Question 1

​According to Stigler's search model, a computerized used car search service is likely to:

Accepted Answer

A) increase the opportunity cost of time. 
B) decrease the amount of search. 
C) increase price dispersion. 
D) decrease price dispersion. 
E) lower the marginal benefit of search. 
A) increase the opportunity cost of time. 
B) decrease the amount of search. 
C) increase price dispersion. 
D) decrease price dispersion. 
E) lower the marginal benefit of search. D

Question 2

The subfield of behavioral economics that examines how economic decision making affects areas of the brain is called neuroeconomics.​

Accepted Answer

A) True 
 B)False  True

Question 3

Andrew leaves the washer, dryer, and dishwasher running at home when he leaves for his music class. Being aware that the recently bought fire insurance for his house will cover any damage caused by fire, he considers himself risk free. Which of the following problems is described in this example?​

Accepted Answer

A) The common resource problem 
B) The unbounded rationality problem 
C) The adverse selection problem 
D) The winner's curse problem 
E) The moral hazard problem 
A) The common resource problem 
B) The unbounded rationality problem 
C) The adverse selection problem 
D) The winner's curse problem 
E) The moral hazard problem E

Question 4

​The figure given below shows the marginal cost and the marginal benefit of information curves. In the figure given below, the point I1 indicates: Figure 14.2

Accepted Answer

A) the optimal amount of information gathered. 
B) common knowledge. 
C) the opportunity cost of a consumer's time. 
D) adverse selection. 
E) that all information is costly. 
A) the optimal amount of information gathered. 
B) common knowledge. 
C) the opportunity cost of a consumer's time. 
D) adverse selection. 
E) that all information is costly.

Question 5

A company that produces furniture wax branches out into producing a dusting product like Lemon-Dust-Away. This expansion can be called efficient if the company:​

Accepted Answer

A) benefits from vertical integration. 
B) benefits from horizontal integration. 
C) experiences economies of scale. 
D) experiences economies of scope. 
E) incurs zero transaction cost. 
A) benefits from vertical integration. 
B) benefits from horizontal integration. 
C) experiences economies of scale. 
D) experiences economies of scope. 
E) incurs zero transaction cost.

Question 6

​Which of the following occupations is most likely to encounter the adverse selection problem?

Accepted Answer

A) A salesman at an apparel store 
B) A hair stylist 
C) A manager of a company 
D) A supermarket cashier 
E) A tightrope walker 
A) A salesman at an apparel store 
B) A hair stylist 
C) A manager of a company 
D) A supermarket cashier 
E) A tightrope walker

Question 7

The figure given below shows the marginal cost and the marginal benefit of information curves. In the figure given below, which of the following is true of a consumer who has gathered information equal to I3?​ ​
Figure 14.2

Accepted Answer

A) The consumer has made an optimal search. 
B) The consumer is relying solely on common knowledge. 
C) The consumer has acquired all available information that is beneficial to her. 
D) Further information will be costless to this consumer. 
E) The consumer should increase her search. 
A) The consumer has made an optimal search. 
B) The consumer is relying solely on common knowledge. 
C) The consumer has acquired all available information that is beneficial to her. 
D) Further information will be costless to this consumer. 
E) The consumer should increase her search.

Question 8

By requiring that applicants for insurance policies fill out lengthy forms and take a physical examination, insurers attempt to guard against:​

Accepted Answer

A) unbounded rationality. 
B) adverse selection. 
C) negative signaling. 
D) moral hazard. 
E) the winner's curse. 
A) unbounded rationality. 
B) adverse selection. 
C) negative signaling. 
D) moral hazard. 
E) the winner's curse.

Question 9

​Spacely Sprockets, Inc. usually pays $1,000 for a million flanges, which it uses as inputs in the manufacture of sprockets. It also spends an average of $20 per million flanges looking for manufacturers and negotiating contracts. Spacely can make its own flanges at a cost of $980 per million. Given these costs, we can conclude that Spacely should:

Accepted Answer

A) continue to contract out for flanges. 
B) start to manufacture its own flanges. 
C) increase the use of flanges in the production of sprockets. 
D) stop paying the additional $20 to find and negotiate contracts and just buy the flanges outright for $1,000 per million flanges. 
E) move away from the use of flanges toward an input that it can produce by itself. 
A) continue to contract out for flanges. 
B) start to manufacture its own flanges. 
C) increase the use of flanges in the production of sprockets. 
D) stop paying the additional $20 to find and negotiate contracts and just buy the flanges outright for $1,000 per million flanges. 
E) move away from the use of flanges toward an input that it can produce by itself.

