Question 1

If a firm experiences economies of scope, per unit production costs fall as it produces more than one kind of product.

Accepted Answer

A) True 
 B)False  True

Question 2

An example of screening job applicants is

Accepted Answer

A)  listing years of education on résumés 
B)  providing college transcripts 
C)  sending in letters of recommendation 
D)  dressing in a suit for interviews 
E)  checking résumés for spelling and typographical errors 
A)  listing years of education on résumés 
B)  providing college transcripts 
C)  sending in letters of recommendation 
D)  dressing in a suit for interviews 
E)  checking résumés for spelling and typographical errors E

Question 3

Employers rely on a job applicant's signals

Accepted Answer

A)  because they are always an accurate indication of the applicant's skills 
B)  because actual abilities are not observable prior to employment 
C)  because actual abilities are not observable after the applicant is hired 
D)  only when hiring someone for an entry-level position 
E)  only when hiring someone who has a college degree 
A)  because they are always an accurate indication of the applicant's skills 
B)  because actual abilities are not observable prior to employment 
C)  because actual abilities are not observable after the applicant is hired 
D)  only when hiring someone for an entry-level position 
E)  only when hiring someone who has a college degree B

Question 4

Wendy's must decide whether to grow its own potatoes for French fries. 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 is a small number of potato suppliers. 
D)  Yes, because there is a small number of potato suppliers. 
E)  No, because it is easy to observe the quality of potatoes. 
A)  No, because Wendy's managers have bounded rationality. 
B)  Yes, because Wendy's managers have bounded rationality. 
C)  No, because there is a small number of potato suppliers. 
D)  Yes, because there is a small number of potato suppliers. 
E)  No, because it is easy to observe the quality of potatoes.

Question 5

If the minimum efficient scale in woodstove production is 100,000 units per year,

Accepted Answer

A)  the average cost of producing 50,000 stoves is greater than the average cost of producing 100,000 
B)  the average cost of producing 50,000 stoves is equal to the average cost of producing 100,000 
C)  the total cost of producing 50,000 stoves is greater than the total cost of producing 100,000 
D)  the firm should not produce more than 100,000 woodstoves 
E)  MC exceeds AC at 100,000 stoves 
A)  the average cost of producing 50,000 stoves is greater than the average cost of producing 100,000 
B)  the average cost of producing 50,000 stoves is equal to the average cost of producing 100,000 
C)  the total cost of producing 50,000 stoves is greater than the total cost of producing 100,000 
D)  the firm should not produce more than 100,000 woodstoves 
E)  MC exceeds AC at 100,000 stoves

Question 6

The marginal benefit of acquiring additional information tends to

Accepted Answer

A)  be zero if the marginal cost of information is zero 
B)  increase and then decrease as additional information is obtained 
C)  be smaller, the smaller the quantity of information the individual already has obtained 
D)  increase as additional information is obtained 
E)  decrease as additional information is obtained 
A)  be zero if the marginal cost of information is zero 
B)  increase and then decrease as additional information is obtained 
C)  be smaller, the smaller the quantity of information the individual already has obtained 
D)  increase as additional information is obtained 
E)  decrease as additional information is obtained

Question 7

If transaction costs of market exchange are small, then a firm will expand to produce more of its product internally.

Accepted Answer

A) True 
 B)False

Question 8

NARRBEGIN: Exhibit 14-2
Exhibit 14-2
  
-In Exhibit 14-2, the optimal level of search is

Accepted Answer

A)  I1 
B)  I2 
C)  I3 
D)  0 
E)  not shown 
A)  I1 
B)  I2 
C)  I3 
D)  0 
E)  not shown

Question 9

By requiring that policyholders pay a deductible on a claim, insurers guard against

Accepted Answer

A)  symmetrical information 
B)  adverse selection 
C)  natural selection 
D)  moral hazard 
E)  the winner's curse 
A)  symmetrical information 
B)  adverse selection 
C)  natural selection 
D)  moral hazard 
E)  the winner's curse

