Question 1

Someone who is an excellent salesperson will normally be less inclined to work for commissions than for a fixed salary.

Accepted Answer

A) True 
 B)False

Question 2

In the area of market signaling, education is a strong signal in the job market because

Accepted Answer

A)  it tells employers that you have gained skills that will be useful in the work place. 
B)  education is costly to obtain. 
C)  education is less costly to obtain for highly productive individuals who are also likely to be highly productive in the work place. 
D)  firms can easily verify your level of education. 
A)  it tells employers that you have gained skills that will be useful in the work place. 
B)  education is costly to obtain. 
C)  education is less costly to obtain for highly productive individuals who are also likely to be highly productive in the work place. 
D)  firms can easily verify your level of education.

Question 3

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow.   Figure 17.2
-Refer to Figure 17.2. Sam has two job offers when he graduates from college. Sam views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $60,000. The second offer is at a fixed salary of $30,000 plus a possible bonus of $60,000. Sam believes that he has a 50-50 chance of earning the bonus. If Sam takes the offer that maximizes his expected utility and is risk-neutral, which job offer will he choose?

Accepted Answer

A)  Sam will take the first offer. 
B)  Sam will take the second offer. 
C)  Sam is indifferent between the offers-both yield the same expected utility. 
D)  Indeterminate from the given information. 
A)  Sam will take the first offer. 
B)  Sam will take the second offer. 
C)  Sam is indifferent between the offers-both yield the same expected utility. 
D)  Indeterminate from the given information.

Question 4

Which of the following statements about asymmetric information is true?

Accepted Answer

A)  Asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have. 
B)  Asymmetric information reduces market failures because it makes it easier for individuals to engage in transactions that in the presence of perfect information would take place. 
C)  Asymmetric information can only be solved through government intervention. 
D)  Asymmetric information occurs only in the market for used cars and in the insurance market. 
A)  Asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have. 
B)  Asymmetric information reduces market failures because it makes it easier for individuals to engage in transactions that in the presence of perfect information would take place. 
C)  Asymmetric information can only be solved through government intervention. 
D)  Asymmetric information occurs only in the market for used cars and in the insurance market.

Question 5

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow.   Figure 17.1
-Refer to Figure 17.1. We would say that Dmitri is risk averse based on his

Accepted Answer

A)  income potential. 
B)  utility from income. 
C)  present income. 
D)  past income. 
A)  income potential. 
B)  utility from income. 
C)  present income. 
D)  past income.

Question 6

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
  
-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Jane?

Accepted Answer

A)  $0 
B)  $20,000 or less 
C)  more than $20,000 but less than $40,000 
D)  $40,000 or more 
A)  $0 
B)  $20,000 or less 
C)  more than $20,000 but less than $40,000 
D)  $40,000 or more

Question 7

Relating to the Economics in Practice on page 360: The smart phone app which allows skiers at a slope to report weather conditions to others would lessen the problem of

Accepted Answer

A)  moral hazard. 
B)  market signaling. 
C)  asymmetric information. 
D)  risk-loving. 
A)  moral hazard. 
B)  market signaling. 
C)  asymmetric information. 
D)  risk-loving.

Question 8

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
  
-Refer to Table 17.4. Suppose Celeste has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Celeste does not become disabled, she will earn her usual salary of $120,000. Celeste has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. On average, such a contract would cost the insurance company ________ per insured person.

Accepted Answer

A)  $40,000 
B)  $60,000 
C)  $80,000 
D)  $120,000 
A)  $40,000 
B)  $60,000 
C)  $80,000 
D)  $120,000

Question 9

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
  
-Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. Such an insurance policy be worth ________ to Isabel.

Accepted Answer

A)  $0 
B)  less than $40,000 but more than $0 
C)  $40,000 or more 
D)  indeterminate from the given information 
A)  $0 
B)  less than $40,000 but more than $0 
C)  $40,000 or more 
D)  indeterminate from the given information

Question 10

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
  
-Refer to Table 17.4. From the table, we can see that Celeste is

Accepted Answer

A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Celeste's attitude toward risk from the table. 
A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Celeste's attitude toward risk from the table.

Question 11

Jim used to be very careful with his car. However, once he bought full auto insurance on it, he stopped turning on his alarm or even locking it when parking it. This is an example of moral hazard.

Accepted Answer

A) True 
 B)False

Question 12

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow.   Figure 17.1
-Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is

Accepted Answer

A)  risk-neutral. 
B)  risk-averse. 
C)  risk-loving. 
D)  a risk taker. 
A)  risk-neutral. 
B)  risk-averse. 
C)  risk-loving. 
D)  a risk taker.

Question 13

Why, in the labor market, are contracts often designed to include a variable salary component that is tied to some measure of performance?

