Question 1

A risk-averse manager is hired to run a firm for shareholders.If shareholders cannot observe the manager's effort,which would be the best employment contract?

Accepted Answer

A)  a high-powered incentive contract to elicit maximum effort. 
B)  a fixed salary. 
C)  a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk. 
D)  an incentive scheme that provides maximum incentives and maximum insurance. 
A)  a high-powered incentive contract to elicit maximum effort. 
B)  a fixed salary. 
C)  a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk. 
D)  an incentive scheme that provides maximum incentives and maximum insurance. C

Question 2

One way the "lemons problem" in the used-car market can be mitigated is by

Accepted Answer

A)  raising the price of used cars. 
B)  hiring auto experts to sell used cars. 
C)  requiring sellers to guarantee trouble-free cars. 
D)  allowing owners to trade in their own cars when they purchase a used car. 
A)  raising the price of used cars. 
B)  hiring auto experts to sell used cars. 
C)  requiring sellers to guarantee trouble-free cars. 
D)  allowing owners to trade in their own cars when they purchase a used car. C

Question 3

Return to the ready-to-eat cereal example from the previous question.Now assume that there is only one kind of cereal,so the manufacturer cannot distinguish between types of consumer (adults vs.children,of which suppose there are equal numbers in the market).What is the optimal menu of cereal boxes?

Accepted Answer

A)  a 3 ounce box (which adults will buy) sold for 48 cents; a 4 ounce box (which children will buy) sold for $1.12. 
B)  a 3 ounce box (which adults will buy) sold for 48 cents; a 4 ounce box (which children will buy) sold for 64 cents. 
C)  a 2 ounce box (which adults will buy) sold for 36 cents; a 4 ounce box (which children will buy) sold for 76 cents. 
D)  No menu; the manufacturer is better off just selling a 5 ounce box for $1.12, which is only purchased by children. 
A)  a 3 ounce box (which adults will buy) sold for 48 cents; a 4 ounce box (which children will buy) sold for $1.12. 
B)  a 3 ounce box (which adults will buy) sold for 48 cents; a 4 ounce box (which children will buy) sold for 64 cents. 
C)  a 2 ounce box (which adults will buy) sold for 36 cents; a 4 ounce box (which children will buy) sold for 76 cents. 
D)  No menu; the manufacturer is better off just selling a 5 ounce box for $1.12, which is only purchased by children. D

Question 4

A ready-to-eat cereal manufacturer faces two types of consumers,adults and children,having the following schedule of gross surpluses for each additional unit of cereal consumed.  
Cereal costs 10 cents per ounce to produce.Begin by assuming that the manufacturer has full information about types because adults only by fiber-rich cereal and children only buy sweet cereal (with marshmallows).

Accepted Answer

A)  3 ounces of fiber cereal sold to adults for 48 cents; 4 ounces of sweet cereal sold to children for $1.12. 
B)  3 ounces of fiber cereal sold to adults for 36 cents; 4 ounces of sweet cereal sold to children for 64 cents. 
C)  5 ounces of fiber cereal sold to adults for 60 cents; 5 ounces of sweet cereal sold to children for $1.20. 
D)  5 ounces of fiber cereal sold to adults for 20 cents; 5 ounces of sweet cereal sold to children for 40 cents. 
A)  3 ounces of fiber cereal sold to adults for 48 cents; 4 ounces of sweet cereal sold to children for $1.12. 
B)  3 ounces of fiber cereal sold to adults for 36 cents; 4 ounces of sweet cereal sold to children for 64 cents. 
C)  5 ounces of fiber cereal sold to adults for 60 cents; 5 ounces of sweet cereal sold to children for $1.20. 
D)  5 ounces of fiber cereal sold to adults for 20 cents; 5 ounces of sweet cereal sold to children for 40 cents.

Question 5

Which is a distortion (a loss of social surplus)associated with a monopolist's inability to observe consumer types when constructing a nonlinear pricing scheme?

Accepted Answer

A)  the monopolist must expend more resources on market research. 
B)  all bundles involve inefficiently low quantities. 
C)  only some bundles involve inefficiently low quantities. 
D)  quantities aren't distorted, but prices extract too much consumer surplus. 
A)  the monopolist must expend more resources on market research. 
B)  all bundles involve inefficiently low quantities. 
C)  only some bundles involve inefficiently low quantities. 
D)  quantities aren't distorted, but prices extract too much consumer surplus.