Question 10

Vertical integration is

Accepted Answer

A)  the expansion of a firm into earlier or later stages of production 
B)  an attempt by a firm to allow market prices to coordinate more transactions 
C)  an attempt by a firm to minimize shirking 
D)  an attempt by a firm to minimize the need to coordinate transactions within its boundaries 
E)  a way for a firm to accumulate information about its competitors 
A)  the expansion of a firm into earlier or later stages of production 
B)  an attempt by a firm to allow market prices to coordinate more transactions 
C)  an attempt by a firm to minimize shirking 
D)  an attempt by a firm to minimize the need to coordinate transactions within its boundaries 
E)  a way for a firm to accumulate information about its competitors

Question 11

Adverse selection is more likely when

Accepted Answer

A)  a job requires specific training 
B)  a job requires intangible or unmeasurable abilities 
C)  the wage offered is above the average of all wages in the market 
D)  the wage is based on true marginal revenue products 
E)  performance can be monitored closely 
A)  a job requires specific training 
B)  a job requires intangible or unmeasurable abilities 
C)  the wage offered is above the average of all wages in the market 
D)  the wage is based on true marginal revenue products 
E)  performance can be monitored closely

Question 12

According to the search model, we should expect greater price dispersion for a given good

Accepted Answer

A)  if the good is a luxury 
B)  if the good is inferior 
C)  if there is much common knowledge about the good 
D)  during a recession 
E)  if a computerized search service is offered 
A)  if the good is a luxury 
B)  if the good is inferior 
C)  if there is much common knowledge about the good 
D)  during a recession 
E)  if a computerized search service is offered

Question 13

The lemons problem is that when there are hidden characteristics known only to the seller of a used car,

Accepted Answer

A)  the ratio of lemons to high-quality cars is likely to be high 
B)  the ratio of lemons to high-quality cars is likely to be low 
C)  good used cars will sell for more than their market value 
D)  no lemons will be offered on the market 
E)  the price of lemons will be below their market value 
A)  the ratio of lemons to high-quality cars is likely to be high 
B)  the ratio of lemons to high-quality cars is likely to be low 
C)  good used cars will sell for more than their market value 
D)  no lemons will be offered on the market 
E)  the price of lemons will be below their market value

Question 14

Which of the following statements about resource allocation is correct?

Accepted Answer

A)  Within a firm, resources are allocated by prices; in the market, resources are allocated by the decisions of managers. 
B)  Resources are allocated by prices both in the market and within the firm. 
C)  Within a firm, resources are allocated by the decisions of managers; in the market, resources are allocated by prices. 
D)  Resources are allocated by the decisions of managers both within the firm and in the market. 
E)  In the market, resources are allocated either by prices or by the decisions of managers. 
A)  Within a firm, resources are allocated by prices; in the market, resources are allocated by the decisions of managers. 
B)  Resources are allocated by prices both in the market and within the firm. 
C)  Within a firm, resources are allocated by the decisions of managers; in the market, resources are allocated by prices. 
D)  Resources are allocated by the decisions of managers both within the firm and in the market. 
E)  In the market, resources are allocated either by prices or by the decisions of managers.

Question 15

Adverse selection is a situation in which one party, as a result of a contract, has an incentive to alter their behavior in a way that harms the other party to the contract.

Accepted Answer

A) True 
 B)False

Question 16

Don's Pasture Apple Cider Company buys four inputs: apples, glass bottles, apple presses, and computers for record keeping. If the company decides to become more vertically integrated, it will

Accepted Answer

A)  probably start growing apples next 
B)  probably start making glass bottles next 
C)  probably start making apple presses next 
D)  probably start making computers next 
E)  have to grow apples and make glass bottles, apple presses, and computers 
A)  probably start growing apples next 
B)  probably start making glass bottles next 
C)  probably start making apple presses next 
D)  probably start making computers next 
E)  have to grow apples and make glass bottles, apple presses, and computers

