True / False
1. The science of economics is a finished jewel, perfect and unchanging.
a.
True
b.
False
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
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
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
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
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
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
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
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
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
29. The Condorcet paradox tells us that, even though it is impossible to satisfy all of Arrow’s properties of a desirable
voting system, pairwise majority voting will always satisfy transitivity.
a.
True
b.
False
30. Borda count is a voting method often used in polls that rank sports teams.
a.
True
b.
False
31. Arrow’s impossibility theorem demonstrates the impossibility of the median voter theorem.
a.
True
b.
False
32. Arrow’s impossibility theorem shows that it is impossible to find a better voting system than pairwise majority voting.
a.
True
b.
False
33. Arrow’s impossibility theorem illustrates the difficulties in creating the perfect voting system.
a.
True
b.
False
34. Arrow’s impossibility theorem states that the majority rule fails to produce transitive preferences for society.
a.
True
b.
False
35. The unanimity property states that the ranking between any two outcomes should not depend on whether some third
outcome is available.
a.
True
b.
False
36. Majority rule will produce the outcome most preferred by the median voter.
a.
True
b.
False
37. According to the median voter theorem, majority rule will produce an outcome that is inconsistent with transitive
preferences.
a.
True
b.
False
38. An implication of the median voter theorem is that Republicans and Democrats will try to align their views with those
of the median voter.
a.
True
b.
False
39. Political leaders are always aiming for an optimal combination of efficiency and equality.
a.
True
b.
False
40. In the field of study called political economy, economists make use of insights from the field of psychology.
a.
True
b.
False
41. The field of behavioral economics applies the methods of economics to study how government works.
a.
True
b.
False
42. A “satisficer” is a person whose decision making is the same as that predicted by mainstream economic models.
a.
True
b.
False
43. Researchers have found that the systematic mistakes that people make in their decision making include a lack of
confidence in their own abilities.
a.
True
b.
False
44. Most economic models incorporate the assumption of rational behavior on the part of economic actors.
a.
True
b.
False
45. Studies of human decision-making have found that people do not give enough weight to a small number of vivid
observations.
a.
True
b.
False
46. Studies of human decision making have found that people are reluctant to change their minds.
a.
True
b.
False
47. Evidence from experiments in which real people play the ultimatum game supports the idea that people care about
fairness as well as about maximization of their personal wealth.
a.
True
b.
False
48. Based on studies of human decision making, many people care more about the fairness of a game than about their
personal winnings.
a.
True
b.
False
49. The tendency of many people to procrastinate supports the view that people are consistent over time.
a.
True
b.
False
50. Economic experiments show that people care more about winning a game than about its intrinsic fairness.
a.
True
b.
False
51. A person’s tendency to smoke a cigarette after promising himself that he will quit is an example of the behavioral
economics insight that people are inconsistent over time
a.
True
b.
False
52. When an individual purchases health insurance and knows more about her family medical history than the insurance
company, this is an example of adverse selection.
a.
True
b.
False
53. Adverse selection can only occur when there is asymmetric information.
a.
True
b.
False
54. The median voter theorem states that majority-rule political systems will produce policies that are most preferable for
the median voter.
a.
True
b.
False
55. Smoking cessation tools (e.g., nicotine gum) provide evidence that people behave in a time inconsistent manner.
a.
True
b.
False
56. People are willing to give up monetary rewards to promote fairness.
a.
True
b.
False