Lecture13_Practice. Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Lecture13_Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. 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. 2. 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. 3. 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 4. 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. 5. 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. 6. The 2001 Nobel prize in economics was awarded to George Akerlof, Michael Spence, and Joseph Stiglitz for their work on a. asymmetric information. b. political economy. c. behavioral economics. d. growth theory. 7. 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.

2 8. 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. 9. 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. 10. 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. 11. 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. 12. Which of the following is not an example of a principal trying to solve the moral-hazard problem? a. the principal conducts an extensive interview of the agent b. the principal installs hidden cameras to monitor the agent s behavior c. the principal pays the agent efficiency wages d. the principal pays the agent a year-end bonus 13. 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 has voluntarily removed video cameras from the factory floor. c. The employer has discontinued the practice of giving his employees' year-end bonuses. d. Both A and B are correct. 14. 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. 15. Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. In this example, your friend is the a. principal and the owner of the coffee shop is the agent. b. agent and the owner of the coffee shop is the principal. c. signaler and the owner of the coffee shop is the screener.

3 d. screener and the owner of the coffee ship is the signaler. 16. Employers can try to overcome the moral-hazard problem involving their employees by a. paying their employees more often. b. paying their employees below-equilibrium wages since the employees will likely shirk some of their responsibilities. c. better monitoring their employees' work efforts. d. requiring their employees to take a pre-employment work effort test. 17. Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. His firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his income in quarterly bonuses based on how much he sells. a. The consulting firm is trying to prevent adverse selection with its compensation strategy. b. Peter has an incentive to go golfing with his buddies rather than conducting sales meetings. c. The consulting firm is responding to the moral hazard problem with its compensation strategy. d. Peter should quit this job and take a job where he gets paid an equilibrium wage more frequently. 18. An efficiency wage a. gives an employee an incentive to shirk his duties. b. is lower than the equilibrium wage for that position and region. c. is higher than the equilibrium wage for that position and region. d. both a and b are correct. 19. Manuel buys automobile insurance from Ax-i-Dent Insurance Company. If Manuel avoids having an accident for three years, Ax-i-Dent will reduce the price he has to pay for his insurance. Nevertheless, he routinely drives fast and with reckless abandon. a. This is an adverse selection problem which should be corrected with government intervention. b. Manuel is a principal and Ax-i-Dent is an agent in this principal-agent problem. c. This is a moral hazard problem. d. There is no way for Ax-i-Dent to determine whether Manuel is a cautious or risky driver. 20. Kevin borrowed some money from Hi Interest Bank, telling the loan officer that he intended to use the money to make repairs to his home. After getting the loan, Kevin and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment. a. This is an example of adverse selection since banks have difficulty selecting their customers. b. This is a typical example of the Condorcet Paradox. c. From the given information, Kevin is the principal and his girlfriend is the agent. d. From the given information, Hi Interest Bank is the principal and Kevin is the agent. 21. Suppose you are covered under health insurance or belong to a Health Maintenance Organization (HMO), and you are insured against all or most of the costs of visits to the doctor. As a result you are likely to make greater use of medical services of all kinds. This tendency of people with insurance to change their behavior in a way that leads to more claims against the insurance company is called a. adverse selection. b. moral hazard. c. screening

4 d. signaling. 22. Studies show that during the March Madness college basketball tournament, the productivity of average company in the US falls considerably. This is an example of a. the Condorcet Paradox. b. signaling. c. moral hazard. d. screening. 23. In corporations, which of the following are principals but not agents? a. shareholders b. the board of directors c. managers d. workers 24. Insurance companies charge annual premiums to collect revenue, which they then use to pay customers who file claims for damages they incur. Because of the moral hazard problem insurance companies separate customers into groups. Group 1: customers who file few claims & Group 2: customers that file a lot of claims. After creating these groups, what happens to the average annual premium within a group? a. Group 1: average annual premium increases Group 2: average annual premium increases b. Group 1: average annual premium decreases Group 2: average annual premium increases c. Group 1: average annual premium increases Group 2: average annual premium decreases d. Group 1: average annual premium decreases Group 2: average annual premium decreases 25. Which of the following is a characteristic of a corporation but not of a small family-owned business? a. The firm buys inputs in markets for the factors of production. b. The firm sells output in markets for goods and services. c. The firm is guided in its decisions by the objective of profit maximization. d. The firm faces a principal-agent problem created by the separation of ownership and control. 26. Adverse selection is a. the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior. b. an action taken by an uninformed party to induce an informed party to reveal information. c. the failure of majority voting to produce transitive preferences for society. d. the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party. 27. Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of a. moral hazard. b. screening. c. adverse selection. d. the principal-agent problem. 28. When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is engaging in

5 a. both moral hazard and adverse selection. b. neither moral hazard nor adverse selection. c. moral hazard, but not adverse selection. d. adverse selection, but not moral hazard. 29. Which of the following is an example of an adverse selection problem? a. A customer purchases four apples, two of which are bruised. b. A card shop puts its Halloween merchandise on sale on November 1st. c. A young worker is fired after she is late for work three times in one month. d. A man whose father had a heart attack wants to increase his life insurance coverage. 30. When the buyer knows less than the seller about the characteristics of the good being sold, there is a. a principal-agent problem. b. a moral hazard problem. c. an adverse selection problem. d. a signaling problem. 31. "Signaling" refers to actions by an informed party for the sole purpose of a. telling another party that the signaler has information to reveal, without actually revealing that information. b. conveying false information. c. confusing another party. d. credibly revealing private information. 32. Effective signals a. convey useful information from informed parties to uninformed parties. b. impose little or no cost on the signaler. c. cannot be conveyed accurately when there is an information asymmetry. d. can be used by employers to alleviate the moral hazard problem in the workplace. 33. Which of the following is not an example of signaling? a. screening b. advertising c. getting an education d. gift giving 34. A brand of wine is priced at only $5 per bottle, far below the market price of most high quality wines. Before any reputation exists for the wine, consumers buy very little of this inexpensive wine because they interpret the low price to mean that the wine is of poor quality. The company decides to change the label on the wine to show that it has won awards for quality. This label change is an example of a. signaling. b. screening. c. selecting. d. All of the above are correct. 35. A home has been on the market for an extended amount of time without much interest from buyers. The sellers decide to purchase and include a home warranty insuring against major defects with the home. The warranty is an example of a(n) a. signal. b. screen. c. moral hazard. d. adverse selection.

