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Exam 22: Frontiers of Microeconomics

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Question 41

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Scenario 22-6 Shana owns a boutique that sells high­end 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. -Refer to Scenario 22-6. Which of the ladies, if any, is committing a moral hazard?

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Question 42

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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) raise the quantity sold but reduce the price sellers receive.

E) All of the above
F) B) and D)

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Question 43

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The Condorcet paradox shows that there is no scheme for aggregating individual preferences into a valid set of social preferences.

Bill and Bev are playing the ultimatum game, starting with $50. A coin flip results in Bev being the one to propose a division of the $50. If Bev acts as economic theory assumes, she should propose that

Scenario 22-3 At issue in a particular city vote is how much to spend, per person, on road repair next year. Among the 10,000 voters, 2,900 prefer to spend $500 per person, but no more; 2,200 prefer to spend $600 per person, but no more; 1,900 prefer to spend $800 per person, but no more; 1,600 prefer to spend $1,200 but no more, and 1,400 prefer to spend $1,400 per person, but no more. -Refer to Scenario 22-3. The median voter is one who prefers to spend

When one party is better informed about an economic situation than another party, economists describe the problem as one of

According to the median voter theorem, majority rule will produce an outcome that is inconsistent with transitive preferences.

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.

When some people are better informed than others and the imbalance affects the choices they make, economists say there is

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?

Table 22-2 Three longtime friends-Allen, Brian, and Cody-are deciding how they will spend their Sunday afternoon. They all agree that they should do one of three things: go to a movie, play golf, or go to a baseball game. They also agree that they will have two pairwise votes to determine how to spend their afternoon, 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. -Refer to Table 22-2. Which of the following statements is correct?

Insurance companies charge annual premiums to collect revenue, which they then use to pay customers who file claims for damages they incur. As a result of the moral hazard problem (1) what is the effect on the percentage of policy holders making claims, and (2) what is the effect on the average premium charged when compared to a world with no moral hazard problem?

Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may be reluctant to reveal relevant information.

Table 22-11 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. -Refer to Table 22-11. The town administrator would much rather have more tax revenue than have to cut any programs or services. If he wants to ensure that winning choice from voting is increasing taxes, how should he set up the voting?

When each voter has a most-preferred outcome for the expenditure on a particular government program, majority rule will produce the outcome

One property of Kenneth Arrow's "perfect" voting system is that the ranking between any two outcomes A and B should not depend on whether some third outcome C is also available. Arrow called this property

If preferences exhibit the property of transitivity, then

Table 22-3 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. -Refer to Table 22-3. 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?

Table 22-9 Voter Type -Refer to Table 22-9. 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?

According to behavioral economics, an employee will likely