Question 1

Which of the following is a method for solving the problem of adverse selection?

Accepted Answer

A) Truth-in-advertising laws 
B) Product liability laws 
C) Food labeling requirements 
D) All of the above. 
A) Truth-in-advertising laws 
B) Product liability laws 
C) Food labeling requirements 
D) All of the above.

Question 2

If an agent is risk neutral and a principal is risk averse, which of the following contracts would be efficient in risk bearing?

Accepted Answer

A) A fixed fee is paid to the agent. 
B) A fixed fee is paid to the principal. 
C) An hourly rate is paid to the agent. 
D) The agent enjoys a share of the profit. 
A) A fixed fee is paid to the agent. 
B) A fixed fee is paid to the principal. 
C) An hourly rate is paid to the agent. 
D) The agent enjoys a share of the profit.

Question 3

A college education can be a signal because

Accepted Answer

A) a college education is expensive. 
B) those who graduate college have successful parents, and are therefore also likely to be successful. 
C) highly capable people are more likely to finish college than those with low capabilities. 
D) college teaches useful skills and gives valuable training. 
A) a college education is expensive. 
B) those who graduate college have successful parents, and are therefore also likely to be successful. 
C) highly capable people are more likely to finish college than those with low capabilities. 
D) college teaches useful skills and gives valuable training.

Question 4

Monitoring a manager can be difficult if

Accepted Answer

A) the owner and manager do not have an enforceable contract. 
B) the owner cannot easily observe the manager's actions. 
C) the manager doesn't have to use a time clock. 
D) the board does not have enough outside directors. 
A) the owner and manager do not have an enforceable contract. 
B) the owner cannot easily observe the manager's actions. 
C) the manager doesn't have to use a time clock. 
D) the board does not have enough outside directors.

Question 5

The requirement that all drivers must carry auto insurance reduces

Accepted Answer

A) moral hazard. 
B) the effectiveness of signaling. 
C) adverse selection. 
D) the chance of auto accidents. 
A) moral hazard. 
B) the effectiveness of signaling. 
C) adverse selection. 
D) the chance of auto accidents.

Question 6

Many companies monitor their employees' Internet use and email. Why might they be doing this?

Accepted Answer

A) Because they like to spy. 
B) In order to improve morale. 
C) To gain inside information on new consumer trends. 
D) To reduce shirking. 
A) Because they like to spy. 
B) In order to improve morale. 
C) To gain inside information on new consumer trends. 
D) To reduce shirking.

Question 7

Assume Health Insurance is provided universally by the government. This would

Accepted Answer

A) eliminate the problems of adverse selection. 
B) result in adverse selection. 
C) eliminate the problems of moral hazard. 
D) All of the above. 
A) eliminate the problems of adverse selection. 
B) result in adverse selection. 
C) eliminate the problems of moral hazard. 
D) All of the above.

Question 8

Suppose employees pay a bond of $1,000 to an employer. The gain from shirking is $400. Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking. The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%. They feel this is needed to deter all shirking. What is your recommendation to the company? Explain.

Accepted Answer

Shirking is already deterred;

Question 9

What is one reason the eBay seller reputation system is important?

Accepted Answer

A) eBay transactions tend to be isolated, one-off transactions. 
B) eBay transactions tend to be repeat sales between the same seller and buyers. 
C) eBay transactions often involve stolen products. 
D) eBay transactions require a larger percentage than, say, Amazon transactions. 
A) eBay transactions tend to be isolated, one-off transactions. 
B) eBay transactions tend to be repeat sales between the same seller and buyers. 
C) eBay transactions often involve stolen products. 
D) eBay transactions require a larger percentage than, say, Amazon transactions.

Question 10

In which type of contract is the agent paid per unit of output?

Accepted Answer

A) A commission-based contract. 
B) A sharecropping contract. 
C) A piece rate contract. 
D) A contract with stock options as salary. 
A) A commission-based contract. 
B) A sharecropping contract. 
C) A piece rate contract. 
D) A contract with stock options as salary.

Question 11

Contingent contracts

Accepted Answer

A) are inefficient when monitoring is possible. 
B) equally divide the risk between principal and agent. 
C) can be used when monitoring is not reasonably possible. 
D) put the risk on the principal. 
A) are inefficient when monitoring is possible. 
B) equally divide the risk between principal and agent. 
C) can be used when monitoring is not reasonably possible. 
D) put the risk on the principal.

Question 12

Explain why some people who are applying for a job at a bank dress up, arrive early, and have their paperwork neatly completed for the job interview.

Accepted Answer

They are trying to eliminate a

Question 13

If an additional dollar spent on monitoring would reduce shirking by 10 minutes, then the firm will increase the worker's wage by $1 if this caused

Accepted Answer

A) shirking to increase by less than 10 minutes. 
B) shirking to decrease by more than 10 minutes. 
C) shirking to decrease by less than 10 minutes. 
D) monitoring to become unnecessary. 
A) shirking to increase by less than 10 minutes. 
B) shirking to decrease by more than 10 minutes. 
C) shirking to decrease by less than 10 minutes. 
D) monitoring to become unnecessary.