6 36. A firm with a very good product a. has a higher cost of signaling (advertising) than does a firm with an inferior product. b. has more to gain by signaling (advertising) than does a firm with an inferior product. c. does not need to signal (advertise) because the product s quality speaks for itself. d. will signal (advertise) effectively if signaling is free. 37. Budweiser typically purchases several 30 second advertising spots during the Super Bowl at a very high cost. Miller Brewing Co. typically does not advertise during the Super Bowl. Which of the following is correct? a. Budweiser chooses to signal during the Super Bowl, while Miller Brewing Co. does not. b. Budweiser chooses to screen during the Super Bowl, while Miller Brewing Co. does not. c. Miller does not advertise during the Super Bowl because it has a superior product and the audience already knows that. d. Budweiser s advertisements during the Super Bowl are entertaining but convey no information about the quality of its products. 38. Which of the following is an example of signaling? a. Graduates of highly-respected universities highlight that fact on their resumes. b. Magazine advertisements include the phrase "as seen on TV." c. Advertisements for universities include the phrase "fully accredited." d. All of the above are correct. 39. Screening occurs when a. an informed party acts to reveal his private information. b. an informed party acts to conceal his private information. c. an uninformed party acts to induce the informed party to reveal private information. d. one informed party acts to prevent another informed party from revealing private information. 40. An insurance company that writes automobile policies tries to separate safe drivers from risky drivers by offering policies that feature different deductibles and different premiums. This practice is best described as an example of a. screening. b. behavioral economics. c. the Condorcet Paradox. d. signaling. 41. A safe driver would likely choose an auto insurance policy with a a. low premium and a high deductible. b. high premium and a high deductible. c. high premium and a low deductible. d. high premium and no deductible. 42. On car insurance policies, Countrywide Insurance Company offers drivers an option: Policy 1 features a deductible of $1,000, and it requires a driver to pay an annual premium of $500. Policy 2 features a deductible of $250, and it requires a driver to pay an annual premium of $1,000. a. In offering these two policies, Countrywide is engaging in illegal price discrimination. b. In offering these two policies, Countrywide is screening drivers. c. Policy 1 is more of a burden for safe drivers than it is for risky drivers. d. In offering these two policies, Countrywide is signaling their quality to drivers. 43. The field of political economy a. casts aside most of the standard methods of economic analysis. b. is also referred to as the field of public choice.

7 c. is also referred to as the field of macroeconomics. d. produces the conclusion that democratic principles rarely lead to desirable economic outcomes. 44. The field of political economy applies the methods of a. psychology to study how the economy works. b. political science to study how the economy works c. economics to study how government works. d. psychology to study how government works. 45. Suppose that residents of a town are asked to vote on the best way to improve the safety of an intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. When the mayor asks the residents to choose between a stoplight and a 4-way stop, the residents choose a 4-way stop. Then, when the mayor asks them to choose between a 4-way stop and a 2-way stop, they choose a 2-way stop. However, if the mayor firsts asks the residents to choose between a 4-way stop and a 2-way stop, they choose a 2-way stop. Then, when the mayor asks the residents to choose between a 2-way stop and a stoplight, they choose a stoplight. What does this example illustrate? a. Arrow s impossibility theorem b. the Condorcet paradox c. a Borda count d. the median voter theorem 46. Suppose that residents of a town are asked to vote on the best day to improve the safety of an intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. The mayor asks the residents to assign 3 points to their first choice, 2 points to their second choice, and 1 point to their last choice. The intersection will be controlled by the method that receives the most points. This voting scheme is called a. Arrow s impossibility theorem. b. the Condorcet paradox. c. a Borda count. d. the median voter theorem. 47. Which of the following sets of preferences satisfies the property of transitivity? a. Cookies are preferred to brownies. Brownies are preferred to ice cream. Ice cream is preferred to cookies. b. Cookies are preferred to pie. Brownies are preferred to pie. Pie is preferred to cookies. c. Cookies are preferred to ice cream. Ice cream is preferred to brownies. Cookies are preferred to brownies. d. Cookies are preferred to pie. Ice cream is preferred to cookies. Pie is preferred to ice cream. Table 22-1 Three friends -- Tricia, Sarah, and Katie -- are deciding where to go together for vacation. They all agree that they should go to one of three places: Ireland, Italy, or Greece. They also agree that they will have two pairwise votes to determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the table below. Tricia Sarah Katie First choice Ireland Italy Greece Second choice Italy Greece Ireland Third choice Greece Ireland Italy

8 48. Refer to Table If the first vote pits Italy against Greece and the second vote pits Ireland against the winner of the first vote, then the outcome is as follows: a. Italy wins the first vote and Ireland wins the second vote, so they go to Ireland. b. Italy wins the first vote and Italy wins the second vote, so they go to Italy. c. Greece wins the first vote and Greece wins the second vote, so they go to Greece. d. Greece wins the first vote and Ireland wins the second vote, so they go to Ireland. 49. Refer to Table Depending on the order of the pairwise voting, a. the friends could go to either Ireland, Greece, or Italy. b. the friends could go to either Ireland or Greece, but they will not go to Italy. c. the friends could go to either Greece or Italy, but they will not go to Ireland. d. the friends could go to either Ireland or Italy, but they will not go to Greece. 50. Refer to Table If the friends change their minds and decide to choose a vacation destination using a Borda count, then a. the friends will go to Ireland. b. the friends will go to Italy. c. the friends will go to Greece. d. A Borda count will not result in a single winner in this case. 51. Which of the following is not correct? a. Pairwise voting never produces transitive preferences. b. The order of pairwise voting can affect the result. c. Majority voting by itself does not tell us what outcome a society really wants. d. No voting system can satisfy all of the following properties: unanimity, transitivity, independence of irrelevant alternatives, and no dictators. 52. Recent developments in political economy a. render much of the traditional field of political science obsolete. b. render much of the traditional field of economics obsolete. c. illustrate the resolute nature of democracy. d. point to the fact that government is a less-than-perfect institution. 53. The Condorcet paradox a. proved that the Arrow impossibility theorem is wrong. b. was proved wrong by the Arrow impossibility theorem. c. serves as an example of the Arrow impossibility theorem. d. pertains to voting systems, whereas Arrow's Impossibility Theorem does not. Table 22-2 Three longtime friends-jack, Ryan, and Colin-are deciding how they will spend their Sunday afternoon. They all agree that they should do one of three things: go to a movie, go to the zoo, or go to a museum. They also agree that they will have two pairwise votes to determine how to spend their evening, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the table below. Jack Ryan Colin First choice Baseball Game Zoo Movie Second choice Zoo Movie Baseball Game Third choice Movie Baseball Game Zoo

