Question 1

Adverse selection occurs when an informed individual is ________ willing to trade in situations that make trading ________ to an uninformed trading partner.

Accepted Answer

A)  more; more advantageous 
B)  more; less advantageous 
C)  less; more advantageous 
D)  less; less advantageous 
A)  more; more advantageous 
B)  more; less advantageous 
C)  less; more advantageous 
D)  less; less advantageous B

Question 2

Figure 21.2 shows the benefit functions for low-ability workers and high-ability workers (A and B),along with one indifference curve for each worker type (C and D).The employer cannot observe worker type directly but has created two positions,E and F,as a screening mechanism.Which of the following is true?

Accepted Answer

A) High- and low-ability workers will choose position E. 
B) High-ability workers will choose position E and low ability workers will choose position F. 
C) High- and low-ability workers will choose position F. 
D) High-ability workers will choose position F and low ability workers will choose position E. 
A) High- and low-ability workers will choose position E. 
B) High-ability workers will choose position E and low ability workers will choose position F. 
C) High- and low-ability workers will choose position F. 
D) High-ability workers will choose position F and low ability workers will choose position E. B

Question 3

Which of the following explains why a compensation contract designed to combat employee moral hazard that features strong incentives might be worse than having no incentive scheme at all?

Accepted Answer

A)  Generally, an employee's effort and ability are the only two determinants of the employee's performance. 
B)  Employers are generally pretty skilled at measuring the aspects of job performance in which they are the most interested. 
C)  Workers may choose to concentrate only on the most measurable aspects of job performance at the expense at those aspects that are less easily measured. 
D)  Compensation contracts with strong incentives are never efficient in the presence of moral hazard. 
A)  Generally, an employee's effort and ability are the only two determinants of the employee's performance. 
B)  Employers are generally pretty skilled at measuring the aspects of job performance in which they are the most interested. 
C)  Workers may choose to concentrate only on the most measurable aspects of job performance at the expense at those aspects that are less easily measured. 
D)  Compensation contracts with strong incentives are never efficient in the presence of moral hazard. C

Question 4

In an insurance market,________ occurs when one type of policy generates losses,while another type of policy generates profits,and all policies collectively break even.

Accepted Answer

A)  cross-subsidization 
B)  pooling 
C)  a separating equilibrium 
D)  screening 
A)  cross-subsidization 
B)  pooling 
C)  a separating equilibrium 
D)  screening

Question 5

Explain the differences and similarities between screening and signaling.Is one better than the other?

Accepted Answer

Screening and signaling are both ways in

Question 6

Figure 21.2 shows the benefit functions for low-ability workers and high-ability workers (A and B),along with one indifference curve for each worker type (C and D).The employer cannot observe worker type directly but has created two positions,E and F,as a screening mechanism.Which of the following is true?

Accepted Answer

A)  Curve A is an indifference curve for a low-ability worker, and curve B is an indifference curve for a high-ability worker. 
B)  Curve A is the benefit curve for high-ability workers, and curve B is an indifference curve for a high ability worker. 
C)  Curve A is an indifference curve for a high-ability worker, and curve C is the benefit curve for high-ability workers. 
D)  Curve A is the benefit curve for high-ability workers, and curve C is an indifference curve for a high ability worker. 
A)  Curve A is an indifference curve for a low-ability worker, and curve B is an indifference curve for a high-ability worker. 
B)  Curve A is the benefit curve for high-ability workers, and curve B is an indifference curve for a high ability worker. 
C)  Curve A is an indifference curve for a high-ability worker, and curve C is the benefit curve for high-ability workers. 
D)  Curve A is the benefit curve for high-ability workers, and curve C is an indifference curve for a high ability worker.

Question 7

________ has occurred if the manager of a firm takes an action that furthers her own interests at the expense of the firm's profits.

Accepted Answer

A)  Incentive scheming 
B)  Adverse selection 
C)  Signaling 
D)  Moral hazard 
A)  Incentive scheming 
B)  Adverse selection 
C)  Signaling 
D)  Moral hazard

Question 8

If a person takes a costly action simply to influence others' beliefs then this person is engaged in what economists call:

Accepted Answer

A)  market unraveling. 
B)  adverse selection. 
C)  moral hazard. 
D)  signaling. 
A)  market unraveling. 
B)  adverse selection. 
C)  moral hazard. 
D)  signaling.

