Frontiers of Microeconomics
Multiple Choice – Section 00: Introduction
1. Which of the following is not correct?
a. Economics is a study of the choices that people make and the resulting interactions they have
with one another.
b. In areas it has already studied, economists have found perfect and unchanging answers.
c. Economists are trying to expand their understanding of human behavior and society.
d. The economics of asymmetric information, political economy, and behavioral economics are all
topics at the frontier of microeconomics.
2. Asymmetric information, political economy, and behavioral economics
a. are topics at the frontier of microeconomics.
b. are topics that economists no longer research.
c. are being studied as economists try to expand their understanding of human behavior and
society.
d. both a and c are correct.
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3. When one party is better informed about an economic situation than another party, economists
describe the problem as one of
a. asymmetric information.
b. moral hazard.
c. political economy.
d. behavioral economics
4. When markets fail, which of the following is true?
a. Government intervention can always improve outcomes.
b. Government intervention can potentially improve outcomes.
c. Government intervention can never improve outcomes.
d. Markets do not fail.
5. The field of behavioral economics builds a more subtle and complex model of economic behavior
using insights from
a. physics.
b. biology.
c. psychology.
d. anthropology.
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6. Which of the following frontier areas of economics incorporates some findings from psychology
into the study of economic issues?
a. asymmetric information
b. political economy
c. behavioral economics
d. public economics
7. Which of the following frontier fields of economics identifies that people do not always act
rationally?
a. asymmetric information
b. political economy
c. behavioral economics
d. existential economics
8. Bill would like to buy a gift for Ann to convey his love for her. Which of the following areas of
economics would most likely study this type of decision?
a. asymmetric information
b. political economy
c. behavioral economics
d. industrial organization
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Multiple Choice – Section 01: Asymmetric Information
1. In economics, a difference in access to relevant knowledge is called a(n)
a. relevancy frontier.
b. knowledge gap.
c. information asymmetry.
d. information equilibrium.
2. Informational asymmetry is a difference in
a. efficiency.
b. equality.
c. relevant knowledge.
d. signaling.
3. Information asymmetry refers to
a. the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise
undesirable behavior.
b. the tendency for the mix of unobserved attributes to become undesirable from the standpoint of
an uninformed party.
c. an action taken by an informed party to reveal private information to an uninformed party.
d. a difference in access to relevant knowledge.
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4. When asymmetric information affects a relationship between two parties, it is always the case that
a. neither party is well informed.
b. one party is better informed than the other party.
c. both parties are equally well informed.
d. the government is better informed than either of the two parties.
5. Which of the following relationships involves asymmetric information?
a. A potential employee knows more about his skills and motivations than potential employers.
b. The seller of a used car knows of mechanical problems that aren’t easy for the average buyer
to observe.
c. A real estate agent knows the lowest price a seller is willing to sell her house for, but does not
reveal it to people he shows the house.
d. All of the above are correct.
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6. Which of the following relationships involves asymmetric information?
a. A recruiter for a college football team evaluates the performance of a high-school player.
b. A loan applicant knows more about the likelihood her business will be successful than the loan
officer.
c. Someone considering buying running shoes looks at a number of online reviews by buyers.
d. All of the above are correct.
7. Which of the following relationships involves asymmetric information?
a. Patients can look up information regarding certain prescription drugs giving them the same
information as their doctors.
b. Consumer Reports allows customers of DVD players to know as much about the quality of
various players as the store salesperson.
c. Car Fax allows car buyers to obtain used-vehicle histories providing them with the same
information as the dealership salesperson.
d. The batter in a baseball game must guess whether the pitcher is going to throw a fastball,
curveball, or change-up.
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8. Which of the following is an example of asymmetric information?
a. When someone is applying for a job, the employer checks references to determine the previous
work habits of the applicant.
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 potential buyer requests
documentation of the repair history of the car.
d. All of the above are correct.
9. Which of the following is not an example of asymmetric information?
a. When someone is applying for a job, the employer checks references to determine the previous
work habits of the applicant.
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 dealer knows more about
the true condition of the car than does the potential buyer.
d. All of the above are examples of asymmetric information.