Question 17

Moral hazard occurs when a person's behavior changes in a way that

Accepted Answer

A)  is immoral 
B)  is inherently dangerous 
C)  increases the chances of an unfavorable outcome 
D)  increases the likelihood of profit 
E)  raises the net welfare of society 
A)  is immoral 
B)  is inherently dangerous 
C)  increases the chances of an unfavorable outcome 
D)  increases the likelihood of profit 
E)  raises the net welfare of society

Question 18

McDonald's requires that franchisees provide at least 40 percent of the cost of the franchise with their own funds and work full-time daily in the restaurant. It does this in order to avoid

Accepted Answer

A)  signaling and screening 
B)  moral hazard 
C)  the winner's curse 
D)  adverse selection 
E)  symmetrical information 
A)  signaling and screening 
B)  moral hazard 
C)  the winner's curse 
D)  adverse selection 
E)  symmetrical information

Question 19

The principal-agent problem arises because of

Accepted Answer

A)  natural selection 
B)  diminishing marginal returns 
C)  hidden actions 
D)  the winner's curse 
E)  hidden characteristics 
A)  natural selection 
B)  diminishing marginal returns 
C)  hidden actions 
D)  the winner's curse 
E)  hidden characteristics

Question 20

If the production of a sofa requires the purchase of 3 types of inputs and the production of a harp requires the purchase of 30 types of inputs,

Accepted Answer

A)  the harp-producing firm will buy the sofa-producing firm 
B)  the sofa-producing firm will buy the harp-producing firm 
C)  harp production is more likely to be done by firms than sofa production is 
D)  sofa production is more likely to be done by firms than harp production is 
E)  both harp and sofa production will always be done by firms because there is more than one input involved in each 
A)  the harp-producing firm will buy the sofa-producing firm 
B)  the sofa-producing firm will buy the harp-producing firm 
C)  harp production is more likely to be done by firms than sofa production is 
D)  sofa production is more likely to be done by firms than harp production is 
E)  both harp and sofa production will always be done by firms because there is more than one input involved in each

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

If a firm experiences economies of scope, per unit production costs fall as it produces more than one kind of product.

An example of screening job applicants is

Employers rely on a job applicant's signals

Wendy's must decide whether to grow its own potatoes for French fries. 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?

If the minimum efficient scale in woodstove production is 100,000 units per year,

The marginal benefit of acquiring additional information tends to

If transaction costs of market exchange are small, then a firm will expand to produce more of its product internally.

NARRBEGIN: Exhibit 14-2 Exhibit 14-2 -In Exhibit 14-2, the optimal level of search is

By requiring that policyholders pay a deductible on a claim, insurers guard against

Vertical integration is

Adverse selection is more likely when

According to the search model, we should expect greater price dispersion for a given good

The lemons problem is that when there are hidden characteristics known only to the seller of a used car,

Which of the following statements about resource allocation is correct?

Adverse selection is a situation in which one party, as a result of a contract, has an incentive to alter their behavior in a way that harms the other party to the contract.

Don's Pasture Apple Cider Company buys four inputs: apples, glass bottles, apple presses, and computers for record keeping. If the company decides to become more vertically integrated, it will

Moral hazard occurs when a person's behavior changes in a way that

McDonald's requires that franchisees provide at least 40 percent of the cost of the franchise with their own funds and work full-time daily in the restaurant. It does this in order to avoid

The principal-agent problem arises because of

If the production of a sofa requires the purchase of 3 types of inputs and the production of a harp requires the purchase of 30 types of inputs,

The Art and Science of Economic Analysis

Appendix: Understanding Graphs

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Elasticity of Demand and Supply

Consumer Choice and Demand

Production and Cost in the Firm

A: Perfect Competition

B: Perfect Competition

A: Monopoly

B: Monopoly

Monopolistic Competition and Oligopoly

Resource Markets

Labor Markets and Labor Unions

Capital, Interest, and Corporate Finance

Economic Regulation and Antitrust Policy

Public Goods and Public Choice

Externalities and the Environment

Income Distribution and Poverty

International Trade

International Finance

Economic Development

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