1485Chapter 22Frontiers of MicroeconomicsTRUE/FALSE1. The science of economics is a finished jewel, perfect and unchanging.ANS: F DIF: 1 REF: 22-0NAT: Analytic LOC: The Study of economics, and definitions in economicsTOP: economics MSC: Definitional2. In economics, a difference in access to relevant knowledge is called a behavioral asymmetry.ANS: F DIF: 1 REF: 22-1NAT: Analytic LOC: The Study of economics, and definitions in economicsTOP: Asymmetric information MSC: Definitional3. Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may be reluctant to reveal relevant information.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Asymmetric information MSC: Applicative4. An example of asymmetric information is when a seller of a house knows more than the buyer about the houses condition.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Asymmetric information MSC: Applicative5. Economists have found that asymmetric information is not very prevalent.ANS: F DIF: 2 REF: 22-1NAT: Analytic LOC: The Study of economics, and definitions in economicsTOP: Asymmetric information MSC: Interpretive6. An example of an information asymmetry is when a worker knows more than his employer about his work effort.ANS: T DIF: 1 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Asymmetric information MSC: Interpretive7. The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and Adelphia are an example of moral hazard.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Moral hazard MSC: Applicative8. The problem of moral hazard is a problem of hidden action.ANS: T DIF: 1 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Moral hazard MSC: Interpretive9. The problem that arises when one person performs a task on behalf of another person is called the lemons problem.ANS: F DIF: 1 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Moral hazard MSC: Interpretive10. One of the things that employers can do to lessen the moral hazard problem involving their employees is to pay them in advance for their work.ANS: F DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Moral hazard MSC: Interpretive1486 Chapter 22/Frontiers of Microeconomics11. In the employer-worker relationship, the employer is regarded as the principal and the worker is regarded as the agent.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Moral hazard MSC: Definitional12. 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.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Moral hazard MSC: Interpretive13. The classic example of adverse selection is the market for used cars.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Adverse selection MSC: Interpretive14. The two major problems caused by asymmetric information are the moral-hazard problem and the principal-agent problem.ANS: F DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Asymmetric information MSC: Interpretive15. Signaling is an action taken by an uninformed party to induce an informed party to reveal information.ANS: F DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Screening | Signaling MSC: Definitional16. An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to convey his love for her.ANS: T DIF: 2 REF: 22-1NAT: Analytic LOC: Understanding and applying economic modelsTOP: Signaling MSC: Applicative17. Valerie prefers A to B and she prefers B to C. If Valeries preferences are transitive, then she prefers A to C.ANS: T DIF: 1 REF: 22-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Transitivity MSC: Definitional18. The Condorcet voting paradox shows that outcomes based on dictatorial preferences do not always obey the property of transitivity.ANS: F DIF: 2 REF: 22-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Condorcet paradox MSC: Interpretive19. The Condorcet paradox implies that the order in which items are voted on under majority rule is unimportant.ANS: F DIF: 1 REF: 22-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Condorcet paradox MSC: Interpretive20. Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.ANS: F DIF: 1 REF: 22-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Condorcet paradox MSC: Interpretive21. The Condorcet paradox demonstrates that the order in which people vote on choices may influence the final outcome.ANS: T DIF: 2 REF: 22-2NAT: Anal