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84. A brand of wine is priced at only $5 per bottle, far below the market price of most high quality
wines. Before any reputation exists for the wine, consumers buy very little of this inexpensive
wine because they interpret the low price to mean that the wine is of poor quality. The company
decides to change the label on the wine to show that it has won awards for quality. This label
change is an example of
a. signaling.
b. screening.
c. selecting.
d. All of the above are correct.
85. If the seller of a used car offers a limited warranty, the warranty is an example of a(n)
a. signal.
b. screen.
c. efficiency wage.
d. agent.
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86. A home has been on the market for an extended amount of time without much interest from
buyers. The sellers decide to purchase and include a home warranty insuring against major defects
with the home. The warranty is an example of a(n)
a. signal.
b. screen.
c. moral hazard.
d. adverse selection.
87. A firm with a very good product
a. has a higher cost of signaling (advertising) than does a firm with an inferior product.
b. has more to gain by signaling (advertising) than does a firm with an inferior product.
c. does not need to signal (advertise) because the product’s quality speaks for itself.
d. will signal (advertise) effectively if signaling is free.
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88. Budweiser typically purchases several 30 second advertising spots during the Super Bowl at a
very high cost. Miller Brewing Co. typically does not advertise during the Super Bowl. Which of
the following is correct?
a. Budweiser chooses to signal during the Super Bowl, while Miller Brewing Co. does not.
b. Budweiser chooses to screen during the Super Bowl, while Miller Brewing Co. does not.
c. Miller does not advertise during the Super Bowl because it has a superior product and the
audience already knows that.
d. Budweiser’s advertisements during the Super Bowl are entertaining but convey no information
about the quality of its products.
89. Which of the following is an example of signaling?
a. Graduates of highly-respected universities highlight that fact on their resumes.
b. Magazine advertisements include the phrase “as seen on TV.”
c. Advertisements for universities include the phrase “fully accredited.”
d. All of the above are correct.
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90. Which of the following events best exemplifies the concept of signaling?
a. A college student’s parents, having learned that their child is short of money, send her a check
for $1,000.
b. A new company making high quality bicycles at a reasonable price sends free bikes to
reviewers working for bicycle magazines.
c. A grocery store maintains a policy of examining the driver’s license of everyone who writes a
personal check to purchase his groceries.
d. A university maintains a policy of considering for admission only those students who graduated
among the top ten percent of their high school class.
91. Scott’s Painting Company paints houses. Since Scott’s business does not have the name
recognition of some of the bigger painting companies, Scott advertises a “Five-Year Money Back
Guarantee” to indicate to buyers that his service is of high quality. This guarantee is an example
of
a. screening.
b. signaling.
c. the seller’s curse.
d. the principal-agent problem.
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92. Which of the following is an example of signaling?
a. Pat is considering the purchase of a used car. Before making the purchase he has the car
checked by an auto mechanic.
b. Zach is applying for a new life insurance policy. Before writing the policy, the insurance
company requires Zach to be examined by a doctor.
c. Denise is applying for a new job. Before hiring her, the firm requires Denise to take a drug test.
d. Marcus is planning to ask for Chaquila’s hand in marriage. Before asking her, he buys her a
box of her favorite chocolates and takes her to dinner at her favorite restaurant.
93. Screening occurs when
a. an informed party acts to reveal his private information.
b. an informed party acts to conceal his private information.
c. an uninformed party acts to induce the informed party to reveal private information.
d. an uninformed party acts on its limited information.
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94. A life insurance company requires new applicants to have a medical exam prior to writing the
insurance policy. This requirement is an example of
a. signaling.
b. screening.
c. moral hazard.
d. adverse selection.
95. Which of the following is an example of screening?
a. A lender checks a loan applicants credit history.
b. When an employee purchases group life insurance without taking a physical exam, she knows
more about her health than does the insurance company.
c. When someone is considering buying a used car from a dealership, the seller knows the repair
history of the car but the potential buyer does not.
d. All of the above are correct.
96. Which of the following is an example of screening?
a. a man buys an expensive birthday present for his girlfriend
b. an insurance company offers a policy with a high deductible
c. the seller of a used motorcycle knows more about its true condition than a prospective buyer
d. society supports long prison terms for corporate criminals
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97. An insurance company that writes automobile policies tries to separate safe drivers from risky
drivers by offering policies that feature different deductibles and different premiums. This practice
is best described as an example of
a. screening.
b. behavioral economics.
c. monitoring.
d. signaling.
98. A safe driver would likely choose an auto insurance policy with a
a. low premium and a high deductible.
b. high premium and a high deductible.
c. high premium and a low deductible.
d. high premium and no deductible.
