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Frontiers of Microeconomics 5543
39. According to behavioral economics, participants in a half-marathon are likely to have trained
a. more than they planned and run faster than they anticipated.
b. more than they planned but run slower than they anticipated.
c. less than they planned and run slower than they anticipated.
d. less than they planned but run faster than they anticipated.
40. According to behavioral economics, an employee will likely
a. work harder if she is a satisficer and if she believes a coworker is overpaid.
b. work harder if she is a satisficer, but work less hard if she believes a coworker is overpaid.
c. work harder if she believes a coworker is overpaid, but work less hard if she is a satisficer.
d. work less hard if she is a satisficer and if she believes a coworker is overpaid.
5544 Frontiers of Microeconomics
41. Which of the following is not an example of a systematic mistake that people make?
a. When asked to predict how many movie stars he can list, Ed says 200 but when put to the test
he can only name 130.
b. Susan watched a home improvement show in which a contractor installed a faulty deck which
collapsed within 2 years of installation. She is now concerned about the safety of her own
deck.
c. Kate’s manager asks her to work additional hours for which she will be paid her usual hourly
wage. Kate weighs the value of her leisure time against the additional wages before responding
to her manager.
d. Bill has purchased Skillman tools for years and has recently noticed a decline in quality and
durability of Skillman tools. Still, when he needs a new drill, he purchases a Skillman brand drill.
42. Conventional economic theory suggests that in the ultimatum game, the player proposing a split of
$50 will propose that she get $49 and that the other player get $1. By the same reasoning, if the
amount to be split is $1000, the player proposing the split will propose that she gets
a. $500 and that the other player gets $500.
b. $998 and that the other player gets $2.
c. $999 and that the other player gets $1.
d. $1000 and that the other player gets nothing.
Frontiers of Microeconomics 5545
43. Ihaveathousandfriends Social Networking firm had a remarkably profitable year. As a result, its
employees expect to receive bonus checks. Which of the following insights into human behavior
do the employees exhibit?
a. People are overconfident.
b. People care about fairness.
c. People are reluctant to change their minds.
d. People are inconsistent over time.
44. The results of the ultimatum game illustrate the fact that
a. people's behavior is often driven by an innate sense of fairness.
b. homo economicus is a good description of people's behavior.
c. self-interest brings out the most efficient economic outcome.
d. Both b and c are correct.
5546 Frontiers of Microeconomics
45. Experiments show that when real people play the ultimatum game, starting with $100,
a. Player A usually proposes giving Player B more than $50.
b. Player B usually accepts Player A's proposal if Player A proposes giving Player B $30 or $40.
c. players show themselves to be rational wealth-maximizers.
d. Both B and C are correct.
46. Evidence points to the fact that, in the real world, people appear to care about fairness
a. only when it coincides with their own self-interest.
b. only when it coincides with their determination to be consistent over time.
c. even when it does not coincide with their own self-interest.
d. not at all.
Frontiers of Microeconomics 5547
47. Evidence from experiments in which real people play the ultimatum game supports the idea that
people
a. are rational wealth-maximizers.
b. tend to be driven by fairness, without regard for their own self-interest.
c. are driven by both fairness and self-interest.
d. have trouble calculating their own levels of wealth.
48. Suppose that an economics professor selects two students, Audrey and Michael, to participate in a
classroom experiment. The professor gives Audrey twenty $1 bills. Audrey must pick an allocation
of the twenty $1 bills to offer to Michael. If Michael accepts the allocation, each student keeps his
or her portion of the money. If Michael rejects the allocation, the professor keeps the $20, and
each student receives nothing. Audrey selects $19 for herself and $1 for Michael. Based on the
studies of human decision making, which of the following statements is correct?
a. If Michael accepts the offer, he is behaving rationally.
b. If Michael rejects the offer, he may value fairness more than $1.
c. If Michael rejects the offer, Audrey made a bad choice by trying to keep $19 for herself.
d. Any of the above could be correct.