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10. A driver knows more than his auto insurer about how cautiously he drives. This is an example of
a. a hidden action.
b. a hidden characteristic.
c. adverse selection.
d. the Condorcet Paradox.
11. Frequently it is the case that: (1) A worker knows more than his employer about how much effort
he puts into his job, and (2) the seller of a used car knows more than the buyer about the car‘s
condition.
a. Neither (1) nor (2) serves as an example of asymmetric information.
b. Both (1) and (2) serve as examples of asymmetric information.
c. Neither (1) nor (2) serves as an example of a hidden action.
d. Both (1) and (2) serve as examples of hidden action.
12. Which of the following is an example of informational asymmetry?
a. A seller of a house knows more about its true condition than does a potential buyer.
b. A salesperson knows more about her efforts than does her manager.
c. A child knows more about how much time he spent playing video games while he was alone in
his bedroom than do his parents.
d. All of the above are correct.
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13. Asymmetric information
a. is not an area of current research in economics.
b. can take the form of a hidden action or a hidden characteristic.
c. explains Arrow’s impossibility theorem.
d. is uncommon in corporate management.
14. Government action in cases of asymmetric information may not be an ideal solution because
a. the private market can sometimes deal with information asymmetries on its own.
b. the government tends to have more information than private parties.
c. both (a) and (b).
d. None of the above is correct.
15. In view of the possible need for government action in markets where asymmetric information is a
problem, which of the following is a valid concern?
a. The government rarely has more information than the private parties.
b. Private markets can sometimes deal with information asymmetries on their own.
c. The government is itself an imperfect institution.
d. All of the above are valid concerns.
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16. Which of the following statements is correct?
a. Hidden actions and hidden characteristics are both associated with the moral-hazard problem.
b. Hidden actions and hidden characteristics are both associated with the adverse-selection
problem.
c. Hidden actions are associated with the moral-hazard problem, whereas hidden characteristics
are associated with the adverse-selection problem.
d. Hidden actions are associated with the adverse-selection problem, whereas hidden
characteristics are associated with the moral-hazard problem.
17. The problem that arises when one person performs a task on behalf of another person is called
a. the hidden characteristics problem.
b. the lemons problem.
c. moral hazard.
d. adverse selection.
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18. Moral hazard occurs when
a. an employer closely monitors an employee.
b. two people consider a trade with each other and one person has relevant information about
some aspect of the product’s quality that the other person lacks.
c. an employee lacks an incentive to promote the best interests of the employer, and the employer
cannot observe the actions of the employee.
d. an employee closely monitors the actions of her employer.
19. The temptation of imperfectly-monitored workers to shirk their responsibilities is
a. an example of the moral hazard problem.
b. an example of the adverse selection problem.
c. an example of screening.
d. an example of signaling.
20. Which of the following is not an example of a principal-agent relationship?
a. a soccer player and her coach
b. a man and his neighbor
c. an construction worker and his foreman
d. a driver and her insurance agent
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21. Which of the following is not an example of a principal trying to solve the moral-hazard problem?
The principal
a. calls the agent’s references.
b. installs hidden cameras to monitor the agent’s behavior.
c. pays the agent efficiency wages.
d. pays the agent a year-end bonus.
22. Which of the following would be an example of a principal trying to deal with a moral hazard
problem?
a. The parents of an infant secretly place video cameras in their house before the baby-sitter
arrives.
b. An insurance company checks police records to determine if its policyholders have received
traffic citations.
c. An employer examines his workers’ output on a daily basis.
d. All of the above are correct.
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23. When a corporation decides to include its own corporate stock as part of the compensation for its
employees, it is trying to solve the
a. adverse selection problem.
b. principal-agent problem.
c. lemons problem.
d. signaling problem.
24. Which of the following offers an explanation as to why the principal-agent problem exists for a
firm?
a. The firm cares less about profit and more about cost when there are many competitors in the
market.
b. The firm offers an employee-incentive program in which employees share in the firm’s profits.
c. The firm operates in a market with many competitors forcing the firm to pay its employees
more to keep them from switching to another firm.
d. The firm operates to maximize profit while the employees attempt to work as little as possible
to earn their paychecks.
