Question 1

Explain how incomplete information causes each of the following situations and why the equilibrium in each of these situations is not Pareto optimal:

Accepted Answer

The answer of Explain how incomplete information causes each of...

Question 2

How does the adverse selection problem faced by insurance companies differ from the moral hazard problem they face? How might an insurance company deal with each problem?

Accepted Answer

In the adverse selection problem,one gro

Question 3

For a fixed resource like land to be allocated to its highest valued use

Accepted Answer

A)  a good social plan is needed. 
B)  it should be allocated to those who will pay the most. 
C)  it should be taxed at 100 percent of its rental value. 
D)  it should be offered to those who promise to put it to its best use. 
A)  a good social plan is needed. 
B)  it should be allocated to those who will pay the most. 
C)  it should be taxed at 100 percent of its rental value. 
D)  it should be offered to those who promise to put it to its best use.

Question 4

When you hire a company to paint your house,you cannot be sure of the quality of paint that was used.This situation is an example of

Accepted Answer

A)  moral hazard. 
B)  the adverse selection problem. 
C)  the market for lemons. 
D)  the principal-agent problem. 
A)  moral hazard. 
B)  the adverse selection problem. 
C)  the market for lemons. 
D)  the principal-agent problem.

Question 5

In the principal-agent problem,the principal is the person performing work and the agent is the one for whom the work is being done.

Accepted Answer

A) True 
 B)False

Question 6

A Military Draft

The following questions refer to the accompanying graph, which shows the supply and demand for military service where Q0 represents the quantity provided by a volunteer army and Qd the quantity provided by a draft.

-Refer to Supply and Demand.Deadweight loss

Accepted Answer

A)  is eliminated by a limited draft. 
B)  occurs only with a volunteer army. 
C)  occurs only with a draft. 
D)  Occurs with both a volunteer army and with a draft. 
A)  is eliminated by a limited draft. 
B)  occurs only with a volunteer army. 
C)  occurs only with a draft. 
D)  Occurs with both a volunteer army and with a draft.

Question 7

A limited military draft is likely to be inefficient because

Accepted Answer

A)  it transfers wealth from those who are drafted to those who benefit from the army's services. 
B)  the wage rate paid to army personnel is set by the government,not by the market. 
C)  more people will be drafted than would have joined a volunteer army. 
D)  there is no guarantee that young adults with the lowest opportunity costs will be drafted. 
A)  it transfers wealth from those who are drafted to those who benefit from the army's services. 
B)  the wage rate paid to army personnel is set by the government,not by the market. 
C)  more people will be drafted than would have joined a volunteer army. 
D)  there is no guarantee that young adults with the lowest opportunity costs will be drafted.

Question 8

Technical analysts in the financial markets are those who

Accepted Answer

A)  believe that markets always operate efficiently. 
B)  look for stocks to buy based on the degree to which the company is investing in technology. 
C)  argue that a careful study of past prices of a given stock conveys useful information about future prices. 
D)  base their analyses on the current state of the macroeconomy. 
A)  believe that markets always operate efficiently. 
B)  look for stocks to buy based on the degree to which the company is investing in technology. 
C)  argue that a careful study of past prices of a given stock conveys useful information about future prices. 
D)  base their analyses on the current state of the macroeconomy.

Question 9

Consider two individuals,Jay and Randy,and their decision to serve in the military.The accompanying tables show their opportunity costs of supplying military service.The government has determined that it needs 12 total hours of military service per week from these two individuals.

Accepted Answer

The answer of Consider two individuals,Jay and Randy,and their decision...

Question 10

Define the term rent.Explain why confiscation of rents would cause more than a simple transfer of income from resource owners to the government.

Accepted Answer

Rent is any payment made to a resource i

Question 11

When do insurance companies encounter the problem of moral hazard?

