Exam 17: Markets With Asymmetric Information

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. An employer who only wants to hire those people who find learning less costly can do so by choosing y^* to be anywhere between:

What is the problem with paying plant managers in multi-plant firms according to the level of output they produce?

Which incentive scheme would simultaneously elicit accurate information about feasible plant production levels and motivate managers to perform up to potential (in the following schemes, B is the bonus payment, Q is actual plant output, and Q_f is the manager's estimate of feasible output)?

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

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

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

The "efficiency wage" is the wage at which:

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

Ty's Sporting Goods is considering rewarding employees with profit sharing for good performance. Without the sharing plan, Ty's total cost function is: and his marginal cost function is: Ty can sell all his output for $500. Calculate Ty's optimal output level. What is his level of profits? If Ty implements the profit sharing plan, his total cost function is: and his marginal cost function is: If the profit sharing plan entitles his employees to 25% of the profits, should Ty institute the plan?

Figure 17.1.1 -Used cars sell for much less than new cars because:

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:

Which of the following job market signals are less costly for high-quality workers to send than low-quality workers?

The problem of production in multi-plant firms with asymmetric information can be solved by paying the manager:

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:

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?

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 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?

Why do workers tend to choose low effort levels when they are compensated with fixed wage payments?

The bonus of a plant manager in a vertically integrated firm is based on the following formula: Bonus = 10,000 - 0.5(Q_f - Q) Where Q_f is feasible production and Q is actual production. The value for Q_f is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive:

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?