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25. Which of the following practices would indicate that an employer is trying to overcome a moral–
hazard problem with his employees?
a. The employer pays his workers wages that are unusually high for the industry and region.
b. The employer pays his employees year-end bonuses depending to how well the business does
and his observations of the employees’ efforts.
c. The employer has voluntarily removed video cameras from the factory floor.
d. Both A and B are correct.
26. Which of the following practices are, at least in part, attempts to reduce moral hazard problems?
a. Parking ramps require customers to take a ticket with the time stamped on it from a machine in
order to gain entrance.
b. Part of the income of waiters and waitresses is based on tips.
c. Both A and B are correct.
d. None of the above are correct.
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27. Which of the following practices are, at least in part, attempts to reduce moral hazard problems?
a. Cashiers at movie theaters are required to give customers tickets.
b. An employer pays below equilibrium wages because he thinks his employees are not working
as hard as they could be.
c. Both A and B are correct.
d. None of the above are correct.
28. Which of the following is not an example of a moral hazard problem?
a. A manager stays late one evening so that her employee can leave early to attend his child’s
music recital.
b. A small child takes an extra cookie from the cookie jar when he thinks his mom isn’t watching
him closely.
c. An employee plays solitaire on her computer at 4:30 p.m. on a Friday when her boss has left
for the day.
d. A customer whose new eyeglasses come with a “60day insurance policy in case of breakage”
leaves her glasses out where her new puppy can chew on them.
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29. Which of the following is an example of moral hazard?
a. a driver is arrested for drunk driving
b. a pet-sitter being paid to walk a dog for one hour per day only walks the dog for 20 minutes per
day
c. a thief steals a car
d. All of the above are examples of moral hazard.
30. When new professors are hired, their job performance is monitored closely. If they meet their
institution‘s standards, they will eventually receive tenure. After receiving tenure, professors’ job
performance is less closely monitored, and they become difficult to fire. Tenure thus creates
a. adverse selection.
b. a Condorcet paradox.
c. a screening problem.
d. a moral hazard problem.
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31. Pedro, who knows nothing about construction, paid Benito to remodel a room in his house. Two
years later, one wall in the remodeled room crumbled because Benito used poor-quality materials.
This illustrates which economic problem?
a. adverse selection
b. screening
c. moral hazard
d. signaling
32. Rick goes to work 8 hours per day, but while he is at work he spends most of his time visiting
internet sites monitoring his fantasy football teams. This is an example of
a. the Condorcet Paradox.
b. signaling.
c. moral hazard.
d. screening.
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33. In the case of a moral-hazard problem, which of the following is not a way for the principal to
encourage the agent to act more responsibly? The principal could
a. better monitor the agent.
b. pay the agent above-equilibrium wages.
c. delay payment to the agent.
d. stop paying bonuses.
34. Studies show that during the March Madness college basketball tournament, the productivity of
the average company in the US falls considerably. This is an example of
a. the Condorcet Paradox.
b. signaling.
c. moral hazard.
d. screening.
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35. Which of the following is not a common response to the moral hazard problem that employers
face?
a. offering all employees some funding for additional education
b. paying efficiency wages
c. requiring employees to provide itemized receipts for reimbursable expenses
d. paying year-end bonuses rather than higher monthly earnings
36. You own an ice cream store and are concerned that an employee may be giving generous scoops
to friends and relatives and smaller scoops to some other customers. This is an example of
a. a moral hazard problem.
b. adverse selection.
c. behavioral economics.
d. signaling.
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37. You own an ice cream store and are concerned that an employee may be giving generous scoops
to friends and relatives and smaller scoops to some other customers. This may be reducing sales.
In this example, you are the
a. principal and the your employee is the agent.
b. agent and the your employee is the principal.
c. signaler and the your employee is the screener.
d. screener and the owner of the coffee ship is the signaler.
38. You own an ice cream store and are concerned that an employee may be giving generous scoops
to friends and relatives and smaller scoops to some other customers. This may be reducing sales.
If you want your employee to stop giving larger scoops to friends and relatives, which of the
following is not a good approach?
a. Make visits to the store at the same time each day.
b. Pay employees an above equilibrium wage.
c. Give your employees a monthly bonus based on profits.
d. None of the above are good approaches.