Question 6

A market characterized by asymmetric information will have an equilibrium price if at that price

Accepted Answer

A)  quantity demanded equals quantity supplied when all participants have the same information. 
B)  quantity demanded equals quantity supplied given prevailing information levels. 
C)  quantity demanded equals quantity supplied under perfect information. 
D)  quantity demanded exceeds quantity supplied if suppliers are better informed (and vice versa). 
A)  quantity demanded equals quantity supplied when all participants have the same information. 
B)  quantity demanded equals quantity supplied given prevailing information levels. 
C)  quantity demanded equals quantity supplied under perfect information. 
D)  quantity demanded exceeds quantity supplied if suppliers are better informed (and vice versa).

Question 7

In the Spence education signaling model,what is the social value of education?

Accepted Answer

A)  employees improve their ability to perform on the job. 
B)  employers can use education as a screen to match talented employees with high-skill jobs. 
C)  employers can save the costs of on-the-job training, which is less efficient than a general education. 
D)  it allows low-ability employees to apply for high-salary jobs. 
A)  employees improve their ability to perform on the job. 
B)  employers can use education as a screen to match talented employees with high-skill jobs. 
C)  employers can save the costs of on-the-job training, which is less efficient than a general education. 
D)  it allows low-ability employees to apply for high-salary jobs.

Question 8

Concerning auctions,what is the definition of a "common-values setting"?

Accepted Answer

A)  bids are submitted using open outcries. 
B)  bids are submitted simultaneously, and the highest is selected as the winner. 
C)  bidders value the object the same, but are uncertain as to what that value is. 
D)  bids are submitted by syndicates of cooperating bidders. 
A)  bids are submitted using open outcries. 
B)  bids are submitted simultaneously, and the highest is selected as the winner. 
C)  bidders value the object the same, but are uncertain as to what that value is. 
D)  bids are submitted by syndicates of cooperating bidders.

Question 9

Which of the following is an application of the adverse selection problem?

Accepted Answer

A)  a customer driving more recklessly after buying car insurance. 
B)  a teenager "hanging out" with friends his or her parents do not approve of. 
C)  shareholders offering a high-powered incentive contract to a manager. 
D)  an auto repairman claiming that the repairs are more extensive than they actually are. 
A)  a customer driving more recklessly after buying car insurance. 
B)  a teenager "hanging out" with friends his or her parents do not approve of. 
C)  shareholders offering a high-powered incentive contract to a manager. 
D)  an auto repairman claiming that the repairs are more extensive than they actually are.

Question 10

The "lemons model" predicts quality deterioration in the used car market because

Accepted Answer

A)  used cars require increasing maintenance. 
B)  suppliers and demanders have different information about cars' quality. 
C)  used cars are generally of a lower quality than new cars. 
D)  people will usually buy new cars if they are available. 
A)  used cars require increasing maintenance. 
B)  suppliers and demanders have different information about cars' quality. 
C)  used cars are generally of a lower quality than new cars. 
D)  people will usually buy new cars if they are available.

Question 11

Given a series of employment contracts with the same slope (where slope refers to how the contract varies with changes in the firm's gross profits)but different intercepts (referring to the overall generosity of the contract).Which of these is not a consideration in figuring out which of these intercepts the shareholders would decide to build into the contract offered to the manager?

Accepted Answer

A)  if too generous a contract is offered, this comes out of the firm's bottom-line profit. 
B)  if too generous a contract is offered, the manager may become lazy and not exert the required effort. 
C)  if the contract isn't generous enough, the manager will decide to work elsewhere. 
D)  if the contract isn't generous enough, only low-ability managers will apply. 
A)  if too generous a contract is offered, this comes out of the firm's bottom-line profit. 
B)  if too generous a contract is offered, the manager may become lazy and not exert the required effort. 
C)  if the contract isn't generous enough, the manager will decide to work elsewhere. 
D)  if the contract isn't generous enough, only low-ability managers will apply.

Question 12

A monopoly coffee shop is deciding on a menu of different cup sizes to sell to a population of consumers,some of whom are high demanders and some low demanders.How would the optimal menu differ depending on whether the consumers can be observably separated into the different types or not?

