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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

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Table 22-4 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. Table 22-4 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. -Refer to Table 22-4. Which of the following statements is correct regarding the results of pairwise voting in Anytown? A) The results of pairwise voting depend on the order of the pairs but satisfy the transitivity property. B) The results of pairwise voting do not depend on the order of the pairs and satisfy the transitivity property. C) The results of pairwise voting depend on the order of the pairs and do not satisfy the transitivity property. D) The results of pairwise voting do not depend on the order of the pairs and do not satisfy the transitivity property. -Refer to Table 22-4. Which of the following statements is correct regarding the results of pairwise voting in Anytown?


A) The results of pairwise voting depend on the order of the pairs but satisfy the transitivity property.
B) The results of pairwise voting do not depend on the order of the pairs and satisfy the transitivity property.
C) The results of pairwise voting depend on the order of the pairs and do not satisfy the transitivity property.
D) The results of pairwise voting do not depend on the order of the pairs and do not satisfy the transitivity property.

E) A) and B)
F) C) and D)

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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?

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People are...

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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.

E) B) and D)
F) B) and C)

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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.

E) A) and D)
F) A) and C)

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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

E) A) and C)
F) B) and C)

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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

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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

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reject Lindsay's pro...

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Which of the following sets of preferences satisfies the property of transitivity?


A) Cookies are preferred to pie. Pie is preferred to brownies. Cookies are preferred to brownies.
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. Brownies are preferred to cookies.
D) Cookies are preferred to pie. Ice cream is preferred to cookies. Pie is preferred to ice cream.

E) All of the above
F) None of the above

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Table 22-17 Table 22-17 -Refer to Table 22-17. The table shows the preferences of three types of voters over three possible outcomes: A, B, and C. In addition, the table shows the percentage of voters of each type. Based on this information, which of the following statements is true? A) As the Condorcet Paradox predicts, majority rule fails to produce transitive preferences for society. B) As Arrow's Impossibility Theorem demonstrates, it is impossible from this information to determine which outcome the voters prefer. C) The median voter theorem allows us to conclude that in a vote between B and C, B will win since the Type 2 voter is the median voter. D) While the Condorcet Paradox predicts that majority rule may not produce transitive preferences for society as a whole, society's preferences in this case are transitive. -Refer to Table 22-17. The table shows the preferences of three types of voters over three possible outcomes: A, B, and C. In addition, the table shows the percentage of voters of each type. Based on this information, which of the following statements is true?


A) As the Condorcet Paradox predicts, majority rule fails to produce transitive preferences for society.
B) As Arrow's Impossibility Theorem demonstrates, it is impossible from this information to determine which outcome the voters prefer.
C) The median voter theorem allows us to conclude that in a vote between B and C, B will win since the Type 2 voter is the median voter.
D) While the Condorcet Paradox predicts that majority rule may not produce transitive preferences for society as a whole, society's preferences in this case are transitive.

E) C) and D)
F) B) and D)

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Which of the following is a lesson from the Condorcet paradox?


A) If voters are choosing a point along a line, then majority rule will pick the most preferred point of the median voter.
B) Under certain conditions, there is no scheme for aggregating individual preferences.
C) When there are more than two options, deciding the order in which to vote can have a powerful influence over the outcome of an election.
D) Majority voting always indicates what outcome a society really wants.

E) A) and C)
F) All of the above

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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. 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. Which pairwise voting scheme would result in outcome D? 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 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. C) 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. D) First, choose between C and D. Second, voters choose between the winner of the first vote and B. Third, voters choose between the winner of the second vote and A. -Refer to Table 22-11. Which pairwise voting scheme would result in outcome D?


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 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.
C) 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.
D) First, choose between C and D. Second, voters choose between the winner of the first vote and B. Third, voters choose between the winner of the second vote and A.

E) A) and C)
F) None of the above

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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

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Arrow's im...

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The science of economics is a finished jewel, perfect and unchanging.

A) True
B) False

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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. 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. -Refer to Table 22-24. If the town decides to use a Borda count, which sport will win? -Refer to Table 22-24. If the town decides to use a Borda count, which sport will win?

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In the case of a moral-hazard problem, which of the following is not a way for the principal to encourage the agent to act more responsibly? The principal could


A) better monitor the agent.
B) pay the agent above-equilibrium wages.
C) delay payment to the agent.
D) stop paying bonuses.

E) C) and D)
F) B) and C)

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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. 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? A) First vote: taxes vs. streetlights; Second vote: winner of the first vote vs. police; Third vote: winner of the second vote vs. arts B) First vote: arts vs. streetlights; Second vote: winner of the first vote vs. police; Third vote: winner of the second vote vs. taxes C) First vote: police vs. taxes; Second vote: winner of the first vote vs. arts; Third vote: winner of the second vote vs. streetlights D) The town administrator should use a Borda count. -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?


A) First vote: taxes vs. streetlights; Second vote: winner of the first vote vs. police; Third vote: winner of the second vote vs. arts
B) First vote: arts vs. streetlights; Second vote: winner of the first vote vs. police; Third vote: winner of the second vote vs. taxes
C) First vote: police vs. taxes; Second vote: winner of the first vote vs. arts; Third vote: winner of the second vote vs. streetlights
D) The town administrator should use a Borda count.

E) A) and D)
F) A) and B)

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Table 22-19 The 600 voters of Appleton are deciding by majority rule how much to spend on a new library. Table 22-19 The 600 voters of Appleton are deciding by majority rule how much to spend on a new library. -Refer to Table 22-19. If an election were held between spending $2 million and $3 million, the median voter would vote for A) $3 million and $3 million would win. B) $3 million and $2 million would win. C) $2 million and $3 million would win. D) $2 million and $2 million would win. -Refer to Table 22-19. If an election were held between spending $2 million and $3 million, the median voter would vote for


A) $3 million and $3 million would win.
B) $3 million and $2 million would win.
C) $2 million and $3 million would win.
D) $2 million and $2 million would win.

E) A) and B)
F) A) and C)

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The field of economics that combines the study the psychology of human behavior and economic issues is

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behavioral...

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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. 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. 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. -Refer to Table 22-11. 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.

E) A) and C)
F) A) and D)

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