Exam 17: Markets With Asymmetric Information

Use the following statements to answer this question: I. Efficiency wage theory was developed to help explain persistent unemployment and wage discrimination in labor markets. II. Efficiency wage theory recognizes that labor productivity may be affected by the wage rate.

In the insurance market, "moral hazard" refers to the problem that

Scenario 17.2 Consider the information below: For Group K the cost of attaining an educational level y is C_K(y) = $2,000y and for Group M the cost of attaining that level is C_M(y) = $4,000y. Employees will be offered $30,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $90,000 if they have y > . -Refer to Scenario 17.2. The highest level of y^* that can be set and still have the high-productivity people choose to meet it is

A bumper-to-bumper warranty on a used car is a signaling device that

The "efficiency wage" is the wage at which

You want to add a new room on your house, but you are not familiar with the local building contractors and are not sure who to consider for the job. If you ask your friends for referrals, you are using their past experience as a way to evaluate the ________ of the builders.

Assume that a particular state has decided to outlaw the sharing of individuals' credit histories as an illegal invasion of privacy. As a result of this action we would expect the

Credit histories allow firms to

In a competitive labor market, shirking on the job can be a problem. In this market for labor services, the demand for labor is expressed as: W = where W is wage rate (dollars per hour) and L is number employed per unit of time. The no shirking constraint (NSC) is expressed as: NSC = where NSC is the minimum wage workers need not to shirk, and L is the number employed per unit of time. Assume that the labor force L^* = 150,000. Determine the following: a. the level of unemployment that would result when firms pay the efficiency wage b. the market clearing wage c. the efficiency wage

What is the problem with paying plant managers in multi-plant firms according to how much each plant produces relative to its capacity?

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 not in place, the insurer would not be willing to insure against the flood for any premium less than

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 there is no flood insurance and the flood control system is in place, the expected loss from a flood is

Hart's Pinefall Lodge provides guided hunts and fishing trips to their customers in Ontario, Canada. The market price for high quality hunting and fishing trips is $1,250. The market price for standard quality hunting and fishing trips is $750. The marginal cost of providing high quality trips each season is: MC(Q) = 156.25Q. The marginal cost of providing standard quality trips each season is: MC(Q) = 62.5Q. In order to be able to sell their hunting and fishing trips at high quality prices, Hart's Pinefall Lodge must pay an advertising fee of $500 each season. Should the Lodge pay the fee and sell high quality trips?

The problem of adverse selection in insurance results in a situation in which

Suppose Bob owns two factories that are located several hundred miles apart. Bob decides to manage one of the plants himself, and he hires another person to manage the second plant. For purposes of operating the second plant, who is the agent and who is principal?

How does the federal government avoid the asymmetric information problem associated with providing health care to people over 65 years of age?

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. If the fire protection program were not in place, the insurer would not be willing to ensure the warehouse for any amount less than

Scenario 17.5 Consider the following information: Income to the firm from workers who sell door-to-door Bad Luck Good Luck Low Effort (e = 0) $5,000 $7,000 High Effort (e = 1) $7,000 $13,000 Cost of effort: c = $2500e Probabilities: Bad luck = .75; Good luck = .25 -Refer to Scenario 17.5. If a fixed wage of $3000 is given the individual worker, the result will be

Wiz-Bang Games is a new video game maker for the latest game console. As a new game maker, they have not established a reputation of providing quality games. The marginal cost to Wiz-Bang for manufacturing games is: MC(Q) = 0.05Q. The market price for low-quality games is $20. The market price for high-quality games is $65. If Wiz-Bang sells their product in the low quality market, calculate their producer surplus. If Wiz-Bang sells their product in the high quality market, calculate their producer surplus. If Wiz-Bang spends $12,500 on marketing and packaging, they will be perceived as a high quality producer of video games. Should Wiz-Bang spend the $12,500 to provide a signal to video game consumers of producing high quality games?

Scenario 17.1 Consider the information below: For Group A the cost of attaining an educational level y is C_A(y) = $6,000y and for Group B the cost of attaining that level is C_B (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y^*. -Refer to Scenario 17.1. If the threshold educational level y^* is set at 14,