Question 1

Julia is a 28-year-old nonsmoking,non-drinking female of normal weight.Because of adverse selection in health insurance,

Accepted Answer

A) She will be charged less for her premiums than people who are higher risks. 
B) She is less likely to buy health insurance than the average person,because policy premiums are based on expected medical expenditures of people who are less healthy than she is. 
C) When she get health insurance,she will be less likely to take care of herself. 
D) She must get health insurance early in life,and is likely to lose health insurance if she smokes,drinks to excess,or gains weight. 
E) She is more likely than the average person to buy health insurance,because she is more likely to be offered it. 
A) She will be charged less for her premiums than people who are higher risks. 
B) She is less likely to buy health insurance than the average person,because policy premiums are based on expected medical expenditures of people who are less healthy than she is. 
C) When she get health insurance,she will be less likely to take care of herself. 
D) She must get health insurance early in life,and is likely to lose health insurance if she smokes,drinks to excess,or gains weight. 
E) She is more likely than the average person to buy health insurance,because she is more likely to be offered it. B

Question 2

Suppose new electronic devices make it easier to monitor the effort levels of workers.If some shirking is still possible in the efficiency wage model,what happens to the level of unemployment?

Accepted Answer

A) Increases,but some unemployment remains 
B) Increases,and the labor market reaches full employment 
C) Decreases 
D) Does not change 
A) Increases,but some unemployment remains 
B) Increases,and the labor market reaches full employment 
C) Decreases 
D) Does not change A

Question 3

Assume that the owners of a firm know that the firm's profits will depend upon two parameters: (1)how hard the managers work,and (2)the state of the economy.For simplicity,assume that the managers can exert either maximum or minimum effort and that the economy can be either favorable or unfavorable.The profits under various situations are represented by the matrix below.
Favorable Unfavorable
Economy Economy
Maximum Effort 700,000 400,000
Minimum Effort 400,000 200,000
The firm considers there to be an equal probability of either state of the economy.The manager considers the cost of effort to be C = 55,000 x,where x = 1 for maximum effort,0 for minimum effort.The firm is considering the pay scheme described below.Evaluate each alternative in terms of their incentive effects for the manager and their effect on the firm's profitability.
a.a flat salary of $30,000 that is not tied to the firm's performance
b.a bonus of 0 if profit equals 200,000 or 400,000 and a bonus of 120,000
if profit equals 700,000
c.a bonus determined by the formula: B = 0.20(PROFIT - 300,000)
d.a bonus determined by the formula: B = 0.24(PROFIT - 300,000)

Accepted Answer

a. The flat salary provides no incentive for maximum effort.The expected profit is $300,000 under these circumstances. b. The bonus of 0 to $120,000 will be effective.The expected bonus is $60,000 = [0.5(0)+ 0.5(120,000)].The $60,000 exceeds the cost of effort to the manager inducing maximum effort.With maximum effort the firm's net profit will rise either to $400,000 or $700,000 - $120,000 or $580,000. c. The scheme will not induce maximum effort.If the manager exerts maximum effort,expected profit is $550,000.With an expected profit of $550,000,the expected bonus is: B^E = 0.20(550,000 - 300,000) B^E = 50,000 The expected bonus is less than the cost associated with maximum effort. d. This bonus scheme would be effective in bringing about maximum effort. B^E = 0.24(550,000 - 300,000) B^E = 60,000 The expected bonus exceeds the cost associated with effort.

Question 4

The "no shirking constraint" (NSC)curve is

Accepted Answer

A) downward-sloping to reflect the fact that at higher wages,firms will monitor workers more to see whether they are shirking. 
B) downward-sloping to reflect the fact that shirking tends to be higher in lower-paying industries. 
C) upward-sloping because at high levels of unemployment,workers will refrain from slacking without much other incentive. 
D) upward-sloping because at high levels of employment,many "slacking" individuals have been hired. 
E) vertical because the constraint represents the absolute amount of time a firm will tolerate workers' slacking without laying them off. 
A) downward-sloping to reflect the fact that at higher wages,firms will monitor workers more to see whether they are shirking. 
B) downward-sloping to reflect the fact that shirking tends to be higher in lower-paying industries. 
C) upward-sloping because at high levels of unemployment,workers will refrain from slacking without much other incentive. 
D) upward-sloping because at high levels of employment,many "slacking" individuals have been hired. 
E) vertical because the constraint represents the absolute amount of time a firm will tolerate workers' slacking without laying them off.

