Question 1

Cheap talk works at placing workers in the right job as long as

Accepted Answer

A) the interests of the worker and the firm coincide. 
B) all workers want the most demanding jobs regardless of their abilities. 
C) workers have different ability levels that are unknown to firms. 
D) firms are not profit maximizers. 
A) the interests of the worker and the firm coincide. 
B) all workers want the most demanding jobs regardless of their abilities. 
C) workers have different ability levels that are unknown to firms. 
D) firms are not profit maximizers.

Question 2

When relatively few workers have high ability,

Accepted Answer

A) they will settle for the average wage. 
B) they will want to signal their ability. 
C) the premium for high ability is less than when most workers have high ability. 
D) they do not need to signal their ability. 
A) they will settle for the average wage. 
B) they will want to signal their ability. 
C) the premium for high ability is less than when most workers have high ability. 
D) they do not need to signal their ability.

Question 3

In a labor-market pooling equilibrium with high-skill and low-skill workers and where a costly educational degree is used as a signaling device, all else equal, an increase in the wage differential between high- and low-skill workers leads to

Accepted Answer

A) an increase in the required minimum share of high-skill workers. 
B) a decrease in the required minimum share of high-skill workers. 
C) no change in the required minimum share of high-skill workers. 
D) None of the above answers are correct. 
A) an increase in the required minimum share of high-skill workers. 
B) a decrease in the required minimum share of high-skill workers. 
C) no change in the required minimum share of high-skill workers. 
D) None of the above answers are correct.

Question 4

If a bank offers mortgages that do not require the normal 20% down payment, the bank encourages

Accepted Answer

A) people who know they might not pay off the mortgage. 
B) people who can't afford the down payment but can pay off the mortgage. 
C) people who know that they are going to pay off the mortgage. 
D) people who know they can't pay off the mortgage but who can afford the down payment. 
A) people who know they might not pay off the mortgage. 
B) people who can't afford the down payment but can pay off the mortgage. 
C) people who know that they are going to pay off the mortgage. 
D) people who know they can't pay off the mortgage but who can afford the down payment.

Question 5

Employers verify the facts of potential employees' resumes to avoid

Accepted Answer

A) signaling. 
B) screening. 
C) cheap talk. 
D) moral hazard. 
A) signaling. 
B) screening. 
C) cheap talk. 
D) moral hazard.

Question 6

A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) signaling. 
D) screening. 
A) moral hazard. 
B) adverse selection. 
C) signaling. 
D) screening.

Question 7

Asymmetric information will always cause

Accepted Answer

A) efficiency problems. 
B) equity problems. 
C) Both A and B. 
D) None of the above. 
A) efficiency problems. 
B) equity problems. 
C) Both A and B. 
D) None of the above.

Question 8

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.

Question 9

If adverse selection exists in a market,

Accepted Answer

A) it increases consumer surplus but reduces producer surplus. 
B) it reduces consumer and producer surplus. 
C) it reduces producer surplus but has no impact on consumer surplus. 
D) it increases both consumer and producer surplus. 
A) it increases consumer surplus but reduces producer surplus. 
B) it reduces consumer and producer surplus. 
C) it reduces producer surplus but has no impact on consumer surplus. 
D) it increases both consumer and producer surplus.

Question 10

Adverse selection occurs when

Accepted Answer

A) a person takes more risks that are not known to the life insurance company because he has life insurance. 
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company. 
C) a person is a risk lover. 
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women. 
A) a person takes more risks that are not known to the life insurance company because he has life insurance. 
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company. 
C) a person is a risk lover. 
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women.

Question 11

Firms are able to price discriminate

Accepted Answer

A) when all customers are uninformed about quality differences. 
B) when no customers are uninformed about quality differences. 
C) when some customers are uninformed about quality differences. 
D) when there is full information about quality available to all customers. 
A) when all customers are uninformed about quality differences. 
B) when no customers are uninformed about quality differences. 
C) when some customers are uninformed about quality differences. 
D) when there is full information about quality available to all customers.

Question 12

If one job applicant truthfully reveals that they subscribe to an industry publication, the job applicant is

Accepted Answer

A) using the trade publication as a screening tool. 
B) using the trade publication as a signaling tool. 
C) using the trade publication as a form of statistical discrimination. 
D) using the trade publication for the wrong reasons. 
A) using the trade publication as a screening tool. 
B) using the trade publication as a signaling tool. 
C) using the trade publication as a form of statistical discrimination. 
D) using the trade publication for the wrong reasons.

Question 13

Screening and signaling in the labor market are inefficient

Accepted Answer

A) unless college costs are relatively low. 
B) unless they result in a better job match. 
C) because the benefits are spread out over many firms. 
D) because they raise the wage paid to all workers. 
A) unless college costs are relatively low. 
B) unless they result in a better job match. 
C) because the benefits are spread out over many firms. 
D) because they raise the wage paid to all workers.

