Multiple Choice Questions
1. Because Elaine has a family history of significant medical problems, she buys health insurance, whereas her friend Jerry, who has a healthier family, goes without. This is an example of
a. Moral hazard.
b. Adverse selection.
c. Signaling.
d. Screening.
2. George has a life insurance policy that pays his family $1 million if he dies. As a result, he does not hesitate to enjoy his favorite hobby of bungee jumping. This is an example of
a. Moral hazard.
b. Adverse selection.
c. Signaling.
d. Screening.
3. Before selling anyone a health insurance policy, the Kramer Insurance Company requires that applicants undergo a medical examination. Those with significant preexisting medical problems are charged more. This is an example of
a. Moral hazard.
b. Adverse selection.
c. Signaling.
d. Screening.
4. The Condorcet paradox illustrates Arrow's impossibility theorem by showing that pairwise majority voting
a. Is inconsistent with the principle of unanimity.
b. Leads to social preferences that are not transitive.
c. Violates the independence of irrelevant alternatives.
d. Makes one person in effect a dictator.
5. Two political candidates are vying for town mayor, and the key issue is how much to spend on the annual Fourth of July fireworks. Among the 100 voters, 40 want to spend $30,000, 30 want to spend $10,000, and 30 want to spend nothing at all. What is the winning position on this issue?
a. $10,000
b. $15,000
c. $20,000
d. $30,000
6. The experiment called the ultimatum game illustrates that people
a. Are overconfident in their own abilities.
b. Play the Nash equilibrium in strategic situations.
c. Care about fairness, even to their own detriment.
d. Make inconsistent decisions over time.