9 54. Refer to Table If (1) the first vote pits "baseball game" against "zoo," and (2) the second vote pits "movie" against the winner of the first vote, then a. "Baseball game" wins the first vote and "baseball game" wins the second vote, so they go to a baseball game. b. "Baseball game" wins the first vote and "movie" wins the second vote, so they go to a movie. c. "Zoo" wins the first vote and "zoo" wins the second vote, so they go to the zoo. d. "Zoo" wins the first vote and "movie" wins the second vote, so they go to a movie. 55. Refer to Table Which of the following statements is correct? a. In a pairwise election, "movie" beats "zoo." b. In a pairwise election, "zoo" beats "baseball game." c. In a pairwise election, "baseball game" beats "movie." d. None of the above is correct. 56. Refer to Table Which of the following statements is correct? a. In a pairwise election, "zoo" beats "movie." b. In a pairwise election, "baseball game" beats "zoo." c. In a pairwise election, "movie" beats "baseball game." d. All of the above are correct. 57. Refer to Table If Jack, Ryan, and Colin use a Borda count, rather than pairwise majority voting, to decide how to spend their afternoon, then they will go to a. a movie. b. the zoo. c. a baseball game. d. None of the above is correct; a Borda count fails to produce a winner in this instance. Table 22-3 The citizens of Anytown will decide whether to build a new library, a new community center, or a new ice rink. 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 1 Type 2 Type 3 Percent of Electorate First choice Library Community Center Ice Rink Second choice Community Center Ice Rink Library Third choice Ice Rink Library Community Center 58. Refer to Table If (1) the first vote pits "library" against "ice rink," and (2) the second vote pits "community center" against the winner of the first vote, then the outcome is as follows: a. "Library" wins the first vote and "library" wins the second vote, so they build a library. b. "Library" wins the first vote and "community center" wins the second vote, so they build a community center. c. "Ice rink" wins the first vote and "ice rink" wins the second vote, so they build an ice rink. d. "Ice rink" wins the first vote and "community center" wins the second vote, so they build a community center.

10 59. Refer to Table Which of the following statements is correct regarding the Condorcet paradox and the results of pairwise voting in Anytown? a. The paradox implies that pairwise voting never produces transitive preferences, and so the voting in Anytown fails to produce transitive preferences. b. The paradox implies that pairwise voting sometimes (but not always) produces transitive preferences, and the voting in Anytown does produce transitive preferences. c. The paradox implies that pairwise voting sometimes (but not always) fails to produce transitive preferences, and the voting in Anytown fails to produce transitive preferences. d. The paradox does not apply to the case at hand, because the preferences of Type 3 voters are not individually transitive. 60. Refer to Table If the citizens of Anytown use an instant runoff election., then they will build a new a. library. b. community center. c. ice rink. d. None of the above is correct; an instant runoff fails to produce a winner in this instance. 61. As an alternative to pairwise majority voting, each voter could be asked to rank the possible outcomes, giving 1 point to her lowest choice, 2 points to her second-lowest choice, 3 points to her third-lowest choice, and so on. This voting method is called a(n) a. median vote. b. pairwise minority vote. c. Borda count. d. Arrow count. 62. In his 1951 book, Social Choice and Individual Values, Kenneth Arrow defined a "perfect" voting system. That system includes which of the following features? a. unanimity b. transitivity c. absence of a dictator d. All of the above are correct. 63. In his 1951 book, Social Choice and Individual Values, Kenneth Arrow used the term "unanimity" to mean a. A beats B only if everyone prefers A to B. b. if everyone prefers A to B, then A beats B. c. if A beats B and B beats C, then A must best C. d. everyone who is eligible to vote must vote; otherwise, the outcome is invalid. 64. In his 1951 book, Social Choice and Individual Values, Kenneth Arrow used the term "transitivity" to mean a. A beats B only if everyone prefers A to B. b. if everyone prefers A to B, then A beats B. c. if A beats B and B beats C, then A must beat C. d. everyone who is eligible to vote must vote; otherwise, the outcome is invalid. 65. In a vote between options A, B, and C, option C wins. When option B is eliminated and a vote is taken between option A and option C, option A wins. The voting system used fails to satisfy which of Arrow s properties of a desirable voting system? a. Unanimity b. Transitivity c. Independence of irrelevant alternatives d. No dictators

11 66. Majority rule will produce the outcome most preferred by the median voter, as demonstrated by the a. Arrow impossibility theorem. b. Condorcet paradox. c. pairwise voting proposition. d. median voter theorem. 67. Assume there are nine voters in a certain small town and let x = the preferred number of dollars spent per person per month on garbage collection. For Voters 1, 2, and 3, x = $10; for Voter 4, x = $15; for Voter 5, x = $18; and for Voters 6, 7, 8 and 9, x = $20. The median voter is a. Voter 3. b. Voter 4. c. Voter 5. d. Voter Assume there are nine voters in a certain small town and let x = the preferred number of dollars spent per person per month on garbage collection. For Voters 1, 2, and 3, x = $10; for Voter 4, x = $15; for Voter 5, x = $18; and for Voters 6, 7, 8 and 9, x = $20. Based on the results of the vote, the dollars spent per person per month on garbage collection will be a. $10. b. $15. c. $18 d. $ The median voter a. is the voter exactly in the middle of the distribution. b. is the voter whose preferred outcome beats any other proposal in a two-way race. c. always has more than half the votes on his side in a two-way race. d. All of the above are correct. 70. If the median voter theorem holds, a. a Borda count will violate the principle of transitivity. b. the Condorcet paradox also holds. c. minority views will not receive much consideration. d. All of the above are correct. 71. According to the median voter theorem, majority rule will a. always produce an inconclusive outcome. b. produce the outcome least preferred by the median voter. c. produce the outcome most preferred by the median voter. d. produce an outcome that is inconsistent with transitive preferences. 72. Arrow's impossibility theorem is "disturbing" in the sense that it proves that a. no voting system is perfect. b. only a dictator can produce a desirable social outcome. c. the preferences of the wealthy should be given more weight than the preferences of the poor. d. the centuries-old Condorcet paradox was not a paradox after all. 73. The median voter's preferred outcome is the same as the a. average preferred outcome. b. outcome preferred by the greatest number of voters. c. outcome produced by majority rule. d. outcome preferred by Arrow s perfect voter.