Question 10

Which of the following is true of traditional economics?​

Accepted Answer

A) It questions the assumptions of utility and demand. 
B) It questions the assumptions of unbounded rationality and will power. 
C) It borrows insights from philosophy to explain certain economic decisions. 
D) It assumes that people make irrational choices and end up with bad outcomes. 
E) It assumes that people act rationally to maximize their overall well-being. 
A) It questions the assumptions of utility and demand. 
B) It questions the assumptions of unbounded rationality and will power. 
C) It borrows insights from philosophy to explain certain economic decisions. 
D) It assumes that people make irrational choices and end up with bad outcomes. 
E) It assumes that people act rationally to maximize their overall well-being.

Question 11

According to Stigler's search model, the marginal benefit of acquiring information about a product:​

Accepted Answer

A) is greater for a doctor than for a nurse. 
B) is the same for both high-income and low-income consumers. 
C) is greater for expensive items than for cheap items. 
D) is greater for cheap items than for expensive items. 
E) increases as more information is acquired. 
A) is greater for a doctor than for a nurse. 
B) is the same for both high-income and low-income consumers. 
C) is greater for expensive items than for cheap items. 
D) is greater for cheap items than for expensive items. 
E) increases as more information is acquired.

Question 12

​The firm becomes the dominant organization type when:

Accepted Answer

A) production involves a few resource suppliers. 
B) production requires unskilled labor resources. 
C) the cost of identifying appropriate inputs is negligible. 
D) the cost of negotiating agreements with suppliers is low. 
E) the production process is complicated. 
A) production involves a few resource suppliers. 
B) production requires unskilled labor resources. 
C) the cost of identifying appropriate inputs is negligible. 
D) the cost of negotiating agreements with suppliers is low. 
E) the production process is complicated.

Question 13

An individual will prefer outsourcing a task to an agent if the latter has a higher opportunity cost of time.​

Accepted Answer

A) True 
 B)False

Question 14

The subfield of behavioral economics that examines how economic decision making affects areas of the brain is called _____.​

Accepted Answer

A) rational economics 
B) neuroeconomics 
C) environmental economics 
D) developmental economics 
E) scientific economics 
A) rational economics 
B) neuroeconomics 
C) environmental economics 
D) developmental economics 
E) scientific economics

Question 15

Wendy's restaurant must decide whether to grow its own potatoes for French fries or procure them from suppliers. However, growing potatoes is a very different process from running a fast food restaurant. Based on this information alone, should Wendy's grow its own potatoes?​

Accepted Answer

A) No, because Wendy's managers have bounded rationality. 
B) Yes, because Wendy's managers have bounded rationality. 
C) No, because there are very few potato suppliers. 
D) Yes, because there are a few potato suppliers. 
E) No, because potatoes are traded in a perfectly competitive market. 
A) No, because Wendy's managers have bounded rationality. 
B) Yes, because Wendy's managers have bounded rationality. 
C) No, because there are very few potato suppliers. 
D) Yes, because there are a few potato suppliers. 
E) No, because potatoes are traded in a perfectly competitive market.

