Question 1

In a market where there is signaling, a separating equilibrium occurs when economic agents separate their actions as consumers from their actions as producers.

Accepted Answer

A) True 
 B)False  False

Question 2

An insurance company must be concerned about the possibility that someone will buy fire insurance on a building and then set fire to it. This is an example of moral hazard.

Accepted Answer

A) True 
 B)False  True

Question 3

In a market where there is a pooling equilibrium, different types of agents choose the same action.

Accepted Answer

A) True 
 B)False  True

Question 4

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16. The community has equal numbers of each type of worker. The local community college offers a course in microeconomics. High-productivity workers think taking this course is as bad as a cut in wages of $4 and low-productivity workers think it is as bad as a wage cut of $8.

Accepted Answer

A)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
B)  There is no separating equilibrium and no pooling equilibrium. 
C)  There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid $13. 
D)  There is a separating equilibrium in which high-productivity workers take the course and are paid $20 and low-productivity workers do not take the course and are paid $10. 
E)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13. 
A)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
B)  There is no separating equilibrium and no pooling equilibrium. 
C)  There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid $13. 
D)  There is a separating equilibrium in which high-productivity workers take the course and are paid $20 and low-productivity workers do not take the course and are paid $10. 
E)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13.

Question 5

A firm hires two kinds of workers, alphas and betas. The population at large has equal number of alphas and betas. One can't tell a beta from an alpha by looking at her, but an alpha will produce $3,000 worth of output per month and a beta will produce $2,500 worth of output in a month. The firm decides to distinguish alphas from betas by having workers take an examination. A worker will be paid $3,000 if she gets at least 60 answers right and $2,500 otherwise. For each question that they get right on the exam, alphas have to spend   hour studying and betas have to spend 1 hour. For either type, an hour's studying is as bad as giving up $20 of income per month. This scheme leads to

Accepted Answer

A)  a separating equilibrium where alphas score 60 and betas score 0. 
B)  a pooling equilibrium where alphas score 60 and betas score 0. 
C)  a pooling equilibrium where everybody scores 60. 
D)  a pooling equilibrium where everybody scores 0. 
E)  a separating equilibrium where everybody scores 60. 
A)  a separating equilibrium where alphas score 60 and betas score 0. 
B)  a pooling equilibrium where alphas score 60 and betas score 0. 
C)  a pooling equilibrium where everybody scores 60. 
D)  a pooling equilibrium where everybody scores 0. 
E)  a separating equilibrium where everybody scores 60.

Question 6

Ten workers work jointly on a project. All 10 workers are equally skilled. The total value of the output produced is $90 times the sum of the number of hours worked by all 10 workers. Each worker's utility is equal to his income minus the square of the number of hours he works. Each worker is selfish. The employers have no way of keeping track of any individual's work effort, so they decide to let each person work as long as he wants to and they divide the total value of the output equally among the workers. How much income will each worker get?

Accepted Answer

A)  $420 
B)  $45 
C)  $405 
D)  $4,050 
E)  None of the above. 
A)  $420 
B)  $45 
C)  $405 
D)  $4,050 
E)  None of the above.

Question 7

Jan's utility function is C - H2, where C is consumption and H is hours worked per day. She can work in the city for 8 hours per day, earning $100 a day. Alternatively, she can rent a small farm from Mr. Porksniffer. If she rents the farm, she can work as many hours a day as she wishes. If she works H hours per day, she can sell her crops for a total of $20H per day, but she must pay Mr. Porksniffer an annual rent of $R. Mr. Porksniffer wants to charge the highest rent $R that he can and still be able to have Jan rent from him. What is the highest rent he can charge? A penny less than

Accepted Answer

A)  $100 per day. 
B)  $64 per day. 
C)  $60 per day. 
D)  $50 per day. 
E)  $36 per day. 
A)  $100 per day. 
B)  $64 per day. 
C)  $60 per day. 
D)  $50 per day. 
E)  $36 per day.

Question 8

Lexus has recently begun a program in which a used Lexus automobile which passes a 100+ point inspection is designated by the local dealer to be a Lexus Certified Pre-owned Vehicle. Would local Lexus dealers find it in their best interest to participate? Explain.

Accepted Answer

Yes. If the certification is credible to

Question 9

In Rustbucket, Michigan, there are 200 used cars for sale; half of these cars are good and half of them are lemons. Owners of lemons are willing to sell them for $100. Owners of good used cars are willing to sell them for prices above $1,500 but will keep them if the price is lower than $1,500. There is a large number of potential buyers who are willing to pay $300 for a lemon and $1,900 for a good car. Buyers can't tell good cars from bad, but original owners know.

Accepted Answer

A)  There will be an equilibrium in which all used cars sell for $1,100. 
B)  The only equilibrium is one in which all used cars on the market are lemons and they sell for $300. 
C)  There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,500. 
D)  There will be an equilibrium in which all used cars sell for $800. 
E)  There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,900. 
A)  There will be an equilibrium in which all used cars sell for $1,100. 
B)  The only equilibrium is one in which all used cars on the market are lemons and they sell for $300. 
C)  There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,500. 
D)  There will be an equilibrium in which all used cars sell for $800. 
E)  There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,900.