12 Scenario 22-1 At issue in a particular city vote is how much to spend, per person, on road repair next year. Among the 10,000 voters, 1,500 prefer to spend $300 per person, but no more; 2,800 prefer to spend $450 per person, but no more; 3,500 prefer to spend $800 per person, but no more; and 2,200 prefer to spend $1500 per person, but no more. 74. Refer to Scenario The median voter is one who prefers to spend a. $300. b. $450. c. $800. d. $ Refer to Scenario If there is a vote on whether to spend $800 per person or $1100 per person, the median voter will vote to spend a. $800 per person and the voting outcome will be $800 per person. b. $800 per person and the voting outcome will be $1100 per person. c. $1100 per person and the voting outcome will be $800 per person. d. $1100 per person and the voting outcome will be $1100 per person. 76. When Republicans and Democrats offer similar platforms in an election campaign, a likely explanation is the a. Arrow impossibility theorem. b. Condorcet paradox. c. median voter theorem. d. fact that politicians are more interested in the national interest than their own self-interest. 77. In American politics, we often observe that during a campaign, the Democratic and Republican positions on many issues are similar, which illustrates a. Arrow s impossibility theorem. b. the Condorcet paradox. c. a Borda count. d. the median voter theorem. 78. An implication of the median voter theorem is that a. minority views and majority views are given equal weight. b. platforms of the major political parties will not differ greatly. c. the logic of democracy is fundamentally flawed. d. behavioral economics plays a significant role in voting outcomes. Table 22-4 Five voters must choose from among four options: A, B, C, or D. Each voter s preferences are summarized in the table below. Options higher in the table are more preferred by the voter. Preferences Voter 1 Voter 2 Voter 3 Voter 4 Voter 5 1st Choice D C B C A 2nd Choice A B A D D 3rd Choice B A D B C 4th Choice C D C A B

13 79. Refer to Table If the vote were conducted according to a modified Borda count system where each person's first choice receives 10 points, second choice 5 points, third choice 3 points and fourth choice 1 point, the result would be that a. A would win. b. B would win. c. C would win. d. D would win. 80. Refer to Table Which pairwise voting scheme would result in outcome B? a. First, choose between A and B. Second, voters choose between the winner of the first vote and C. Third, voters choose between the winner of the second vote and D. b. First, choose between B and C. Second, voters choose between the winner of the first vote and A. Third, voters choose between the winner of the second vote and D. c. First, choose between B and D. Second, voters choose between the winner of the first vote and C. Third, voters choose between the winner of the second vote and A. d. First, choose between C and D. Second, voters choose between the winner of the first vote and A. Third, voters choose between the winner of the second vote and B. 81. Refer to Table Which pairwise voting scheme would result in outcome A? a. First, choose between A and B. Second, voters choose between the winner of the first vote and C. Third, voters choose between the winner of the second vote and D. b. First, choose between A and C. Second, voters choose between the winner of the first vote and B. Third, voters choose between the winner of the second vote and D. c. First, choose between B and D. Second, voters choose between the winner of the first vote and C. Third, voters choose between the winner of the second vote and A. d. First, choose between C and D. Second, voters choose between the winner of the first vote and A. Third, voters choose between the winner of the second vote and B. Table 22-5 The 500 voters of Appleton are deciding by majority rule how much to spend on a new library. Number of voters who most prefer this amount of spending $0 65 $1 million 60 $2 million 100 $3 million 75 $4 million Refer to Table The median voter prefers to spend a. $2 million. b. $2.57 million. c. $3 million. d. $4 million. Table 22-6 Voter Type Type 1 Type 2 Type 3 Percent of electorate

14 First choice C B A Second choice B A B Third choice A C C 83. Refer to Table The table shows the preferences of three types of voters over three possible outcomes: A, B, and C. The table also shows the percentage of voters of each type. Based on this information, which voter type is the median voter? a. Type 1 b. Type 2 c. Type 3 d. The median voter cannot be determined without knowing the pair of outcomes from which the voters will be choosing. 84. Refer to Table The table shows the preferences for three types of voters over three possible outcomes: A, B, and C. The table also shows the percentage of voters of each type. Based on this information, which of the following statements is true? a. In a vote between B and C, C loses since only the Type 1 voters prefer C to B. b. In a vote between A and B, B wins getting 85% of the total vote. c. In a vote between A and C, C loses getting only 45% of the total vote. d. Both a and b. Table 22-7 Number of People Preferred Budget 4 $20 7 $30 10 $ 0 13 $40 15 $10 26 $ Refer to Table The table shows the most preferred budget of 75 voters. In an election, each voter will select the budget closest to his or her most preferred budget. Using this information, what is the most preferred budget of the median voter? a. $10 b. $20 c. $30 d. $40 Table 22-8 Voter Type Type 1 Type 2 Type 3 Type 4 Percent of electorate First choice D C A B Second choice C A D D Third choice B D B A Fourth choice A B C C

15 86. Refer to Table The table shows the preferences of four types of voters over four possible outcomes: A, B, C, D. In addition, the table shows the percentage of voters of each type. Given pairwise voting in which voters choose first between A and B, then between the winner of the first vote and C, and finally between the winner of the second vote and D, which outcome would win? a. A b. B c. C d. D 87. Refer to Table The table shows the preferences of four types of voters over four possible outcomes: A, B, C, and D. In addition, the table shows the percentage of voters of each type. If the election is an instant runoff, the winner will be a. A. b. B. c. C. d. D. Table 22-9 Voter Type Type 1 Type 2 Type 3 # Voters First choice C B A Second choice B A C Third choice A C B 88. Refer to Table The table shows the preferences of 100 voters over three possible outcomes: A, B, and C. If a Borda count election were held among these voters, giving three points to each voter's first choice, two points to the second choice, and one point to the last choice, which outcome would win the election? a. Outcome A b. Outcome B c. Outcome C d. Either outcome A or outcome C since these have the same total score. 89. Refer to Table The table shows the preferences of 100 voters over three possible outcomes: A, B, and C. Which of the following statements is true? a. In pairwise majority voting, B is preferred to A, A is preferred to C, and B is preferred to C. b. In pairwise majority voting, C is preferred to B, B is preferred to A, and C is preferred to A. c. In pairwise majority voting, B is preferred to A, A is preferred to C, and C is preferred to B. d. In pairwise majority voting, A is preferred to C, C is preferred to B, and A is preferred to B. 90. Refer to Table The table shows the preferences of 100 voters over three possible outcomes: A, B, and C. In pairwise majority voting in which voters choose first between A and B and then choose between the winner of the first vote and C, a. outcome A will win the election. b. outcome B will win the election. c. outcome C will win the election.

