Question 1

What do we mean when we state that a particular principal-agent payment scheme is inefficient?

Accepted Answer

A)  The principal and agent could find another agreement that would increase the sum of the owner's revenue and the worker's payment. 
B)  The agreement involves the highest level of effort for the worker. 
C)  The agreement leads to the lowest level of revenue for the owner. 
D)  The sum of the income taxes paid by the owner and the worker is too high. 
A)  The principal and agent could find another agreement that would increase the sum of the owner's revenue and the worker's payment. 
B)  The agreement involves the highest level of effort for the worker. 
C)  The agreement leads to the lowest level of revenue for the owner. 
D)  The sum of the income taxes paid by the owner and the worker is too high.

Question 2

The "no shirking constraint" (NSC) curve never crosses the supply of labor curve, so

Accepted Answer

A)  the market never reaches equilibrium. 
B)  there is always full employment in equilibrium. 
C)  there is always some unemployment in equilibrium. 
D)  the efficiency wage is always lower than the market-clearing wage. 
E)  the gap between the NSC curve and the supply of labor curve equals the difference between the efficiency wage and the market-clearing wage. 
A)  the market never reaches equilibrium. 
B)  there is always full employment in equilibrium. 
C)  there is always some unemployment in equilibrium. 
D)  the efficiency wage is always lower than the market-clearing wage. 
E)  the gap between the NSC curve and the supply of labor curve equals the difference between the efficiency wage and the market-clearing wage.

Question 3

Which of the following represent examples of adverse selection?

Accepted Answer

A)  Unhealthy people are more likely to want health insurance. 
B)  Careless drivers purchasing extra auto insurance. 
C)  Risk averse individuals choosing to buy extra insurance. 
D)  all of the above 
E)  A and B only 
A)  Unhealthy people are more likely to want health insurance. 
B)  Careless drivers purchasing extra auto insurance. 
C)  Risk averse individuals choosing to buy extra insurance. 
D)  all of the above 
E)  A and B only

Question 4

A warranty is most valuable as a signaling device when

Accepted Answer

A)  the buyer has much more information about the product than the seller does. 
B)  the seller has much more information about the product than the buyer does. 
C)  the buyer has much more information about his or her own preferences than the seller does. 
D)  neither the buyer nor the seller has good information about the product. 
E)  neither the buyer nor the seller has good information about consumer preferences. 
A)  the buyer has much more information about the product than the seller does. 
B)  the seller has much more information about the product than the buyer does. 
C)  the buyer has much more information about his or her own preferences than the seller does. 
D)  neither the buyer nor the seller has good information about the product. 
E)  neither the buyer nor the seller has good information about consumer preferences.

Question 5

Mr. Barnes operates a power plant in the local market. His marginal revenue of average employee effort level is: MR(e) = 25 - e. The marginal cost of effort to Mr. Barnes is: MC(e) = w. Employees set their effort level according to: e =   
, where   
is the average wage at all other jobs in the local market. Currently, this average is $7.50. If Mr. Barnes pays a wage rate of $7.50, is he maximizing profits? If not, what wage rate should Mr. Barnes pay?

Accepted Answer

If Mr. Barnes sets the wage rate to $7.5

Question 6

Which of the following is TRUE about producers' willingness to offer warranties on products?

Accepted Answer

A)  Producers are equally likely to offer warranties on high-quality and low-quality goods. 
B)  Producers are more likely to offer warranties on low-quality goods, because without the signal that the warranty provides, the low-quality good wouldn't sell. 
C)  Producers are more likely to offer warranties on high-quality goods, because the expected cost of repairs is lower for those goods. 
D)  Producers have an incentive to deal with third-party companies to provide the warranties, so that an "impartial" view of the product is given to the consumer. 
E)  Producers will not offer warranties in any market that suffers from asymmetric information. 
A)  Producers are equally likely to offer warranties on high-quality and low-quality goods. 
B)  Producers are more likely to offer warranties on low-quality goods, because without the signal that the warranty provides, the low-quality good wouldn't sell. 
C)  Producers are more likely to offer warranties on high-quality goods, because the expected cost of repairs is lower for those goods. 
D)  Producers have an incentive to deal with third-party companies to provide the warranties, so that an "impartial" view of the product is given to the consumer. 
E)  Producers will not offer warranties in any market that suffers from asymmetric information.

Question 7

The presence of deposit insurance in the savings and loan industry

Accepted Answer

A)  created an adverse selection problem because good S&Ls were forced out of the market. 
B)  solved its own adverse selection problem because it pushed badly managed S&Ls out of the market. 
C)  contributed to "depositor moral hazard" but did not involve a moral hazard problem with owners. 
D)  contributed to "moral hazard by owners" but did not involve a moral hazard problem with depositors. 
E)  contributed to both "depositor moral hazard" and "moral hazard by owners." 
A)  created an adverse selection problem because good S&Ls were forced out of the market. 
B)  solved its own adverse selection problem because it pushed badly managed S&Ls out of the market. 
C)  contributed to "depositor moral hazard" but did not involve a moral hazard problem with owners. 
D)  contributed to "moral hazard by owners" but did not involve a moral hazard problem with depositors. 
E)  contributed to both "depositor moral hazard" and "moral hazard by owners."

