Question 1

The efficiency wage is

Accepted Answer

A)  lower than the market-clearing wage, to penalize shirking. 
B)  higher than the market-clearing wage, to penalize shirking. 
C)  lower than the market-clearing wage, to allow managers the resources to monitor shirking. 
D)  higher than the market-clearing wage, to reward workers for informing on others who shirk. 
E)  lower than the market-clearing wage, because of shirking done by managers. 
A)  lower than the market-clearing wage, to penalize shirking. 
B)  higher than the market-clearing wage, to penalize shirking. 
C)  lower than the market-clearing wage, to allow managers the resources to monitor shirking. 
D)  higher than the market-clearing wage, to reward workers for informing on others who shirk. 
E)  lower than the market-clearing wage, because of shirking done by managers. B

Question 2

When a moral hazard problem exists for automobile driving, the marginal cost of driving

Accepted Answer

A)  is lowered, and the amount of driving done is raised above the efficient level. 
B)  is lowered, and the amount of driving done is lowered below the efficient level. 
C)  is raised, and the amount of driving done is raised above the efficient level. 
D)  is raised, and the amount of driving done is lowered below the efficient level. 
E)  is raised above the efficient level, but market forces keep the total amount of driving is kept at the efficient level. 
A)  is lowered, and the amount of driving done is raised above the efficient level. 
B)  is lowered, and the amount of driving done is lowered below the efficient level. 
C)  is raised, and the amount of driving done is raised above the efficient level. 
D)  is raised, and the amount of driving done is lowered below the efficient level. 
E)  is raised above the efficient level, but market forces keep the total amount of driving is kept at the efficient level. A

Question 3

Which of the following job market signals are less costly for high-quality workers to send than low-quality workers?

Accepted Answer

A)  Spending long hours at the office 
B)  Sending emails to coworkers and supervisors at night and on weekends 
C)  Leaving voice-mail message for colleagues before or after regular business hours 
D)  all of the above 
A)  Spending long hours at the office 
B)  Sending emails to coworkers and supervisors at night and on weekends 
C)  Leaving voice-mail message for colleagues before or after regular business hours 
D)  all of the above A

Question 4

The efficiency wage is

Accepted Answer

A)  a wage at which there is no unemployment, and shirking workers are not counted in the pool of total labor. 
B)  a wage at which there is a positive amount of unemployment. Individuals who are fired for shirking will be penalized with a period of unemployment. 
C)  a wage at which there is a shortage of labor. Firms who fire a worker for shirking will be able to hire another one easily. 
D)  the wage that is paid to high-quality, non-shirking workers. Other workers are paid the market-clearing wage. 
E)  the wage that subtracts the cost of shirking from the market-clearing wage to determine that which is really paid. 
A)  a wage at which there is no unemployment, and shirking workers are not counted in the pool of total labor. 
B)  a wage at which there is a positive amount of unemployment. Individuals who are fired for shirking will be penalized with a period of unemployment. 
C)  a wage at which there is a shortage of labor. Firms who fire a worker for shirking will be able to hire another one easily. 
D)  the wage that is paid to high-quality, non-shirking workers. Other workers are paid the market-clearing wage. 
E)  the wage that subtracts the cost of shirking from the market-clearing wage to determine that which is really paid.

Question 5

Scenario 17.1
Consider the information below:
For Group A the cost of attaining an educational level y is
CS1U1B1AS1U1B0(y) = $6,000y
and for Group B the cost of attaining that level is
CS1U1B1BS1U1B0 (y) = $10,000y.
Employees will be offered $50,000 if they have y  yS1U1P1*S1S1P0.
-Refer to Scenario 17.1. If the threshold educational level y* is set at 7,

Accepted Answer

A)  only individuals in Group A will attain it. 
B)  only individuals in Group B will attain it. 
C)  individuals in both groups will attain it. 
D)  no individuals will attain it. 
E)  some fraction of individuals in each group will attain it. 
A)  only individuals in Group A will attain it. 
B)  only individuals in Group B will attain it. 
C)  individuals in both groups will attain it. 
D)  no individuals will attain it. 
E)  some fraction of individuals in each group will attain it.