16 d. the outcome of the election cannot be determined with the given information. 91. Which of the following would violate transitivity? a. Vanessa likes A more than B, C more than B, and C more than A. b. Jay likes C more than B, A more than B, B more than D, and C more than D. c. Maddy likes C more than A, B more than D, A more than B, and D more than C. d. Victoria likes C more than B, C more than D, and B more than D. 92. Suppose that there are 175 voters in an election and that 80 of them prefer a $100 budget while the remainder prefer a $150 budget. Which of the following statements is true? a. The Condorcet Paradox predicts that the $100 budget will win even though fewer people prefer that budget. b. The median voter theorem predicts that the winning budget will be $125, the median of the preferences of the two types of voters. c. Arrow's impossibility theorem says that the winning budget cannot be determined in this election since there is no unanimity. d. None of the above. 93. What is the name of the mathematical result showing that no voting system can simultaneously satisfy the properties of unanimity, transitivity, independence of irrelevant alternatives, and no dictators? a. The fundamental theorem of behavioral economics b. Arrow's impossibility theorem c. The fundamental theorem of voting d. The median voter theorem 94. One implication of the Condorcet paradox is a. that the order in which things are voted on can affect the result. b. that the order in which things are voted on is irrelevant. c. that you do not want to be in charge of arranging which items are voted upon first. d. that when there are only two items being voted on the order matters. Scenario 22-3 Three candidates, Frank, Brian, and Wanda, are running for office. There are three voters in the upcoming election: Henry, Diane, and Linda. Henry prefers Brian over Frank and Frank over Wanda. Diane prefers Wanda over Brian and Brian over Frank. Linda prefers Frank over Brian and Brian over Wanda. 95. Refer to Scenario Which of the following statements is correct regarding the Condorcet paradox and the results of pairwise voting by Henry, Diane, and Linda? a. The paradox implies that pairwise voting never produces transitive preferences, and so the voting by Henry, Diane, and Linda fails to produce transitive preferences. b. The paradox implies that pairwise voting sometimes (but not always) produces transitive preferences, and the voting by Henry, Diane, and Linda does produce transitive preferences. c. The paradox implies that pairwise voting sometimes (but not always) fails to produce transitive preferences, and the voting by Henry, Diane, and Linda fails to produce transitive preferences. d. The paradox does not apply to the case at hand, because Henry's preferences are not individually transitive. 96. Refer to Scenario If the vote were conducted according to a Borda count system where each person's first choice receives 3 points, second choice 2 points, and third choice 1 point, the election winner would be

17 a. Frank. b. Brian. c. Wanda. d. a tie between Frank and Wanda. Scenario 22-4 Suppose that residents of a town are asked to vote on the best way to improve the safety of an intersection. The three choices are: a stoplight, a 4-way stop, and a 2-way stop. The voters are divided into three groups based on their preferences. Voter Type Type 1 Type 2 Type 3 Percent of Electorate st Choice 4-way stop stoplight 2-way stop 2nd Choice 2-way stop 4-way stop 4-way stop 3rd Choice stoplight 2-way stop stoplight 97. Refer to Scenario If the first vote pits a stoplight against a 4-way stop and the second vote pits a 2-way stop against the winner of the first vote, then the outcome is as follows: a. 4-way stop wins the first vote and 4-way stop wins the second vote, so the town installs a 4-way stop. b. 4-way stop wins the first vote and 2-way stop wins the second vote, so the town installs a 2-way stop. c. Stoplight wins the first vote and stoplight wins the second vote, so the town installs a stoplight. d. Stoplight wins the first vote and 2-way stop wins the second vote, so the town installs a 2-way stop. 98. Refer to Scenario If the first vote pits a 2-way stop against a stoplight and the second vote pits a 4-way stop against the winner of the first vote, then the outcome is as follows: a. 2-way stop wins the first vote and 2-way stop wins the second vote, so the town installs a 2-way stop. b. 2-way stop wins the first vote and 4-way stop wins the second vote, so the town installs a 4-way stop. c. Stoplight wins the first vote and stoplight wins the second vote, so the town installs a stoplight. d. Stoplight wins the first vote and 4-way stop wins the second vote, so the town installs a 4-way stop. 99. Refer to Scenario If the vote were conducted according to a Borda count system where each person's first choice receives 3 points, second choice 2 points, and third choice 1 point, the result would be a. a 2-way stop. b. a 4-way stop. c. a stoplight d. a tie between a 2-way stop and a stoplight. Table Three family members -- Seamus, Maeve, and Siobhan -- are deciding what type of movie to attend. The three choices are an action adventure, comedy, or horror. The first, second, and third choices for each person are as indicated in the table below.

18 Seamus Maeve Siobhan First Choice Comedy Action Horror Second Choice Horror Horror Comedy Third Choice Action Comedy Action 100. Refer to Table Suppose the three decide to make the decision based on pairwise majority voting. If they first choose between Action and Horror and then choose between the winner of the first vote and Comedy, which movie alternative will win? a. Action b. Comedy c. Horror d. There is no clear winner - Action and Horror will tie. Table The following table shows the number of voters preferring various amounts of spending on a new school. Number of Voters Preferred Spending (millions) 12 $ $ $ $1.5 6 $2.0 4 $2.5 1 $ Refer to Table What is the preferred spending amount of the median voter? a. $0.5 b. $1.0 c. $1.5 d. $2.0 Table The fortunate residents of Anytown have a budget surplus. The mayor decided that it is only fair to have the residents vote on what to do with the surplus. The mayor has narrowed the options down to three possible projects: a playground, a library, or a swimming pool. The voters fall into three categories and have preferences as illustrated in the table. Voter Types Residents with Young Children Residents with Older Children Residents with No Children Percent of Electorate First Choice Playground Swimming Pool Library Second Choice Library Playground Swimming Pool Third Choice Swimming Pool Library Playground