Question 5

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

Question 6

When firms participate in group health insurance for all employees,it

Accepted Answer

A) raises rates for everyone,because it brings unhealthy people into the pool. 
B) raises rates for unhealthy people. 
C) may lower rates for all people to the extent that it keeps healthy people in the pool. 
D) prevents unhealthy people from "selecting out," to the detriment of healthy people. 
E) increases the amount of information available to insurers about the population. 
A) raises rates for everyone,because it brings unhealthy people into the pool. 
B) raises rates for unhealthy people. 
C) may lower rates for all people to the extent that it keeps healthy people in the pool. 
D) prevents unhealthy people from "selecting out," to the detriment of healthy people. 
E) increases the amount of information available to insurers about the population.

Question 7

Job market signals like dressing well for interviews are not especially effective because:

Accepted Answer

A) the cost of dressing well is about the same for high-quality and low-quality workers. 
B) many businesses have adopted casual office attire,so dressing well is not important to the firm. 
C) federal labor laws prohibit firms from using dress or appearance as an employment criterion. 
D) none of the above 
A) the cost of dressing well is about the same for high-quality and low-quality workers. 
B) many businesses have adopted casual office attire,so dressing well is not important to the firm. 
C) federal labor laws prohibit firms from using dress or appearance as an employment criterion. 
D) none of the above

Question 8

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:   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 9

The "efficiency wage" is the wage at which

Accepted Answer

A) employees have no incentive to shirk. 
B) employees have an incentive to do the optimal (positive)amount of shirking. 
C) the cost of looking for work is equal to the value of the leisure time for the unemployed individual. 
D) there is no unemployment. 
E) there is only frictional unemployment. 
A) employees have no incentive to shirk. 
B) employees have an incentive to do the optimal (positive)amount of shirking. 
C) the cost of looking for work is equal to the value of the leisure time for the unemployed individual. 
D) there is no unemployment. 
E) there is only frictional unemployment.

Question 10

As part of the most recent collective bargaining agreement with state employees,a state government must offer dental insurance at "reasonable,nonprofit rates." The state plans to self insure in place of using a private insurance company.Statistical evidence suggests that the average household currently spends $300 per year for corrective dental work and $80 for routine checkups.Administrative costs are expected to average $20 per family.The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of three years.The auditor considers the choice of the plan to be extremely important.Consequently,the auditor has asked you to evaluate the three proposals listed below in terms of their propensity to result in adverse selection and/or moral hazard.Proposal 1 would charge a $400 premium with no deductible.Coverage is extended to preexisting conditions,but to cover the nondeductible clause,routine checkups are not covered.Proposal 2 charges a $200 premium with a $200 deductible.The plan does not cover preexisting conditions,but does cover routine office visits.Proposal 3 charges a $150 premium with a $150 deductible.This plan doesn't cover preexisting conditions or routine checkups.The collective bargaining agreement dictates that participation in the plan must be at the employee's option.

Accepted Answer

Plan 1 creates adverse selection difficu

Question 11

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 12

Jim's Hardware Supply has theft insurance.Jim also has an alarm system.The alarm system has just recently malfunctioned.If Jim has the alarm system repaired,it will cost him $100.The probability of a theft occurring is p = 0.0001.If a theft occurs and there is no alarm system,the value of stolen materials will be $125,000.However,Jim's insurance will compensate him fully for the loss.No thefts will occur if the alarm system is in place.What is the expected cost to Jim of repairing the alarm system? What is the expected cost to society of not repairing the alarm system?

Accepted Answer

Jim's private costs and the costs to soc

Question 13

Over the past several years,the federal government has rescued a few financially distressed banks and other large private companies,and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem.However,critics of these interventions argue that these actions generate a moral hazard problem.Why?

Accepted Answer

A) Government oversight of rescued firms is typically based on limited information,so the outcome is economically inefficient. 
B) Rescued firms will have a difficult time buying insurance in private markets,so the government will also have to insure the firm against losses from fire,theft,etc. 
C) Managers have more information about the financial strength of their firm than government officials,so the rescue attempts may be unnecessary. 
D) Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure. 
A) Government oversight of rescued firms is typically based on limited information,so the outcome is economically inefficient. 
B) Rescued firms will have a difficult time buying insurance in private markets,so the government will also have to insure the firm against losses from fire,theft,etc. 
C) Managers have more information about the financial strength of their firm than government officials,so the rescue attempts may be unnecessary. 
D) Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure.

