Question 1

A pooling contract:

Accepted Answer

A) is the contract offered to all types of people in an insurance market. 
B) can never be a bona fide equilibrium. 
C) refers to the deal signed with the pool services worker. 
D) is always preferred to discriminating contracts. 
A) is the contract offered to all types of people in an insurance market. 
B) can never be a bona fide equilibrium. 
C) refers to the deal signed with the pool services worker. 
D) is always preferred to discriminating contracts. A

Question 2

Signaling:

Accepted Answer

A) is a method of solving moral hazard problems. 
B) benefits the sellers of low quality goods. 
C) involves a pure transfer of wealth from employers to employees. 
D) is a method of solving an adverse selection problem. 
A) is a method of solving moral hazard problems. 
B) benefits the sellers of low quality goods. 
C) involves a pure transfer of wealth from employers to employees. 
D) is a method of solving an adverse selection problem. D

Question 3

Skimming the cream:

Accepted Answer

A) means that a firm takes only the best of a group. 
B) benefits all firms. 
C) allows markets to offer everyone the same contract. 
D) is a farming term. 
A) means that a firm takes only the best of a group. 
B) benefits all firms. 
C) allows markets to offer everyone the same contract. 
D) is a farming term. A

Question 4

Which of the following is likely a result of adverse selection?

Accepted Answer

A) Young women pay less for automobile insurance than young men. 
B) New life insurance policies have a one- year suicide exclusion. 
C) Smokers pay more for life insurance than nonsmokers. 
D) Employment insurance premiums increase with income. 
A) Young women pay less for automobile insurance than young men. 
B) New life insurance policies have a one- year suicide exclusion. 
C) Smokers pay more for life insurance than nonsmokers. 
D) Employment insurance premiums increase with income.

Question 5

The lemons principle refers to the situation where:

Accepted Answer

A) neither type of good is offered on the market. 
B) high quality goods are never offered on the market. 
C) low quality goods are never offered on the market. 
D) low quality and high quality goods are sold in the same market. 
A) neither type of good is offered on the market. 
B) high quality goods are never offered on the market. 
C) low quality goods are never offered on the market. 
D) low quality and high quality goods are sold in the same market.

Question 6

In the case of the insurance equilibrium with low and high risk drivers, market failure represents:

Accepted Answer

A) the choice by high- risk drivers to buy insurance. 
B) low premiums. 
C) the choice by low- risk drivers not to buy insurance. 
D) the choice by low- risk drivers to buy insurance. 
A) the choice by high- risk drivers to buy insurance. 
B) low premiums. 
C) the choice by low- risk drivers not to buy insurance. 
D) the choice by low- risk drivers to buy insurance.

Question 7

A hold- up problem is:

Accepted Answer

A) when a firm tries to capture the rents caused by a sunk investment. 
B) when you get robbed. 
C) when a firm demands more money for completing a task. 
D) when nature prevents you from completing a task. 
A) when a firm tries to capture the rents caused by a sunk investment. 
B) when you get robbed. 
C) when a firm demands more money for completing a task. 
D) when nature prevents you from completing a task.

Question 8

In order for a firm to produce high quality goods in an asymmetric information market with high and low quality producers:

Accepted Answer

A) the present value of revenue must be positive. 
B) the present value of profits has to be higher than the costs of operating. 
C) the present value of the premium for high quality goods must be higher than the gain from cheating. 
D) the present value of cheating must be higher than the gain from producing high quality goods. 
A) the present value of revenue must be positive. 
B) the present value of profits has to be higher than the costs of operating. 
C) the present value of the premium for high quality goods must be higher than the gain from cheating. 
D) the present value of cheating must be higher than the gain from producing high quality goods.

Question 9

Duels of honour:

Accepted Answer

A) was employed mostly by low- class individuals. 
B) was a barbaric tradition. 
C) was a screening device. 
D) was a risky attempt to impress the ladies. 
A) was employed mostly by low- class individuals. 
B) was a barbaric tradition. 
C) was a screening device. 
D) was a risky attempt to impress the ladies.

Question 10

Which of the following is not an example of sunk costs?

Accepted Answer

A) advertising 
B) locate the firm is a huge warehouse. 
C) spending money in the community 
D) undertake costly actions to inform customers about itself 
A) advertising 
B) locate the firm is a huge warehouse. 
C) spending money in the community 
D) undertake costly actions to inform customers about itself

Question 11

The lemons principle

Accepted Answer

A) indicates that jewels can pass as lemons. 
B) indicates that lemons can pass as jewels. 
C) has the moral hazard problem at it root. 
D) states that making good lemonade is as tough as learning economics. 
A) indicates that jewels can pass as lemons. 
B) indicates that lemons can pass as jewels. 
C) has the moral hazard problem at it root. 
D) states that making good lemonade is as tough as learning economics.

Question 12

Firms might not commit to spending sunk costs because of:

Accepted Answer

A) the property rights problem. 
B) the bankruptcy problem. 
C) the free rider problem. 
D) the hold- up problem. 
A) the property rights problem. 
B) the bankruptcy problem. 
C) the free rider problem. 
D) the hold- up problem.

Question 13

Vertical integration refers to:

Accepted Answer

A) mergers taking place in industries subject to double hold- ups. 
B) merging with a competitor. 
C) merging taking place among multinationals. 
D) merging with a firm upstream. 
A) mergers taking place in industries subject to double hold- ups. 
B) merging with a competitor. 
C) merging taking place among multinationals. 
D) merging with a firm upstream.

Question 14

Explain why punishing a cheating firm by never shopping there again will have no affect on the behavior of the firm.