19 102. Refer to Table If the mayor asks the residents to choose between the playground and the library using pairwise voting, a. the playground wins by 45%. b. the playground wins by 60%. c. the library wins by 20%. d. the library wins by 80%. Table The Johnson family is planning a vacation and, though Mr. and Mrs. Johnson will be paying for the trip, they have decided to use a democratic voting process to choose their destination. The family members preferences are reflected in the table below. Mr. Jack Mrs. Jill Janie Julie Justin Johnson Johnson 1st choice Grand Canyon Opryland Opryland Disneyland Sea World 2nd choice Sea World Grand Canyon Disneyland Grand Canyon Disneyland 3rd choice Opryland Disneyland Grand Canyon Sea World Grand Canyon 4th choice Disneyland Sea World Sea World Opryland Opryland 103. Refer to Table Mr. Johnson recommends using a vote by majority rule. If he wants to ensure that his 1st choice becomes the family s winning destination, he should propose a. first choosing between Opryland and the Grand Canyon, then choosing between the winner of the first vote and Sea World, and finally choosing between the winner of the second vote and Disneyland. b. first choosing between Disneyland and Sea World, then choosing between the winner of the first vote and the Grand Canyon and finally choosing between the winner of the second vote and the Opryland. c. first choosing between Sea World and the Grand Canyon, then choosing between the winner of the first vote and Disneyland, and finally choosing between the winner of the second vote and Opryland. d. first choosing between Opryland and Disneyland, then choosing between the winner of the first vote and the Grand Canyon, and finally choosing between the winner of the second vote and Sea World Refer to Table If Mr. Johnson wants to ensure that his 1st choice becomes the family s winning destination, he should propose a. using a vote by majority rule and first choosing between Opryland and the Grand Canyon, then choosing between the winner of the first vote and Sea World, and finally choosing between the winner of the second vote and Disneyland. b. using a vote by majority rule and first choosing between Disneyland and Sea World, then choosing between the winner of the first vote and the Grand Canyon and finally choosing between the winner of the second vote and the Opryland. c. using a vote by majority rule and first choosing between Sea World and the Grand Canyon, then choosing between the winner of the first vote and Disneyland, and finally choosing between the winner of the second vote and Opryland. d. using a Borda count Refer to Table If the family uses a Borda count to make their decision, what is their vacation destination? a. Grand Canyon

20 b. Sea World c. Opryland d. Disneyland Table The town of Portsmouth is considering a renovation to the high school. The voters in Portsmouth have different preferences on the budget for the renovation as displayed below. Preferred Budget Number of Voters $0 million 12,000 $4 million 20,000 $8 million 6,000 $12 million 8,000 $16 million 30,000 $20 million 4, Refer to Table If there is a vote between a budget of $12 million and $16 million, the median voter will vote to spend a. $12 million and the voting outcome will be $12 million. b. $12 million and the voting outcome will be $16 million. c. $16 million and the voting outcome will be $12 million.. d. $16 million and the voting outcome will be $16 million Economic policy that appears to be ideal in an economics textbook may not be the final policy that is approved by elected politicians because a. sometimes a politician s self interest may conflict with the national interest. b. economics professors have a notoriously low voting rate. c. only policies advocated by the President s Council of Economic Advisors receive enough national attention to interest politicians. d. Economists cannot explain why politicians do not implement the ideas from their textbooks. Table Citizens in a small town are deciding how best to develop a plot of land at the center of town. They have narrowed the options to: a park, town hall, gas station, restaurant. The voters preferences are shown in the table below. Voter First Choice Second Choice Third Choice Fourth Choice 1 park restaurant gas station town hall 2 town hall restaurant gas station park 3 park restaurant gas station town hall 4 gas station town hall restaurant park 5 town hall restaurant gas station park 6 restaurant gas station park town hall 7 park restaurant gas station town hall 8 town hall restaurant gas station park 9 restaurant gas station park town hall

21 10 park restaurant gas station town hall 11 park restaurant gas station town hall 12 gas station restaurant town hall park 13 town hall restaurant gas station park 14 gas station town hall restaurant park 108. Refer to Table If the election is conducted by instant runoff, the first votes to be reassigned will be the first choice votes for a. restaurant, which will be reassigned as votes for gas station. b. restaurant, which will be reassigned as votes for park. c. gas station, which will be reassigned as votes for town hall. d. gas station, which will be reassigned as two votes for town hall and one vote for restaurant Refer to Table If the election is conducted by instant runoff, the final two options will be a. park and restaurant. b. restaurant and town hall. c. town hall and gas station. d. gas station and park Refer to Table If the election is conducted by instant runoff, the election winner will be a. park. b. restaurant. c. town hall. d. gas station Economists use basic psychological insights in the field of study called a. psychological economics. b. transitional economics. c. behavioral economics. d. social economics Most economic models a. incorporate the assumption of rational behavior on the part of economic actors. b. incorporate the notion that people are usually reluctant to change their minds. c. are meant to precisely duplicate reality. d. assume that people often make sub-optimal choices 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 Conventional economic theory assumes that people a. care a great deal about fairness. b. are inconsistent over time in their decisionmaking. c. are rational. d. are satisficers A person who makes decisions that are "merely good enough" is called a(n) a. optimizer.

22 b. rational person. c. satisficer. d. maxi-minimizer Which of the following is an example of satisficing behavior? a. You continue studying for your economics exam until you believe you ll get a perfect score. b. You spend time looking over the lettuce at the grocery store in order to make sure you get the best head of lettuce. c. You briefly clean your room because that's all it takes to get it "clean enough." d. You carefully plan your day in order to get "the most out of life." 117. Which of the following students exhibits satisficing behavior? a. Mick studies his economics notes every night so that he can be sure to earn a perfect score on his exam. b. Bill studies his economics notes for a few hours the night before the test because he will be satisfied with a C on his exam. c. Marguerite studies extensively as she will only be satisfied with a very high score. d. None of these students exhibits satisficing behavior Riley travels a great deal, and over the past several years he has read dozens of reviews of hotel chains, all of which rave about the clean rooms and great service at Comeon Inns. Last month, Riley checked into a room at a Comeon Inn for the first time, only to find the room filthy and the service lousy. He decided the Comeon Inn chain is inferior to other hotel chains. a. Riley was irrational to have believed the reviews that he had read. b. Riley was rational to have changed his mind about Comeon Inns based on his one experience. c. Riley is an example of someone who gives too much weight to a small number of vivid observations. d. Riley is an example of someone who is reluctant to change his mind Evidence from studies of workers' choices on whether to participate in 401(k) plans suggests that the workers' behavior appears to exhibit a. indifference. b. ignorance. c. inertia. d. indecision Suppose a group of people read an article on capital punishment. Prior to reading the article, 60% of the members of the group were opposed to capital punishment, while 40% of the members of the group were in favor of capital punishment. According to studies of human decision-making, which of the following is likely? a. After reading the article, all members of the group oppose capital punishment. b. After reading the article, all members of the group are in favor of capital punishment. c. After reading the article, 60% of the members of the group are opposed and 40% of the members of the group are in favor of capital punishment. d. The members of the group would elect a representative in favor of capital punishment Conventional economic theory suggests that in the ultimatum game, the player proposing a split of $50 will propose that she get $49 and that the other player get $1. By the same reasoning, if the amount to be split is $1000, the player proposing the split will propose that she gets a. $500 and that the other player gets $500.

