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test bank of microeconomics 7th edition jeffrey m perloff

Test Bank of Microeconomics 7th
Edition Jeffrey M. Perloff
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Microeconomics, 7e (Perloff)
Chapter 1 Introduction

1.1 Microeconomics: The Allocation of Scarce Resources


1) Microeconomics studies the allocation of
1.

A) decision makers.

2.

B) scarce resources.

3.


C) models.

4.

D) unlimited resources.

2) Microeconomics is often called
1.

A) price theory.

2.

B) decision science.

3.

C) scarcity.

4.

D) resource theory.

3) Most microeconomic models assume that decision makers wish to


1.

A) make themselves as well off as possible.

2.

B) act selfishly.

3.

C) make others as well off as possible.

4.



D) None of the above.

4) Society faces trade-offs because of
1.

A) government regulations.

2.

B) profit motive.

3.

C) faceless bureaucrats.

4.

D) scarcity.

5) A market
1.

A) always involves the personal exchange of goods for money.

2.

B) allows interactions between consumers and firms.


3.

C) always takes place at a physical location.

4.

D) has no influence on prices.

6) What links the decisions of consumers and firms in a market?
1.

A) the government

2.

B) prices

3.

C) coordination officials

4.

D) microeconomics

7) The price of a good is
1.

A) always equal to the cost of producing the good.

2.

B) never affected by the number of buyers and sellers.

3.

C) usually determined in a market.

4.

D) None of the above.


8) Who or what is responsible for bringing together scarce resources to produce most of
the goods and services in the U.S.?
1.

A) the U.S. government

2.

B) the United Nations

3.

C) the Federal Reserve Bank

4.

D) markets and prices

9) Which of the following is a fundamental topic addressed by microeconomics?
1.

A) whether to extend unemployment insurance

2.

B) determining how many new iPhones the Apple company should produce

3.

C) the level of inflation in the country

4.

D) the impact of interest rates on savings in the economy


10) A "twinkie tax" on fatty foods would aim to
1.

A) reduce the consumption of fatty foods.

2.

B) reduce the production of fatty foods.

3.

C) raise tax revenues for other uses.

4.

D) All of the above.

11) Which choice below illustrates the tradeoff faced by surfboard manufacturers after
Clark foam shut down in 2005, eliminating 80% of the world's foam blanks used to
shape surfboards? The firms decide to
1.

A) substitute foam blanks for balsa wood blanks as used in the 1940s.

2.

B) advertise their new surfboard wax.

3.

C) offer surf classes.

4.

D) B and C


12) In the Soviet Union, which boasted about giving every worker a job, some workers
were given the task of digging holes and filling them again. What function of
microeconomic analysis did this policy address?
1.

A) What goods/services to produce

2.

B) How to produce the goods and services

3.

C) Who gets the goods and services

4.

D) A and B

13) The objective of creating a permit trading system for SO2 (sulfur dioxide) is to
1.

A) employ environmental protection agency (EPA) workers.

2.

B) create a market in which one did not previously exist.

3.

C) make annual company tax reporting more difficult.

4.

D) increase the incidence of acid rain.


14) Under most circumstances, the application of taxes on goods will only affect who
gets the goods.

15) Most modern financial centers use computers to match buyers and sellers. This
absence of personal contact contradicts the definition of a market.

16) Governments do not respond to prices.


17) Explain how a market helps determine which goods and services will be produced,
how to produce them, and who gets them.

1.2 Models

1) The purpose of making assumptions in an economic model is to
1.

A) force the model to yield the correct answer.

2.

B) minimize the amount of work an economist must do.

3.

C) simplify the model while keeping important details.

4.

D) express the relationship mathematically.

2) Einstein was quoted saying "Everything should be made as simple as possible, but
not simpler." When it comes to economic modeltallation of additional
monitoring devices to increase the chance of catching a shirker to 100%. They feel this
is needed to deter all shirking. What is your recommendation to the company? Explain.

