Question 1

Which of the following is an example of moral hazard?

Accepted Answer

A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain. 
A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain. B

Question 2

Which of the following is not a major impediment to shareholder control of large corporations?

Accepted Answer

A)  The top management of the firm usually controls the voting and proxy process. 
B)  Shareholders seeking to change management recover their costs only if they are successful. 
C)  No one shareholder owns a substantial percentage of the corporation's stock. 
D)  Most shareholders in large firms engage in rational apathy. 
E)  Shareholders of large corporations are protected by limited liability. 
A)  The top management of the firm usually controls the voting and proxy process. 
B)  Shareholders seeking to change management recover their costs only if they are successful. 
C)  No one shareholder owns a substantial percentage of the corporation's stock. 
D)  Most shareholders in large firms engage in rational apathy. 
E)  Shareholders of large corporations are protected by limited liability. E

Question 3

A used car salesperson offers a warranty on any car sold in the lot. This is known as:

Accepted Answer

A)  signaling. 
B)  risk aversion. 
C)  self-selection. 
D)  screening. 
E)  adverse selection. 
A)  signaling. 
B)  risk aversion. 
C)  self-selection. 
D)  screening. 
E)  adverse selection. A

Question 4

The Federal Reserve System has suggested that some very large banks in the US are "too big to fail." If the Fed adopts such a policy stance, what problem will it probably face as it seeks to cope with troubled banks?

Accepted Answer

The problem is one of moral hazard. Bank

Question 5

The strategy of purchasing suppliers in order to have a reliable supply chain is known as:

Accepted Answer

A)  in-house production. 
B)  outsourcing. 
C)  benchmarking. 
D)  vertical integration. 
E)  product lifecycle management. 
A)  in-house production. 
B)  outsourcing. 
C)  benchmarking. 
D)  vertical integration. 
E)  product lifecycle management.

Question 6

What are the major mechanisms to address the principal-agent problems of large, publicly held corporations? How are they intended to correct the problems? How effective are they?

Accepted Answer

There are five main mechanisms to mitiga

Question 7

What factors typically lead a firm to centralize decision making? What causes it to decentralize?

Accepted Answer

Centralization is favored when a high de

Question 8

Which of the following is an example of a principal-agent problem?

Accepted Answer

A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain. 
A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.

Question 9

Across its facilities, a financial firm pays its back-office clerical workers in two different ways: (i) a set wage per hours worked (hours are flexible and can vary between 40 hours and 50 hours per week) or (ii) compensation according to the quantity (number of tasks) and the quality of work completed. Which method would you recommend? Explain briefly.

Accepted Answer

Paying by the hour (according to inputs

Question 10

The German electronics company Siemens has a two-tier system of corporate governance: a management board and a separate supervisory board. For major company decisions, management must build a consensus with the supervisory board. What are the advantages and disadvantages of this corporate structure?

Accepted Answer

Siemens' supervisory board exerts much g

Question 11

Assume that a worker works 60 hours a week. He contributes an additional $90,000 to the firm's revenue and his personal disutility from the job is $35,000. If he is paid $58,000 per year, what is the net profit from this employment relationship?

Accepted Answer

A)  $32,000 
B)  $35,000 
C)  $55,000 
D)  $34,000 
E)  $23,000 
A)  $32,000 
B)  $35,000 
C)  $55,000 
D)  $34,000 
E)  $23,000

Question 12

Which of the following is an example of self selection?

Accepted Answer

A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A CEO who takes certain self-interested actions that diminish overall shareholder value. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain. 
A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A CEO who takes certain self-interested actions that diminish overall shareholder value. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.

Question 13

Which of the following is an example of signaling?

Accepted Answer

A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain. 
A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.

Question 14

Which of the following is an example of asymmetric information leading to a "lemons" market?

Accepted Answer

A)  A marketing manager is uncertainty about the volume of sales in the next quarter. 
B)  An employee does not know the rate of inflation in the coming year and so cannot ascertain his real wage. 
C)  The seller of a used laptop knows more about its true condition than the buyer. 
D)  A firm's manager has motives that sometimes conflict with the interests of shareholders. 
E)  A trader, who has access to inside information, profits by trading on that information. 
A)  A marketing manager is uncertainty about the volume of sales in the next quarter. 
B)  An employee does not know the rate of inflation in the coming year and so cannot ascertain his real wage. 
C)  The seller of a used laptop knows more about its true condition than the buyer. 
D)  A firm's manager has motives that sometimes conflict with the interests of shareholders. 
E)  A trader, who has access to inside information, profits by trading on that information.

