium and high deductable |
C | a high premium and high deductible |
D | None, high risk drivers prefer not to take out insurance. |
DIF: Moderate TOP: Screening to induce information revelation
17. Suppose an insurance company successfully screens drivers by offering two contracts. One contract is a policy with high premiums and comprehensive coverage, and the other a policy with low premiums and $1500 excess on each claim. This means that:
A | risky drivers and safe drivers would both select the high premium contract |
B | risky drivers would select the high premium contract and safe drivers would select the low premium contract |
C | risky drivers would select the low premium contract and safe drivers would select the high premium contract |
D | risky drivers and safe drivers would both select the low premium contract |
DIF: Moderate TOP: Screening to induce information revelation
18. The Condorcet paradox illustrates how:
A | choice of voting order has no impact on the outcome of a democratic election |
B | majority voting by itself can tell us what outcome of society really wants |
C | choice of voting order can have an impact on the outcome of a democratic election |
D | aggregating individual preferences into preferences for society as a whole is relatively straightforward. |
DIF: Moderate TOP: The Condorcet voting paradox
19. According to the median voter theorem, majority rule will produce the outcome:
A | least preferred by the voter exactly in the middle of a distribution |
B | that represents everyone’s preferences equally |
C | most preferred by the voter at an extreme end of the distribution |
D | most preferred by the voter exactly in the middle of a distribution |
DIF: Moderate TOP: The median voter is king
20. The median voter is:
A | any voter in a democratic system |
B | the voter at the start of a distribution |
C | the voter at the end of a distribution |
D | the voter exactly in the middle of a distribution |
DIF: Moderate TOP: The median voter is king
21. Parties in a two-party political system tend to put forward similar policies because:
A | of the median voter theorem |
B | of the average voter theorem |
C | politicians find it hard to think of new policies |
D | voters don’t like things to change |
DIF: Moderate TOP: The median voter is king
22. An implication of the median voter theorem is that, in a democratic voting system:
A | minority views are not given much weight |
B | minority views are given significant weight |
C | the intensity of minority preferences play a central role in determining the outcome |
D | the outcome can best be described as a compromise that takes into account diverse preferences |
DIF: Moderate TOP: The median voter is king
Three friends, Brent, Frida and Jess, are on a road trip and are deciding which album to listen to next. Unfortunately, there are only three CD’s in the car: Najwa Karam’s pop hits, the best of Paul Kelly, and Daft Punk’s greatest hits. The following table ranks the individual music preferences of each individual
Table 23-1
Rank | Brent’s preferences | Frida’s preferences | Jess’s preferences |
1st choice | Daft Punk | Najwa Karam | Paul Kelly |
2nd choice | Paul Kelly | Daft Punk | Najwa Karam |
3rd choice | Najwa Karam | Paul Kelly | Daft Punk |
23. Refer to Table 23-1. With pairwise voting, and starting with a comparison between Daft Punk and Paul Kelly, which album will they listen to?
A | Daft Punk |
B | Paul Kelly |
C | Najwa Karam |
D | it cannot be determined |
DIF: Moderate TOP: The Condorcet voting paradox
24. Refer to Table 23-1. With pairwise voting, and starting with a comparison between Daft Punk and Najwa Karam, which album will they listen to?
A | Daft Punk |
B | Paul Kelly |
C | Najwa Karam |
D | it cannot be determined |
DIF: Moderate TOP: The Condorcet voting paradox
25. Refer to Table 23-1. With pairwise voting, and starting with a comparison between Paul Kelly and Najwa Karam, which album will they listen to?