Accepted Answer

A)  the menu is unaffected by type observability. 
B)  if types aren't observable, the large cup size should be increased to separate the high demander. 
C)  if types aren't observable, the small cup size should be increased to make it more attractive to low demanders. 
D)  if types aren't observable, the small cup size should be reduced to make it less attractive to high demanders. 
A)  the menu is unaffected by type observability. 
B)  if types aren't observable, the large cup size should be increased to separate the high demander. 
C)  if types aren't observable, the small cup size should be increased to make it more attractive to low demanders. 
D)  if types aren't observable, the small cup size should be reduced to make it less attractive to high demanders.

Question 13

Which are social costs associated with the inability of shareholders to observe a manager's effort? (You may choose more than one.)

Accepted Answer

A)  excessive insurance offered. 
B)  the manager has to be exposed to risk to induce effort, and risk is costly. 
C)  the manager ends up exerting less than first-best effort. 
D)  excessive effort induced. 
A)  excessive insurance offered. 
B)  the manager has to be exposed to risk to induce effort, and risk is costly. 
C)  the manager ends up exerting less than first-best effort. 
D)  excessive effort induced.

Question 14

There are two types of worker,high ability and low ability.High ability workers generate gross profit of A on the job and low ability generate nothing.Education does not make workers more productive,but is costly to obtain (cH for high ability workers and cL for low ability ones).Let w be the wage that all firms in the economy pay by regulatory mandate.Suppose the worker obtains utility given by the wage (if the worker is employed,0 if not)minus the cost of education (if any).There is no disutility from work.Which condition is required if only the high ability type is to obtain an education in equilibrium?

Accepted Answer

A)  cH L.. 
B)  cL H. 
C)  cH L L H < w. 
A)  cH L.. 
B)  cL H. 
C)  cH L L H < w.

Question 15

Return to the case of education and the job market from the previous question.Which condition would be consistent with both types' obtaining an education in equilibrium?

Accepted Answer

A)  cH L.. 
B)  cL H. 
C)  cH L L H . 
A)  cH L.. 
B)  cL H. 
C)  cH L L H .

Question 16

A risk-averse manager is hired to run a firm for shareholders.If the manager's effort can be observed and specified in a contract,which would be the best employment contract?

Accepted Answer

A)  a high-powered incentive contract to elicit the most effort. 
B)  a fixed salary paid as long as the required effort is undertaken. 
C)  a proportion of profits paid as long as the required effort is undertaken. 
D)  a wage well in excess of his or her outside opportunity . 
A)  a high-powered incentive contract to elicit the most effort. 
B)  a fixed salary paid as long as the required effort is undertaken. 
C)  a proportion of profits paid as long as the required effort is undertaken. 
D)  a wage well in excess of his or her outside opportunity .

Question 17

The principal is distinct from the agent in the principal-agent model because

Accepted Answer

A) the principal offers the contract to the agent. 
B) the principal is fully informed. 
C) both a and b. 
D) neither a nor b. 
A) the principal offers the contract to the agent. 
B) the principal is fully informed. 
C) both a and b. 
D) neither a nor b.

Question 18

Adverse selection arises in insurance markets because

Accepted Answer

A)  insurance buyers have more information than insurance sellers. 
B)  insurance sellers have more information than insurance buyers. 
C)  individuals can select which insurance company to patronize. 
D)  insurance companies can exercise too much control over whom they insure. 
A)  insurance buyers have more information than insurance sellers. 
B)  insurance sellers have more information than insurance buyers. 
C)  individuals can select which insurance company to patronize. 
D)  insurance companies can exercise too much control over whom they insure.

Question 19

How is it logically possible for a monopolist to get different consumers to purchase different bundles on a menu (such as different sizes of coffee cups),and thereby achieve a form of price discrimination,even if the firm cannot observe the consumers' valuations directly?

Accepted Answer

A)  different types of consumers have different tradeoffs between money and amounts of the good. 
B)  the monopolist can use a market-separation strategy. 
C)  social norms are powerful deterrents to lying about one's type. 
D)  this is impossible: if one bundle is preferred by one type, logically it will be preferred by all. 
A)  different types of consumers have different tradeoffs between money and amounts of the good. 
B)  the monopolist can use a market-separation strategy. 
C)  social norms are powerful deterrents to lying about one's type. 
D)  this is impossible: if one bundle is preferred by one type, logically it will be preferred by all.

