Subjective Short Answer
1. When some people are better informed than others and the imbalance affects the choices they make, economists say
there is
asymmetric information.
2. The field of economics in which the tools of economics are used to understand the functioning of government is
political economy.
3. The field of economics that combines the study the psychology of human behavior and economic issues is
behavioral economics.
4. The problem that results from an agent, who is imperfectly monitored by the principal, engaging in dishonest or
otherwise undesirable behavior is called
moral hazard.
5. The problem that arises in markets in which the seller knows more about the characteristics of the good being sold than
the buyer knows is
adverse selection.
6. People with hidden health problems are more likely to buy health insurance than other people. As a result, people in
average health may observe the high prices of insurance and decide not to buy it. This is an example of
7. Pete owns a small store. He has noticed that when he is not at the store monitoring his employees, his revenue goes
down. What are two changes Pete could make to wages he pays his employees to correct this problem?
8. Maria and Jose installed a “nanny–camera” in their home so that they can view how the nanny is interacting with their
children while they are at work. What type of problem are they trying to combat?
9. Brandon is considering buying a used car but he first downloads a report from the internet that shows the history of
accidents and major repairs conducted on the car. This action is called
10. An action taken by an informed party to reveal private information to an uninformed party is called
11. A travel agency offers a money-back guarantee for vacationers taking their first cruise in case they do not enjoy the
experience. This guarantee is an example of
signaling.
Scenario 22-5
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
12. Refer to Scenario 22–5. By offering consumers these choices and allowing them to select the plan that best meets
their needs, the wireless service provider is engaging in
screening.
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?
Magda
14. Refer to Scenario 22-6. What is the term for the type of wage Shana pays Katie?
15. Refer to Scenario 22-2. Why do you suppose Shana pays Katie a wage higher than the market wage?
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.
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
transitivity.
20. The failure of majority rule to produce transitive preferences for society is called the
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?
arts
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?
Football
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?
Hockey
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?
Basketball
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?
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?
straight
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?
right
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
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?
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?
People are overconfident.
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?
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
47. Explain what is meant by “asymmetric information.” Identify and explain the two basic types of problems that arise
when there is asymmetric information.
of hidden characteristics or “lemons.”
48. Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers
or even average drivers to choose not to buy car insurance unless the law requires it.
49. Explain the Condorcet paradox. To which type of voting system does it apply?
50. Assume there are two major political parties: the Conservatives and the Liberals. What does the median voter theorem
imply about the nature of the platforms (that is, policy stances) of the Conservatives and Liberals?
51. How have insights from the field of psychology influenced the thinking of economists in recent years?