Accepted Answer

A)  When simply having insurance causes people to take more risks than they would otherwise. 
B)  When they do not have enough information to distinguish between people who are "good risks" and those who are "bad risks." 
C)  When the price of insurance premiums fully reflects all available information. 
D)  When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously. 
A)  When simply having insurance causes people to take more risks than they would otherwise. 
B)  When they do not have enough information to distinguish between people who are "good risks" and those who are "bad risks." 
C)  When the price of insurance premiums fully reflects all available information. 
D)  When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously.

Question 12

A principal-agent problem occurs when

Accepted Answer

A)  people are "fooled" by high absolute wages offered by employers. 
B)  insurance increases people's willingness to take risks. 
C)  an employer cannot fully monitor the employee's work. 
D)  a highly productive worker is unable to earn any rent. 
A)  people are "fooled" by high absolute wages offered by employers. 
B)  insurance increases people's willingness to take risks. 
C)  an employer cannot fully monitor the employee's work. 
D)  a highly productive worker is unable to earn any rent.

Question 13

Distributing goods equally among consumers would be not only fair but efficient.

Accepted Answer

A) True 
 B)False

Question 14

One theory of unemployment argues that the unemployment rate will rise when

Accepted Answer

A)  people have accurate expectations regarding the inflation rate. 
B)  unexpected inflation causes people to be "fooled" by high absolute wages. 
C)  people mistakenly believe their wages have greater purchasing power. 
D)  people overestimate the rate of inflation. 
A)  people have accurate expectations regarding the inflation rate. 
B)  unexpected inflation causes people to be "fooled" by high absolute wages. 
C)  people mistakenly believe their wages have greater purchasing power. 
D)  people overestimate the rate of inflation.

Question 15

An efficiency wage is the wage that maximizes the surplus of the worker.

Accepted Answer

A) True 
 B)False

Question 16

The adverse selection process is prevalent in the used car market because

Accepted Answer

A)  only poorer people are likely to purchase used cars. 
B)  sellers know more about the vehicles being sold than do potential buyers. 
C)  the price of the car sends a signal about its quality. 
D)  so many consumers are adverse to buying used cars. 
A)  only poorer people are likely to purchase used cars. 
B)  sellers know more about the vehicles being sold than do potential buyers. 
C)  the price of the car sends a signal about its quality. 
D)  so many consumers are adverse to buying used cars.

Question 17

The theory of efficient markets suggests that the steep decline the value of stocks traded on the NASDAQ was due to

Accepted Answer

A)  a speculative bubble. 
B)  a response to new information about firms' expected future profitability.. 
C)  a natural cycle in technology stock prices evidenced by charts of previous prices trends. 
D)  moral hazard. 
A)  a speculative bubble. 
B)  a response to new information about firms' expected future profitability.. 
C)  a natural cycle in technology stock prices evidenced by charts of previous prices trends. 
D)  moral hazard.

Question 18

Which of the following are attempts to ease the principal-agent problem?

Accepted Answer

A)  Stock Options. 
B)  Golden Parachutes. 
C)  Efficiency Wages. 
D)  All of the above. 
A)  Stock Options. 
B)  Golden Parachutes. 
C)  Efficiency Wages. 
D)  All of the above.

Question 19

In an efficient market,the current price reflects all available information.

Accepted Answer

A) True 
 B)False

Question 20

A speculative bubble causes

Accepted Answer

A)  current prices to sink artificially low. 
B)  current prices to rise artificially high. 
C)  no current price changes,only possible future changes. 
D)  undervaluing of stock prices. 
A)  current prices to sink artificially low. 
B)  current prices to rise artificially high. 
C)  no current price changes,only possible future changes. 
D)  undervaluing of stock prices.

Explain how incomplete information causes each of the following situations and why the equilibrium in each of these situations is not Pareto optimal:

How does the adverse selection problem faced by insurance companies differ from the moral hazard problem they face? How might an insurance company deal with each problem?

