Question 1

With asymmetric information,firms might be reluctant to improve the quality of their products because

Accepted Answer

A) it costs them more to produce the better quality product. 
B) they are not able to completely capture the benefits of the improvement. 
C) consumers do not value the better product. 
D) consumers are better informed about the product and value the new product less. 
A) it costs them more to produce the better quality product. 
B) they are not able to completely capture the benefits of the improvement. 
C) consumers do not value the better product. 
D) consumers are better informed about the product and value the new product less. B

Question 2

Life insurance companies often give applicants a physical examination to prevent

Accepted Answer

A) the person from dying before obtaining the policy. 
B) signaling. 
C) adverse selection. 
D) profit maximization. 
A) the person from dying before obtaining the policy. 
B) signaling. 
C) adverse selection. 
D) profit maximization. C

Question 3

A person who generally drives without a seat belt on does not reveal this to his automobile insurance company before he purchases insurance.This is an example of

Accepted Answer

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

Question 4

With asymmetric information among consumers and positive search costs,a firm may

Accepted Answer

A) raise its price above the monopoly price. 
B) price at the monopoly level. 
C) price at the competitive level. 
D) None of the above. 
A) raise its price above the monopoly price. 
B) price at the monopoly level. 
C) price at the competitive level. 
D) None of the above.

Question 5

Workers do not know the safety records at individual firms;they only know industry averages.As a result,

Accepted Answer

A) each firm tries to outdo each other in making safety improvements. 
B) each firm has the incentive to be the safest in its industry. 
C) the equilibrium level of safety is less than optimal. 
D) the optimal level of safety is achieved. 
A) each firm tries to outdo each other in making safety improvements. 
B) each firm has the incentive to be the safest in its industry. 
C) the equilibrium level of safety is less than optimal. 
D) the optimal level of safety is achieved.

Question 6

Government mandated safety standard within firms

Accepted Answer

A) will always decrease efficiency. 
B) can increase efficiency by avoiding a prisoners' dilemma outcome. 
C) are unnecessary because of asymmetric information. 
D) will create unfair competition among firms. 
A) will always decrease efficiency. 
B) can increase efficiency by avoiding a prisoners' dilemma outcome. 
C) are unnecessary because of asymmetric information. 
D) will create unfair competition among firms.

Question 7

Explain how product liability laws can reduce adverse selection.

Accepted Answer

Product liability laws force p

Question 8

If sellers of good cars and sellers of lemons both offer a warranty on their cars,consumers will then be able to tell which cars are the lemons.

Accepted Answer

A) True 
 B)False

Question 9

If a college degree is used to signal high ability,but the cost of a college degree is relatively high,

Accepted Answer

A) a separating equilibrium is achieved. 
B) a pooling equilibrium is achieved. 
C) even low-ability workers will attend college. 
D) the share of high-ability workers must be 1. 
A) a separating equilibrium is achieved. 
B) a pooling equilibrium is achieved. 
C) even low-ability workers will attend college. 
D) the share of high-ability workers must be 1.

Question 10

A physical examination is NOT a good screening device for life insurance companies if

Accepted Answer

A) life-threatening diseases are usually undetected. 
B) doctors cannot be easily bribed to write a good report. 
C) medical history is a good predictor of life expectancy. 
D) one's current state of health is a good predictor of life expectancy. 
A) life-threatening diseases are usually undetected. 
B) doctors cannot be easily bribed to write a good report. 
C) medical history is a good predictor of life expectancy. 
D) one's current state of health is a good predictor of life expectancy.

Question 11

-The above figure shows the payoff to two firms in an industry deciding to make an investment in worker safety.The Nash equilibrium

Accepted Answer

A) is for just one of the firms to make the investment. 
B) is for both firms to make the investment. 
C) is for neither firm to make the investment. 
D) does not exist. 
A) is for just one of the firms to make the investment. 
B) is for both firms to make the investment. 
C) is for neither firm to make the investment. 
D) does not exist.

Question 12

If diplomas work efficiently in signaling productive capabilities to employers,the resulting equilibrium

Accepted Answer

A) will be a separating equilibrium. 
B) will be a pooling equilibrium. 
C) will always be inefficient. 
D) will never be efficient. 
A) will be a separating equilibrium. 
B) will be a pooling equilibrium. 
C) will always be inefficient. 
D) will never be efficient.

Question 13

-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

Accepted Answer

A) All of the cars will be sold. 
B) No cars will be sold. 
C) Only lemons will be sold. 
D) Ten percent of the used cars sold will be lemons. 
A) All of the cars will be sold. 
B) No cars will be sold. 
C) Only lemons will be sold. 
D) Ten percent of the used cars sold will be lemons.