5548 Frontiers of Microeconomics
49. Anthony and Addie are playing the ultimatum game, starting with $100. The coin flip results in
Anthony being the one to propose a division of the $100. Anthony proposes that he gets $99 and
Addie gets $1. Which of the following statements is correct?
a. Because the 99-1 split isn’t fair, Anthony should not make this offer.
b. Conventional economic theory predicts that Anthony will propose a 99-1 split, just as he did.
c. Experimental evidence suggests that Addie will accept the 99-1 split because, even though it
isn’t fair, it’s better than nothing.
d. Economic theory predicts that Anthony should choose a 60-40 split to maximize his payoff.
50. Bill and Bev are playing the ultimatum game, starting with $50. A coin flip results in Bev being the
one to propose a division of the $50. If Bev acts as economic theory assumes, she should propose
that
a. she gets $30 and Bill gets $20.
b. she gets $25 and Bill gets $25.
c. she gets $24 and Bill gets $26.
d. she gets $49 and Bill gets $1.
Frontiers of Microeconomics 5549
51. Robert and Neal are playing the ultimatum game, starting with $100. Based on the coin toss,
Robert is the player to propose a division of the $100. If Robert acts as economic theory assumes
and Neal acts as experimental evidence shows, Neal will
a. accept Robert’s proposal of keeping $99 and offering Neal $1.
b. accept Robert’s proposal of keeping $60 and offering Neal $40.
c. reject Robert’s proposal of keeping $99 and offering Neal $1.
d. reject Robert’s proposal of keeping $60 and offering Neal $40.
52. The ultimatum game reveals that
a. it does not make sense to try to maximize profits.
b. people may have an innate sense of fairness that economic theory does not capture.
c. offering someone a wildly unfair outcome is usually ok since people tend to make decisions
using a "something is better than nothing" philosophy.
d. Both a and b.
5550 Frontiers of Microeconomics
53. If you are assigned the role of Player A in the Ultimatum game and you propose that player B
gets $1 and you get $99
a. you are behaving as a rational wealth-maximizer and player B is likely to accept your offer.
b. you are behaving as a rational wealth-maximizer and player B is likely to reject your offer.
c. you are not behaving as a rational wealth-maximizer and player B is likely to accept your offer.
d. you are not behaving as a rational wealth-maximizer and player B is likely to reject your offer.
54. In a dictator game, player A must divide $100 between player A and player B. In this game,
player B does not have the opportunity to reject an offer — he or she goes home with whatever
player A offers. Experiments have observed that when player A splits the $100, he or she
consistently offers over $10 to player B. Which of the following comments fits best.
a. Although player A is acting as economic theory usually assumes, he or she makes such offers
because they seem more fair.
b. Although player A is acting as economic theory usually assumes, he or she makes such offers
although they are not fair.
c. Although player A is not acting as economic theory usually assumes, he or she makes such
offers because they seem more fair.
d. Although player A is not acting as economic theory usually assumes, he or she makes such
offers because they are not fair.
Frontiers of Microeconomics 5551
55. Advocates of a tax on soda and other sugary drinks argue that such a tax
a. may encourage better nutrition.
b. will protect our future selves from the long run negative effects of consuming these drinks.
c. is needed because people tend to behave inconsistently over time.
d. All of the above are correct.
56. Mankiw argues that a primary difference between taxing products like gasoline and taxing soda
and other sugary drinks is that
a. consumption of gasoline causes negative externalities on society while consumption of soda
affects the consumer.
b. the government can generate significant revenue from the gas tax but not from a soda tax.
c. gasoline has inelastic demand but soda has elastic demand.
d. Both a and c are correct.
5552 Frontiers of Microeconomics
57. Which of the following statements is correct?
a. Based on studies of human decision making, most people are overconfident in their own
abilities.
b. Arrow’s impossibility theorem disproves the median voter theorem.
c. Romantic gifts are an example of adverse selection.
d. An efficiency wage encourages workers to shirk.