A | Daft Punk |
B | Paul Kelly |
C | Najwa Karam |
D | it cannot be determined |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
26. Refer to Table 23-1. The situation that arises from pairwise voting with these preference is called:
A | inconsistent preferences |
B | the pairwaise paradox |
C | the Condorcet voting paradox |
D | the democratic preferences paradox |
DIF: Easy TOP: The Condorccet voting paradox
27. In the context of a voting system, unanimity means that:
A | if everyone prefers A to B, then A should beat B |
B | if A beats B, and B beats C, then A should beat C |
C | the ranking between any two outcomes A and B should not depend on whether some third outcome C is also available |
D | there this no person that always gets his way, regardless of everyone else’s preferences |
DIF: Moderate TOP: Arrow’s impossibility theorem
28. In the context of a voting system, unanimity means that:
A | if option X beats option Y, and Y beats Z, then X should beat Z |
B | if A beats B, and B beats C, then A should beat C |
C | the ranking between any two outcomes A and B should not depend on whether some third outcome C is also available |
D | if everyone prefers option X to option Y, then X should beat Y |
DIF: Moderate TOP: Arrow’s impossibility theorem
29. In the context of a voting system, independence of irrelevant alternatives means that:
A | if everyone prefers A to B, then A should beat B |
B | if A beats B, and B beats C, then A should beat C |
C | there this no person that always gets his way, regardless of everyone else’s preferences |
D | the ranking between any two outcomes A and B should not depend on whether some third outcome C is also available |
DIF: Moderate TOP: Arrow’s impossibility theorem
30. A difference in access to relevant knowledge is called:
A | an information symmetry |
B | an information asymmetry |
C | signalling |
D | screening |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
31. When signing up for monthly charity donations, often the first payment does not occur immediately, but rather in two months time. Research has showed that when structured this way, many more people sign up to donate. This behaviour is an example of:
A | people being reluctant to change their minds |
B | people caring about fairness |
C | people being time-inconsistent |
D | people giving too much weight to vivid observations |
DIF: Moderate TOP: Behavioural economincs
32. Political economy:
A | tends to view human behaviour as less complex than that found in conventional economic theory |
B | brings some of the insights from psychology into the study of economic issues |
C | applies the tools of economics to understand the functioning of government |
D | includes topics such as adverse selection and moral hazard |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
33. The field of information asymmetry:
A | tends to view human behaviour as less complex than that found in conventional economic theory |
B | brings some of the insights from psychology into the study of economic issues |
C | applies the tools of economics to understand the functioning of government |
D | includes topics such as adverse selection and moral hazard |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
34. The field of political economy is:
A | the use of the methods of economics to study how government works |
B | the study of the economic consequences of political actions |
C | the study of economic policy made by government |
D | the study of the market for lobbying and political donations |
DIF: Easy TOP: Political economy
35. Behavioural economists argue that:
A | people are rational maximisers |
B | consumers always choose the best possible course of action |
C | people are flexible and change their beliefs in response to new evidence |
D | people largely make decisions that are merely good enough |
DIF: Easy TOP: People aren’t always rational
36. Economists:
A | have always suggested that people are rational maximisers, not satisfiers |
B | use basic psychological insights in the field of behavioural economics |
C | generally argue that people do not weigh the costs and benefits of different courses of action |
D | assume individuals and firms do not face constraints in the market |
DIF: Easy TOP: People aren’t always rational
37. If Anne finds it difficult to stick to a diet, she might be exhibiting:
A | inconsistency over time |
B | asymmetric information |
C | moral hazard |
D | adverse selection |
DIF: Easy TOP: People are inconsistent over time
38. In the case where landlords require tenants to pay security deposits:
A | the landlord is the agent and the tenant is the principal |
B | the landlord is the principal and the tenant is the agent |
C | both the landlord and the tenant are agents |
D | both the landlord and the tenant are principals |
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
39. Suppose a consumer always goes to the same hairdresser to get her hair cut. Even after the hairdresser puts up the price of a cut by $5, the consumer doesn’t switch to any hairdressers that are cheaper or more skilled. This means that the consumer is:
A | acting as a rational utility maximiser |
B | acting as a satisficer |
C | a victim of asymmetric information |
D | getting a loyalty discount from the hairdresser |
DIF: Difficult TOP: People aren’t always rational
Table 23-2
Voter Type | |||
Type 1 | Type 2 | Type 3 | |
% of electorate | 35 | 45 | 20 |
1st choice | C | A | B |
2nd choice | A | B | C |
3rd choice | B | C | A |
Suppose a town is to vote on three possible locations for a new park: A, B, or C. The preferences are in Table 23-2. Suppose the mayor decides on the following Borda count voting scheme: For each option, we will give one point for last place, two points for second last, and three points for the third last etc. The outcome with the most points is the winner.