Question 14

A job advertised in an industry publication rather than a local newspaper is an attempt to

Accepted Answer

A) use access to the industry publication as a screening mechanism. 
B) use access to the newspaper as a screening mechanism. 
C) use access to the industry publication as a means of statistical discrimination. 
D) use access to the newspaper as a means of statistical discrimination. 
A) use access to the industry publication as a screening mechanism. 
B) use access to the newspaper as a screening mechanism. 
C) use access to the industry publication as a means of statistical discrimination. 
D) use access to the newspaper as a means of statistical discrimination.

Question 15

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Accepted Answer

A) a warranty on a lemon is costly to the seller. 
B) warranties are offered on all cars. 
C) warranties are only offered on lemons. 
D) a warranty on a good car is a false signal. 
A) a warranty on a lemon is costly to the seller. 
B) warranties are offered on all cars. 
C) warranties are only offered on lemons. 
D) a warranty on a good car is a false signal.

Question 16

Auto insurance rates are lower for young women relative to young men. An unusually reckless young woman driver benefits from this

Accepted Answer

A) statistical discrimination. 
B) signal. 
C) screening. 
D) majority voting. 
A) statistical discrimination. 
B) signal. 
C) screening. 
D) majority voting.

Question 17

Suppose 10% of all workers are of high ability. If a firm knows a worker's ability, workers of low ability are paid $20,000 and workers of high ability are paid $30,000. A college degree can signal ability, and the cost of the degree is $11,000. Will there be a pooling equilibrium or a separating equilibrium?

Accepted Answer

Under a pooling equilibrium, all workers

Question 18

Which of the following is an example of a hidden characteristic?

Accepted Answer

A) After purchasing life insurance, Billy joins the bomb squad. 
B) Only the owner knows about her car defects. 
C) Bobby let his employer know about his college degree. 
D) Sally provides her driving record to the car insurance company. 
A) After purchasing life insurance, Billy joins the bomb squad. 
B) Only the owner knows about her car defects. 
C) Bobby let his employer know about his college degree. 
D) Sally provides her driving record to the car insurance company.

Question 19

Firms are not allowed to ask certain questions during job interviews, including marital status or how many children you have. Why is this the case?

Accepted Answer

A) People with children are more productive, thus it is unfair if the firm knows this information. 
B) Firms might use the answers to these questions as a means of statistical discrimination. 
C) People with children are less productive, thus the firm has no right to this information. 
D) Such questions violate the privacy clause of the U.S. Constitution. 
A) People with children are more productive, thus it is unfair if the firm knows this information. 
B) Firms might use the answers to these questions as a means of statistical discrimination. 
C) People with children are less productive, thus the firm has no right to this information. 
D) Such questions violate the privacy clause of the U.S. Constitution.

Question 20

Firms under-invest in safety because

Accepted Answer

A) firms are not concerned with safety. 
B) firms do not want their plants to be safe. 
C) firms are risk averse. 
D) firms do not enjoy all of the benefits from investments in safety. 
A) firms are not concerned with safety. 
B) firms do not want their plants to be safe. 
C) firms are risk averse. 
D) firms do not enjoy all of the benefits from investments in safety.

Cheap talk works at placing workers in the right job as long as

When relatively few workers have high ability,

In a labor-market pooling equilibrium with high-skill and low-skill workers and where a costly educational degree is used as a signaling device, all else equal, an increase in the wage differential between high- and low-skill workers leads to

If a bank offers mortgages that do not require the normal 20% down payment, the bank encourages

Employers verify the facts of potential employees' resumes to avoid

A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of

Asymmetric information will always cause

Some companies subject their applicants to extensive tests. Why?

If adverse selection exists in a market,

Adverse selection occurs when

Firms are able to price discriminate

If one job applicant truthfully reveals that they subscribe to an industry publication, the job applicant is

Screening and signaling in the labor market are inefficient

A job advertised in an industry publication rather than a local newspaper is an attempt to

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Auto insurance rates are lower for young women relative to young men. An unusually reckless young woman driver benefits from this

Which of the following is an example of a hidden characteristic?

Firms are not allowed to ask certain questions during job interviews, including marital status or how many children you have. Why is this the case?

Firms under-invest in safety because

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

Cheap talk works at placing workers in the right job as long as

When relatively few workers have high ability,

In a labor-market pooling equilibrium with high-skill and low-skill workers and where a costly educational degree is used as a signaling device, all else equal, an increase in the wage differential between high- and low-skill workers leads to

If a bank offers mortgages that do not require the normal 20% down payment, the bank encourages

Employers verify the facts of potential employees' resumes to avoid

A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of

Asymmetric information will always cause

Some companies subject their applicants to extensive tests. Why?

If adverse selection exists in a market,

Adverse selection occurs when

Firms are able to price discriminate

If one job applicant truthfully reveals that they subscribe to an industry publication, the job applicant is

Screening and signaling in the labor market are inefficient

A job advertised in an industry publication rather than a local newspaper is an attempt to

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Auto insurance rates are lower for young women relative to young men. An unusually reckless young woman driver benefits from this

Which of the following is an example of a hidden characteristic?

Firms are not allowed to ask certain questions during job interviews, including marital status or how many children you have. Why is this the case?

Firms under-invest in safety because

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