20.4 Checks on Principals

1) Under deferred compensation packages,
1.

A) a moral hazard occurs if a firms fires a good worker before the worker
receives her deferred compensation.

2.

B) a moral hazard occurs if workers decide not to shirk so as to receive the
deferred compensation.


3.
4.

C) moral hazards are avoided.
D) workers' wages are below their marginal revenue product as they near
retirement.

2) Workers can reduce the chance of an employer lying by
1.

A) obtaining more information about the firm's performance.

2.

B) having a representative on the board of directors.

3.

C) requiring that employers share the cost of an economic downtown.

4.

D) All of the above.

3) Wage reduction policies are less common than layoffs because
1.

A) workers never prefer wage reduction policies.

2.

B) workers always trust the firm to tell the truth.

3.

C) of asymmetric information.


4.

D) of adverse selection problems.

4) A deferred payment scheme is more likely to be accepted by a worker if
1.

A) the firm has a reputation of not firing senior employees to save pension costs.

2.

B) the worker is very young.

3.

C) the worker is very old.

4.

D) None of the above.

5) If a firm was owned by its employees,
1.

A) there is a higher probability that wage reductions would outweigh layoffs.

2.

B) those in charge would not act any differently than regular owners; there would
still be layoffs.

3.

C) those not in charge would remain risk neutral.

4.

D) wage reductions would be lower than if the firm was run for profit.


6) Assume a firm is run as a zero-profit enterprise. Which of the following would be
true?
1.

A) There is a higher probability that wage reductions would outweigh layoffs.

2.

B) Those in charge would not act any different than regular owners, there would
still be layoffs.

3.
4.

C) Those not in charge would remain risk neutral.
D) Wage reductions would be lower than they would be if the firm was run for
profit.

7) Socially inefficient outcomes are possible when
1.

A) uninformed parties want to avoid opportunistic behavior by informed parties.

2.

B) informed parties engage in opportunistic behavior against uninformed parties.

3.

C) those in charge are risk neutral.


4.

D) workers do not own the firm.

For the following, please answer "True" or "False" and explain why.

8) Including an employee representative on the board of directors reduces the
possibility of opportunistic employer behavior.

9) Explain why checks on principals might be necessary.

20.5 Contract Choice

1) One way to prevent workers from shirking is to


1.

A) hire only workers who are predisposed toward shirking.

2.

B) hire only workers who are predisposed toward not shirking.

3.

C) reduce monitoring to zero.

4.

D) pay workers a fixed fee.

2) Firms that seek to avoid hiring lazy workers that assert they are hardworking are
trying to avoid
1.

A) adverse selection.

2.

B) moral hazard.

3.

C) screening.

4.

D) signaling.

3) A good salesperson can sell $1,000,000 worth of goods, while a poor one can sell
only $100,000 worth of goods. Job applicants know if they are good or bad, but the firm


does not. A firm will offer job applicants a choice between a fixed salary and a 20%
commission. Assuming risk-neutral salespersons and no opportunistic behavior, what
level must the fixed salary be so that the firm can determine a prospective good
salesperson from a poor one?
1.

A) between $0 and $20,000

2.

B) between $20,000 and $200,000

3.

C) greater than $200,000

4.

D) zero

4) If good salespeople are extremely risk averse, then a choice between a fixed-fee
contract and a contingent contract
1.

A) avoids a moral hazard.

2.

B) will result in all job candidates choosing the contingent contract.

3.

C) will result in an efficient contract.

4.

D) may not be a good screening device.


5) What is one potential problem with offering a choice of contracts to two different
employees?
1.

A) If Employee A is paid more than Employee B, Employee A might sue for
discrimination.

2.

B) Employee A might be paid less than Employee B, proving statistical
discrimination.

3.

C) The two employees might compare salaries without comparing riskpreferences, thereby running the risk of jealousy or claims of discrimination.

4.

D) The two employees might compare risk preferences without comparing
salaries, thereby running the risk of jealousy or claims of discrimination.