Question 14

Author A accepts a $5,000 advance from a publisher and a 10% royalty after 5,000 books are sold. Author B foregoes the publisher's advance and negotiates for a 15% royalty on all books sold. Author C decides to self-publish his book and keep 100% of all sales revenue. Which of these authors expects to sell the fewest books?

Accepted Answer

A) Author A 
B) Author B 
C) Author C 
D) They are all equally likely. 
A) Author A 
B) Author B 
C) Author C 
D) They are all equally likely.

Question 15

The agency problem can be avoided if

Accepted Answer

A) the firm is not subject to regulation by a government agency. 
B) the manager and owner can manipulate reported profit. 
C) the firm has positive profits. 
D) the goals of the owner and manager are aligned. 
A) the firm is not subject to regulation by a government agency. 
B) the manager and owner can manipulate reported profit. 
C) the firm has positive profits. 
D) the goals of the owner and manager are aligned.

Question 16

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

Accepted Answer

A) The lawyer is paid by the hour. 
B) The lawyer receives a share of the settlement. 
C) The lawyer receives a fixed fee. 
D) The lawyer pays the client a fee for the right to the entire settlement. 
A) The lawyer is paid by the hour. 
B) The lawyer receives a share of the settlement. 
C) The lawyer receives a fixed fee. 
D) The lawyer pays the client a fee for the right to the entire settlement.

Question 17

Stock options

Accepted Answer

A) are a type of contingent reward. 
B) allow you to pay people only $1 in salary. 
C) force CEOs to try and maximize the share price in the short run. 
D) All of the above. 
A) are a type of contingent reward. 
B) allow you to pay people only $1 in salary. 
C) force CEOs to try and maximize the share price in the short run. 
D) All of the above.

Question 18

One problem with compensation systems is that

Accepted Answer

A) sometimes a manager is rewarded for an objective other than maximizing profits. 
B) managers are often paid too much. 
C) owners sometimes want to pursue social objectives. 
D) the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are non-binding. 
A) sometimes a manager is rewarded for an objective other than maximizing profits. 
B) managers are often paid too much. 
C) owners sometimes want to pursue social objectives. 
D) the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are non-binding.

Question 19

Monitoring is often used by firms in an attempt to decrease

Accepted Answer

A) shirking. 
B) piece rates. 
C) adverse selection. 
D) signaling. 
A) shirking. 
B) piece rates. 
C) adverse selection. 
D) signaling.

Question 20

Some companies subject their applicants to extensive tests. Why?

Accepted Answer

A) To reduce the informational asymmetry between the firm and the applicant. 
B) To screen the applicant to avoid the problem of adverse selection. 
C) To gather more information about the applicant. 
D) All of the above. 
A) To reduce the informational asymmetry between the firm and the applicant. 
B) To screen the applicant to avoid the problem of adverse selection. 
C) To gather more information about the applicant. 
D) All of the above.

Which of the following is a method for solving the problem of adverse selection?

If an agent is risk neutral and a principal is risk averse, which of the following contracts would be efficient in risk bearing?

A college education can be a signal because

Monitoring a manager can be difficult if

The requirement that all drivers must carry auto insurance reduces

Many companies monitor their employees' Internet use and email. Why might they be doing this?

Assume Health Insurance is provided universally by the government. This would

What is one reason the eBay seller reputation system is important?

In which type of contract is the agent paid per unit of output?

Contingent contracts

Explain why some people who are applying for a job at a bank dress up, arrive early, and have their paperwork neatly completed for the job interview.

If an additional dollar spent on monitoring would reduce shirking by 10 minutes, then the firm will increase the worker's wage by $1 if this caused

The agency problem can be avoided if

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

Stock options

One problem with compensation systems is that

Monitoring is often used by firms in an attempt to decrease

Some companies subject their applicants to extensive tests. Why?

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Managerial Decision-Making Under Uncertainty

Government and Business

Global Business

Filters

Exam 15: Asymmetric Information

Which of the following is a method for solving the problem of adverse selection?

If an agent is risk neutral and a principal is risk averse, which of the following contracts would be efficient in risk bearing?

A college education can be a signal because

Monitoring a manager can be difficult if

The requirement that all drivers must carry auto insurance reduces

Many companies monitor their employees' Internet use and email. Why might they be doing this?

Assume Health Insurance is provided universally by the government. This would

What is one reason the eBay seller reputation system is important?

In which type of contract is the agent paid per unit of output?

Contingent contracts

Explain why some people who are applying for a job at a bank dress up, arrive early, and have their paperwork neatly completed for the job interview.

If an additional dollar spent on monitoring would reduce shirking by 10 minutes, then the firm will increase the worker's wage by $1 if this caused

The agency problem can be avoided if

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

Stock options

One problem with compensation systems is that

Monitoring is often used by firms in an attempt to decrease

Some companies subject their applicants to extensive tests. Why?

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Managerial Decision-Making Under Uncertainty

Government and Business

Global Business

Filters