Deck 16: Asymmetric Information

Question 1

The costs of obtaining a college degree for high-productivity and low-productivity workers are as follows:
High productivity: C_H = $120,000
Low productivity: C_L = $180,000
Suppose workers with a college degree are paid a lifetime income of $400,000 and workers without a college degree are paid $230,000. Which of the following statements is (are) TRUE?

A) Both high- and low-productivity workers choose to get a college degree.
B) Neither high- nor low-productivity workers choose to get a college degree.
C) The net lifetime income of high-productivity workers increases by $50,000 because of their college degree.
D) Low-productivity workers are better off getting a college degree.

Answer 1

C

Question 2

Carfax offers a report on used cars for $39.99. It details the ownership type and history, vehicle mileage, accident reports, and other information. Carfax is an example of how markets try to:

A) increase adverse selection.
B) lessen the lemons problem by reducing asymmetric information.
C) profit from increasing information disparities between buyers and sellers.
D) address an inefficiency by making things worse because buyers must now pay for the report.

Answer 2

B

Question 3

Kulap, a soybean farmer, acts to prevent crop failure. The marginal benefit is represented by MB = 80 - A, where A is the number of precautions. The marginal cost of these precautions (e.g., soil preparation and pesticide and fertilizer use) is MC = 20 - 0.5A. Suppose the government offers Kulap crop insurance, which changes the marginal benefit of taking precautions to MB = 65 - 2A. The number of precautions Kulap takes _____ from _____ without insurance to _____ with insurance.

A) falls; 20; 3
B) falls; 40; 20
C) falls; 120; 30
D) rise; 60; 120

Answer 3

C

Question 4

In the market for karate lessons, the instructors know more about the quality of their instruction than their students do. This situation may set up a:

A) lemons problem.
B) sensei equilibrium.
C) subgame outcome.
D) dojo fruition.

Question 5

(Figure: Fire Insurance) Lilly, who owns the Cigar Bar and Grill, is considering whether to purchase fire insurance. Without insurance, the marginal benefit of precautions to reduce the risk of fire is given by MB₁.Which of the following statements is (are) TRUE? I. With full insurance, the marginal benefit of acting to reduce the risk of fire is given by MB₃.
II) If Lilly purchases fire insurance, whether it is full or partial coverage, the marginal benefits of acting to reduce the risk of fire will increase.
III) With partial insurance, the marginal benefit of acting to reduce the risk of fire is given by MB₂.

A) I and III
B) III
C) II
D) I

Question 6

(Table: Car Quality Rating) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at
, where
Is the average quality rating of the cars available for sale. At an auction price of $2,000, there will be ____ cars for sale.

A) nine
B) seven
C) five
D) three

Question 7

(Table: Insurance Claims) Five people vary in health status. Each person knows his or her own health status and expected medical bills, which are given in the table. These people are considering buying health insurance. Assume that each person is equally likely to file a claim. Suppose that the insurance company does not know the health status of any one person but does know the expected claims of the group as a whole. If the insurance company sets the premium based on the average expected claims of these five people, then the premium is ____.

A) $30,000
B) $20,000
C) $14,000
D) $10,000

Question 8

Consumers value high-quality dirt bikes at $6,000 and low-quality dirt bikes at $2,500. The supply of used high-quality dirt bikes is Q_H = 0.5P_H - 2,000, while the supply of used low-quality dirt bikes is Q_L = P_L - 1,000. Potential buyers cannot distinguish between the two. Buyers base their willingness to pay on the belief that half the used dirt bikes are high quality. At the buyers' willingness to pay, sellers will offer _____ high-quality bikes and _____ low-quality ones.

A) 125; 3,250
B) 2,000; 2,000
C) 450; 900
D) 3,000; 1,500

Question 9

Ideally, regulations that address low-quality cars should:

A) ban the sale of low-quality cars.
B) make buyers fully aware of which cars are low quality.
C) prevent low-quality cars from being sold to the public at discounted prices.
D) make sellers fully aware of which cars are low quality.

Question 10

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. Without insurance coverage, Troy will make ____ physician visits.

A) 12
B) 10
C) 6
D) 5

Question 11

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, ____ high-quality motorcycles will be offered for sale at the consumers' willingness to pay.

A) 8,000
B) 1,400
C) 600
D) 0

Question 12

Warranties on products _____ asymmetric information, but they _____ the lemons problem.