Accepted Answer

A)  Such contracts are considered the fairest to employees under fair labor standard laws. 
B)  Most people are risk-averse and thus variability in their compensation leads to higher total utility. 
C)  Firms use such contracts to differentiate between high and low quality workers. 
D)  These contracts tend to attract employees with the lowest probability of switching jobs. 
A)  Such contracts are considered the fairest to employees under fair labor standard laws. 
B)  Most people are risk-averse and thus variability in their compensation leads to higher total utility. 
C)  Firms use such contracts to differentiate between high and low quality workers. 
D)  These contracts tend to attract employees with the lowest probability of switching jobs.

Question 14

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
  
-Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Would Terri purchase such a policy?

Accepted Answer

A)  yes 
B)  no 
C)  maybe 
D)  indeterminate from the given information 
A)  yes 
B)  no 
C)  maybe 
D)  indeterminate from the given information

Question 15

Related to the Economics in Practice on page 356: Insurance companies are interested in being legally allowed to obtain the results of genetic testing before deciding on issuing insurance policies to potential buyers, which would lessen the problem of ________ in the health insurance market.

Accepted Answer

A)  moral hazard 
B)  market signaling 
C)  adverse selection 
D)  risk-loving 
A)  moral hazard 
B)  market signaling 
C)  adverse selection 
D)  risk-loving

Question 16

Which of the following is an example of mechanism design?

Accepted Answer

A)  an employer pays all sales people a fixed salary 
B)  welfare reform that limits the amount of time a person can collect benefits 
C)  health insurance with zero co-pays 
D)  reduced prices on bulk purchases 
A)  an employer pays all sales people a fixed salary 
B)  welfare reform that limits the amount of time a person can collect benefits 
C)  health insurance with zero co-pays 
D)  reduced prices on bulk purchases

Question 17

Which of the following are examples of tools used to reduce adverse selection?

Accepted Answer

A)  universal health coverage 
B)  dealer warranties 
C)  lemon laws 
D)  all of the above 
A)  universal health coverage 
B)  dealer warranties 
C)  lemon laws 
D)  all of the above

Question 18

Relating to the Economics in Practice on page 360: The smart phone app which allows skiers at a slope to report weather conditions to others could be considered a form of

Accepted Answer

A)  moral hazard. 
B)  market signaling. 
C)  asymmetric information. 
D)  risk-loving. 
A)  moral hazard. 
B)  market signaling. 
C)  asymmetric information. 
D)  risk-loving.

Question 19

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
  
-Refer to Table 17.1. Suppose Jane has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Jane does not become disabled, she will earn her usual salary of $60,000. Jane has the opportunity to purchase disability insurance for $20,000 which will pay her her full salary in the event she becomes disabled. Jane's utility per year with the policy is ________ and her expected utility without the policy is ________.

Accepted Answer

A)  45; 40 
B)  45; 45 
C)  60; 40 
D)  20; 45 
A)  45; 40 
B)  45; 45 
C)  60; 40 
D)  20; 45

Question 20

Refer to the data provided in Table 17.2 below to answer the following question(s). The table shows the relationship between income and utility for Sue.
Table 17.2
  
-Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will double her money ($80,000) but if they lose she loses her entire salary ($0). This bet can be characterized as

Accepted Answer

A)  risk-neutral. 
B)  an unfair bet. 
C)  a fair bet. 
D)  risk-loving. 
A)  risk-neutral. 
B)  an unfair bet. 
C)  a fair bet. 
D)  risk-loving.

Exam 17: Uncertainty and Asymmetric Information

Someone who is an excellent salesperson will normally be less inclined to work for commissions than for a fixed salary.

In the area of market signaling, education is a strong signal in the job market because

Which of the following statements about asymmetric information is true?

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. We would say that Dmitri is risk averse based on his

Relating to the Economics in Practice on page 360: The smart phone app which allows skiers at a slope to report weather conditions to others would lessen the problem of

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste. Table 17.4 -Refer to Table 17.4. From the table, we can see that Celeste is

Jim used to be very careful with his car. However, once he bought full auto insurance on it, he stopped turning on his alarm or even locking it when parking it. This is an example of moral hazard.

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is

Why, in the labor market, are contracts often designed to include a variable salary component that is tied to some measure of performance?

Related to the Economics in Practice on page 356: Insurance companies are interested in being legally allowed to obtain the results of genetic testing before deciding on issuing insurance policies to potential buyers, which would lessen the problem of ________ in the health insurance market.

Which of the following is an example of mechanism design?

Which of the following are examples of tools used to reduce adverse selection?

Relating to the Economics in Practice on page 360: The smart phone app which allows skiers at a slope to report weather conditions to others could be considered a form of

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: The Labor and Land Markets

Input Demand: The Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Monopolistic Competition

Externalities, Public Goods, and Common Resources

Income Distribution and Poverty

Public Finance: The Economics of Taxation

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

Money, the Federal Reserve, and the Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Cost Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing Economies

Critical Thinking About Research

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