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For economists, the NCAA basketball tournament is more than just a three-week sporting event--it's an annual natural experiment.
1. NCAA tournament pools are a popular pastime, in which participants pool together funds and award prize money to those most successful at picking tournament game winners. One study of the 1993 tournament found that 80 percent of Boston participants picked a No. 1 seed (one of the top four ranked teams) to win the whole tournament, while prior odds indicate that these teams would have only a 50 percent chance of winning. Which is the best explanation of how an economist would play such a pool to maximize the expected payoff? |
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| Pick a No. 1, because the participants must know something the odds don’t
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| Pick a No. 2 or 3, because the expected payoff of No. 1 seeds is diluted
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| Pick a random team because the market will even the payoff for all teams
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| Pick a No. 16 seed to win, because economists always root for the underdog
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2. NCAA men’s basketball has been a wildly profitable enterprise in recent years at its highest level of Division I, largely due to a $6.2 billion television contract with CBS. Although college basketball revenue has been rising, student-athletes do not receive additional funds because of scholarship limits imposed by the NCAA on its member schools. Which of the following economic classifications best describes the relationship between the NCAA Division I scholarship schools and their athletes? |
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| A market where one seller has undue influence (a monopoly)
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| A market where one buyer has undue influence (a monopsony)
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| A market where a few sellers affect but do not control the market (an oligopoly)
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| A market with many buyer and sellers (perfect competition)
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3. A school sponsoring college basketball observes that its potential financial reward for outstanding tournament performance increased more than its competitors over the past five years, yet the school showed no improvement in actual tournament performance over the same period of time. Which of the following economic classifications best explains this behavior? |
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| The market does not recognize the total impact of economic activity (externalities)
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| The buyers in the market know more than the sellers (asymmetric information)
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| Individuals change their behavior after signing a contract (moral hazard)
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| Incentives are not aligned between owners and workers (principal-agent problem)
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4. Aside from tournament pools, thousands of people also bet on individual basketball game results. One popular way to do this is to bet for or against point spreads, the number of points by which a favored team is expected to beat a weaker team. There’s evidence that teams with long winning streaks do worse on average than point spreads would predict, and that teams with long losing streaks do better on average. Which of the following behavioral phenomena is the best explanation for this bias? |
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| Subjects tend to overestimate the likelihood of an event whose probability of occurring is close to zero
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| Subjects generally expect fewer long streaks than actually occur in a random series
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| Subjects believe that losing streaks have more permanence than winning streaks
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| Subjects are adverse to risk
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