40. Refer to the information provided. The winner of this Borda count will be:
A | option A |
B | option B |
C | option C |
D | a tie between option A and B |
DIF: Moderate TOP: Arrow’s impossibility theorem
41. Refer to the information provided. Suppose option B is no longer an alternative. The winner of this Borda count will be:
A | option A |
B | option B |
C | option C |
D | a tie between option A and C |
DIF: Difficult TOP: Arrow’s impossibility theorem
42. Refer to the information provided. The Borda count fails to satisfy which of Arrow’s properties of a perfect voting system?
A | unanimity |
B | transitivity |
C | independence of irrelevant alternatives |
D | no dictators |
DIF: Moderate TOP: Arrow’s impossibility theorem
43. Arrow’s impossibility theorem is named after the:
A | the ex-US president Walter Arrow |
B | economist, Kenneth Arrow |
C | direction that is required in order to rank possible outcomes |
D | French political theorist, Marquis de Arrow |
DIF: Easy TOP: Arrow’s impossibility theorem
44. Political economy is also referred to as public:
A | goods |
B | choice |
C | provision |
D | policy |
DIF: Moderate TOP: The Condorcet voting paradox
45. Education and advertising are two examples of:
A | signalling |
B | adverse selection |
C | moral hazard |
D | the Condorcet paradox |
DIF: Moderate TOP: Signalling to convey private information
46. Asymmetric information is:
A | very rare in the Australian economy |
B | very commonplace in the Australian economy |
C | non-existent in the Australian economy |
D | irrelevant to the study of the markets in the Australian economy |
DIF: Easy TOP: Hidden actions: Principals, agents and moral hazard
47. In insurance markets, buyers with:
A | low risk may choose to be uninsured, because the policies they are offered reflect their true characteristics |
B | low risk may choose to be insured, because the policies they are offered fail to reflect their true characteristics |
C | low risk may choose to be uninsured, because the policies they are offered fail to reflect their true characteristics |
D | high risk may choose to be insured, because the policies they are offered reflect their true characteristics |
DIF: Difficult TOP: Hidden characteristics: Adverse selection
48. The social scientist Herbert Simon is famous for his work in:
A | asymmetric information |
B | signalling theory |
C | voting systems |
D | behavioural economics |
DIF: Easy TOP: People aren’t always rational
SHORT ANSWER
1. What is moral hazard and how might it manifest in an employment relationship? What can an employer do to reduce the problem of moral hazard?
DIF: Moderate TOP: Hidden actions: Principals, agents and moral hazard
2. What is adverse selection, and how is it applied to the used car market?
DIF: Moderate TOP: Hidden characteristics: Adverse selection
3. How do markets respond to problems of asymmetric information?
DIF: Moderate TOP: Hidden characteristics: Adverse selection and signalling
4. How might a car insurance company screen drivers for risky behaviour?
DIF: Moderate TOP: Screening to induce information revelation
5. What are two implications of the Condorcet paradox?
DIF: Moderate TOP: The Condorcet voting paradox
6. What are three ways that employers can respond to the asymmetry of information between employers and employees?
DIF: Moderate TOP: Arrow’s impossibility theorem
7. What are the implications of the median voter theorem?
DIF: Moderate TOP: The median voter is king
8. What is the difference between a consumer who is a rational self-interest maximiser and a consumer who is a satisficer?
DIF: Moderate TOP: People aren’t always rational
9. Suppose two players are playing the ultimatum game, and Player A has to propose a division of $100 between the two players. What is the Nash equilibrium for this game, and is it the usual result of the game when it is played? What does it tell us about people’s attitudes towards fairness?
DIF: Moderate TOP: People care about fairness
10. Provide three example of inconsistent choice over time.
DIF: Moderate TOP: People are inconsistent over time
11. The marrying of the fields of psychology and economics has led to an explosion in the field of behavioural economics. Give three explanations of some of the insights of behavioural economics and examples of when each insight might apply.
DIF: Moderate TOP: Behavioural economics