58. Which of the following statements is not correct?
a. Based on studies of human decision making, most people value fairness.
b. Based on studies of human decision making, some people’s preference are inconsistent over
time.
c. Government intervention is the best remedy for the problems caused by asymmetric
information.
d. Advertising can be an example of a company signaling the quality of its products.
Frontiers of Microeconomics 5553
59. Which of the following statements is not correct?
a. The median voter theorem explains why politicians appeal to the middle of the voting
distribution.
b. Based on studies of human decision making, most people prefer to procrastinate, both in the
immediate future and in the distant future.
c. Screening refers to an uninformed party trying to extract information from an informed party.
d. Advertising can be an example of a company signaling the quality of its products.
True/False and Short Answer
1. The science of economics is a finished jewel, perfect and unchanging.
a. True
b. False
5554 Frontiers of Microeconomics
2. In economics, a difference in access to relevant knowledge is called a behavioral asymmetry.
a. True
b. False
3. Informational asymmetry may apply to a hidden action or hidden characteristic where the informed
party may be reluctant to reveal relevant information.
a. True
b. False
4. An example of asymmetric information is when a seller of a house knows more than the buyer
about the house’s condition.
a. True
b. False
Frontiers of Microeconomics 5555
5. Economists have found that asymmetric information is not very prevalent.
a. True
b. False
6. An example of an information asymmetry is when a worker knows more than his employer about
his work effort.
a. True
b. False
7. The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and
Adelphia are an example of moral hazard.
a. True
b. False
5556 Frontiers of Microeconomics
8. The problem of moral hazard is a problem of hidden action.
a. True
b. False
9. The problem that arises when one person performs a task on behalf of another person is called the
lemons problem.
a. True
b. False
10. One of the things that employers can do to lessen the moral hazard problem involving their
employees is to pay them in advance for their work.
a. True
b. False
Frontiers of Microeconomics 5557
11. In the employer-worker relationship, the employer is regarded as the "principal" and the worker is
regarded as the "agent."
a. True
b. False
12. In a moral hazard problem, the agent is unable to perfectly monitor the principal’s behavior so the
principal applies less effort than the agent considers desirable.
a. True
b. False
13. One way that employers respond to the moral-hazard problem is by monitoring their employees.
a. True
b. False
5558 Frontiers of Microeconomics
14. The moral-hazard problem and the desire of firms to lessen that problem serve as a plausible
explanation for a firm paying above-equilibrium wages to its workers.
a. True
b. False
15. The classic example of adverse selection is the market for used cars.
a. True
b. False
16. The two major problems caused by asymmetric information are the moral-hazard problem and the
principal-agent problem.
a. True
b. False
Frontiers of Microeconomics 5559
17. Moral hazard and adverse selection are similar asymmetric information problems but moral hazard
involves hidden actions while adverse selection involves hidden characteristics.
a. True
b. False
18. Signaling is an action taken by an uninformed party to induce an informed party to reveal
information.
a. True
b. False
19. An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to
convey his love for her.
a. True
b. False
5560 Frontiers of Microeconomics
20. Screening is an action taken by an uninformed party to induce an informed party to reveal
information.
a. True
b. False
21. An example of screening is a company spending a large sum on advertising to convey the high
quality of its product.
a. True
b. False
22. Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she
prefers A to C.
a. True
b. False
Frontiers of Microeconomics 5561
23. If A is preferred to B and C is preferred to D, then B must be preferred to C to satisfy
transitivity.
a. True
b. False
24. The Condorcet voting paradox shows that outcomes based on dictatorial preferences do not
always obey the property of transitivity.
a. True
b. False
25. The Condorcet paradox implies that the order in which items are voted on under majority rule is
unimportant.
a. True
b. False
5562 Frontiers of Microeconomics
26. Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.
a. True
b. False
27. The Condorcet paradox demonstrates that the order in which people vote on choices may
influence the final outcome.
a. True
b. False
28. The Condorcet paradox shows that there is no scheme for aggregating individual preferences into
a valid set of social preferences.
a. True
b. False