Question 9

George Akerloff theorized that adverse selection in the used car market could be so bad that the market completely unravels and no good used cars are offered for sale.But,of course,there probably are some good used cars offered for sale in real used car markets.What methods have developed in the used car market to overcome this problem of asymmetric information and to prevent market unraveling?

Accepted Answer

There are several ways in which the mark

Question 10

Which of the following is NOT a potential source of incentives covered in the textbook?

Accepted Answer

A)  Cultural norms 
B)  Performance-based pay 
C)  Ownership rights 
D)  Informal understandings 
A)  Cultural norms 
B)  Performance-based pay 
C)  Ownership rights 
D)  Informal understandings

Question 11

A salesperson works for a car dealership for 40 hours per week,but may choose not to work hard all of the time.The dealership's owner cannot observe the salesperson's effort,but can observe the number of cars sold.The salesperson's personal cost of working at the dealership is C(H)= 1,200 + H2,where H is the number of hours during which he works hard.The corresponding marginal cost of effort is MC = 2H.Without any effort,the salesperson will,on average,generate a profit of $1,200.With each hour of high effort,he has a 5 percent chance of selling a car.Each car sale generates a profit of $900.Suppose the owner gives the salesperson $1,200 in base pay plus a bonus of $500 for each car he sells.How many hours of hard work will the salesperson choose?

Accepted Answer

A)  20 
B)  22.5 
C)  12.5 
D)  25 
A)  20 
B)  22.5 
C)  12.5 
D)  25

Question 12

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is QsH = 0.04(W - 1,500)and the supply of low-quality workers is QsL = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,what is the equilibrium wage?

Accepted Answer

A)  $5,000 
B)  $7,500 
C)  $10,000 
D)  $12,500 
A)  $5,000 
B)  $7,500 
C)  $10,000 
D)  $12,500

Question 13

The indifference curves in Figure 21.1 slope upward because:

Accepted Answer

A)  a higher wage is necessary in order to compensate someone for getting more years of education. 
B)  as people achieve higher levels of education, they generally receive higher wages. 
C)  all indifference curves slope upward. 
D)  education is an inferior good. 
A)  a higher wage is necessary in order to compensate someone for getting more years of education. 
B)  as people achieve higher levels of education, they generally receive higher wages. 
C)  all indifference curves slope upward. 
D)  education is an inferior good.

Question 14

When analyzing cases of signaling,economists tend to focus their attention primarily on:

Accepted Answer

A)  general equilibria. 
B)  pooling equilibria. 
C)  separating equilibria. 
D)  asymmetric equilibria. 
A)  general equilibria. 
B)  pooling equilibria. 
C)  separating equilibria. 
D)  asymmetric equilibria.

Question 15

Adverse selection can drive good used cars from the market because:

Accepted Answer

A)  sellers have no way of convincing buyers that they have good information. 
B)  sellers are unable to distinguish good used cars from bad used cars. 
C)  buyers reduce their willingness to pay for used cars because they are wary of bad cars. 
D)  buyers decide to purchase only bad cars. 
A)  sellers have no way of convincing buyers that they have good information. 
B)  sellers are unable to distinguish good used cars from bad used cars. 
C)  buyers reduce their willingness to pay for used cars because they are wary of bad cars. 
D)  buyers decide to purchase only bad cars.

Question 16

A salesperson works for a car dealership for 40 hours per week,but may choose not to work hard all of the time.The dealership's owner cannot observe the salesperson's effort,but can observe the number of cars sold.The salesperson's personal cost of working at the dealership is C(H)= 1,200 + H2,where H is the number of hours during which he works hard.The corresponding marginal cost of effort is MC = 2H.Without any effort,the salesperson will,on average,generate a profit of $1,200.With each hour of high effort,he has a 5 percent chance of selling a car.Each car sale generates a profit of $900.What is the efficient number of hours of hard work?

Accepted Answer

A)  22.5 
B)  20 
C)  40 
D)  27.5 
A)  22.5 
B)  20 
C)  40 
D)  27.5

Question 17

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is QsH = 0.04(W - 1,500)and the supply of low-quality workers is QsL = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are observable to employers,what are the equilibrium wages?