Question 15

A large health insurance plan pays for 90% of the cost of emergency room and other hospital visits but only 20% of the cost of an individual's purchases of prescription drugs. How might this affect the individual's health-care decisions? Why might the result lead to high health-care spending?

Accepted Answer

The insurance plan is heavily weighted t

Question 16

Describe how reputation and warranties alleviate the problem of adverse selection.

Accepted Answer

The offer of a warranty is a credible wa

Question 17

Which of the following is an example of asymmetric information?

Accepted Answer

A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain. 
A)  A buyer who makes a large raise in bid at an auction to discourage other bidders. 
B)  A doctor who performs a large number of in-office tests and is paid per test. 
C)  An elderly couple who elect a generous medical insurance policy. 
D)  A board of directors that is trying to refine the compensation system for its CEO. 
E)  A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.

Question 18

Which of the following leads to adverse selection in a market?

Accepted Answer

A)  Signaling 
B)  Externalities 
C)  Uncertainty 
D)  Asymmetric information 
E)  Moral hazard 
A)  Signaling 
B)  Externalities 
C)  Uncertainty 
D)  Asymmetric information 
E)  Moral hazard

Question 19

You have decided to purchase a new car and are making arrangements for payment. The salesperson suggests that you consider purchasing an extended warranty. In fact, it seems that the salesperson is even more eager to sell the extended warranty than to sell the new car. What economic issues should you consider before you buy the warranty? Explain.

Accepted Answer

The eagerness of the salesperson implies

Question 20

What are the problems that a manager may face while evaluating the performance of employees who work together as a team?

Accepted Answer

When members of a team work together, it

Which of the following is an example of moral hazard?

Which of the following is not a major impediment to shareholder control of large corporations?

A used car salesperson offers a warranty on any car sold in the lot. This is known as:

The Federal Reserve System has suggested that some very large banks in the US are "too big to fail." If the Fed adopts such a policy stance, what problem will it probably face as it seeks to cope with troubled banks?

The strategy of purchasing suppliers in order to have a reliable supply chain is known as:

What are the major mechanisms to address the principal-agent problems of large, publicly held corporations? How are they intended to correct the problems? How effective are they?

What factors typically lead a firm to centralize decision making? What causes it to decentralize?

Which of the following is an example of a principal-agent problem?

The German electronics company Siemens has a two-tier system of corporate governance: a management board and a separate supervisory board. For major company decisions, management must build a consensus with the supervisory board. What are the advantages and disadvantages of this corporate structure?

Assume that a worker works 60 hours a week. He contributes an additional $90,000 to the firm's revenue and his personal disutility from the job is $35,000. If he is paid $58,000 per year, what is the net profit from this employment relationship?

Which of the following is an example of self selection?

Which of the following is an example of signaling?

Which of the following is an example of asymmetric information leading to a "lemons" market?

A large health insurance plan pays for 90% of the cost of emergency room and other hospital visits but only 20% of the cost of an individual's purchases of prescription drugs. How might this affect the individual's health-care decisions? Why might the result lead to high health-care spending?

Describe how reputation and warranties alleviate the problem of adverse selection.

Which of the following is an example of asymmetric information?

Which of the following leads to adverse selection in a market?

What are the problems that a manager may face while evaluating the performance of employees who work together as a team?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

Exam 14: Asymmetric Information and Organizational Design

Which of the following is an example of moral hazard?

Which of the following is not a major impediment to shareholder control of large corporations?

A used car salesperson offers a warranty on any car sold in the lot. This is known as:

The Federal Reserve System has suggested that some very large banks in the US are "too big to fail." If the Fed adopts such a policy stance, what problem will it probably face as it seeks to cope with troubled banks?

The strategy of purchasing suppliers in order to have a reliable supply chain is known as:

What are the major mechanisms to address the principal-agent problems of large, publicly held corporations? How are they intended to correct the problems? How effective are they?

What factors typically lead a firm to centralize decision making? What causes it to decentralize?

Which of the following is an example of a principal-agent problem?

Assume that a worker works 60 hours a week. He contributes an additional $90,000 to the firm's revenue and his personal disutility from the job is $35,000. If he is paid $58,000 per year, what is the net profit from this employment relationship?

Which of the following is an example of self selection?

Which of the following is an example of signaling?

Which of the following is an example of asymmetric information leading to a "lemons" market?

A large health insurance plan pays for 90% of the cost of emergency room and other hospital visits but only 20% of the cost of an individual's purchases of prescription drugs. How might this affect the individual's health-care decisions? Why might the result lead to high health-care spending?

Describe how reputation and warranties alleviate the problem of adverse selection.

Which of the following is an example of asymmetric information?

Which of the following leads to adverse selection in a market?

What are the problems that a manager may face while evaluating the performance of employees who work together as a team?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters