Question 1

The principal-agent problem of ownership vs. control of the corporation arises when owners and managers:

Accepted Answer

A)  are the same people. 
B)  pursue objectives that differ from those their customers wish them to pursue. 
C)  pursue objectives that differ from those their workers wish them to pursue. 
D)  pursue objectives that differ from those the government wishes them to pursue. 
E)  pursue different objectives. 
A)  are the same people. 
B)  pursue objectives that differ from those their customers wish them to pursue. 
C)  pursue objectives that differ from those their workers wish them to pursue. 
D)  pursue objectives that differ from those the government wishes them to pursue. 
E)  pursue different objectives.

Question 2

Prestige University grants degrees only to high skill students who perform well for their eventual employers. Mediocre University grants degrees only to low skill students. The market demand for newly graduated high skilled workers is:   The market demand for newly graduated low skilled workers is:   Currently, Prestige University graduates 1,000 students while Mediocre University graduates 5,000. Determine the equilibrium prices for low and high skilled graduates. Suppose that in an effort to cut costs, the State has merged Prestige University and Mediocre University into State University. This merger has eliminated the signal that employers use to rely on to discern graduate quality. As a result, the demand for State University graduates is:   The number of graduates from State University will be 6,000. Calculate the equilibrium price for State University graduates. Before the merger, would students at both Universities be willing to pay higher tuition in an effort to prevent the Universities from merging? Why or why not?

Accepted Answer

Before the merger, equilibrium in the hi

Question 3

Which of the following statements is NOT a reason that the cost of a college education is greater for the low-productivity group than for the high-productivity group?

Accepted Answer

A)  The wages they give up by going to college instead of working will tend to be higher for them. 
B)  They may have to pay for tutoring services or other extra help to accomplish the same educational goal. 
C)  They may have to take remedial classes, which would increase the length of time it takes to accomplish the same goal. 
D)  Even if they take no remedial classes, they may have to spend more time studying for each class, and the value of their leisure time needs to be considered in the calculation. 
E)  Based on previous signaling, such as from their high school grades or SATs, they may receive less merit-based financial assistance, and thus be under a greater financial strain during their college years. 
A)  The wages they give up by going to college instead of working will tend to be higher for them. 
B)  They may have to pay for tutoring services or other extra help to accomplish the same educational goal. 
C)  They may have to take remedial classes, which would increase the length of time it takes to accomplish the same goal. 
D)  Even if they take no remedial classes, they may have to spend more time studying for each class, and the value of their leisure time needs to be considered in the calculation. 
E)  Based on previous signaling, such as from their high school grades or SATs, they may receive less merit-based financial assistance, and thus be under a greater financial strain during their college years.

Question 4

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:   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   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: @#IMG-DLM& If

Question 5

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.

Question 6

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   where y* is an education threshold determined by the employer. They will be offered $130,000 if they have  
-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 7

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 8

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees. Currently, the employees receive an annual bonus. Trisha can sell all the output she produces for $150 per unit. Trisha's total cost function (including bonus payments to employees) is:   The marginal cost function is:   The profit sharing plan would pay employees 30% of profits. However, due to greater cost saving initiatives from employees, Trisha's total cost function becomes:   The relevant marginal cost function becomes:   Which plan offers Trisha the greatest profits for herself?

Accepted Answer

With the bonus plan, Trisha's profit max

Question 9

In the text, the authors present evidence that the market for free agents in professional baseball is subject to the lemons problem. How could a prospective free agent overcome this problem when seeking a new contract?

Accepted Answer

A)  Agree to accept a lower salary with a new team. 
B)  Rely on standardization to avoid the asymmetric information problem. 
C)  Decide to negotiate only with their current team. 
D)  Develop a reputation as a reliable and productive player. 
A)  Agree to accept a lower salary with a new team. 
B)  Rely on standardization to avoid the asymmetric information problem. 
C)  Decide to negotiate only with their current team. 
D)  Develop a reputation as a reliable and productive player.

Question 10

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees. Currently, the employees receive an annual bonus. In a "Boom" market, Trisha can sell all the output she produces for $225 per unit. In a "Bust" market, Trisha can sell all the output she produces for $125 per unit. The probability of a "Boom" market is 75% and the probability of a bust market is 25%. Trisha's total cost function (including bonus payments to employees) is:   The marginal cost function is:   The profit sharing plan would pay employees 30% of profits. However, due to greater cost saving initiatives from employees, Trisha's total cost function becomes:   . The relevant marginal cost function becomes:   Which plan offers Trisha the greatest expected profits for herself? Suppose the employees will only approve a profit sharing plan if they are guaranteed their portion of profits will be at least $400. Will the employees approve of the profit sharing program?

Accepted Answer

The table below displays Trisha's profit

Question 11

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:

Accepted Answer

A)  cost of borrowing money to rise. 
B)  number of loans to unworthy credit risks to rise. 
C)  problems of asymmetric information to become more severe. 
D)  all of the above 
E)  none of the above 
A)  cost of borrowing money to rise. 
B)  number of loans to unworthy credit risks to rise. 
C)  problems of asymmetric information to become more severe. 
D)  all of the above 
E)  none of the above

Question 12

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 13

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 14

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?