Question 10

Which of the following is the best example of adverse selection?

Accepted Answer

A)  People who face the highest risks are the people most likely to buy insurance against these risks. 
B)  The residual claimant will have to bear the consequences of the most adverse outcomes. 
C)  An individual can influence the probability that she has an accident. 
D)  Items in the most popular styles sell out the quickest. 
E)  People sometimes mistakenly choose low-quality products. 
A)  People who face the highest risks are the people most likely to buy insurance against these risks. 
B)  The residual claimant will have to bear the consequences of the most adverse outcomes. 
C)  An individual can influence the probability that she has an accident. 
D)  Items in the most popular styles sell out the quickest. 
E)  People sometimes mistakenly choose low-quality products.

Question 11

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 8,000 used cars on the market is such that the number of used cars of value less than V is   . Original owners must sell their used cars. Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it. An owner can either take his car to an appraiser and pay the appraiser $100 to appraise the car (accurately and credibly) or sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

Accepted Answer

A)  $100. 
B)  $4,000. 
C)  $300. 
D)  $200. 
E)  $400. 
A)  $100. 
B)  $4,000. 
C)  $300. 
D)  $200. 
E)  $400.

Question 12

Enigma, Ohio, has two kinds of workers, klutzes whose labor is worth $1,000 a month and kandos whose labor is worth $2,500 a month. Enigma has exactly twice as many klutzes as kandos. Klutzes look just like kandos and are accomplished liars, so if you ask, they claim to be kandos. It is too expensive to monitor anybody's work. A professor who likes to talk offers to give free lectures on personal hygiene and macroeconomics. Klutzes and kandos find these lectures excruciatingly dull. An hour's lecture is as bad as losing $50 for a kando and as bad as losing $100 for a klutz. If all other firms pay wages equal to the productivity of an average citizen of Enigma, which of these strategies would be most profitable for a new firm?

Accepted Answer

A)  Offer a wage of $2,000 per month and require its workers to listen to 6 hours of lectures per month. 
B)  Offer a wage of $2,000 per month and require its workers to listen to 4 hours of lectures per month. 
C)  Offer a wage of $1,750 per month and require its workers to listen to 6 hours of lectures per month. 
D)  Offer a wage of $1,660 per month and require its workers to attend 1 hour of lectures per month. 
E)  Offer a wage of $2,600 per month and require its workers to attend 8 hours of lectures per month. 
A)  Offer a wage of $2,000 per month and require its workers to listen to 6 hours of lectures per month. 
B)  Offer a wage of $2,000 per month and require its workers to listen to 4 hours of lectures per month. 
C)  Offer a wage of $1,750 per month and require its workers to listen to 6 hours of lectures per month. 
D)  Offer a wage of $1,660 per month and require its workers to attend 1 hour of lectures per month. 
E)  Offer a wage of $2,600 per month and require its workers to attend 8 hours of lectures per month.

Question 13

There are two types of used cars, high quality and low quality. Buyers cannot distinguish the two types until after they have purchased them. Owners of high-quality cars will sell them if the price is $2,000 or higher. Owners of low-quality cars will sell them if the price is $1,000 or higher. Buyers value a high-quality used car at $1,942 and a low-quality used car at $1,200. Suppose that 70% of used cars are of high quality and 30% of used cars are of low quality. In equilibrium,

Accepted Answer

A)  only low-quality used cars will be sold. 
B)  only high-quality used cars will be sold. 
C)  no used cars will be sold. 
D)  all used cars will be sold. 
E)  high-quality used cars will sell for a uniformly higher price than low-quality used cars. 
A)  only low-quality used cars will be sold. 
B)  only high-quality used cars will be sold. 
C)  no used cars will be sold. 
D)  all used cars will be sold. 
E)  high-quality used cars will sell for a uniformly higher price than low-quality used cars.

Question 14

Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $4,000 per month. You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity. Kandos, however, have more patience than klutzes. Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $100 for a kando. There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $4,000 per month and anybody who does not is paid $1,000 per month

Accepted Answer

A)  if 12 < H < 30. 
B)  if 12 < H < 60. 
C)  for all positive values of H. 
D)  only in the limit as H approaches infinity. 
E)  if 10 < H < 25. 
A)  if 12 < H < 30. 
B)  if 12 < H < 60. 
C)  for all positive values of H. 
D)  only in the limit as H approaches infinity. 
E)  if 10 < H < 25.

Question 15

Ten workers work jointly on a project. All 10 workers are equally skilled. The total value of the output produced is $60 times the sum of the number of hours worked by all 10 workers. Each worker's utility is equal to his income minus the square of the number of hours he works. Each worker is selfish. The employers have no way of keeping track of any individual's work effort, so they decide to let each person work as long as he wants to and they divide the total value of the output equally among the workers. How much income will each worker get?

