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If you are assigned the role of Player A in the Ultimatum game and you propose that player B gets $1 and you get $99


A) you are behaving as a rational wealth-maximizer and player B is likely to accept your offer.
B) you are behaving as a rational wealth-maximizer and player B is likely to reject your offer.
C) you are not behaving as a rational wealth-maximizer and player B is likely to accept your offer.
D) you are not behaving as a rational wealth-maximizer and player B is likely to reject your offer.

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

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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.

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

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A life insurance company requires new applicants to have a medical exam prior to writing the insurance policy. This requirement is an example of


A) signaling.
B) screening.
C) moral hazard.
D) adverse selection.

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

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Scenario 22-1 Esteban and Michaela own an apartment building. They hire Nico to manage the building and deal with tenants' complaints. They also hire Ted to make any necessary repairs to the apartments or the common area and they hire Rex to be the door guard at night. -Refer to Scenario 22-1. Which of the following is an example of a moral hazard problem?


A) Ted steals $5 off the counter in a tenant's apartment while he is there to repair a leaky faucet.
B) Esteban and Michaela do not tell Nico that they are planning to sell the building at the end of the year.
C) Esteban goes golfing while Michaela reviews the financials from the business.
D) Rex is paid an efficiency wage to ensure productivity because he is usually not monitored while working.

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

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Severe adverse-selection problems may result in


A) too few good used cars being offered for sale.
B) wages that are too low relative to equilibrium levels.
C) too many good drivers buying too much automobile insurance.
D) people with average health buying too much health insurance.

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

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A driver knows more than his auto insurer about how cautiously he drives. This is an example of


A) a hidden action.
B) a hidden characteristic.
C) adverse selection.
D) the Condorcet Paradox.

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

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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.

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

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The field of political economy


A) applies the methods of political science to microeconomics.
B) applies the methods of political science to macroeconomics.
C) is relevant to the issue of how active government should be in economic matters.
D) integrates psychological insights to better understand individual choices.

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

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Herbert Simon suggested that people are not rational maximizers but satisficers, meaning that they choose a course of action that is


A) personally satisfying, with a greater emphasis on personal consumption than on fairness.
B) socially satisfying, with a greater emphasis on fairness than on personal consumption.
C) good enough.
D) risk averse.

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

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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.

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

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Table 22-21 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. Table 22-21 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. -Refer to Table 22-21. What is the preferred spending amount of the median voter? A) $1.0 B) $1.5 C) $2.0 D) None of the above are correct. -Refer to Table 22-21. What is the preferred spending amount of the median voter?


A) $1.0
B) $1.5
C) $2.0
D) None of the above are correct.

E) None of the above
F) B) and D)

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Table 22-14 Amy, Beth, and Connie are on a hiring committee. They have interviewed 3 candidates identified by their last names and are going to vote on which one is hired. Table 22-14 Amy, Beth, and Connie are on a hiring committee. They have interviewed 3 candidates identified by their last names and are going to vote on which one is hired. -Refer to Table 22-14. Adams calls and says she's accepted another position. In which case does Campbell win against Brown? A) both a pairwise vote and a Borda Count vote B) a pairwise vote, but not a Borda Count vote C) a Borda Count vote, but not a pairwise vote D) neither a Borda Count vote, nor a pairwise vote -Refer to Table 22-14. Adams calls and says she's accepted another position. In which case does Campbell win against Brown?


A) both a pairwise vote and a Borda Count vote
B) a pairwise vote, but not a Borda Count vote
C) a Borda Count vote, but not a pairwise vote
D) neither a Borda Count vote, nor a pairwise vote

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

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Brandon is considering buying a used car but he first downloads a report from the internet that shows the history of accidents and major repairs conducted on the car. This action is called

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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.

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

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Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.

A) True
B) False

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Table 22-21 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. Table 22-21 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. -Refer to Table 22-21. The city council is considering two alternative ballots. The first would allow voters to choose between $1.5 million and $2 million. The second would allow voters to select between $2 million and $2.5 million. If the first ballot is used, A) voters will select $1.5 million. If the second ballot is used voters will select $2 million. B) voters will select $1.5 million. If the second ballot is used voters will select $2.5 million. C) voters will select $2 million. If the second ballot is used voters will select $2 million. D) voters will select $2 million. If the second ballot is used voters will select $2.5 million -Refer to Table 22-21. The city council is considering two alternative ballots. The first would allow voters to choose between $1.5 million and $2 million. The second would allow voters to select between $2 million and $2.5 million. If the first ballot is used,


A) voters will select $1.5 million. If the second ballot is used voters will select $2 million.
B) voters will select $1.5 million. If the second ballot is used voters will select $2.5 million.
C) voters will select $2 million. If the second ballot is used voters will select $2 million.
D) voters will select $2 million. If the second ballot is used voters will select $2.5 million

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

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Refer to Narrative 22-1. Which of the ladies is causing a moral hazard problem?


A) Shana
B) Katie
C) Belinda
D) Magda

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

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In the field of study called political economy, economists make use of insights from the field of psychology.

A) True
B) False

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Table 22-20 The table below shows the preferred city budget (in millions) for in the city of Springfield. Table 22-20 The table below shows the preferred city budget (in millions) for in the city of Springfield. -Refer to Table 22-20. 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 -Refer to Table 22-20. 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

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

Correct Answer

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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.

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

Correct Answer

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