23 b. $998 and that the other player gets $2. c. $999 and that the other player gets $1. d. $1000 and that the other player gets nothing 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 The ultimatum game reveals that a. it does not make sense to try to maximize profits. b. people may have an innate sense of fairness that economic theory does not capture. c. offering someone a wildly unfair outcome is usually ok since people tend to make decisions using a "something is better than nothing" philosophy. d. Both a and b Advocates of a tax on soda and other sugary drinks argue that such a tax a. may encourage better nutrition. b. will protect our future selves from the long run negative effects of consuming these drinks. c. is needed because people tend to behave inconsistently over time. d. All of the above are correct Which of the following statements is not correct? a. The median voter theorem explains why politicians appeal to the middle of the voting distribution. b. Based on studies of human decision making, most people prefer to procrastinate, both in the immediate future and in the distant future. c. Screening refers to an uninformed party trying to extract information from an informed party. d. Advertising can be an example of a company signaling the quality of its products. Short Answer 126. Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information 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 Explain the Condorcet paradox. To which type of voting system does it apply? 129. 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? 130. How have insights from the field of psychology influenced the thinking of economists in recent years?

24 Lecture13_Practice Answer Section MULTIPLE CHOICE 1. ANS: B PTS: 1 DIF: 1 REF: 22-0 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Frontiers of microeconomics 2. ANS: C PTS: 1 DIF: 1 REF: 22-0 TOP: Behavioral economics MSC: Definitional 3. ANS: C PTS: 1 DIF: 1 REF: 22-0 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Behavioral economics MSC: Definitional 4. ANS: C PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Asymmetric information MSC: Definitional 5. ANS: D PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Asymmetric information MSC: Definitional 6. ANS: A PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Asymmetric information 7. ANS: B PTS: 1 DIF: 2 REF: 22-1 TOP: Asymmetric information MSC: Analytical 8. ANS: B PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Asymmetric information MSC: Analytical 9. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Asymmetric information 10. ANS: D PTS: 1 DIF: 2 REF: 22-1 TOP: Asymmetric information 11. ANS: D PTS: 1 DIF: 2 REF: 22-1 TOP: Asymmetric information 12. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 13. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 14. ANS: C PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard MSC: Definitional

25 15. ANS: B PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Principal Agent 16. ANS: C PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 17. ANS: C PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 18. ANS: C PTS: 1 DIF: 1 REF: 22-1 TOP: Moral hazard MSC: Definitional 19. ANS: C PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 20. ANS: D PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 21. ANS: B PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 22. ANS: C PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 23. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 24. ANS: B PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard MSC: Analytical 25. ANS: D PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard 26. ANS: D PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Adverse selection MSC: Definitional 27. ANS: C PTS: 1 DIF: 2 REF: 22-1 TOP: Adverse selection 28. ANS: D PTS: 1 DIF: 2 REF: 22-1 TOP: Moral hazard Adverse selection 29. ANS: D PTS: 1 DIF: 2 REF: 22-1 TOP: Adverse selection 30. ANS: C PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Adverse selection MSC: Definitional 31. ANS: D PTS: 1 DIF: 1 REF: 22-1

26 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Signaling MSC: Definitional 32. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Signaling 33. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Signaling 34. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Signaling 35. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Signaling 36. ANS: B PTS: 1 DIF: 2 REF: 22-1 TOP: Signaling 37. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Signaling 38. ANS: D PTS: 1 DIF: 1 REF: 22-1 TOP: Signaling 39. ANS: C PTS: 1 DIF: 1 REF: 22-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Screening MSC: Definitional 40. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Screening 41. ANS: A PTS: 1 DIF: 2 REF: 22-1 TOP: Screening 42. ANS: B PTS: 1 DIF: 2 REF: 22-1 TOP: Screening MSC: Analytical 43. ANS: B PTS: 1 DIF: 1 REF: 22-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Political economy MSC: Definitional 44. ANS: C PTS: 1 DIF: 1 REF: 22-2 TOP: Political economy MSC: Definitional 45. ANS: B PTS: 1 DIF: 2 REF: ANS: C PTS: 1 DIF: 1 REF: 22-2 TOP: Borda count 47. ANS: C PTS: 1 DIF: 2 REF: 22-2

27 TOP: Transitivity 48. ANS: A PTS: 1 DIF: 2 REF: ANS: A PTS: 1 DIF: 2 REF: ANS: D PTS: 1 DIF: 2 REF: 22-2 TOP: Borda count 51. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Political economy 52. ANS: D PTS: 1 DIF: 2 REF: 22-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Political economy 53. ANS: C PTS: 1 DIF: 2 REF: ANS: B PTS: 1 DIF: 2 REF: ANS: D PTS: 1 DIF: 2 REF: ANS: D PTS: 1 DIF: 2 REF: ANS: D PTS: 1 DIF: 3 REF: 22-2 TOP: Borda count 58. ANS: D PTS: 1 DIF: 2 REF: ANS: C PTS: 1 DIF: 3 REF: ANS: B PTS: 1 DIF: 3 REF: 22-2 TOP: Instant runoff 61. ANS: C PTS: 1 DIF: 1 REF: 22-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Borda count MSC: Definitional 62. ANS: D PTS: 1 DIF: 1 REF: 22-2 TOP: Arrow's impossibility theorem MSC: Definitional 63. ANS: B PTS: 1 DIF: 2 REF: 22-2 TOP: Arrow's impossibility theorem MSC: Definitional