For a fixed resource like land to be allocated to its highest valued use

When you hire a company to paint your house,you cannot be sure of the quality of paint that was used.This situation is an example of

In the principal-agent problem,the principal is the person performing work and the agent is the one for whom the work is being done.

A Military Draft The following questions refer to the accompanying graph, which shows the supply and demand for military service where Q0 represents the quantity provided by a volunteer army and Qd the quantity provided by a draft. -Refer to Supply and Demand.Deadweight loss

A limited military draft is likely to be inefficient because

Technical analysts in the financial markets are those who

Consider two individuals,Jay and Randy,and their decision to serve in the military.The accompanying tables show their opportunity costs of supplying military service.The government has determined that it needs 12 total hours of military service per week from these two individuals.

Define the term rent.Explain why confiscation of rents would cause more than a simple transfer of income from resource owners to the government.

When do insurance companies encounter the problem of moral hazard?

A principal-agent problem occurs when

Distributing goods equally among consumers would be not only fair but efficient.

One theory of unemployment argues that the unemployment rate will rise when

An efficiency wage is the wage that maximizes the surplus of the worker.

The adverse selection process is prevalent in the used car market because

The theory of efficient markets suggests that the steep decline the value of stocks traded on the NASDAQ was due to

Which of the following are attempts to ease the principal-agent problem?

In an efficient market,the current price reflects all available information.

A speculative bubble causes

Supply,demand,and Equilibrium

Prices,costs and Gains From Trade

The Behavior of Consumers

Consumers in the Marketplace

The Behavior of Firms

Production and Costs

Competition

Welfare Economics and the Gains From Trade

Monopoly

Market Power,collusion,and Oligopoly

The Theory of Games

External Costs and Benefits

Common Property and Public Goods

The Demand for Factors of Production

The Market for Labor

Allocating Goods Over Time

Risk and Uncertainty

What Is Economics

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Exam 9: Knowledge and Information

Explain how incomplete information causes each of the following situations and why the equilibrium in each of these situations is not Pareto optimal:

How does the adverse selection problem faced by insurance companies differ from the moral hazard problem they face? How might an insurance company deal with each problem?

For a fixed resource like land to be allocated to its highest valued use

When you hire a company to paint your house,you cannot be sure of the quality of paint that was used.This situation is an example of

In the principal-agent problem,the principal is the person performing work and the agent is the one for whom the work is being done.

A Military Draft The following questions refer to the accompanying graph, which shows the supply and demand for military service where Q0 represents the quantity provided by a volunteer army and Qd the quantity provided by a draft. -Refer to Supply and Demand.Deadweight loss

A limited military draft is likely to be inefficient because

Technical analysts in the financial markets are those who

Consider two individuals,Jay and Randy,and their decision to serve in the military.The accompanying tables show their opportunity costs of supplying military service.The government has determined that it needs 12 total hours of military service per week from these two individuals.

Define the term rent.Explain why confiscation of rents would cause more than a simple transfer of income from resource owners to the government.

When do insurance companies encounter the problem of moral hazard?

A principal-agent problem occurs when

Distributing goods equally among consumers would be not only fair but efficient.

One theory of unemployment argues that the unemployment rate will rise when

An efficiency wage is the wage that maximizes the surplus of the worker.

The adverse selection process is prevalent in the used car market because

The theory of efficient markets suggests that the steep decline the value of stocks traded on the NASDAQ was due to

Which of the following are attempts to ease the principal-agent problem?

In an efficient market,the current price reflects all available information.

A speculative bubble causes

Supply,demand,and Equilibrium

Prices,costs and Gains From Trade

The Behavior of Consumers

Consumers in the Marketplace

The Behavior of Firms

Production and Costs

Competition

Welfare Economics and the Gains From Trade

Monopoly

Market Power,collusion,and Oligopoly

The Theory of Games

External Costs and Benefits

Common Property and Public Goods

The Demand for Factors of Production

The Market for Labor

Allocating Goods Over Time

Risk and Uncertainty

What Is Economics

Filters