Exam 17: Markets With Asymmetric Information

Ty's Sporting Goods is considering rewarding employees with profit sharing for good performance.Without the sharing plan,Ty's total cost function is: TC(Q)= 250Q + and his marginal cost function is: MC(Q)= 250 + .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: TC(Q)= 125Q + and his marginal cost function is: MC(Q)= 125 + .If the profit sharing plan entitles his employees to 25% of the profits,should Ty institute the plan?

John is a 55-year-old male smoker,about 50 pounds overweight,who has high blood sugar and drinks to excess a couple of times each month.Because of adverse selection in health insurance,

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: MC(Q)= 156.25Q.The marginal cost of providing standard quality trips each season is: MC(Q)= 62.5Q.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?

When asymmetric information problems drive high quality products from a market,we refer to this situation as:

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?

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?

Ron owns an automotive repair center.Ron provides high quality automotive repair.The market price for high quality service is $225 while the market price for standard service is $150.Currently,Ron only has a reputation for providing standard service.Ron's marginal cost function of providing high quality service is: MC_H(Q)= 0.25Q.Ron's marginal cost function of providing standard service is: MC_S(Q)= 0.0625Q.Butch's Marketing has told Ron that if he hires Butch's firm to advertise and market Ron's high quality services,consumers will pay him the high quality service market price providing he delivers that quality.What is the most amount of money Ron is willing to pay for Butch's services?

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

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

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?

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 efficiency wage?

A warranty is most valuable as a signaling device when

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:

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

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

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

Which of the following is TRUE about producers' willingness to offer warranties on products?

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)= 20Qdue 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?