Question 1

Which of the following statements is not correct?

Accepted Answer

A)  Based on studies of human decision making, most people value fairness. 
B)  Based on studies of human decision making, some people's preference are inconsistent over time. 
C)  Government intervention is the best remedy for the problems caused by asymmetric information. 
D)  Advertising can be an example of a company signaling the quality of its products. 
A)  Based on studies of human decision making, most people value fairness. 
B)  Based on studies of human decision making, some people's preference are inconsistent over time. 
C)  Government intervention is the best remedy for the problems caused by asymmetric information. 
D)  Advertising can be an example of a company signaling the quality of its products. C

Question 2

Explain and provide examples of what is meant by "asymmetric information."

Accepted Answer

Asymmetric information is present when there is a difference in access to relevant information. Examples include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and his insurer.

Question 3

In the principal-agent relationship, the principal performs a task on behalf of the agent.

Accepted Answer

A) True 
 B)False  False

Question 4

What is herd mentality?

Accepted Answer

Herd mentality is a tendency for people

Question 5

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Accepted Answer

A)  a moral hazard problem. 
B)  adverse selection. 
C)  behavioral economics. 
D)  signalling. 
A)  a moral hazard problem. 
B)  adverse selection. 
C)  behavioral economics. 
D)  signalling.

Question 6

Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of

Accepted Answer

A)  moral hazard. 
B)  screening. 
C)  adverse selection. 
D)  the principal-agent problem. 
A)  moral hazard. 
B)  screening. 
C)  adverse selection. 
D)  the principal-agent problem.

Question 7

The ultimatum game demonstrates that people will always make choices according to their self-interest.

Accepted Answer

A) True 
 B)False

Question 8

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

Accepted Answer

A)  signal. 
B)  screen. 
C)  efficiency wage. 
D)  agent. 
A)  signal. 
B)  screen. 
C)  efficiency wage. 
D)  agent.

Question 9

In the ultimatum game, what split would be rational for both the person proposing the split and the person who must accept or reject the split?

Accepted Answer

A)  There is no rational solution. 
B)  75/25 
C)  99/1 
D)  1/99 
E)  50/50 
A)  There is no rational solution. 
B)  75/25 
C)  99/1 
D)  1/99 
E)  50/50

Question 10

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Accepted Answer

Drivers (buyers and potential buyers of

Question 11

Signals to convey high quality are most effective when they are costless to all firms in the industry.

Accepted Answer

A) True 
 B)False

Question 12

Moral hazard occurs when

Accepted Answer

A)  the principal monitors an agent. 
B)  two people might trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks. 
C)  an agent lacks an incentive to promote the best interests of the principal, and the principal cannot observe the actions of the agent. 
D)  an agent monitors the principal. 
A)  the principal monitors an agent. 
B)  two people might trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks. 
C)  an agent lacks an incentive to promote the best interests of the principal, and the principal cannot observe the actions of the agent. 
D)  an agent monitors the principal.

Question 13

Which is an example of people trying to make better choices for themselves?

Accepted Answer

A)  Take out a pension plan with monthly contributions to provide a better future pension. 
B)  Insist that your partner doesn't buy chocolate or sugary drinks when at the supermarket, to help with your diet plans. 
C)  Pay for gym membership and go regularly in order to improve your fitness. 
D)  All of the above. 
A)  Take out a pension plan with monthly contributions to provide a better future pension. 
B)  Insist that your partner doesn't buy chocolate or sugary drinks when at the supermarket, to help with your diet plans. 
C)  Pay for gym membership and go regularly in order to improve your fitness. 
D)  All of the above.

Question 14

Asymmetric information is a problem that occurs when one person in a transaction knows more about what is going on than the other.

Accepted Answer

A) True 
 B)False

Question 15

Frequently it is the case that: (1) A worker knows more than his employer about how much effort he puts into his job, and (2) the seller of a used car knows more than the buyer about the car's condition.

