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Exam 22: Frontiers in Microeconomics

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Question 81

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When new professors are hired, their job performance is monitored closely. If they meet their institution's standards, they will eventually receive tenure. After receiving tenure, professors' job performance is less closely monitored, and they become difficult to fire. Tenure thus creates

A) adverse selection.
B) a Condorcet paradox.
C) a screening problem.
D) a moral hazard problem.

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

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Question 82

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Daniel's Bistro is ranked as the best casual restaurant. Your best friend dined at Daniel's Bistro and commented that the food was mediocre. Your decision not to have dinner at Daniel's Bistro based on your friend's experience illustrates that people

A) are reluctant to change their minds.
B) are overconfident.
C) give too much weight to a small number of vivid observations.
D) are satisficers.

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

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Question 83

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The majority of Americans, when asked how many states they could name, think they could name all fifty. However, when they are asked to do so, very few are able to come up with all fifty. This is an example of which systematic mistake that people make?

The Condorcet paradox tells us that, even though it is impossible to satisfy all of Arrow's properties of a desirable voting system, pairwise majority voting will always satisfy transitivity.

When asked to give a range for the height of the tallest mountain in North America such that people were 90 percent confident the true number falls within it, most people gave ranges that were

Scenario 22-1 ​ Shana owns a boutique that sells high-end 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 blouse she is considering purchasing. Even though she's had several other customers return this type of blouses due to flaws, Katie tells Belinda the quality is great. Magda is another customer who is returning a necklace without revealing that she lost a gem from it while wearing it. -Refer to Scenario 22-1. Which of the ladies is an agent?

Arrow's impossibility theorem states that the majority rule fails to produce transitive preferences for society.

The mathematical result showing that a majority rule voting system will produce the outcome most preferred by the voter exactly in the middle of the distribution is called the

What insight into human behavior do economist learn from observing people playing the ultimatum game?

Evidence from experiments in which real people play the ultimatum game supports the idea that people care about fairness as well as about maximization of their personal wealth.

A college professor hires a student to babysit her children and pays the student an efficiency wage. Which of the following is correct about the wage the student earns?

The moral-hazard problem and the desire of firms to lessen that problem serve as a plausible explanation for a firm paying above-equilibrium wages to its workers.

Table 22-1 Three friends-Stephanie, Stella, and Lydia-are deciding where to go together for vacation. They all agree that they should go to one of the three places: Italy, Spain, or Hawaii. 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 following table. ​ ​ $\begin{array} { | c | c | c | c | } \hline & \text { Stephanie } & \text { Stella } & \text { Lydia } \\\hline \text { First choice } & \text { Italy } & \text { Spain } & \text { Hawaii } \\\hline \text { Second choice } & \text { Spain } & \text { Hawaii } & \text { Italy } \\\hline \text { Third choice } & \text { Hawaii } & \text { Italy } & \text { Spain } \\\hline\end{array}$ -Refer to Table 22-1. Depending on the order of the pairwise voting, the friends could go to either

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

Bill would like to buy a gift for Ann to convey his love for her. Which of the following areas of economics would most likely study this type of decision?

The problem that arises when one person performs a task on behalf of another person is called

A firm with a very good product

Harold has always driven cars made by Universal Motors. The last two Universal Motors cars that Harold purchased have had major engine problems resulting in Harold incurring significant cost. Consumer Reports has consistently given Universal Motors poor ratings. Still, Harold plans to purchase another Universal Motors car next fall. Harold's behavior is an example of which systematic mistake that people make?

Table 22-7 The town of Franklin is facing a severe budget shortage. The town administrator has proposed four options to balance the budget: increase property taxes (taxes), cut the school arts budget (arts), turn off half of the streetlights in the town (streetlights), reduce police patrols (police). Exactly one of the four 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. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Voter Type }$ $\begin{array} { | l | l | l | l | l | } \hline & \text { Type A } & \text { Type B } & \text { Type C } & \text { Type D } \\\hline \text { \% of Electorate } & 14 & 40 & 28 & 18 \\\hline \text { First choice } & \text { taxes } & \text { streetlights } & \text { arts } & \text { police } \\\hline \text { Second choice } & \text { police } & \text { arts } & \text { taxes } & \text { arts } \\\hline \text { Third choice } & \text { streetlights } & \text { taxes } & \text { police } & \text { streetlights } \\\hline \text { Fourth choice } & \text { arts } & \text { police } & \text { streetlights } & \text { taxes } \\\hline\end{array}$ -Refer to Table 22-7. If the town administrator asks the people to first choose between cutting the arts program and turning off half of the streetlights, and then choose between the winner of the first election and reducing police patrols, and then choose between the winner of the second election and increasing taxes, which option will win each vote?

Herbert Simon, one of the first social scientists to work at the boundary of economics and psychology, suggested that humans should be viewed not as rational maximers but as