Question 8

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet). What is the source of the asymmetric information problem in this case?

Accepted Answer

A)  The bank has more information about the true cost of the corporate jet than the firm. 
B)  The bank has more information about the opportunity cost of the loaned funds. 
C)  The firm has more information about the actual use of the funds than the bank. 
D)  The firm has more information about the interest rate on the loan than the bank. 
A)  The bank has more information about the true cost of the corporate jet than the firm. 
B)  The bank has more information about the opportunity cost of the loaned funds. 
C)  The firm has more information about the actual use of the funds than the bank. 
D)  The firm has more information about the interest rate on the loan than the bank.

Question 9

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. Moral hazard would be eliminated in this situation if

Accepted Answer

A)  the insurer would always charge $5000. 
B)  the insurer would always charge $10,000. 
C)  the insurer could costlessly monitor whether a flood control system is in place, and adjust the premium upward if it is not. 
D)  the insurer could costlessly monitor whether a flood control system is in place, and adjust the premium downward if it is not. 
E)  the flood did not occur. 
A)  the insurer would always charge $5000. 
B)  the insurer would always charge $10,000. 
C)  the insurer could costlessly monitor whether a flood control system is in place, and adjust the premium upward if it is not. 
D)  the insurer could costlessly monitor whether a flood control system is in place, and adjust the premium downward if it is not. 
E)  the flood did not occur.

Question 10

Scenario 17.2
Consider the information below:
For Group K the cost of attaining an educational level y is
CS1U1B1KS1U1B0(y) = $2,000y
and for Group M the cost of attaining that level is
CS1U1B1MS1U1B0(y) = $4,000y.
Employees will be offered $30,000 if they have y    .
-Refer to Scenario 17.2. An employer who only wants to hire those people who find learning less costly can do so by choosing y* to be anywhere between

Accepted Answer

A)  15 and 45. 
B)  15 and 30. 
C)  13 1/3 and 30. 
D)  8 and 20. 
E)  none of the above 
A)  15 and 45. 
B)  15 and 30. 
C)  13 1/3 and 30. 
D)  8 and 20. 
E)  none of the above

Question 11

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. Under which of the following payment schemes would workers have an incentive to exert high effort?

Accepted Answer

A)  A guaranteed wage equal to $0 
B)  A guaranteed wage equal to $5000 
C)  A guaranteed wage equal to $10,000 
D)  A wage equal to the income earned, minus $4000 
E)  A wage equal to $0 if revenue is $5000, $2000 if revenue is $7000, and $8000 if revenue is $13,000 
A)  A guaranteed wage equal to $0 
B)  A guaranteed wage equal to $5000 
C)  A guaranteed wage equal to $10,000 
D)  A wage equal to the income earned, minus $4000 
E)  A wage equal to $0 if revenue is $5000, $2000 if revenue is $7000, and $8000 if revenue is $13,000

Question 12

Asymmetric information problems arise

Accepted Answer

A)  in horizontally integrated firms, but not vertically integrated firms. 
B)  in vertically integrated firms, but not horizontally integrated firms. 
C)  in both vertically and horizontally integrated firms. 
D)  only in firms that do not have the advantage of either horizontal or vertical integration. 
E)  only when a single firm is both horizontally and vertically integrated. 
A)  in horizontally integrated firms, but not vertically integrated firms. 
B)  in vertically integrated firms, but not horizontally integrated firms. 
C)  in both vertically and horizontally integrated firms. 
D)  only in firms that do not have the advantage of either horizontal or vertical integration. 
E)  only when a single firm is both horizontally and vertically integrated.

Question 13

The problem of asymmetric information in multi-plant firms involves

Accepted Answer

A)  only the problem of how to get managers to produce as much as possible. 
B)  only the problem of how to get managers to produce the amount the larger firm wants them to, whether it be a lot or a little. 
C)  both the problem of how to get managers to produce the appropriate amount and the problem of how to get them to accurately report their capacity. 
D)  both the problem of how to get managers to produce the appropriate amount and the problem of how to get them to not sell that output outside of the firm. 
E)  both the problems of vertical and horizontal integration with the rest of the firm. 
A)  only the problem of how to get managers to produce as much as possible. 
B)  only the problem of how to get managers to produce the amount the larger firm wants them to, whether it be a lot or a little. 
C)  both the problem of how to get managers to produce the appropriate amount and the problem of how to get them to accurately report their capacity. 
D)  both the problem of how to get managers to produce the appropriate amount and the problem of how to get them to not sell that output outside of the firm. 
E)  both the problems of vertical and horizontal integration with the rest of the firm.

Question 14

Explain what the principal-agent problem is, and explain evidence of its existence in hospitals in the United States.

Accepted Answer

The principal-agent problem is an exampl

Question 15

Which of the following is TRUE about a college education as a signaling device?