Accepted Answer

A)  WH = $15,000; WL = $7,500 
B)  WH = $7,500; WL = $7,500 
C)  WH = $12,500; WL = $12,500 
D)  WH = $5,250; WL = $4,500 
A)  WH = $15,000; WL = $7,500 
B)  WH = $7,500; WL = $7,500 
C)  WH = $12,500; WL = $12,500 
D)  WH = $5,250; WL = $4,500

Question 18

The value of a worker's marginal product is $50 per hour for high-ability workers and $15 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function UH(E,W)= W - 4E,and the preferences of low-ability workers correspond to the utility function UL(E,W)= W - 10E.By law,everyone is required to attend at least ten years of school.Three-fifths of the population has low ability,and two-fifths has high ability.What is the most efficient separating equilibrium?

Accepted Answer

A)  EL = 13.5; EH = 13.5 
B)  EL = 10; EH = 13.5 
C)  EL = 13.5; EH = 16.125 
D)  EL = 10; EH = 10 
A)  EL = 13.5; EH = 13.5 
B)  EL = 10; EH = 13.5 
C)  EL = 13.5; EH = 16.125 
D)  EL = 10; EH = 10

Question 19

Mandated minimum quality standards can be a way to:

Accepted Answer

A)  reduce information asymmetry. 
B)  promote information asymmetry. 
C)  provide a public good. 
D)  screen. 
A)  reduce information asymmetry. 
B)  promote information asymmetry. 
C)  provide a public good. 
D)  screen.

Question 20

When one party to a transaction takes actions that a trading partner cannot observe but that nonetheless affect that trading partner,this is called:

Accepted Answer

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

Adverse selection occurs when an informed individual is willing to trade in situations that make trading to an uninformed trading partner.

Which of the following explains why a compensation contract designed to combat employee moral hazard that features strong incentives might be worse than having no incentive scheme at all?

In an insurance market,________ occurs when one type of policy generates losses,while another type of policy generates profits,and all policies collectively break even.

Explain the differences and similarities between screening and signaling.Is one better than the other?

________ has occurred if the manager of a firm takes an action that furthers her own interests at the expense of the firm's profits.

If a person takes a costly action simply to influence others' beliefs then this person is engaged in what economists call:

Which of the following is NOT a potential source of incentives covered in the textbook?

The indifference curves in Figure 21.1 slope upward because:

When analyzing cases of signaling,economists tend to focus their attention primarily on:

Adverse selection can drive good used cars from the market because:

Mandated minimum quality standards can be a way to:

When one party to a transaction takes actions that a trading partner cannot observe but that nonetheless affect that trading partner,this is called:

Introduction

Supply and Demand

Balancing Benefits and Costs

Consumer Preferences

Constraints, Choices, and Demand

Demand and Welfare

Technology and Production

Cost

Profit Maximization

Choices Involving Time

Choices Involving Risk

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Filters

Exam 21: Asymmetric Information

Adverse selection occurs when an informed individual is ________ willing to trade in situations that make trading ________ to an uninformed trading partner.

Which of the following explains why a compensation contract designed to combat employee moral hazard that features strong incentives might be worse than having no incentive scheme at all?

In an insurance market,________ occurs when one type of policy generates losses,while another type of policy generates profits,and all policies collectively break even.

Explain the differences and similarities between screening and signaling.Is one better than the other?

________ has occurred if the manager of a firm takes an action that furthers her own interests at the expense of the firm's profits.

If a person takes a costly action simply to influence others' beliefs then this person is engaged in what economists call:

Which of the following is NOT a potential source of incentives covered in the textbook?

The indifference curves in Figure 21.1 slope upward because:

When analyzing cases of signaling,economists tend to focus their attention primarily on:

Adverse selection can drive good used cars from the market because:

Mandated minimum quality standards can be a way to:

When one party to a transaction takes actions that a trading partner cannot observe but that nonetheless affect that trading partner,this is called:

Introduction

Supply and Demand

Balancing Benefits and Costs

Consumer Preferences

Constraints, Choices, and Demand

Demand and Welfare

Technology and Production

Cost

Profit Maximization

Choices Involving Time

Choices Involving Risk

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Filters

Adverse selection occurs when an informed individual is willing to trade in situations that make trading to an uninformed trading partner.