Question 1

In the arena of asymmetric information, standardization (for example, menus at McDonald's restaurants) is a substitute for

Accepted Answer

A)  quality. 
B)  government regulation. 
C)  reputation of individual sellers. 
D)  firms' distinguishing among buyers. 
E)  firms' segregation of buyers. 
A)  quality. 
B)  government regulation. 
C)  reputation of individual sellers. 
D)  firms' distinguishing among buyers. 
E)  firms' segregation of buyers.

Question 2

Because the presence of a warranty for a good is a signal that the good is of high quality,

Accepted Answer

A)  consumers are willing and able to pay more for a good that carries a warranty. 
B)  consumers are willing to buy goods if and only if the goods come with warranties. 
C)  producers do not need to charge extra for warranties. 
D)  producers can use warranties to sort out high-risk customers. 
E)  producers must make warranties available on all goods. 
A)  consumers are willing and able to pay more for a good that carries a warranty. 
B)  consumers are willing to buy goods if and only if the goods come with warranties. 
C)  producers do not need to charge extra for warranties. 
D)  producers can use warranties to sort out high-risk customers. 
E)  producers must make warranties available on all goods.

Question 3

Glen's friend Andre is a big strong guy. Andre will not allow anyone to harm Glen. Glen enjoys teasing people. In fact, Glen's marginal benefit of teasing people is given by: MB(Q) = 75 - 10Q. Generally, people do not enjoy Glen teasing them. Thus, they retaliate to Glen's teasing. Without Andre around to protect Glen from the retaliation, Glen's marginal cost of teasing people is
MC(Q) = 20Q due to the retaliation. However, with Andre around, Glen perceives his marginal costs of teasing to always be zero as no one will retaliate with Andre around. This is because Andre will step in to protect Glen from retaliation. Without Andre around, what is Glen's choice for teasing? How much does Glen increase teasing when Andre's around? Is Glen's behavior characteristic of a moral hazard or adverse selection?

Accepted Answer

Without Andre around, Glen will set: MB(

Question 4

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 10,

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 5

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 arises in this situation because once the firm

Accepted Answer

A)  pays the premium that is based on the .005 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .005. 
B)  pays the premium that is based on the .01 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .01. 
C)  provides for flood control, it has less incentive to spend $5000 on premiums, leaving itself underinsured. 
D)  provides for flood control, it has less incentive to spend $10,000 on premiums, leaving itself underinsured. 
E)  provides for flood control, it will consider that a substitute for insurance and not be able to deal with the loss from a flood should it occur. 
A)  pays the premium that is based on the .005 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .005. 
B)  pays the premium that is based on the .01 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .01. 
C)  provides for flood control, it has less incentive to spend $5000 on premiums, leaving itself underinsured. 
D)  provides for flood control, it has less incentive to spend $10,000 on premiums, leaving itself underinsured. 
E)  provides for flood control, it will consider that a substitute for insurance and not be able to deal with the loss from a flood should it occur.

Question 6

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 low effort is exerted, expected income is

Accepted Answer

A)  $5000. 
B)  $5500. 
C)  $6000. 
D)  $6500. 
E)  $7000. 
A)  $5000. 
B)  $5500. 
C)  $6000. 
D)  $6500. 
E)  $7000.

Question 7

Many business professionals constantly monitor their incoming email and text messages so they can appear to be alert and responsive, even at night and on weekends. Alternatively, some time management consultants recommend that business professionals should not constantly check for new messages because this practice distracts the worker from scheduled tasks that may have higher priority. The decision to check email or text messages less frequently may not harm the worker's salary if it is a:

Accepted Answer

A)  weak signal of worker ability. 
B)  weak signal of cell phone strength. 
C)  strong signal of worker ability. 
D)  strong signal of ease of distraction. 
A)  weak signal of worker ability. 
B)  weak signal of cell phone strength. 
C)  strong signal of worker ability. 
D)  strong signal of ease of distraction.

Question 8

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

Accepted Answer

A)  horizontally integrated. 
B)  vertically integrated. 
C)  multinationals. 
D)  corporations. 
A)  horizontally integrated. 
B)  vertically integrated. 
C)  multinationals. 
D)  corporations.

Question 9

A certain firm can hire two types of workers: Group A workers who have high productivity and Group B workers with low productivity. Group A workers will add $27,500 to the firm's revenues per year, while Group B workers will increase the firm's revenues by $15,000 per year. The firm's managers expect workers to be employed for eight years. The differences in the workers' productivity levels are reflected in their costs per year of education. Each year of education (which includes the psychic costs of study effort) costs an A worker $12,500, while each year costs a B worker $25,000.
a. Under competitive conditions, how much would A and B workers earn?
b. Assuming that the firm is unable to distinguish A from B workers and that it is equally likely that a worker is of either type, what pay scale will the firm offer?
c. Suppose that the firm decides to use education as a market signaling device to distinguish A workers from B workers. What education requirement could the firm set?

Accepted Answer

a.
Under competitive conditions workers

Question 10

Explain what the principal-agent problem is, and discuss evidence of its existence in the banking industry in the United States.

Accepted Answer

The principal-agent problem is an exampl

In the arena of asymmetric information, standardization (for example, menus at McDonald's restaurants) is a substitute for

Because the presence of a warranty for a good is a signal that the good is of high quality,

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

Explain what the principal-agent problem is, and discuss evidence of its existence in the banking industry in the United States.

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

In the arena of asymmetric information, standardization (for example, menus at McDonald's restaurants) is a substitute for

Because the presence of a warranty for a good is a signal that the good is of high quality,

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

Explain what the principal-agent problem is, and discuss evidence of its existence in the banking industry in the United States.

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