28 64. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Arrow's impossibility theorem MSC: Definitional 65. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Arrow's impossibility theorem MSC: Analytical 66. ANS: D PTS: 1 DIF: 1 REF: 22-2 TOP: Median voter theorem 67. ANS: C PTS: 1 DIF: 1 REF: 22-2 TOP: Median voter theorem 68. ANS: C PTS: 1 DIF: 1 REF: 22-2 TOP: Median voter theorem 69. ANS: D PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem MSC: Definitional 70. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 71. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem MSC: Definitional 72. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Arrow's impossibility theorem 73. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 74. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 75. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 76. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 77. ANS: D PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 78. ANS: B PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 79. ANS: C PTS: 1 DIF: 3 REF: 22-2 TOP: Borda count 80. ANS: D PTS: 1 DIF: 3 REF: 22-2

29 TOP: Pairwise voting 81. ANS: C PTS: 1 DIF: 3 REF: 22-2 TOP: Pairwise voting 82. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 83. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem MSC: Analytical 84. ANS: B PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem 85. ANS: D PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem MSC: Analytical 86. ANS: D PTS: 1 DIF: 3 REF: 22-2 MSC: Analytical 87. ANS: D PTS: 1 DIF: 3 REF: 22-2 TOP: Instant runoff MSC: Analytical 88. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Borda count MSC: Analytical 89. ANS: C PTS: 1 DIF: 2 REF: 22-2 MSC: Analytical 90. ANS: C PTS: 1 DIF: 2 REF: 22-2 MSC: Analytical 91. ANS: C PTS: 1 DIF: 2 REF: 22-2 TOP: Transitivity MSC: Analytical 92. ANS: D PTS: 1 DIF: 2 REF: 22-2 TOP: Median voter theorem MSC: Analytical 93. ANS: B PTS: 1 DIF: 1 REF: 22-2 TOP: Arrow's impossibility theorem MSC: Definitional 94. ANS: A PTS: 1 DIF: 2 REF: ANS: B PTS: 1 DIF: 3 REF: ANS: B PTS: 1 DIF: 3 REF: 22-2

30 TOP: Borda count 97. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Pairwise voting 98. ANS: B PTS: 1 DIF: 2 REF: 22-2 TOP: Pairwise voting 99. ANS: B PTS: 1 DIF: 3 REF: 22-2 TOP: Borda count 100. ANS: C PTS: 1 DIF: 2 REF: ANS: B PTS: 1 DIF: 3 REF: 22-2 TOP: Median voter theorem 102. ANS: B PTS: 1 DIF: 2 REF: ANS: D PTS: 1 DIF: 3 REF: ANS: D PTS: 1 DIF: 3 REF: 22-2 Borda count 105. ANS: A PTS: 1 DIF: 3 REF: 22-2 TOP: Borda count 106. ANS: A PTS: 1 DIF: 3 REF: 22-2 TOP: Median voter theorem 107. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Political economy 108. ANS: A PTS: 1 DIF: 2 REF: 22-2 TOP: Instant runoff 109. ANS: D PTS: 1 DIF: 3 REF: 22-2 TOP: Instant runoff 110. ANS: D PTS: 1 DIF: 3 REF: 22-2 TOP: Instant runoff 111. ANS: C PTS: 1 DIF: 1 REF: 22-3 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Behavioral economics MSC: Definitional 112. ANS: A PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics

31 113. ANS: C PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 114. ANS: C PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 115. ANS: C PTS: 1 DIF: 1 REF: 22-3 TOP: Behavioral economics MSC: Definitional 116. ANS: C PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 117. ANS: B PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 118. ANS: C PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 119. ANS: C PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 120. ANS: C PTS: 1 DIF: 1 REF: 22-3 TOP: Behavioral economics 121. ANS: C PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 122. ANS: A PTS: 1 DIF: 2 REF: 22-3 TOP: Behavioral economics 123. ANS: B PTS: 1 DIF: 2 REF: 22-3 TOP: Ultimatum game 124. ANS: D PTS: 1 DIF: 1 REF: 22-3 TOP: Behavioral economics 125. ANS: B PTS: 1 DIF: 2 REF: TOP: Behavioral economics Political economy Asymmetric information MSC: Analytical SHORT ANSWER 126. ANS: Asymmetric information is present when there is a difference in access to relevant information. Examples include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and his insurer. The two basic types of problems are (1) moral hazard, which is a problem of hidden actions and ordinarily involves a principal and an agent, and (2) adverse selection, which is a problem of hidden characteristics or "lemons."

32 PTS: 1 DIF: 2 REF: 22-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Asymmetric information MSC: Definitional 127. ANS: Drivers (buyers and potential buyers of car insurance) know more about their driving habits than do the insurance companies (sellers of car insurance). The price of car insurance is likely to reflect the information asymmetry in that it incorporates more of a risk component than is really necessary to insure good and average drivers. Consequently, good and average drivers are priced out of the market and they rationally choose not to buy the insurance unless they are required to do so. PTS: 1 DIF: 2 REF: 22-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Asymmetric information 128. ANS: The Condorcet paradox applies directly to pairwise majority voting. It shows that even if individual voters' preferences exhibit transitivity, that property does not follow through to outcomes of pairwise majority voting. Consequently, the order in which choices are put up, in pairwise fashion, affects the final outcome. Using choices A, B, and C, it may be the case, for example, that under pairwise voting voters choose A over B and B over C, but then they may choose C over A. This result can obtain even when individual voters' preferences are transitive; hence, the paradox. PTS: 1 DIF: 2 REF: 22-2 NAT: Analytic LOC: Understanding and applying economic models MSC: Definitional 129. ANS: The median voter theorem implies that political parties will set their platforms so as to appeal to the median ("middle of the distribution") voter. Therefore, rather than adopting extreme views, the Conservatives and Liberals will both adopt platforms that are toward the "middle of the road." PTS: 1 DIF: 2 REF: 22-2 NAT: Analytic LOC: Understanding and applying economic models TOP: Median voter theorem 130. ANS: Insights from psychology have led some economists to question the assumption of rationality that pervades mainstream economic models. Evidence from experimental economics does raise serious questions about the rationality assumption. For example, most people may be concerned with the fairness of outcomes, in addition to the impact of those outcomes on their own well-being. An open question is: If the rationality assumption does not really reflect the behavior of real economic actors, then how important is it that we model other motivations, such as the desire for fairness, the tendency to procrastinate, overconfidence, etc.? PTS: 1 DIF: 2 REF: 22-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Behavioral economics