Exam 17: Markets With Asymmetric Information

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 arises in this situation because once the firm:

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?

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?

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:

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 where y* is an education threshold determined by the employer. They will be offered $90,000 if they have -Refer to Scenario 17.2. The lowest level of y^* that can be set and still have only the high-productivity people meet it is:

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 -A principal-agent problem arises in the situation in Scenario 17.5 because:

The presence of deposit insurance in the savings and loan industry:

In this problem, a labor market exists where employers hire and pay workers according to how much formal education workers possess. Education is a proxy for the level of productivity that employers can expect from workers. Therefore, employers follow a strategy in which they hire workers and pay salaries according to the following conditions: Degrees Above the Values of Post High School High School Level Education During Working Life, B(y) None 0 (y = 0 years) Associate's Degree $30,000 (y = 2 years) Bachelor's Degree $51,000 (y = 4 years) Master's Degree $58,000 (y = 6 years) Assume that there are only two types of worker abilities, those who are less productive (type L) and those who are highly productive (type H). The less productive workers have to study harder than highly productive workers in order to earn any degree. Consequently, the costs (including the psychic costs of study effort) of attaining various levels of education for these two types of employees are different. For less productive workers: C_L(y) = $13,000y For highly productive workers: C_H(y) = $10,000y a. Draw a diagram with years of education on the horizontal axis. Graph the benefits to education B(y) and the costs of education for each of the two types of workers. Discuss what level of education each type of worker should obtain. b. Now use the equations above to verify your answer from part (a) mathematically. c. Explain the value of formal education above the high school level in the market place to employers.

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

Mr. Barnes operates a power plant in the local market. His marginal revenue of average employee effort level is: The marginal cost of effort to Mr. Barnes is: Employees set their effort level according to: 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?

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

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 no flood control system is in place, the expected loss from a flood is:

The completion of a degree or course of study is a good labor market signal:

If individuals are paid the wage at which the supply of labor is equal to the demand for labor,

Which of the following is NOT an example of moral hazard in business?

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

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: The marginal cost of providing standard quality trips each season is: 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?

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

Traditionally, the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood. However, the government has recently denied requests to rebuild some homes that were situated in flood-prone areas. This action represents an attempt to ________ the moral hazard problem associated with building private homes in risky areas.

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 where y* is an education threshold determined by the employer. They will be offered $130,000 if they have -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: