Question 1

Adverse selection occurs when there is

Accepted Answer

A) full information. 
B) unobserved behavior. 
C) an unobserved characteristic. 
D) a worker who shirks because his boss does not watch him. 
A) full information. 
B) unobserved behavior. 
C) an unobserved characteristic. 
D) a worker who shirks because his boss does not watch him. C

Question 2

Two firms, A and B, are faced with a decision on making investments in safety. They each currently earn profit of $500. A safety investment would cost $100 paid by the firm that makes the investment and would lower both firms' labor costs by $75 per firm. If both firms share the investment ($50 each)their labor costs are lowered by $100 per firm. Draw the payoff matrix for this game and determine the Nash equilibrium. Does it make sense for the firms in the industry to ask the government to force them to make the investment? Explain.

Accepted Answer

For both firms, the dominant strategy is to not make the investment. The Nash equilibrium occurs when neither firm makes the investment. Government enforcement is preferred because each firm will increase its profit to $550. What each firm needs is not to be forced to make the investment, but the assurance that other firms in the industry are also making the investment.

Question 3

If the government provides universal health insurance, what screening process will the government need?

Accepted Answer

A) It won't need a screening test. 
B) It will only give health insurance to non-smokers. 
C) It won't use screening tests but it will use statistical discrimination. 
D) It won't use screening tests but it will use signals. 
A) It won't need a screening test. 
B) It will only give health insurance to non-smokers. 
C) It won't use screening tests but it will use statistical discrimination. 
D) It won't use screening tests but it will use signals. A

Question 4

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 5

Explain what may occur when a buyer and a seller have unequal amounts of limited information. Describe two different types of problems that may arise when asymmetric information exists.

Accepted Answer

Asymmetric information may lead to oppor

Question 6

Adverse selection can occur when

Accepted Answer

A) all persons involved in a transaction have full information. 
B) one person has information not available to others. 
C) post-agreement incentives result in workers shirking. 
D) nobody has any information about a particular product. 
A) all persons involved in a transaction have full information. 
B) one person has information not available to others. 
C) post-agreement incentives result in workers shirking. 
D) nobody has any information about a particular product.

Question 7

If a student achieves a high SAT score, this

Accepted Answer

A) sends a signal to a college that the applicant will be a good college student. 
B) does not act as a screening device. 
C) is a moral hazard. 
D) provides a college with no information. 
A) sends a signal to a college that the applicant will be a good college student. 
B) does not act as a screening device. 
C) is a moral hazard. 
D) provides a college with no information.

Question 8

The number of brands of identical products will most likely increase as

Accepted Answer

A) the number of informed consumers increases. 
B) the cost of producing many brands decreases. 
C) the number of uninformed consumers decreases. 
D) None of the above. 
A) the number of informed consumers increases. 
B) the cost of producing many brands decreases. 
C) the number of uninformed consumers decreases. 
D) None of the above.

Question 9

If an employer cannot distinguish the ability of workers a separating equilibrium will result.

Accepted Answer

A) True 
 B)False

Question 10

The WWQX Co. sells shirts. Shirts with the company label on the tag are perceived to be of higher quality than shirts with the store's label. Yet, shirts are of identical quality regardless of the label. The demand for perceived high-quality shirts is ph = 80 - qh. The demand for perceived low-quality shirts is pl = 19 + ph - ql. The firm can produce shirts at TC = 2qh + 2ql. How many shirts does the firm label as low quality and how many as high quality? What prices are charged?

Accepted Answer

A) ql = 29; qh = 39 
B) ql = 39; qh = 79 
C) ql = 19; qh = 25 
D) ql = 20; qh = 18 
A) ql = 29; qh = 39 
B) ql = 39; qh = 79 
C) ql = 19; qh = 25 
D) ql = 20; qh = 18

Question 11

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

Accepted Answer

A) use one's driving record as a signal. 
B) use one's driving record as a screening device. 
C) not be able to use one's driving record as a screening device. 
D) request driving records directly from the police and not from the individual applicant. 
A) use one's driving record as a signal. 
B) use one's driving record as a screening device. 
C) not be able to use one's driving record as a screening device. 
D) request driving records directly from the police and not from the individual applicant.

Question 12

Explain how product liability laws can reduce adverse selection.

Accepted Answer

Product liability laws force p

Question 13

In the tourist-trap model, a consumer might pay more than marginal cost for a good sold in a competitive market if the cost of possibly finding the good cheaper is more than the markup over marginal cost.

Accepted Answer

A) True 
 B)False

Question 14

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 15

A firm is more likely to adopt multiple brand names for the same product when the good is a nondurable.

Accepted Answer

A) True 
 B)False

Question 16

Empirical studies conclude that advertising

Accepted Answer

A) raises prices in all markets. 
B) can reduce the prices of many goods. 
C) reduces the prices on all goods. 
D) has no impact on prices. 
A) raises prices in all markets. 
B) can reduce the prices of many goods. 
C) reduces the prices on all goods. 
D) has no impact on prices.

Question 17

If a life insurance company does not require a medical exam of its policyholders, it is most likely that the company

Accepted Answer

A) charges above-average premiums. 
B) charges below-average premiums. 
C) charges no premiums. 
D) has only very healthy policyholders. 
A) charges above-average premiums. 
B) charges below-average premiums. 
C) charges no premiums. 
D) has only very healthy policyholders.

Question 18

The minor league system in professional baseball can be thought of as

Accepted Answer

A) a screening tool. 
B) a signaling tool. 
C) a form of statistical discrimination. 
D) being used for the wrong reasons. 
A) a screening tool. 
B) a signaling tool. 
C) a form of statistical discrimination. 
D) being used for the wrong reasons.

Question 19

What is one of the most important benefits of the Internet?

Accepted Answer

A) The Internet has increased asymmetric information. 
B) The Internet has reduced asymmetric information. 
C) The Internet has increased moral hazard. 
D) The Internet has increased transaction costs. 
A) The Internet has increased asymmetric information. 
B) The Internet has reduced asymmetric information. 
C) The Internet has increased moral hazard. 
D) The Internet has increased transaction costs.

Question 20

As long as there is asymmetric information among consumers and positive search cost, if price is below the monopoly price and the same across all firms, then a competitive firm

Accepted Answer

A) can always profit from raising its price. 
B) can always profit from lowering its price. 
C) can profit from raising its price but by no more than the search cost. 
D) can profit from lowering its price but by no more than the search cost. 
A) can always profit from raising its price. 
B) can always profit from lowering its price. 
C) can profit from raising its price but by no more than the search cost. 
D) can profit from lowering its price but by no more than the search cost.

Adverse selection occurs when there is

If the government provides universal health insurance, what screening process will the government need?

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

Explain what may occur when a buyer and a seller have unequal amounts of limited information. Describe two different types of problems that may arise when asymmetric information exists.

Adverse selection can occur when

If a student achieves a high SAT score, this

The number of brands of identical products will most likely increase as

If an employer cannot distinguish the ability of workers a separating equilibrium will result.

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

Explain how product liability laws can reduce adverse selection.

In the tourist-trap model, a consumer might pay more than marginal cost for a good sold in a competitive market if the cost of possibly finding the good cheaper is more than the markup over marginal cost.

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

A firm is more likely to adopt multiple brand names for the same product when the good is a nondurable.

Empirical studies conclude that advertising

If a life insurance company does not require a medical exam of its policyholders, it is most likely that the company

The minor league system in professional baseball can be thought of as

What is one of the most important benefits of the Internet?

As long as there is asymmetric information among consumers and positive search cost, if price is below the monopoly price and the same across all firms, then a competitive firm

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Uncertainty

Externalities, Open-Access, and Public Goods

Contracts and Moral Hazards

Filters

Exam 19: Asymmetric Information

Adverse selection occurs when there is

If the government provides universal health insurance, what screening process will the government need?

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

Explain what may occur when a buyer and a seller have unequal amounts of limited information. Describe two different types of problems that may arise when asymmetric information exists.

Adverse selection can occur when

If a student achieves a high SAT score, this

The number of brands of identical products will most likely increase as

If an employer cannot distinguish the ability of workers a separating equilibrium will result.

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

Explain how product liability laws can reduce adverse selection.

In the tourist-trap model, a consumer might pay more than marginal cost for a good sold in a competitive market if the cost of possibly finding the good cheaper is more than the markup over marginal cost.

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

A firm is more likely to adopt multiple brand names for the same product when the good is a nondurable.

Empirical studies conclude that advertising

If a life insurance company does not require a medical exam of its policyholders, it is most likely that the company

The minor league system in professional baseball can be thought of as

What is one of the most important benefits of the Internet?

As long as there is asymmetric information among consumers and positive search cost, if price is below the monopoly price and the same across all firms, then a competitive firm

Introduction

Supply and Demand

Applying the Supply-And-Demand Model

Consumer Choice

Applying Consumer Theory

Firms and Production

Costs

Competitive Firms and Markets

Applying the Competitive Model

General Equilibrium and Economic Welfare

Monopoly

Pricing and Advertising

Oligopoly and Monopolistic Competition

Game Theory

Factor Markets

Interest Rates, Investments, and Capital Markets

Uncertainty

Externalities, Open-Access, and Public Goods

Contracts and Moral Hazards

Filters