Question 6

Over the past several decades, low-productivity and high-productivity workers in the US and other countries have tended to invest in their own human capital by completing more years of college than earlier generations. Which of the following reasons does NOT help to explain this trend?

Accepted Answer

A)  The cost of education for low-productivity workers has declined due to the emergence of online and other nontraditional programs. 
B)  The earnings gap between workers with and without education has grown larger over time. 
C)  The cost of education for high-productivity workers has increased over time. 
D)  The benefit associated with increased education has increased over time. 
A)  The cost of education for low-productivity workers has declined due to the emergence of online and other nontraditional programs. 
B)  The earnings gap between workers with and without education has grown larger over time. 
C)  The cost of education for high-productivity workers has increased over time. 
D)  The benefit associated with increased education has increased over time.

Question 7

Ty's Sporting Goods is considering rewarding employees with profit sharing for good performance. Without the sharing plan, Ty's total cost function is: TC(Q) = 250Q +   
and his marginal cost function is: MC(Q) = 250 +   
. Ty can sell all his output for $500. Calculate Ty's optimal output level. What is his level of profits? If Ty implements the profit sharing plan, his total cost function is: TC(Q) = 125Q +   
and his marginal cost function is: MC(Q) = 125 +   
. If the profit sharing plan entitles his employees to 25% of the profits, should Ty institute the plan?

Accepted Answer

Without the profit sharing plan, Ty's pr

Question 8

Job market signals like dressing well for interviews are not especially effective because:

Accepted Answer

A)  the cost of dressing well is about the same for high-quality and low-quality workers. 
B)  many businesses have adopted casual office attire, so dressing well is not important to the firm. 
C)  federal labor laws prohibit firms from using dress or appearance as an employment criterion. 
D)  none of the above 
A)  the cost of dressing well is about the same for high-quality and low-quality workers. 
B)  many businesses have adopted casual office attire, so dressing well is not important to the firm. 
C)  federal labor laws prohibit firms from using dress or appearance as an employment criterion. 
D)  none of the above

Question 9

Use the following statements to answer this question:
I. Based on the principal-agent framework in economics, we know that the lack of incentive compatibility may arise in private firms but not in public agencies or government bureaus.
II. The key problem in principal-agent situations is the principal's fundamental inability to oversee or supervise the agent.

Accepted Answer

A)  I and II are true. 
B)  I is true and II is false. 
C)  II is true and I is false. 
D)  I and II are false. 
A)  I and II are true. 
B)  I is true and II is false. 
C)  II is true and I is false. 
D)  I and II are false.

Question 10

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

Accepted Answer

A)  Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient. 
B)  This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law. 
C)  Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions. 
D)  Managers in some divisions may not have information about production capacities or costs in related divisions. 
A)  Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient. 
B)  This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law. 
C)  Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions. 
D)  Managers in some divisions may not have information about production capacities or costs in related divisions.

Question 11

Scenario 17.4
Consider the following information:
StowUrStuff Storage is located slightly below sea level in a coastal town. It could build and maintain a flood control system around its property at an annual cost of $1000, and if it did so, the probability of a flood's doing $1,000,000 in damage during the year would be .005. With no flood control system, the probability of such a flood would be .01.
-Refer to Scenario 17.4. If the flood control system were in place, the firm could insure against a flood for an annual premium of

Accepted Answer

A)  $5,000. 
B)  $10,000. 
C)  $100,000. 
D)  $200,000. 
E)  $1,000,000. 
A)  $5,000. 
B)  $10,000. 
C)  $100,000. 
D)  $200,000. 
E)  $1,000,000.

Question 12

Suppose the demand for labor shifts rightward due to economic growth, but the supply of labor remains unchanged. How does this affect the market outcome under an efficiency wage equilibrium?