Question 14

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:   = 5,000 -   PH.The market demand for newly graduated low skilled workers is:   = 15,000 -   PL.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: QD = 10,000 -   P.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 hig

Question 15

Matthew drives a truck for Overtheroad Haulers.Matthew's marginal benefit for driving per day is: MB(m)= 2,400 - 2m,where m is the number of miles driven.The marginal social cost per mile is MSC(m)- 2m.Calculate the efficient number of miles driven for Matthew in a day.Since Overtheroad Haulers has full insurance on Matthew's truck,Matthew's personal marginal cost is: MPC(m)= m.How many miles per day will Matthew drive? Would it be efficient for society if Overtheroad Haulers places a limit on the number of miles Matthew drives? If so,what limit should they set?

Accepted Answer

Efficiency requires: @#IMG-DLM& Given Matthew is o

Question 16

Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition.He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons.As a result:

Accepted Answer

A) he should be able to sell my car at a premium price because of its excellent condition. 
B) he will have to accept a lower price for his car because buyers might think that it is a lemon. 
C) he will not be able to sell his car unless he offers some sort of guarantee. 
D) he will get the best price for his car by selling it to a dealer. 
A) he should be able to sell my car at a premium price because of its excellent condition. 
B) he will have to accept a lower price for his car because buyers might think that it is a lemon. 
C) he will not be able to sell his car unless he offers some sort of guarantee. 
D) he will get the best price for his car by selling it to a dealer.

Question 17

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

Accepted Answer

A) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies. 
B) people choose too much coverage because they do not understand the complex information in the policies. 
C) people choose too little coverage because they do not understand the complex information in the policies. 
D) unhealthy people become more likely to buy insurance than healthy people,which drives premiums up,which drives even more healthy people away from the market. 
E) healthy people become more likely to buy insurance than unhealthy people,which drives premiums up,which drives even more unhealthy people away from the market even though they are the ones who need it most. 
A) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies. 
B) people choose too much coverage because they do not understand the complex information in the policies. 
C) people choose too little coverage because they do not understand the complex information in the policies. 
D) unhealthy people become more likely to buy insurance than healthy people,which drives premiums up,which drives even more healthy people away from the market. 
E) healthy people become more likely to buy insurance than unhealthy people,which drives premiums up,which drives even more unhealthy people away from the market even though they are the ones who need it most.

Question 18

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.

Accepted Answer

A) enhance 
B) mitigate 
C) legalize 
D) support 
A) enhance 
B) mitigate 
C) legalize 
D) support

Question 19

Use the following statements to answer this question: I.Efficiency wage theory was developed to help explain persistent unemployment and wage discrimination in labor markets.
II.Efficiency wage theory recognizes that labor productivity may be affected by the wage rate.

Accepted Answer

A) I and II are true. 
B) I is true and II is false. 
C) II is true and I is false. 
D) I and II are false. 
A) I and II are true. 
B) I is true and II is false. 
C) II is true and I is false. 
D) I and II are false.

Question 20

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

Accepted Answer

A) Spending long hours at the office 
B) Sending emails to coworkers and supervisors at night and on weekends 
C) Leaving voice-mail message for colleagues before or after regular business hours 
D) all of the above 
A) Spending long hours at the office 
B) Sending emails to coworkers and supervisors at night and on weekends 
C) Leaving voice-mail message for colleagues before or after regular business hours 
D) all of the above

Julia is a 28-year-old nonsmoking,non-drinking female of normal weight.Because of adverse selection in health insurance,

Suppose new electronic devices make it easier to monitor the effort levels of workers.If some shirking is still possible in the efficiency wage model,what happens to the level of unemployment?

The "no shirking constraint" (NSC)curve is

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

When firms participate in group health insurance for all employees,it

Job market signals like dressing well for interviews are not especially effective because:

The "efficiency wage" is the wage at which

The efficiency wage is

Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition.He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons.As a result:

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

Use the following statements to answer this question: I.Efficiency wage theory was developed to help explain persistent unemployment and wage discrimination in labor markets. II.Efficiency wage theory recognizes that labor productivity may be affected by the wage rate.

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

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 1-83

Externalities and Public Goods

Filters

Exam 17: Markets With Asymmetric Information

Julia is a 28-year-old nonsmoking,non-drinking female of normal weight.Because of adverse selection in health insurance,

Suppose new electronic devices make it easier to monitor the effort levels of workers.If some shirking is still possible in the efficiency wage model,what happens to the level of unemployment?

The "no shirking constraint" (NSC)curve is

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

When firms participate in group health insurance for all employees,it

Job market signals like dressing well for interviews are not especially effective because:

The "efficiency wage" is the wage at which

The efficiency wage is

Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition.He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons.As a result:

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

Use the following statements to answer this question: I.Efficiency wage theory was developed to help explain persistent unemployment and wage discrimination in labor markets. II.Efficiency wage theory recognizes that labor productivity may be affected by the wage rate.

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

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 1-83

Externalities and Public Goods

Filters