Question 1

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. D

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. C

Question 3

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. C

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

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 8

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 9

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 10

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 11

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. $\begin{array}{l}
\begin{array}{lll}
&\text { Marginal } & \text { Marginal } \
&\text { surplus } & \text { surplus } \
&\text { this ounce } & \text { this ounce } \
&\text { provides } & \text { provides } \
\text { Ounce of }&\text { adults in } & \text { children } \
\text { cereal }&\text { cents } & \text { in cents }\
\hline\text { First } & 20 & 40 \
\text { Second } & 16 & 32 \
\text { Third } & 12 & 24 \
\text { Fourth } & 8 & 16 \
\text { Fifth } & 4 & 8 \
\text { Sixth } & 0 & 0 \
\text { Seventh } & 0 & 0
\end{array}
\end{array}$ 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 12

Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort,so cannot specify how hard the executive 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 13

Given a series of contracts offered to an executive having 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 executive?

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 executive may become lazy and not exert the required effort. 
C) if the contract isn't generous enough,the executive will decide to work elsewhere. 
D) if the contract isn't generous enough,only low-ability executives 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 executive may become lazy and not exert the required effort. 
C) if the contract isn't generous enough,the executive will decide to work elsewhere. 
D) if the contract isn't generous enough,only low-ability executives will apply.

Question 14

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 15

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 16

A executive can either slack (effort e = 0)or work hard (e = 1)on behalf of shareholders. If she slacks,the firm earns a gross return of 1,000 for sure. If she works hard,there is an even chance of the gross return being 10,000 or 80,000. Her overall utility equals her utility from wage income (of the form w1/2,where w is the wage)minus the disutility of work (simply d),or in other words U = w1/2 -d. If she slacks,she experiences no disutility of work (d = 0)but if she works hard,the disutility of work is d = 50. Assume that U = 0 in her next best available job. What is the optimal wage contract that shareholders would offer if they can observe the effort of the executive?

Accepted Answer

A) A flat wage w = 0 and no requirement to work hard. 
B) A flat wage w = 50 and a requirement to work hard. 
C) A flat wage w = 2,500 and a requirement to work hard. 
D) A share of 50% of the profits and a requirement to work hard. 
A) A flat wage w = 0 and no requirement to work hard. 
B) A flat wage w = 50 and a requirement to work hard. 
C) A flat wage w = 2,500 and a requirement to work hard. 
D) A share of 50% of the profits and a requirement to work hard.

Question 17

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

Accepted Answer

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

Question 18

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 19

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 20

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.

Which auction format generates the most revenue for the seller?

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

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

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

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

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?

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

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?

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

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?

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

An example of adverse selection is

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

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

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

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?

Economic Models

Utility and Choice

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

Exam 15: Asymmetric Information

Which auction format generates the most revenue for the seller?

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

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

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

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

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?

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

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?

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

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?

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

An example of adverse selection is

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

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

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

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?

Economic Models

Utility and Choice

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