Accepted Answer

A)  $1,800 
B)  $180 
C)  $30 
D)  $195 
E)  None of the above. 
A)  $1,800 
B)  $180 
C)  $30 
D)  $195 
E)  None of the above.

Question 16

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 6,000 used cars on the market is such that the number of used cars of value less than V is   . Original owners must sell their used cars. Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it. An owner can either take his car to an appraiser and pay the appraiser $400 to appraise the car (accurately and credibly) or sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

Accepted Answer

A)  $1,200. 
B)  $3,000. 
C)  $400. 
D)  $800. 
E)  $1,600. 
A)  $1,200. 
B)  $3,000. 
C)  $400. 
D)  $800. 
E)  $1,600.

Question 17

Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $5,000 per month. You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity. Kandos, however, have more patience than klutzes. Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $150 for a kando. There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $5,000 per month and anybody who does not is paid $1,000 per month

Accepted Answer

A)  only in the limit as H approaches infinity. 
B)  if 16 < H < 53.33. 
C)  for all positive values of H. 
D)  if 16 < H < 26.67. 
E)  if 14 < H < 23.33. 
A)  only in the limit as H approaches infinity. 
B)  if 16 < H < 53.33. 
C)  for all positive values of H. 
D)  if 16 < H < 26.67. 
E)  if 14 < H < 23.33.

Question 18

Ten workers work jointly on a project. All 10 workers are equally skilled. The total value of the output produced is $70 times the sum of the number of hours worked by all 10 workers. Each worker's utility is equal to his income minus the square of the number of hours he works. Each worker is selfish. The employers have no way of keeping track of any individual's work effort, so they decide to let each person work as long as he wants to and they divide the total value of the output equally among the workers. How much income will each worker get?

Accepted Answer

A)  $245 
B)  $2,450 
C)  $35 
D)  $260 
E)  None of the above. 
A)  $245 
B)  $2,450 
C)  $35 
D)  $260 
E)  None of the above.

Question 19

Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $5,000 per month. You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity. Kandos, however, have more patience than klutzes. Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $100 for a kando. There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $5,000 per month and anybody who does not is paid $1,000 per month

Accepted Answer

A)  if 16 < H < 80. 
B)  if 16 < H < 40. 
C)  only in the limit as H approaches infinity. 
D)  for all positive values of H. 
E)  if 14 < H < 35. 
A)  if 16 < H < 80. 
B)  if 16 < H < 40. 
C)  only in the limit as H approaches infinity. 
D)  for all positive values of H. 
E)  if 14 < H < 35.

Question 20

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 4,000 used cars on the market is such that the number of used cars of value less than V is   . Original owners must sell their used cars. Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it. An owner can either take his car to an appraiser and pay the appraiser $100 to appraise the car (accurately and credibly) or sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

Accepted Answer

A)  $2,000. 
B)  $100. 
C)  $300. 
D)  $200. 
E)  $400. 
A)  $2,000. 
B)  $100. 
C)  $300. 
D)  $200. 
E)  $400.

Exam 36: Asymmetric Information

In a market where there is signaling, a separating equilibrium occurs when economic agents separate their actions as consumers from their actions as producers.

An insurance company must be concerned about the possibility that someone will buy fire insurance on a building and then set fire to it. This is an example of moral hazard.

In a market where there is a pooling equilibrium, different types of agents choose the same action.

Lexus has recently begun a program in which a used Lexus automobile which passes a 100+ point inspection is designated by the local dealer to be a Lexus Certified Pre-owned Vehicle. Would local Lexus dealers find it in their best interest to participate? Explain.

Which of the following is the best example of adverse selection?

Budget Constraint

A: Budget Constraint

Preferences

A: Preferences

Utility

A: Utility

Choice

A: Choice

Demand

A: Demand

Revealed Preference

A: Revealed Preference

Slutsky Equation

A: Slutsky Equation

Buying and Selling

A: Buying and Selling

Intertemporal Choice

A: Intertemporal Choice

Asset Markets

A: Asset Markets

Uncertainty

A: Uncertainty

Risky Assets

A: Risky Assets

Consumers Surplus

A: Consumers Surplus

Market Demand

A: Market Demand

Equilibrium

A: Equilibrium

Auctions

A: Auctions

Technology

A: Technology

Profit Maximization

A: Profit Maximization

Cost Minimization

A: Cost Minimization

Cost Curves

A: Cost Curves

Firm Supply

A: Firm Supply

Industry Supply

A: Industry Supply

Monopoly

A: Monopoly

Monopoly Behavior

A: Monopoly Behavior

Factor Markets

A: Factor Markets

Oligopoly

A: Oligopoly

Game Theory

A: Game Theory

Game Applications

A: Game Applications

Behavioral Economics

Exchange

A: Exchange

Production

A: Production

Welfare

A: Welfare

Externalities

A: Externalities

Information Technology

A: Information Technology

Public Goods

A: Public Goods

A: Asymmetric Information

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