1. Moral hazard
occurs when
a. the principal monitors an agent.
b. two people might 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 agent lacks an incentive to promote the best interests
of the principal, and the principal cannot observe the actions of the agent.
d. an agent monitors the principal.
2. Carlos, who knew
nothing about construction, paid Joe to remodel a room in his house. Two years
later, the wall of the new room crumbled because Joe used poor-quality
materials. This is an example of
a. adverse selection.
b. screening.
c. moral hazard.
d. signaling.
3. Monitoring an
agent means
a. reducing asymmetric information the agent possesses.
b. obtaining information about the agent’s actions.
c. increasing the costs of moral hazard.
d. reducing the costs of adverse selection.
4. The fact that
someone with a high risk of medical problems is more likely to buy a lot of
health insurance is an example of
a. adverse selection.
b. monitoring.
c. moral hazard.
d. irrational behavior.
5. Adverse selection
occurs when
a. people are not as careful after they buy insurance.
b. owners take better care of their homes than do renters.
c. good cars are underpriced in the used-car market.
d. there is separation of ownership and control.
6. What would be the
equilibrium price of used cars if 4/5 of them were faulty and worth $1000 while
1/5 of them were good quality and worth $2000?
a. $1000
b. $1200
c. $1800
d. $2000
7. Guarantees may not
completely eliminate adverse selection problems because
a. no one guarantees a product 100%.
b. getting the firm to honor a guarantee is too much work.
c. a firm that makes low-quality products may issue
guarantees and then go out of business.
d. a firm offering guarantees subjects itself to lawsuits
concerning their obligations.
8. Which of the
following is an example of a principal-agent relationship?
a. buyer-seller.
b. client-accountant
c. parent-nanny.
d. Both B and C are correct.
9. The
principal-agent problem arises because of
a. the firm’s motive for profit maximization.
b. the salary differential between management and laborers.
c. the structure of the market in which the firm operates.
d. conflicting interests between a principal and an agent.
10. Suppose that the
Boston Red Sox hire Homer Jones as a first baseman. One day, the manager tells
Homer not to swing at a pitch so that he can get a walk and help the team win
the game. Homer, however, wants to hit a home run so that he can improve his
value on the free agent market, so he swings at the next pitch and misses the
ball. This is an example of
a. moral hazard.
b. adverse selection.
c. signaling.
d. the principal-agent problem.
11. The
principal-agent problem is more serious in large firms than in small firms
because
a. monitoring employee activity in large firms is generally
more difficult.
b. employees in large firms have less information.
c. profits increase with the size of the firm.
d. customers expect better treatment from small firms and
they usually get it.
12. The __________
voter is the voter whose views on a policy issue are in the middle of the
spectrum, with half of the other voters on one side of this voter’s view and
half on the other side.
a. average
b. mean
c. Arrow
d. median
13. If voter A would
like the government to spend $10,000 on a project, voter B prefers $5000, voter
C prefers $3000, voter D prefers $2000, and voter E prefers $0, how much
spending would a politician seeking as many votes as possible select when
running against one opponent?
a. $1000
b. $2000
c. $3000
d. $7000
14. The median-voter
theorem explains why
a. politicians take extreme stands on issues.
b. voters are attracted to political outsiders.
c. two opposing politicians tend to take opposite sides of
each issues.
d. politicians tend to take middle-of-the-road positions.
15. The Arrow
impossibility theorem states that
a. there is no tendency for a change unless some underlying
condition changes.
b. the equilibrium government policy is the one favored by
the median voter.
c. people’s votes are generally irrelevant.
d. the results of voting can be inconsistent even if all
voters make consistent choices.
Three candidates,
Fred, Betty, and Wilma, are running for office. There are three voters: Huey,
Dewey, and Louie. Huey prefers Fred over Betty and Betty over Wilma. Dewey
prefers Betty over Wilma and Wilma over Fred. Louie prefers Wilma over Fred and
Fred over Betty. Use this information to answer the next four questions.
16. If the voters
were given a choice of Fred versus Betty first, then the winner was in a second
election versus Wilma, who would win?
a. Fred
b. Betty
c. Wilma
d. There is not enough information to answer this question.
17. If the voters
were given a choice of Betty versus Wilma first, then the winner was in a
second election versus Fred, who would win?
a. Fred
b. Betty
c. Wilma
d. There is not enough information to answer this question.
18. If the voters were
given a choice of Fred versus Wilma first, then the winner was in a second
election versus Betty, who would win?
a. Fred
b. Betty
c. Wilma
d. There is not enough information to answer this question.
19. The outcome of
the previous three questions is an illustration of
a. why people shouldn’t vote.
b. a rational-expectations equilibrium.
c. the median-voter theorem.
d. the Arrow impossibility theorem.
20. Economic theory
assumes that voters, politicians, and other political participants are largely
motivated by
a. personal self-interest.
b. altruism.
c. a desire to promote the general welfare.
d. a desire to promote allocative economic efficiency.
21. When economists
assume that people are rational, they assume that
a. consumers maximize profits.
b. firms maximize revenues.
c. consumers maximize utility.
d. firms maximize output.
22. Some of the
systematic mistakes that people make include
a. they are overconfident.
b. they place too much weight on events that are more vivid
as compared to those with greater statistical probability.
c. they are often unwilling to change their minds.
d. All of the above are correct.
23. 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.
24. Betty knows that
she needs to save 20% of her annual income for retirement. However, she spends
90% of her income each year. This is an indication that Betty’s preferences are
a. irrational.
b. inconsistent over time.
c. satisficing rather than maximizing.
d. undefined.
25. Behavioral
economics
a. integrates psychological insights into economic models.
b. relies on the assumption that homo economicus describes
economic decision-making.
c. assumes that economic agents have full information about
the conditions surrounding their decisions.
d. All of the above are correct.
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