Question 16

Which of the following is an example of a producer taking advantage of economies of scope?​

Accepted Answer

A) A farmer buying more land so that he can produce more soybeans 
B) GM closing a Chevy truck plant in response to a decline in demand for trucks 
C) Disney World staying open later to serve more customers per day 
D) A dairy farmer producing cow's milk and butter 
E) A mouthwash firm expanding production by improving managerial efficiency 
A) A farmer buying more land so that he can produce more soybeans 
B) GM closing a Chevy truck plant in response to a decline in demand for trucks 
C) Disney World staying open later to serve more customers per day 
D) A dairy farmer producing cow's milk and butter 
E) A mouthwash firm expanding production by improving managerial efficiency

Question 17

The figure given below shows the marginal cost and the marginal benefit of information curves. In the figure given below, the marginal benefit curve shows that:​ ​
Figure 14.2
  ​

Accepted Answer

A) as consumers become more familiar with a market, additional information yields less and less improvement in product quality or value. 
B) the marginal benefit of information increases as a consumer spends more and more time acquiring information. 
C) greater and greater distances must be covered to acquire a marginal piece of information. 
D) the cost of gathering information diminishes as more of it is gathered. 
E) common knowledge alone is enough to decide consumer choice. 
A) as consumers become more familiar with a market, additional information yields less and less improvement in product quality or value. 
B) the marginal benefit of information increases as a consumer spends more and more time acquiring information. 
C) greater and greater distances must be covered to acquire a marginal piece of information. 
D) the cost of gathering information diminishes as more of it is gathered. 
E) common knowledge alone is enough to decide consumer choice.

Question 18

Waiters, barbers, and bellhops are paid primarily through tips because:​

Accepted Answer

A) managers can easily assess their productivity. 
B) managers are better at judging their productivity than are consumers. 
C) consumers can judge their productivity easily. 
D) it's always been done that way. 
E) union regulations require this form of payment. 
A) managers can easily assess their productivity. 
B) managers are better at judging their productivity than are consumers. 
C) consumers can judge their productivity easily. 
D) it's always been done that way. 
E) union regulations require this form of payment.

Question 19

Asymmetric information exists when both sides of a market approach perfect information.​

Accepted Answer

A) True 
 B)False

Question 20

Personal dating advertisements in the newspaper are popular because they:​

Accepted Answer

A) increase the marginal benefit of search. 
B) reduce the marginal cost of search. 
C) increase the marginal cost of search. 
D) reduce the optimal amount of search. 
E) increase quality dispersion. 
A) increase the marginal benefit of search. 
B) reduce the marginal cost of search. 
C) increase the marginal cost of search. 
D) reduce the optimal amount of search. 
E) increase quality dispersion.

According to Stigler's search model, a computerized used car search service is likely to:

The subfield of behavioral economics that examines how economic decision making affects areas of the brain is called neuroeconomics.

Andrew leaves the washer, dryer, and dishwasher running at home when he leaves for his music class. Being aware that the recently bought fire insurance for his house will cover any damage caused by fire, he considers himself risk free. Which of the following problems is described in this example?

The figure given below shows the marginal cost and the marginal benefit of information curves. In the figure given below, the point I₁ indicates: Figure 14.2

A company that produces furniture wax branches out into producing a dusting product like Lemon-Dust-Away. This expansion can be called efficient if the company:

Which of the following occupations is most likely to encounter the adverse selection problem?

The figure given below shows the marginal cost and the marginal benefit of information curves. In the figure given below, which of the following is true of a consumer who has gathered information equal to I₃? Figure 14.2

By requiring that applicants for insurance policies fill out lengthy forms and take a physical examination, insurers attempt to guard against:

Which of the following is true of traditional economics?

According to Stigler's search model, the marginal benefit of acquiring information about a product:

The firm becomes the dominant organization type when:

An individual will prefer outsourcing a task to an agent if the latter has a higher opportunity cost of time.

The subfield of behavioral economics that examines how economic decision making affects areas of the brain is called _____.

Wendy's restaurant must decide whether to grow its own potatoes for French fries or procure them from suppliers. However, growing potatoes is a very different process from running a fast food restaurant. Based on this information alone, should Wendy's grow its own potatoes?

Which of the following is an example of a producer taking advantage of economies of scope?

The figure given below shows the marginal cost and the marginal benefit of information curves. In the figure given below, the marginal benefit curve shows that: Figure 14.2

Waiters, barbers, and bellhops are paid primarily through tips because:

Asymmetric information exists when both sides of a market approach perfect information.

Personal dating advertisements in the newspaper are popular because they:

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Exam 14: Transaction Costs, Asymmetric Information, and Behavioral Economics