Accepted Answer

A)  It is a useful signal only if individuals choose majors related to their ultimate field of employment. 
B)  It is a useful signal only if a college education is open to all individuals, no matter what their previous level of educational accomplishment was. 
C)  It is a useful signal whether or not people actually learn anything in college. 
D)  It is a useful signal only if the job in question cannot be done without the preparatory coursework the college degree required. 
E)  It is less and less a useful signal in the post-industrial economy, where the skill sets employers need change so rapidly. 
A)  It is a useful signal only if individuals choose majors related to their ultimate field of employment. 
B)  It is a useful signal only if a college education is open to all individuals, no matter what their previous level of educational accomplishment was. 
C)  It is a useful signal whether or not people actually learn anything in college. 
D)  It is a useful signal only if the job in question cannot be done without the preparatory coursework the college degree required. 
E)  It is less and less a useful signal in the post-industrial economy, where the skill sets employers need change so rapidly.

Question 16

How do online auction sites like Ebay attempt to overcome the asymmetric information problems associated with goods that the buyer cannot personally inspect before purchase?

Accepted Answer

A)  The online auction firm only allows high-quality merchandise to be sold at their site. 
B)  The previous performance (reputations) of the buyer and seller are posted for public review. 
C)  Buyers can take receipt of any goods before they have to pay the seller. 
D)  all of the above 
A)  The online auction firm only allows high-quality merchandise to be sold at their site. 
B)  The previous performance (reputations) of the buyer and seller are posted for public review. 
C)  Buyers can take receipt of any goods before they have to pay the seller. 
D)  all of the above

Question 17

The professional baseball league on planet Economus allows team owners to draft players for life. Once a player is acquired in the draft, team owners may trade players to other teams. The demand for high quality players is:   
= 2,000 -   
. The supply of high quality players is:   
=   
- 500. What is the lowest price necessary to induce an owner to trade a high quality player. Determine the equilibrium price and quantity of high quality players. The demand for low quality players is:   
= 400 -   
. The supply of low quality players is:   
=   
- 125.
Determine the equilibrium price and quantity of low skill players. Now, suppose that only the team that has the rights to the player knows the quality of the player. This implies the new demand for players of uncertain quality is: QD = 1,200 -   
. The supply of players becomes:
QS = {   
Derive the equilibrium price and quantity for players of uncertain ability. Do you believe any high quality players are being traded at this new market price?

Accepted Answer

The lowest price necessary to induce an

Question 18

Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true? The

Accepted Answer

A)  fraction of high quality appliances will be greater than under perfect knowledge. 
B)  fractions of high and low quality appliances will be the same as with perfect information. 
C)  fraction of high quality appliances will be less than with perfect information. 
D)  none of the above 
A)  fraction of high quality appliances will be greater than under perfect knowledge. 
B)  fractions of high and low quality appliances will be the same as with perfect information. 
C)  fraction of high quality appliances will be less than with perfect information. 
D)  none of the above

Question 19

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. The highest level of y* that can be set and still have the high-productivity people choose to meet it is

Accepted Answer

A)  16. 
B)  13 1/3. 
C)  13. 
D)  8. 
E)  0. 
A)  16. 
B)  13 1/3. 
C)  13. 
D)  8. 
E)  0.

Question 20

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. The lowest level of y* that can be set and still have only the high-productivity people meet it is

Accepted Answer

A)  16. 
B)  13 1/3. 
C)  13. 
D)  8. 
E)  0. 
A)  16. 
B)  13 1/3. 
C)  13. 
D)  8. 
E)  0.

What do we mean when we state that a particular principal-agent payment scheme is inefficient?

The "no shirking constraint" (NSC) curve never crosses the supply of labor curve, so

Which of the following represent examples of adverse selection?

A warranty is most valuable as a signaling device when

Which of the following is TRUE about producers' willingness to offer warranties on products?

The presence of deposit insurance in the savings and loan industry

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet). What is the source of the asymmetric information problem in this case?

Asymmetric information problems arise

The problem of asymmetric information in multi-plant firms involves

Explain what the principal-agent problem is, and explain evidence of its existence in hospitals in the United States.

Which of the following is TRUE about a college education as a signaling device?

How do online auction sites like Ebay attempt to overcome the asymmetric information problems associated with goods that the buyer cannot personally inspect before purchase?

Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true? The

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

What do we mean when we state that a particular principal-agent payment scheme is inefficient?

The "no shirking constraint" (NSC) curve never crosses the supply of labor curve, so

Which of the following represent examples of adverse selection?

A warranty is most valuable as a signaling device when

Which of the following is TRUE about producers' willingness to offer warranties on products?

The presence of deposit insurance in the savings and loan industry

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet). What is the source of the asymmetric information problem in this case?

Asymmetric information problems arise

The problem of asymmetric information in multi-plant firms involves

Explain what the principal-agent problem is, and explain evidence of its existence in hospitals in the United States.

Which of the following is TRUE about a college education as a signaling device?

How do online auction sites like Ebay attempt to overcome the asymmetric information problems associated with goods that the buyer cannot personally inspect before purchase?

Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true? The

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