Accepted Answer

A)  Bob is the agent and the manager is the principal. 
B)  Bob is the principal and the manager is Bob's agent. 
C)  Both Bob and the manager are principals. 
D)  We need more information to determine the identities of the principal and the agent in this case. 
A)  Bob is the agent and the manager is the principal. 
B)  Bob is the principal and the manager is Bob's agent. 
C)  Both Bob and the manager are principals. 
D)  We need more information to determine the identities of the principal and the agent in this case.

Question 15

Figure 17.6.1
-Refer to Figure 17.6.1 above. When the no-shirking constraint (NSC) is applied, there is:

Accepted Answer

A)  an increase in the quantity of labor demanded, beyond the quantity of labor supplied. 
B)  an efficiency wage rate with shirking higher than the wage without shirking. 
C)  a reduction in unemployment once the wage rate with shirking is applied. 
D)  an increase in wage rigidity that makes the supply of labor vertical. 
A)  an increase in the quantity of labor demanded, beyond the quantity of labor supplied. 
B)  an efficiency wage rate with shirking higher than the wage without shirking. 
C)  a reduction in unemployment once the wage rate with shirking is applied. 
D)  an increase in wage rigidity that makes the supply of labor vertical.

Question 16

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

Accepted Answer

A)  insurers can't tell high-risk customers from low-risk customers. 
B)  high-risk customers have an incentive to give false signals to make themselves look like low-risk customers. 
C)  companies may unfairly lump individuals together by race, sex, age or other characteristics in an attempt to use demographic data to pinpoint high-risk populations. 
D)  individuals are willing and able to pay different amounts for insurance, but must all be charged the same amount. 
E)  individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before. 
A)  insurers can't tell high-risk customers from low-risk customers. 
B)  high-risk customers have an incentive to give false signals to make themselves look like low-risk customers. 
C)  companies may unfairly lump individuals together by race, sex, age or other characteristics in an attempt to use demographic data to pinpoint high-risk populations. 
D)  individuals are willing and able to pay different amounts for insurance, but must all be charged the same amount. 
E)  individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before.

Question 17

Cecil's Home Appliances sells high quality washing machines. Cecil's marginal cost function is:   Zach's Appliances sells low quality washing machines. Zach's marginal cost function is:   The market demand for high quality washing machines is:   The market demand for low quality washing machines is:   If Consumer's can distinguish between the quality of Cecil's and Zach's machines (and Cecil and Zach behave as price takers), determine the equilibrium price of washing machines. Calculate Cecil's producer surplus. Now, suppose that consumers cannot distinguish between the quality of Cecil's and Zach's washing machines. In this case, the demand for washing machines is:   Determine the joint market supply curve. Calculate the equilibrium price of washing machines and the quantity brought to market by Cecil and Zach. What is Cecil's producer surplus? If Cecil offers a warranty on his washing machines, his marginal cost function becomes:   However, consumers will then perceive his machines to be high quality. Should Cecil offer the warranty?

Accepted Answer

In the high quality market, Cecil sets:

Question 18

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 19

In the economic literature on principal-agent problems, the ________ is the person who takes some action, and the ________ is the person whom the action affects.

Accepted Answer

A)  agent; principal 
B)  principal; agent 
C)  Both statements describe the agent. 
D)  Both statements describe the principal. 
A)  agent; principal 
B)  principal; agent 
C)  Both statements describe the agent. 
D)  Both statements describe the principal.

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   where y* is an education threshold determined by the employer. They will be offered $130,000 if they have  
-Refer to Scenario 17.1. If the threshold educational level y* is set at 14,

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.

The principal-agent problem of ownership vs. control of the corporation arises when owners and managers:

Which of the following statements is NOT a reason that the cost of a college education is greater for the low-productivity group than for the high-productivity group?

The efficiency wage is:

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

In the text, the authors present evidence that the market for free agents in professional baseball is subject to the lemons problem. How could a prospective free agent overcome this problem when seeking a new contract?

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:

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?

Which of the following represent examples of adverse selection?

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?

Figure 17.6.1 -Refer to Figure 17.6.1 above. When the no-shirking constraint (NSC) is applied, there is:

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

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?

In the economic literature on principal-agent problems, the is the person who takes some action, and the is the person whom the action affects.

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

Behavioral Economics

Filters

Exam 17: Markets With Asymmetric Information

The principal-agent problem of ownership vs. control of the corporation arises when owners and managers:

Which of the following statements is NOT a reason that the cost of a college education is greater for the low-productivity group than for the high-productivity group?

The efficiency wage is:

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

In the text, the authors present evidence that the market for free agents in professional baseball is subject to the lemons problem. How could a prospective free agent overcome this problem when seeking a new contract?

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:

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?

Which of the following represent examples of adverse selection?

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?

Figure 17.6.1 -Refer to Figure 17.6.1 above. When the no-shirking constraint (NSC) is applied, there is:

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

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?

In the economic literature on principal-agent problems, the ________ is the person who takes some action, and the ________ is the person whom the action affects.

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

Behavioral Economics

Filters

In the economic literature on principal-agent problems, the is the person who takes some action, and the is the person whom the action affects.