6) Why would a firm knowingly hire lazy employees?
1.

A) Lazy employees have positive marginal revenue product.

2.

B) Lazy employees have successfully sued firms in the past.

3.
4.

C) The Americans with Disabilities Act mandates that laziness be considered a
disability.
D) Lazy employees make hard-working employees look good.


7) If a firm hires lazy employees,
1.

A) it must pay them differently or hard-working employees will engage in moral
hazard.

2.

B) it must pay them more or hard-working employees will engage in moral
hazard.

3.

C) it must fire them before their laziness spreads to hard-working employees.

4.

D) the lazy employees make hard-working employees look good.

8) A good salesperson can sell $500,000 worth of goods, while a poor one can sell only
$100,000 worth of goods. Job applicants know if they are good or bad, but the firm does
not. A firm will offer job applicants a choice between a fixed salary of $10,000 or a 10%
commission. Assuming risk-neutral salespersons and no opportunistic behavior, can the
firm determine a prospective good salesperson from a poor one?
1.

A) Yes, because a poor salesperson will always choose the fixed salary.

2.

B) Yes, because a good salesperson will always choose the fixed salary.

3.

C) No, because a poor salesperson is indifferent between the two contracts.

4.

D) No, because a good salesperson is indifferent between the two contracts.


9) To induce an agent to work hard, a principal may offer the agent a bonus, in other
words, an extra payment if a performance target is hit. Suppose that the agent's
performance is affected by factors beyond the agent's control, for example umbrellas
are demanded more on a rainy day. Under what conditions may the bonus not induce
the agent to work harder?
1.

A) The agent is very risk averse.

2.

B) The agent is very risk loving.

3.

C) The agent is risk neutral.

4.

D) The principal is risk neutral.

10) A good salesperson can sell $100,000 worth of goods, while a poor one can sell
only $10,000 worth of goods. Job applicants know if they are good or bad, but the firm
does not. A firm will offer job applicants a choice between a fixed salary of $2,000 or a
commission on the sale. Assume risk-neutral salespersons and no opportunistic
behavior. Given that the firm wants to distinguish a prospective good salesperson from
a poor one, what should be the commission on sales?
1.

A) Commission should be larger than 50%.

2.

B) Commission should be larger than 40%.

3.

C) Commission should be between 2% and 20%.


4.

D) Commission should be smaller than 2%.

11) A good salesperson can sell $200,000 worth of goods, while a poor one can sell
only a smaller amount worth of goods. Job applicants know if they are good or bad, but
the firm does not. A firm will offer job applicants a choice between a fixed salary of
$20,000 or a 20% commission. Assume risk-neutral salespersons and no opportunistic
behavior. Given that the firm wants to distinguish a prospective good salesperson from
a poor one, what should be the sales amount of a poor salesperson?
1.

A) more than $150,000

2.

B) less than $100,000

3.

C) more than $100,000

4.

D) $100,000

For the following, please answer "True" or "False" and explain why.


12) A trade-off typically exists between incurring a moral hazard and making an adverse
selection.

13) A good salesperson can sell $1,000,000 worth of goods, while a poor one can sell
only $100,000 worth of goods. Job applicants know if they are good or bad, but the firm
does not. A firm will offer job applicants a choice between a fixed salary and 20%
commission. Assuming risk-neutral salespersons and no opportunistic behavior, what
level must the fixed salary be so that the firm can distinguish a prospective good
salesperson from a poor one, and thereby avoid hiring a poor one?

14) A good salesperson can sell $1,000,000 worth of goods, while a poor one can sell
only $100,000 worth of goods. Job applicants know if they are good or bad, but the firm
does not. A firm will offer job applicants a choice between a fixed salary of $25,000 or
20% commission. Assuming risk-neutral salespersons and the possibility of
opportunistic behavior, will this choice of contracts allow the firm to distinguish between
good salespersons and bad ones before the hiring decision is made?


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