Accepted Answer

If the firm is cheating they have alread

Question 15

Which of the following is and example of a market failure caused by asymmetric information?

Accepted Answer

A) The generation of electricity from fossil fuels creates an externality. 
B) Automobile dealers offer warranties on their used cars. 
C) Low risk individuals choose not to buy insurance. 
D) High risk individuals pay higher premiums than low risk individuals. 
A) The generation of electricity from fossil fuels creates an externality. 
B) Automobile dealers offer warranties on their used cars. 
C) Low risk individuals choose not to buy insurance. 
D) High risk individuals pay higher premiums than low risk individuals.

Question 16

A plausible reason the price of new cars falls sharply when they are bought is that:

Accepted Answer

A) few high quality used cars are sold. 
B) new car buyers pay too much for their cars. 
C) used cars are unreliable. 
D) the demand for used cars is weak. 
A) few high quality used cars are sold. 
B) new car buyers pay too much for their cars. 
C) used cars are unreliable. 
D) the demand for used cars is weak.

Question 17

Empirical studies indicate that people with safe and healthy lifestyles tend to buy more life and health insurance than people with unsafe and risky lifestyles. Is this the opposite of what the usual "adverse selection" story predicts?

Accepted Answer

Yes. The "adverse selection" story claim

Question 18

Why would fire insurance claims be more numerous in bad economic times?

Accepted Answer

The moral hazard problem offers an answe

Question 19

A signalling equilibrium occurs where:

Accepted Answer

A) the cost of obtaining the signal is the same for both high and low risk drivers. 
B) the cost of obtaining the signal is low for high risk drivers and high for low risk drivers. 
C) the cost of obtaining the signal is high for high risk drivers and low for low risk drivers. 
D) the cost of the signal is not too high for either type of driver. 
A) the cost of obtaining the signal is the same for both high and low risk drivers. 
B) the cost of obtaining the signal is low for high risk drivers and high for low risk drivers. 
C) the cost of obtaining the signal is high for high risk drivers and low for low risk drivers. 
D) the cost of the signal is not too high for either type of driver.

Question 20

Figure 20A
 
-The cheating strategy for a firm in Figure 20A is at:

Accepted Answer

A) point A. 
B) point B. 
C) point C. 
D) point 0. 
A) point A. 
B) point B. 
C) point C. 
D) point 0.

A pooling contract:

Signaling:

Skimming the cream:

Which of the following is likely a result of adverse selection?

The lemons principle refers to the situation where:

In the case of the insurance equilibrium with low and high risk drivers, market failure represents:

A hold- up problem is:

In order for a firm to produce high quality goods in an asymmetric information market with high and low quality producers:

Duels of honour:

Which of the following is not an example of sunk costs?

The lemons principle

Firms might not commit to spending sunk costs because of:

Vertical integration refers to:

Explain why punishing a cheating firm by never shopping there again will have no affect on the behavior of the firm.

Which of the following is and example of a market failure caused by asymmetric information?

A plausible reason the price of new cars falls sharply when they are bought is that:

Empirical studies indicate that people with safe and healthy lifestyles tend to buy more life and health insurance than people with unsafe and risky lifestyles. Is this the opposite of what the usual "adverse selection" story predicts?

Why would fire insurance claims be more numerous in bad economic times?

A signalling equilibrium occurs where:

Figure 20A -The cheating strategy for a firm in Figure 20A is at:

Microeconomics: a Working Methodology

A Theory of Preferences

Demand Theory

More Demand Theory

Intertemporal Decision Making and Capital Values

Production Cost: One Variable Input

Production Cost: Many Variable Inputs

The Theory of Perfect Competition

Applications of the Competitive Model

Monopoly

Input Markets and the Allocation of Resources

Labour Market Applications

Competitive General Equilibrium

Price Discrimination Monopoly Practices

Introduction to Game Theory

Game Theory and Oligopoly

Choice Making Under Uncertainty

Assymmetric Information, the Rules of the Game, and Externalities

The Theory of the Firm

Filters

Exam 20: Assymetric Information and Market Behaviour

A pooling contract:

Signaling:

Skimming the cream:

Which of the following is likely a result of adverse selection?

The lemons principle refers to the situation where:

In the case of the insurance equilibrium with low and high risk drivers, market failure represents:

A hold- up problem is:

In order for a firm to produce high quality goods in an asymmetric information market with high and low quality producers:

Duels of honour:

Which of the following is not an example of sunk costs?

The lemons principle

Firms might not commit to spending sunk costs because of:

Vertical integration refers to:

Explain why punishing a cheating firm by never shopping there again will have no affect on the behavior of the firm.

Which of the following is and example of a market failure caused by asymmetric information?

A plausible reason the price of new cars falls sharply when they are bought is that:

Empirical studies indicate that people with safe and healthy lifestyles tend to buy more life and health insurance than people with unsafe and risky lifestyles. Is this the opposite of what the usual "adverse selection" story predicts?

Why would fire insurance claims be more numerous in bad economic times?

A signalling equilibrium occurs where:

Figure 20A -The cheating strategy for a firm in Figure 20A is at:

Microeconomics: a Working Methodology

A Theory of Preferences

Demand Theory

More Demand Theory

Intertemporal Decision Making and Capital Values

Production Cost: One Variable Input

Production Cost: Many Variable Inputs

The Theory of Perfect Competition

Applications of the Competitive Model

Monopoly

Input Markets and the Allocation of Resources

Labour Market Applications

Competitive General Equilibrium

Price Discrimination Monopoly Practices

Introduction to Game Theory

Game Theory and Oligopoly

Choice Making Under Uncertainty

Assymmetric Information, the Rules of the Game, and Externalities

The Theory of the Firm

Filters