Accepted Answer

A)  Efficiency wage and employment are higher 
B)  Efficiency wage is lower, employment is higher 
C)  Efficiency wage is higher, employment is lower 
D)  Efficiency wage and employment are lower 
A)  Efficiency wage and employment are higher 
B)  Efficiency wage is lower, employment is higher 
C)  Efficiency wage is higher, employment is lower 
D)  Efficiency wage and employment are lower

Question 13

As part of the most recent collective bargaining agreement with state employees, a state government must offer dental insurance at "reasonable, nonprofit rates." The state plans to self insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $300 per year for corrective dental work and $80 for routine checkups. Administrative costs are expected to average $20 per family. The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of three years. The auditor considers the choice of the plan to be extremely important. Consequently, the auditor has asked you to evaluate the three proposals listed below in terms of their propensity to result in adverse selection and/or moral hazard. Proposal 1 would charge a $400 premium with no deductible. Coverage is extended to preexisting conditions, but to cover the nondeductible clause, routine checkups are not covered. Proposal 2 charges a $200 premium with a $200 deductible. The plan does not cover preexisting conditions, but does cover routine office visits. Proposal 3 charges a $150 premium with a $150 deductible. This plan doesn't cover preexisting conditions or routine checkups. The collective bargaining agreement dictates that participation in the plan must be at the employee's option.

Accepted Answer

Plan 1 creates adverse selection difficu

Question 14

Ford Motor Company was one of the first major companies to adopt a wage structure that is comparable to efficiency wages. What was the outcome of Ford's experiment with efficiency wages?

Accepted Answer

A)  Lower labor force turnover 
B)  Higher labor productivity 
C)  Less absenteeism 
D)  all of the above 
A)  Lower labor force turnover 
B)  Higher labor productivity 
C)  Less absenteeism 
D)  all of the above

Question 15

The "no shirking constraint" (NSC) curve is

Accepted Answer

A)  downward-sloping to reflect the fact that at higher wages, firms will monitor workers more to see whether they are shirking. 
B)  downward-sloping to reflect the fact that shirking tends to be higher in lower-paying industries. 
C)  upward-sloping because at high levels of unemployment, workers will refrain from slacking without much other incentive. 
D)  upward-sloping because at high levels of employment, many "slacking" individuals have been hired. 
E)  vertical because the constraint represents the absolute amount of time a firm will tolerate workers' slacking without laying them off. 
A)  downward-sloping to reflect the fact that at higher wages, firms will monitor workers more to see whether they are shirking. 
B)  downward-sloping to reflect the fact that shirking tends to be higher in lower-paying industries. 
C)  upward-sloping because at high levels of unemployment, workers will refrain from slacking without much other incentive. 
D)  upward-sloping because at high levels of employment, many "slacking" individuals have been hired. 
E)  vertical because the constraint represents the absolute amount of time a firm will tolerate workers' slacking without laying them off.

Question 16

Scenario 17.3
Consider the following information:
The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run.
-Refer to Scenario 17.3. Moral hazard would be eliminated in this situation if

Accepted Answer

A)  the insurer would always charge $300. 
B)  the insurer would always charge $6000. 
C)  the insurer could costlessly monitor whether a fire prevention program has been implemented, and adjust the premium upward if it is not. 
D)  the insurer could costlessly monitor whether a fire prevention program has been implemented, and adjust the premium downward if it is not. 
E)  the fire did not occur. 
A)  the insurer would always charge $300. 
B)  the insurer would always charge $6000. 
C)  the insurer could costlessly monitor whether a fire prevention program has been implemented, and adjust the premium upward if it is not. 
D)  the insurer could costlessly monitor whether a fire prevention program has been implemented, and adjust the premium downward if it is not. 
E)  the fire did not occur.

Question 17

Ms. Moneynickel operates a retail store in the local mall. The marginal product of labor at the mall is a function of employee effort level. The marginal product of employee effort is: MPe(e) = 20 - e. Ms. Moneynickel can sell all the product she stocks for $20. Employees determine their effort level according to the function: e = 10 (w -   
), where   
is the minimum wage. Currently, the minimum wage is $6. The marginal cost to Ms. Moneynickel of effort is: MC(e) =   
. What is the wage rate Ms. Moneynickel should offer her employees to maximize profits? If the minimum wage is increased by $1, how much should Ms. Moneynickel increase the wage rate paid to her employees?

