Question 1

Adverse selection is due to

Accepted Answer

A) hidden characteristics. 
B) hidden actions. 
C) symmetric information. 
D) moral hazard. 
A) hidden characteristics. 
B) hidden actions. 
C) symmetric information. 
D) moral hazard.

Question 2

Restricting entry to a profession through licensing or certification requirements

Accepted Answer

A) increases welfare. 
B) decreases welfare. 
C) may increase or decrease welfare. 
D) leaves welfare unchanged. 
A) increases welfare. 
B) decreases welfare. 
C) may increase or decrease welfare. 
D) leaves welfare unchanged.

Question 3

An uninformed party can use ________ to learn about the information held by the informed party.

Accepted Answer

A) signaling 
B) screening 
C) a warranty 
D) product liability laws 
A) signaling 
B) screening 
C) a warranty 
D) product liability laws

Question 4

As the probability of detecting shirking increases, the size of the bond necessary to deter shirking

Accepted Answer

A) also increases. 
B) stays the same. 
C) decreases. 
D) increases at an exponential rate. 
A) also increases. 
B) stays the same. 
C) decreases. 
D) increases at an exponential rate.

Question 5

One method for solving the adverse selection problem is

Accepted Answer

A) to restrict the ability of the party with information from taking advantage of hidden information. 
B) by having the government run all firms. 
C) to close down firms with bad reputations. 
D) All of the above. 
A) to restrict the ability of the party with information from taking advantage of hidden information. 
B) by having the government run all firms. 
C) to close down firms with bad reputations. 
D) All of the above.

Question 6

In which type of contract does the agent receive a share of revenues earned?

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 7

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

Accepted Answer

A) True 
 B)False

Question 8

What is one potential problem with nationalized health care?

Accepted Answer

A) It might not reduce moral hazard. 
B) It is guaranteed to solve the principal-agent problem. 
C) It would be efficient in risk bearing. 
D) It might cost too much. 
A) It might not reduce moral hazard. 
B) It is guaranteed to solve the principal-agent problem. 
C) It would be efficient in risk bearing. 
D) It might cost too much.

Question 9

One drawback of deferred payments is that

Accepted Answer

A) employees may shirk anyway. 
B) employers might fire high achievers to avoid paying higher wages or bonuses. 
C) it is difficult to determine who are the good and who are the bad workers. 
D) employees have to work for the firm for a long time. 
A) employees may shirk anyway. 
B) employers might fire high achievers to avoid paying higher wages or bonuses. 
C) it is difficult to determine who are the good and who are the bad workers. 
D) employees have to work for the firm for a long time.

Question 10

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents

Accepted Answer

A) the amount the employee loses if caught shirking. 
B) the expected value of the amount the employee loses if he shirks. 
C) the cost of monitoring the employee. 
D) the gain to the employee if he shirks. 
A) the amount the employee loses if caught shirking. 
B) the expected value of the amount the employee loses if he shirks. 
C) the cost of monitoring the employee. 
D) the gain to the employee if he shirks.

Question 11

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

Accepted Answer

A) the worker requires no monitoring. 
B) the worker receives the market wage and requires full-time monitoring. 
C) the cost of monitoring the worker equals the efficiency wage. 
D) the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one. 
A) the worker requires no monitoring. 
B) the worker receives the market wage and requires full-time monitoring. 
C) the cost of monitoring the worker equals the efficiency wage. 
D) the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.

Question 12

An informed party can use ________ to give information to an uninformed or lesser-informed party.

Accepted Answer

A) signaling 
B) screening 
C) an individual mandate 
D) rating sites 
A) signaling 
B) screening 
C) an individual mandate 
D) rating sites

Question 13

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract,

Accepted Answer

A) efficiency is achieved. 
B) the client bears all of the risk. 
C) the lawyer has an incentive to lie about his hours worked. 
D) All of the above. 
A) efficiency is achieved. 
B) the client bears all of the risk. 
C) the lawyer has an incentive to lie about his hours worked. 
D) All of the above.

Question 14

How can a warranty at the seller's expense signal that a product is of high quality?

Accepted Answer

If the product is of low quali

Question 15

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 is most likely to have 10 books published?

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 16

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

Accepted Answer

A) It provides a screening test. 
B) It provides a signal of quality. 
C) It reduces moral hazard. 
D) It reduces costs of giving surveys. 
A) It provides a screening test. 
B) It provides a signal of quality. 
C) It reduces moral hazard. 
D) It reduces costs of giving surveys.

Question 17

A physical examination is NOT a good screening device for life insurance companies if

Accepted Answer

A) life-threatening diseases are usually undetected. 
B) doctors cannot be easily bribed to write a good report. 
C) medical history is a good predictor of life expectancy. 
D) one's current state of health is a good predictor of life expectancy. 
A) life-threatening diseases are usually undetected. 
B) doctors cannot be easily bribed to write a good report. 
C) medical history is a good predictor of life expectancy. 
D) one's current state of health is a good predictor of life expectancy.

Question 18

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

Accepted Answer

A) Firm A, which uses an independent accounting firm for auditing. 
B) Firm B, which uses an internal group for auditing. 
C) Firm C, which has seen its stock go up by $20 per share in the last week. 
D) Firm D, which hasn't been under SEC investigation for over 5 years. 
A) Firm A, which uses an independent accounting firm for auditing. 
B) Firm B, which uses an internal group for auditing. 
C) Firm C, which has seen its stock go up by $20 per share in the last week. 
D) Firm D, which hasn't been under SEC investigation for over 5 years.

Question 19

If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling

Accepted Answer

A) that she does not plan to shirk in the future, regardless of whether she did so in the past. 
B) that she did shirk and she will do so in the future. 
C) that she did shirk but won't do so in the future. 
D) that she didn't shirk and she won't do so in the future. 
A) that she does not plan to shirk in the future, regardless of whether she did so in the past. 
B) that she did shirk and she will do so in the future. 
C) that she did shirk but won't do so in the future. 
D) that she didn't shirk and she won't do so in the future.

Question 20

In the presence of asymmetric information, a piece-rate contract

Accepted Answer

A) is not as good as a contract based on commissions. 
B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C) is impossible to write. 
D) will result in the principal earning all of the profit. 
A) is not as good as a contract based on commissions. 
B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C) is impossible to write. 
D) will result in the principal earning all of the profit.

Adverse selection is due to

Restricting entry to a profession through licensing or certification requirements

An uninformed party can use ________ to learn about the information held by the informed party.

As the probability of detecting shirking increases, the size of the bond necessary to deter shirking

One method for solving the adverse selection problem is

In which type of contract does the agent receive a share of revenues earned?

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

What is one potential problem with nationalized health care?

One drawback of deferred payments is that

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

An informed party can use ________ to give information to an uninformed or lesser-informed party.

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract,

How can a warranty at the seller's expense signal that a product is of high quality?

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

A physical examination is NOT a good screening device for life insurance companies if

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling

In the presence of asymmetric information, a piece-rate contract

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

Adverse selection is due to

Restricting entry to a profession through licensing or certification requirements

An uninformed party can use ________ to learn about the information held by the informed party.

As the probability of detecting shirking increases, the size of the bond necessary to deter shirking

One method for solving the adverse selection problem is

In which type of contract does the agent receive a share of revenues earned?

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

What is one potential problem with nationalized health care?

One drawback of deferred payments is that

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents

A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until

An informed party can use ________ to give information to an uninformed or lesser-informed party.

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract,

How can a warranty at the seller's expense signal that a product is of high quality?

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

A physical examination is NOT a good screening device for life insurance companies if

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling

In the presence of asymmetric information, a piece-rate contract

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