Question 1

Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)

Accepted Answer

A)  a moral hazard problem might arise, in that homeowners may be less careful with the mower, since they can always return it if it breaks. 
B)  the warranty may select for homeowners that don't have a lot of mowing to do, or have smooth lawns, because they won't have to pay as much for a warranty. 
C)  the warranty will increase demand by assuring customers of the product's quality. 
D)  the warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way. 
A)  a moral hazard problem might arise, in that homeowners may be less careful with the mower, since they can always return it if it breaks. 
B)  the warranty may select for homeowners that don't have a lot of mowing to do, or have smooth lawns, because they won't have to pay as much for a warranty. 
C)  the warranty will increase demand by assuring customers of the product's quality. 
D)  the warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way.

Question 2

How do participants in an auction respond to the problem of the "winner's curse"?

Accepted Answer

A)  they bid more aggressively to win the auction and avoid the "curse". 
B)  they exit the auction because winning can only be a bad sign of the object's worth. 
C)  all bid less aggressively, so that the winner ends up not regretting having won. 
D)  the winner regrets having won the auction. 
A)  they bid more aggressively to win the auction and avoid the "curse". 
B)  they exit the auction because winning can only be a bad sign of the object's worth. 
C)  all bid less aggressively, so that the winner ends up not regretting having won. 
D)  the winner regrets having won the auction.

Question 3

How can a monopolist 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 separate the types into different markets. 
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 separate the types into different markets. 
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 4

Which auction format generates the most revenue for the seller?

Accepted Answer

A)  first price. 
B)  second price. 
C)  they generate the same expected revenue. 
D)  depends on the environment. 
A)  first price. 
B)  second price. 
C)  they generate the same expected revenue. 
D)  depends on the environment.

Question 5

An example of adverse selection is

Accepted Answer

A)  purchasing a new car sight unseen based on the recommendation of a neighbor. 
B)  high health insurance premiums resulting from the poor health of people who buy policies. 
C)  suppliers who charge more for better quality clothing than for lower quality clothing. 
D)  being talked into buying a low-quality item because the price is lower. 
A)  purchasing a new car sight unseen based on the recommendation of a neighbor. 
B)  high health insurance premiums resulting from the poor health of people who buy policies. 
C)  suppliers who charge more for better quality clothing than for lower quality clothing. 
D)  being talked into buying a low-quality item because the price is lower.

Question 6

Return to the situation with the manager from the previous question.Now assume that shareholders cannot observe effort,so cannot specify how hard the manager works in the contract but must induce it through the incentive scheme.Which of the following wage contracts would work out best for shareholders in equilibrium?

Accepted Answer

A)  A flat wage w = 2,500 with no profit share. 
B)  A share of 35% of the gross profits. 
C)  A share of 55% of the gross profits. 
D)  A share of 70% of the gross profits. 
A)  A flat wage w = 2,500 with no profit share. 
B)  A share of 35% of the gross profits. 
C)  A share of 55% of the gross profits. 
D)  A share of 70% of the gross profits.

Question 7

Which of the following is an application of the moral hazard problem?

Accepted Answer

A)  a person buying insurance after a cancer diagnosis. 
B)  an salesperson who is not paid on commission being rude to customers. 
C)  coffee hounds buying the menu item meant for lower-demand consumers. 
D)  only inexperienced workers applying for a managerial job advertised with a relatively low salary. 
A)  a person buying insurance after a cancer diagnosis. 
B)  an salesperson who is not paid on commission being rude to customers. 
C)  coffee hounds buying the menu item meant for lower-demand consumers. 
D)  only inexperienced workers applying for a managerial job advertised with a relatively low salary.

Question 8

Adverse selection in competitive insurance markets harms

Accepted Answer

A)  high risk individuals. 
B)  low risk individuals. 
C)  owners of competitive insurance companies. 
D)  everyone. 
A)  high risk individuals. 
B)  low risk individuals. 
C)  owners of competitive insurance companies. 
D)  everyone.

Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)

How do participants in an auction respond to the problem of the "winner's curse"?

How can a monopolist 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?

Which auction format generates the most revenue for the seller?

An example of adverse selection is

Which of the following is an application of the moral hazard problem?

Adverse selection in competitive insurance markets harms

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

Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)

How do participants in an auction respond to the problem of the "winner's curse"?

How can a monopolist 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?

Which auction format generates the most revenue for the seller?

An example of adverse selection is

Which of the following is an application of the moral hazard problem?

Adverse selection in competitive insurance markets harms

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