Accepted Answer

Ms. Moneynickel's marginal revenue of th

Question 18

The principal-agent problem in corporations exists because the managers of a firm

Accepted Answer

A)  may pursue their own goals even when the result is lower profit for owners. 
B)  may know how to operate the business better than absentee owners do, and yet not be allowed to. 
C)  are generally unable to do the monitoring that would result in the firm's avoiding moral hazard problems. 
D)  are generally unable to do the monitoring that would result in the firm's avoiding adverse selection. 
E)  are generally unable to monitor workers, who do not care about the profits due the managers. 
A)  may pursue their own goals even when the result is lower profit for owners. 
B)  may know how to operate the business better than absentee owners do, and yet not be allowed to. 
C)  are generally unable to do the monitoring that would result in the firm's avoiding moral hazard problems. 
D)  are generally unable to do the monitoring that would result in the firm's avoiding adverse selection. 
E)  are generally unable to monitor workers, who do not care about the profits due the managers.

Question 19

Firms that have several plants that produce the same or related products are said to be:

Accepted Answer

A)  horizontally integrated. 
B)  vertically integrated. 
C)  conglomerates. 
D)  cooperatives. 
A)  horizontally integrated. 
B)  vertically integrated. 
C)  conglomerates. 
D)  cooperatives.

Question 20

Consider a market in which high-quality and low-quality television sets are sold. Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know. As compared to a situation where both consumers and sellers know the quality of the sets, this situation would

Accepted Answer

A)  cause no change in the ratio of low to high-quality sets sold. 
B)  increase the fraction of high-quality sets sold. 
C)  increase the fraction of low-quality sets sold. 
D)  cause the average price of goods sold to rise. 
A)  cause no change in the ratio of low to high-quality sets sold. 
B)  increase the fraction of high-quality sets sold. 
C)  increase the fraction of low-quality sets sold. 
D)  cause the average price of goods sold to rise.

The efficiency wage is

When a moral hazard problem exists for automobile driving, the marginal cost of driving

Which of the following job market signals are less costly for high-quality workers to send than low-quality workers?

The efficiency wage is

Over the past several decades, low-productivity and high-productivity workers in the US and other countries have tended to invest in their own human capital by completing more years of college than earlier generations. Which of the following reasons does NOT help to explain this trend?

Job market signals like dressing well for interviews are not especially effective because:

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

Suppose the demand for labor shifts rightward due to economic growth, but the supply of labor remains unchanged. How does this affect the market outcome under an efficiency wage equilibrium?

Ford Motor Company was one of the first major companies to adopt a wage structure that is comparable to efficiency wages. What was the outcome of Ford's experiment with efficiency wages?

The "no shirking constraint" (NSC) curve is

The principal-agent problem in corporations exists because the managers of a firm

Firms that have several plants that produce the same or related products are said to be:

Consider a market in which high-quality and low-quality television sets are sold. Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know. As compared to a situation where both consumers and sellers know the quality of the sets, this situation would

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Uncertainty and Consumer Behavior

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Externalities and Public Goods

Filters

Exam 17: Markets With Asymmetric Information

The efficiency wage is

When a moral hazard problem exists for automobile driving, the marginal cost of driving

Which of the following job market signals are less costly for high-quality workers to send than low-quality workers?

The efficiency wage is

Over the past several decades, low-productivity and high-productivity workers in the US and other countries have tended to invest in their own human capital by completing more years of college than earlier generations. Which of the following reasons does NOT help to explain this trend?

Job market signals like dressing well for interviews are not especially effective because:

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

Suppose the demand for labor shifts rightward due to economic growth, but the supply of labor remains unchanged. How does this affect the market outcome under an efficiency wage equilibrium?

Ford Motor Company was one of the first major companies to adopt a wage structure that is comparable to efficiency wages. What was the outcome of Ford's experiment with efficiency wages?

The "no shirking constraint" (NSC) curve is

The principal-agent problem in corporations exists because the managers of a firm

Firms that have several plants that produce the same or related products are said to be:

Consider a market in which high-quality and low-quality television sets are sold. Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know. As compared to a situation where both consumers and sellers know the quality of the sets, this situation would

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Uncertainty and Consumer Behavior

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Externalities and Public Goods

Filters