Question 20

Suppose that your personal valuation for a painting is $200.Which auction format would induce you to bid more?

Accepted Answer

A)  first price. 
B)  second price. 
C)  you would bid the same in any format. 
D)  depends on the environment. 
A)  first price. 
B)  second price. 
C)  you would bid the same in any format. 
D)  depends on the environment.

A risk-averse manager is hired to run a firm for shareholders.If shareholders cannot observe the manager's effort,which would be the best employment contract?

One way the "lemons problem" in the used-car market can be mitigated is by

Return to the ready-to-eat cereal example from the previous question.Now assume that there is only one kind of cereal,so the manufacturer cannot distinguish between types of consumer (adults vs.children,of which suppose there are equal numbers in the market).What is the optimal menu of cereal boxes?

Which is a distortion (a loss of social surplus)associated with a monopolist's inability to observe consumer types when constructing a nonlinear pricing scheme?

A market characterized by asymmetric information will have an equilibrium price if at that price

In the Spence education signaling model,what is the social value of education?

Concerning auctions,what is the definition of a "common-values setting"?

Which of the following is an application of the adverse selection problem?

The "lemons model" predicts quality deterioration in the used car market because

A monopoly coffee shop is deciding on a menu of different cup sizes to sell to a population of consumers,some of whom are high demanders and some low demanders.How would the optimal menu differ depending on whether the consumers can be observably separated into the different types or not?

Which are social costs associated with the inability of shareholders to observe a manager's effort? (You may choose more than one.)

Return to the case of education and the job market from the previous question.Which condition would be consistent with both types' obtaining an education in equilibrium?

A risk-averse manager is hired to run a firm for shareholders.If the manager's effort can be observed and specified in a contract,which would be the best employment contract?

The principal is distinct from the agent in the principal-agent model because

Adverse selection arises in insurance markets because

How is it logically possible for a monopolist to get different consumers to purchase different bundles on a menu (such as different sizes of coffee cups),and thereby achieve a form of price discrimination,even if the firm cannot observe the consumers' valuations directly?

Suppose that your personal valuation for a painting is $200.Which auction format would induce you to bid more?

Economic Models

Utility and Choice

Individual Demand Curves

Uncertainty

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Externalities and Public Goods

Behavioral Economics

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Exam 15: Asymmetric Information

A risk-averse manager is hired to run a firm for shareholders.If shareholders cannot observe the manager's effort,which would be the best employment contract?

One way the "lemons problem" in the used-car market can be mitigated is by

Which is a distortion (a loss of social surplus)associated with a monopolist's inability to observe consumer types when constructing a nonlinear pricing scheme?

A market characterized by asymmetric information will have an equilibrium price if at that price

In the Spence education signaling model,what is the social value of education?

Concerning auctions,what is the definition of a "common-values setting"?

Which of the following is an application of the adverse selection problem?

The "lemons model" predicts quality deterioration in the used car market because

A monopoly coffee shop is deciding on a menu of different cup sizes to sell to a population of consumers,some of whom are high demanders and some low demanders.How would the optimal menu differ depending on whether the consumers can be observably separated into the different types or not?

Which are social costs associated with the inability of shareholders to observe a manager's effort? (You may choose more than one.)

Return to the case of education and the job market from the previous question.Which condition would be consistent with both types' obtaining an education in equilibrium?

A risk-averse manager is hired to run a firm for shareholders.If the manager's effort can be observed and specified in a contract,which would be the best employment contract?

The principal is distinct from the agent in the principal-agent model because

Adverse selection arises in insurance markets because

How is it logically possible for a monopolist to get different consumers to purchase different bundles on a menu (such as different sizes of coffee cups),and thereby achieve a form of price discrimination,even if the firm cannot observe the consumers' valuations directly?

Suppose that your personal valuation for a painting is $200.Which auction format would induce you to bid more?

Economic Models

Utility and Choice

Individual Demand Curves

Uncertainty

Game Theory

Production

Costs

Profit Maximization and Supply

Perfect Competition in a Single Market

General Equilibrium and Welfare

Monopoly

Imperfect Competition

Pricing in Input Markets

Capital and Time

Externalities and Public Goods

Behavioral Economics

Filters