Accepted Answer

A)  Neither (1) nor (2) serves as an example of asymmetric information. 
B)  Both (1) and (2) serve as examples of asymmetric information. 
C)  Neither (1) nor (2) serves as an example of a hidden action. 
D)  Both (1) and (2) serve as examples of hidden action. 
A)  Neither (1) nor (2) serves as an example of asymmetric information. 
B)  Both (1) and (2) serve as examples of asymmetric information. 
C)  Neither (1) nor (2) serves as an example of a hidden action. 
D)  Both (1) and (2) serve as examples of hidden action.

Question 16

Which of the following must be true about a signal that is used to reveal private information in order for the signal to be effective? It must be:

Accepted Answer

A)  "as seen on TV." 
B)  free to the signalling party. 
C)  costly to the signalling party but less costly to the party with the higher-quality product. 
D)  applied to an inexpensive product. 
A)  "as seen on TV." 
B)  free to the signalling party. 
C)  costly to the signalling party but less costly to the party with the higher-quality product. 
D)  applied to an inexpensive product.

Question 17

According to one survey most Europeans said they were not saving enough for retirement. This example of inconsistency over time

Accepted Answer

A)  is rational behavior. 
B)  likely occurs because saving requires a sacrifice in the present for a reward in the distant future. 
C)  likely occurs because Europeans don't care about retirement. 
D)  definitely would not happen if Europeans earned a greater return on their investments. 
A)  is rational behavior. 
B)  likely occurs because saving requires a sacrifice in the present for a reward in the distant future. 
C)  likely occurs because Europeans don't care about retirement. 
D)  definitely would not happen if Europeans earned a greater return on their investments.

Question 18

An apparel company employs Jean as a designer. In this employment relationship, the apparel company is the

Accepted Answer

A)  agent. 
B)  principal. 
C)  screener. 
D)  signaller. 
A)  agent. 
B)  principal. 
C)  screener. 
D)  signaller.

Question 19

A person's tendency to smoke a cigarette after promising to quit is an example of the behavioral economics insight that people are inconsistent over time.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following relationships involves asymmetric information?

Accepted Answer

A)  Patients can look up information regarding certain prescription drugs giving them the same information as their doctors. 
B)  Consumer Reports allows customers of DVD players to know as much about the quality of various players as the store salesperson. 
C)  Car Fax allows car buyers to obtain used-vehicle histories providing them with the same information as the dealership salesperson. 
D)  The goalkeeper in a football game must guess whether the penalty taker will shot to the goalkeeper's right or left side. 
A)  Patients can look up information regarding certain prescription drugs giving them the same information as their doctors. 
B)  Consumer Reports allows customers of DVD players to know as much about the quality of various players as the store salesperson. 
C)  Car Fax allows car buyers to obtain used-vehicle histories providing them with the same information as the dealership salesperson. 
D)  The goalkeeper in a football game must guess whether the penalty taker will shot to the goalkeeper's right or left side.

Exam 12: Information and Behavioural Economics

Which of the following statements is not correct?

Explain and provide examples of what is meant by "asymmetric information."

In the principal-agent relationship, the principal performs a task on behalf of the agent.

What is herd mentality?

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of

The ultimatum game demonstrates that people will always make choices according to their self-interest.

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

In the ultimatum game, what split would be rational for both the person proposing the split and the person who must accept or reject the split?

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Signals to convey high quality are most effective when they are costless to all firms in the industry.

Moral hazard occurs when

Which is an example of people trying to make better choices for themselves?

Asymmetric information is a problem that occurs when one person in a transaction knows more about what is going on than the other.

Frequently it is the case that: (1) A worker knows more than his employer about how much effort he puts into his job, and (2) the seller of a used car knows more than the buyer about the car's condition.

Which of the following must be true about a signal that is used to reveal private information in order for the signal to be effective? It must be:

According to one survey most Europeans said they were not saving enough for retirement. This example of inconsistency over time

An apparel company employs Jean as a designer. In this employment relationship, the apparel company is the

A person's tendency to smoke a cigarette after promising to quit is an example of the behavioral economics insight that people are inconsistent over time.

Which of the following relationships involves asymmetric information?

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

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