99. An unhealthy person would likely choose a medical insurance policy with a
a. low premium and a high deductible.
b. high premium and a high deductible.
c. high premium and no deductible.
d. The unhealthy person would choose not to be insured.
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100. An airline knows that business travelers have more inelastic demand for travel than vacationers.
That is, business travelers are often willing to pay more for airline tickets than vacationers. The
airline also knows that business travelers do not like to travel over weekends. When customers
request airline tickets that do not involve travel over a weekend, the airline determines that a
traveler is likely a business traveler and charges a higher price. This is an example of
a. moral hazard.
b. signaling.
c. screening.
d. adverse selection.
101. Suppose that an economics department is offering a student exchange program with a university
in Giessen, Germany. If the department requires students to submit an essay in order to be
considered for the program, the essay may be an example of
a. signaling.
b. screening.
c. monitoring.
d. principal.
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102. On car insurance policies, Countrywide Insurance Company offers drivers an option: Policy 1
features a deductible of $1,000, and it requires a driver to pay an annual premium of $500. Policy
2 features a deductible of $250, and it requires a driver to pay an annual premium of $1,000.
a. In offering these two policies, Countrywide is engaging in illegal price discrimination.
b. In offering these two policies, Countrywide is screening drivers.
c. Policy 1 is more of a burden for safe drivers than it is for risky drivers.
d. In offering these two policies, Countrywide is signaling their quality to drivers.
Scenario 22-1
Esteban and Michaela own an apartment building. They hire Nico to manage the building and
deal with tenants’ complaints. They also hire Ted to make any necessary repairs to the
apartments or the common area and they hire Rex to be the door guard at night.
103. Refer to Scenario 22-1. Which of the following statements is correct?
a. If Rex falls asleep while he is supposed to be guarding the door, he has created an adverse
selection problem.
b. Esteban and Michaela are the principals and Nico, Ted, and Rex are the agents.
c. Nico is the principal and Ted and Rex are the agents.
d. All of the above are correct.
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104. Refer to Scenario 22-1. Which of the following is an example of a moral hazard problem?
a. Ted steals $5 off the counter in a tenant’s apartment while he is there to repair a leaky faucet.
b. Esteban and Michaela do not tell Nico that they are planning to sell the building at the end of
the year.
c. Esteban goes golfing while Michaela reviews the financials from the business.
d. Rex is paid an efficiency wage to ensure productivity because he is usually not monitored
while working.
Scenario 22-2
A wireless telephone service provider offers three service plans to its consumers.
Peak Minutes
Messaging
Data Usage
Monthly Fee
Plan A
450
200
2GB/month
$69.99
Plan B
900
1000
5GB/month
$119.99
Plan C
Unlimited
Unlimited
Unlimited
$149.99
105. Refer to Scenario 22-2. By offering consumers these choices, the wireless telephone provider
is
a. signaling to customers that they offer great customer service.
b. screening customers to reveal how much they plan to use the service.
c. creating asymmetric information because only the firm knows the true cost of the service.
d. engaging in a principal-agent problem
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106. Kris and Kelly have been dating for several years. Kris loves Kelly very much and wants to
marry her. Which of the following is the best way to signal his love to her?
a. Kris should buy Kelly a box of his favorite chocolates.
b. Kris should give Kelly $15,000 cash to purchase her own engagement ring, since he doesn’t
know what kind she would like.
c. Kris should buy Kelly the diamond ring that she has been looking at recently in the jewelry
store window.
d. Kris should send Kelly a text asking for her hand in marriage.
Narrative 22-1
Katie owns a boutique that sells high-end women’s clothing and accessories. Shana works part-
time at the boutique and frequently is the only employee in this small store. Katie pays Shana a
wage that is higher than the market wage for this type of job. When the store is not full of
customers, Shana diligently works on displays and cleans to keep the store looking its best.
Magda is a customer in the store who asks Shana’s opinion on the quality of some jeans she is
considering purchasing. Even though she’s had several other customers return them due to
flaws, Shana tells Magda the quality is great. Belinda is another customer who is returning a
necklace without revealing that she lost a gem from it while wearing it.
107. Refer to Narrative 22-1. Which of the ladies is an agent?
a. Shana
b. Katie
c. Belinda
d. Magda
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108. Refer to Narrative 22-1. Which of the ladies is a principal?
a. Shana
b. Katie
c. Belinda
d. Magda
109. Refer to Narrative 22-1. Which of the ladies is causing a moral hazard problem?
a. Shana
b. Katie
c. Belinda
d. Magda
110. Refer to Narrative 22-1. Which of the ladies is the victim of an adverse selection problem?
a. Shana
b. Katie
c. Belinda
d. Magda
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111. A Principles of Microeconomics professor wants to know how much prior knowledge her
students have before beginning the class so she gives them a pre-test. This action is an example
of
a. signaling.
b. screening.
c. adverse selection.
d. moral hazard.