Question 14

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 15

If consumers have limited information about price and search costs exist,then

Accepted Answer

A) the result must be that all firms will charge the same price. 
B) the monopoly price must result. 
C) the full-information,competitive price is not an equilibrium. 
D) the difference in prices between firms will be greater than the search cost. 
A) the result must be that all firms will charge the same price. 
B) the monopoly price must result. 
C) the full-information,competitive price is not an equilibrium. 
D) the difference in prices between firms will be greater than the search cost.

Question 16

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

Accepted Answer

A) True 
 B)False

Question 17

If bad drivers can usually avoid being ticketed by the police,then insurance companies will

Accepted Answer

A) use one's driving record as a signal. 
B) use one's driving record as a screening device. 
C) not be able to use one's driving record as a screening device. 
D) request driving records directly from the police and not from the individual applicant. 
A) use one's driving record as a signal. 
B) use one's driving record as a screening device. 
C) not be able to use one's driving record as a screening device. 
D) request driving records directly from the police and not from the individual applicant.

Question 18

A person who starts practicing poisonous snake charming after signing a contract with a health insurance company 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 19

-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?

Accepted Answer

A) All of the cars sell for $1,900. 
B) Only lemons are sold for $1,900. 
C) Only lemons are sold for $1,000. 
D) Only good cars will be sold for $2,000. 
A) All of the cars sell for $1,900. 
B) Only lemons are sold for $1,900. 
C) Only lemons are sold for $1,000. 
D) Only good cars will be sold for $2,000.

Question 20

-The market for used cars is shown in the above figure.Neither buyers nor sellers can tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

Accepted Answer

A) All of the cars will be sold at $1,600. 
B) No cars will be sold. 
C) Only lemons are sold for $1,000. 
D) Only good cars will be sold for $2,000. 
A) All of the cars will be sold at $1,600. 
B) No cars will be sold. 
C) Only lemons are sold for $1,000. 
D) Only good cars will be sold for $2,000.

With asymmetric information,firms might be reluctant to improve the quality of their products because

Life insurance companies often give applicants a physical examination to prevent

A person who generally drives without a seat belt on does not reveal this to his automobile insurance company before he purchases insurance.This is an example of

With asymmetric information among consumers and positive search costs,a firm may

Workers do not know the safety records at individual firms;they only know industry averages.As a result,

Government mandated safety standard within firms

Explain how product liability laws can reduce adverse selection.

If sellers of good cars and sellers of lemons both offer a warranty on their cars,consumers will then be able to tell which cars are the lemons.

If a college degree is used to signal high ability,but the cost of a college degree is relatively high,

A physical examination is NOT a good screening device for life insurance companies if

-The above figure shows the payoff to two firms in an industry deciding to make an investment in worker safety.The Nash equilibrium

If diplomas work efficiently in signaling productive capabilities to employers,the resulting equilibrium

-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

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

If consumers have limited information about price and search costs exist,then

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

If bad drivers can usually avoid being ticketed by the police,then insurance companies will

A person who starts practicing poisonous snake charming after signing a contract with a health insurance company is an example of

-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?

-The market for used cars is shown in the above figure.Neither buyers nor sellers can tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, Externalities, Rivalry, and Exclusion

Contracts and Moral Hazards

Filters

Exam 18: Asymmetric Information

With asymmetric information,firms might be reluctant to improve the quality of their products because

Life insurance companies often give applicants a physical examination to prevent

A person who generally drives without a seat belt on does not reveal this to his automobile insurance company before he purchases insurance.This is an example of

With asymmetric information among consumers and positive search costs,a firm may

Workers do not know the safety records at individual firms;they only know industry averages.As a result,

Government mandated safety standard within firms

Explain how product liability laws can reduce adverse selection.

If sellers of good cars and sellers of lemons both offer a warranty on their cars,consumers will then be able to tell which cars are the lemons.

If a college degree is used to signal high ability,but the cost of a college degree is relatively high,

A physical examination is NOT a good screening device for life insurance companies if

-The above figure shows the payoff to two firms in an industry deciding to make an investment in worker safety.The Nash equilibrium

If diplomas work efficiently in signaling productive capabilities to employers,the resulting equilibrium

-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

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

If consumers have limited information about price and search costs exist,then

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

If bad drivers can usually avoid being ticketed by the police,then insurance companies will

A person who starts practicing poisonous snake charming after signing a contract with a health insurance company is an example of

-The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?

-The market for used cars is shown in the above figure.Neither buyers nor sellers can tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is TRUE?

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, Externalities, Rivalry, and Exclusion

Contracts and Moral Hazards

Filters