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Frontiers of Microeconomics 5577
Scenario 22-6
Shana owns a boutique that sells high-end women’s clothing and accessories. Katie works part-
time at the boutique and frequently is the only employee in this small store. Shana pays Katie a
wage that is higher than the market wage for this type of job. When the store is not full of
customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda
is a customer in the store who asks Katie’s opinion on the quality of some jeans she is considering
purchasing. Katie tells her the quality is great even though she’s had several other customers
return them due to flaws. Magda is another customer who is returning a necklace without
volunteering that a gem is missing.
13. Refer to Scenario 22-6. Which of the ladies, if any, is committing a moral hazard?
14. Refer to Scenario 22-6. What is the term for the type of wage Shana pays Katie?
15. Refer to Scenario 22-6. Why do you suppose Shana pays Katie a wage higher than the market
wage?
5578 Frontiers of Microeconomics
16. Refer to Scenario 22-6. What is the name for the problem Katie creates by lying about the
quality of the jeans?
17. Refer to Scenario 22-6. Suppose Shana is tired of all of the problems with the brand of jeans
she carries and decides to carry a different, higher quality brand instead. She is concerned that her
customers will not trust the quality of the new brand so she offers a 60 day money-back
guarantee. The action taken by Shana is called
18. State one reason why government intervention may not be a good solution to an asymmetric
information problem.
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19. If A is preferred to B and B is preferred to C, then we would expect A to be preferred to C. This
property is called
20. The failure of majority rule to produce transitive preferences for society is called the
5580 Frontiers of Microeconomics
Table 22-23
The town of Franklin is facing a severe budget shortage. The town administrator has proposed
four options to balance the budget: increase property taxes (taxes), cut the school arts budget
(arts), turn off half of the streetlights in the town (streetlights), reduce police patrols (police).
Exactly one of the four choices will prevail, and the choice will be made by way of pairwise
voting, with the majority determining the outcome on each vote. The preferences of the voters are
summarized in the table below.
Voter Type
Type A
Type B
Type C
Type D
% of Electorate
14
40
28
18
First choice
taxes
streetlights
arts
police
Second choice
police
arts
taxes
arts
Third choice
streetlights
taxes
police
streetlights
Fourth choice
arts
police
streetlights
taxes
21. Refer to Table 22-23. If the town administrator asks the people to first choose between cutting
the arts program and turning off half of the streetlights, and then choose between the winner of
the first election and reducing police patrols, and then choose between the winner of the second
election and increasing taxes, which option will win each vote?
22. Refer to Table 22-23. If a Borda count is used, which option will win?
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Table 22-24
The citizens of Mayville are having a severe budget shortage and are faced with eliminating
athletics from the town high school. The town administrator has determined that the town can
afford to maintain one sport. Exactly one of the three choices will prevail, and the choice will be
made by way of pairwise voting, with the majority determining the outcome on each vote. The
preferences of the voters are summarized in the table below.
Voter Type
Type A
Type B
Type C
Percent of Electorate
20
42
38
First choice
Hockey
Football
Basketball
Second choice
Football
Basketball
Hockey
Third choice
Basketball
Hockey
Football
23. Refer to Table 22-24. If the town administrator asks voters to choose first between hockey and
basketball and then between the winner of the first vote and football, which sport will win the
final vote?
24. Refer to Table 22-24. If the town administrator asks voters to choose first between basketball
and football and then between the winner of the first vote and hockey, which sport will win the
final vote?
5582 Frontiers of Microeconomics
25. Refer to Table 22-24. Explain why the Condorcet paradox applies to this voting situation.
26. Refer to Table 22-24. If the town decides to use a Borda count, which sport will win?
27. Refer to Table 22-24. Suppose the townspeople vote and choose hockey but the town
administrator overrules the vote and chooses football because the town’s football team has a
chance of winning the state championship. Which of the properties of Arrow’s impossibility
theorem is violated?
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Table 22-25
Sophie, Huan, and Santiago are lost with no map or GPS available. They come to an intersection
at which they can turn left, turn right, or continue going straight. Their preferences are
summarized in the table.
Sophie
Huan
Santiago
First choice
Left
Right
Straight
Second choice
Right
Straight
Left
Third choice
Straight
Left
Right
28. Refer to Table 22-25. The travelers decide to conduct pairwise voting with the majority
determining the outcome of each vote to decide their next move. If they first choose between
going left and going right, and then choose between the winner of the first vote and going straight,
which direction will they go?
29. Refer to Table 22-25. The travelers decide to conduct pairwise voting with the majority
determining the outcome of each vote to decide their next move. If they first choose between
going left and going straight, and then choose between the winner of the first vote and going right,
which direction will they go?
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30. Refer to Table 22-25. The travelers decide to conduct pairwise voting with the majority
determining the outcome of each vote to decide their next move. Sophie is very confident that the
travelers need to go left but she is having a difficult time convincing her friends. If she wants to
ensure that the result of the voting is “left,” how should she organize the voting?
31. Refer to Table 22-25. If the travelers decide to use a Borda count, what is the result?
32. The mathematical result showing that, under certain assumptions, there is no scheme for
aggregating individual preferences into a valid set of social preferences is called
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33. Frank is given the choice between pizza and hotdogs and chooses pizza. Then, before serving him,
his host tells Franks he could have a hamburger. Frank says he wants a hot dog. Which of the
properties of Arrow’s impossibility theorem does Frank violate?
34. The mathematical result showing that a majority rule voting system will produce the outcome
most preferred by the voter exactly in the middle of the distribution is called the
35. Suppose a community is debating how much money to spend on improvements to the high school.
The members of the community who have children advocate spending $20 million to make
improvements. The remaining 60% of the community thinks the high school is just fine and does
not want to spend anything. What will the outcome be?
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36. Herbert Simon, one of the first social scientists to work at the boundary of economics and
psychology, suggested that humans should be viewed not as rational maximers but as
37. Rather than always choosing the best course of action, humans make decisions that are merely
good enough. In other words, they are
38. The majority of Americans, when asked how many states they could name, think they could name
all fifty. However, when they are asked to do so, very few are able to come up with all fifty. This
is an example of which systematic mistake that people make?
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39. When asked to give a range for the height of the tallest mountain in North America such that
people were 90 percent confident the true number falls within it, most people gave ranges that
were
40. Your friend tells you that her dad just suffered from a stroke because his blood pressure and
cholesterol were too high. You know that your own father also has high blood pressure so you
become worried that he will also have a stroke. This is an example of which systematic mistake
that people make?
41. Harold has always driven cars made by Universal Motors. The last two Universal Motors cars
that Harold purchased have had major engine problems resulting in Harold incurring significant
cost. Consumer Reports has consistently given Universal Motors poor ratings. Still, Harold plans
to purchase another Universal Motors car next fall. Harold’s behavior is an example of which
systematic mistake that people make?
42. Ed promises his wife that he will mow the lawn on Saturday morning, but when Saturday
morning arrives he changes his mind and says he will do it on Sunday. What insight about human
behavior can be deduced from Ed’s decision?
43. The proposal to place a tax on soda is intended to address what insight about human behavior?
44. What insight into human behavior do economist learn from observing people playing the ultimatum
game?
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45. Lindsay and Tim are playing the ultimatum game starting with $100. Based on the coin toss,
Lindsay is the player to propose a division of the $100. If Lindsay acts as economic theory
assumes and Tim acts as experimental evidence shows, Tim will
46. Lindsay and Tim are playing the ultimatum game starting with $100. Based on the coin toss,
Lindsay is the player to propose a division of the $100. If Lindsay acts as economic theory
assumes, she should propose that