112. Which of the following is a reason to think that government action may not be valuable to
improve market outcomes with asymmetric information?
a. The private market can sometimes deal with information asymmetries using signaling and
screening.
b. The government rarely has more information than the private parties.
c. Government actions have their own imperfections.
d. All of the above are correct.
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Multiple Choice – Section 02: Political Economy
1. The field of political economy
a. casts aside most of the standard methods of economic analysis.
b. is also referred to as the field of public choice.
c. is also referred to as the field of macroeconomics.
d. produces the conclusion that democratic principles rarely lead to desirable economic outcomes.
2. The field of political economy applies the methods of
a. psychology to study how the economy works.
b. political science to study how the economy works
c. economics to study how government works.
d. psychology to study how government works.
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3. The field of political economy
a. applies the methods of political science to microeconomics.
b. applies the methods of political science to macroeconomics.
c. is relevant to the issue of how active government should be in economic matters.
d. integrates psychological insights to better understand individual choices.
4. Recent developments in political economy
a. render much of the traditional field of political science obsolete.
b. render much of the traditional field of economics obsolete.
c. illustrate the resolute nature of democracy.
d. point to the fact that government is a less-than-perfect institution.
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5. Normally, we expect voters‘ preferences to exhibit a property called
a. transitivity.
b. transversality.
c. normality.
d. universality.
6. If preferences exhibit the property of transitivity, then
a. the preferences are irrational.
b. individuals prefer more government involvement in private markets than do people whose
preferences are not transitive.
c. preferences change over time more quickly than when preferences are not transitive.
d. preferences satisfy one of the properties assumed to be desirable by Kenneth Arrow in Social
Choice and Individual Values.
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7. Which of the following statements captures the meaning of transitivity of preferences?
a. If A is preferred to B, then B is less preferred than A.
b. If A is preferred to B, and B is preferred to C, then A is preferred to C.
c. If A is preferred to B and B is preferred to C, then the preference for A over B is stronger than
the preference for B over C.
d. If A is preferred to C, then there exists B such that A is preferred to B and C is preferred to A.
8. Which of the following sets of preferences satisfies the property of transitivity?
a. Cookies are preferred to pie. Pie is preferred to brownies. Cookies are preferred to brownies.
b. Cookies are preferred to pie. Brownies are preferred to pie. Pie is preferred to cookies.
c. Cookies are preferred to ice cream. Ice cream is preferred to brownies. Brownies are preferred
to cookies.
d. Cookies are preferred to pie. Ice cream is preferred to cookies. Pie is preferred to ice cream.
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9. Which of the following would violate transitivity?
a. Vanessa likes A more than B, C more than B, and C more than A.
b. Jay likes C more than B, A more than B, B more than D, and C more than D.
c. Maddy likes C more than A, B more than D, A more than B, and D more than C.
d. Victoria likes C more than B, C more than D, and B more than D.
10. Which of the following sets of preferences can not satisfy the property of transitivity?
a. Plan A is preferred to plan D. Plan D is preferred to plan B. Plan C is preferred to plan B.
b. Plan A is preferred to plan B. Plan B is preferred to plan C. Plan A is preferred to plan C.
c. Plan C is preferred to plan A. Plan B is preferred to plan A. Plan C is preferred to plan B.
d. Plan D is preferred to plan C. Plan C is preferred to plan B. Plan B is preferred to plan D.
11. The Condorcet paradox
a. demonstrates that the order in which one votes on options may influence the outcome.
b. demonstrates that majority voting by itself may not reveal the outcome that society wants.
c. disproves Arrow’s impossibility theorem.
d. Both a and b are correct.
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12. The Condorcet voting paradox applies to situations in which voters
a. decide between exactly two possible outcomes.
b. decide among more than two possible outcomes.
c. as a group have transitive preferences.
d. choose the inferior candidate even though the majority preferred the better candidate.
13. The Condorcet paradox
a. proved that the Arrow impossibility theorem is wrong.
b. was proved wrong by the Arrow impossibility theorem.
c. serves as an example of the Arrow impossibility theorem.
d. pertains to voting systems, whereas Arrow’s Impossibility Theorem does not.
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14. The Condorcet voting paradox demonstrates that democratic outcomes do not always obey the
property of
a. narrowness of preferences.
b. concavity of preferences.
c. asymmetry of preferences.
d. transitivity of preferences.
15. The Condorcet paradox demonstrates that the result of a majority vote may be affected by
a. moral hazard.
b. adverse selection.
c. the order of the votes.
d. All of the above are correct.