A) reduce; do not reduce
B) do not eliminate; reduce
C) increase; do not reduce
D) eliminate; increase

Question 13

Adverse selection can occur when the:
I) buyer has more information than the seller.
II) seller has more information than the buyer.
III) buyer and seller have complete information.

A) I, II, and III
B) II
C) I and II
D) III

Question 14

At a swap meet, 10 sellers each have a used 5.7-L Chevy engine for sale. Half the engines are in mint condition, with each valued by its seller at $3,000. The other engines need repair, and each is valued by its seller at $1,000. Buyers value a mint engine at $3,500 and an engine that needs repair at $1,600. Sellers know whether their engine is in mint condition or needs repair, and buyers can distinguish between engines in mint condition and those needing repair. How many engines will be sold at the swap meet?

A) zero
B) 10
C) five mint engines and none that need repair
D) no mint engines and five that need repair

Question 15

Eric has a job at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard or not. If Eric works hard, there is a 75% probability that electronics goods profits will equal $400 a day and a 25% probability that electronics goods profits will equal $100 a day. If Eric shirks, there is a 75% probability that electronics goods profits will equal $100 a day and a 25% probability that electronics goods profits will equal $400 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. Eric will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.

A) shirk; $87.50; more; $62.50
B) shirk; $125; more; $118
C) work hard; $50; less; $62.50
D) work hard; $100; less; $250

Question 16

(Figure: Principal-Agent Game I) What is the equilibrium in this principal-agent game?

A) (800 , 120)
B) (540 , 210)
C) (700 , 150)
D) (600 , 80)

Question 17

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. With insurance coverage, Troy will visit the physician ____ times.

A) 18
B) 10
C) 6
D) 5

Question 18

(Figure: Theft Prevention) If an individual with no insurance purchases partial coverage, the marginal _____ curve will shift _____, leading her to _____ theft prevention measures.

A) benefit; downward; reduce
B) benefit; upward; increase
C) cost; downward, reduce
D) cost; upward; increase

Question 19

Some employers no longer consider a prospective employee's grade point average as a useful signal. Why might this be the case?

A) because only the really smart students receive high grade-point averages
B) because grade inflation has made it considerably easier for students with a poor work ethic and little self-control to get high grades
C) because it is not fair to the students who put in a lot of effort and still get bad grades
D) because productivity is highly correlated with a worker's grade-point average

Question 20

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, consumers are willing to pay ____ for any used motorcycle.

A) $16,000
B) $10,000
C) $8,000
D) $6,000

Question 21

The costs of obtaining a college degree for high-productivity and low-productivity workers are as follows:
High productivity: C_H = $20,000y
Low productivity: C_L = $40,000y
Where y is years in college. Suppose workers with a college degree are paid a lifetime income of $600,000, and workers without a college degree are paid a lifetime income of $450,000. For low-productivity workers, the net benefit of four years of college is _____, while the net benefit of not going to college is _____.

A) $500,000; $150,000
B) $440,000; $450,000
C) $150,000; $40,000
D) $600,000; $120,000

Question 22

Which of the following statements is TRUE?

A) Evidence suggests that schooling raises earnings only by raising productivity.
B) Sheepskin effects are consistent with signaling.
C) The sheepskin effect refers to evidence that students with a four-year college degree earn no more than students with four years of college but no degree.
D) The effects of signaling are the smallest for recent graduates who are just starting to work.

Question 23

The Affordable Care Act (Obamacare) mandates that everyone buy health insurance or face a penalty. The rationale for this policy is to:

A) solve the adverse selection problem.
B) solve the moral hazard problem.
C) make sure that high-risk people pay higher premiums than low-risk people.
D) ensure that Medicare enrollees pay actuarially fair insurance premiums.

Question 24

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, ____ low-quality motorcycles will be offered for sale at the consumers' willingness to pay.

A) 2,000
B) 1,400
C) 600
D) 0

Question 25

For a signal to be meaningful, the cost of obtaining it must be:

A) the same for everyone.
B) zero.
C) lower for high-quality goods than for low-quality goods.
D) higher for high-quality goods than for low-quality goods.

Question 26

Suppose a company's owners have a hard time observing whether management is acting primarily in its own interest or for the benefit of the company. This situation sets up a:

A) fiduciary responsibility conundrum.
B) principal-agent problem.
C) problem with inefficient loss aversion.
D) symmetry relationship.

Question 27

Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort. Paying a fixed fee for writing a book ____ an example of moral hazard because ____.

A) is; the publisher will not be able to determine whether the author is lazy
B) is; the publisher has more information than the author
C) is not; the publisher will not be able to determine whether the author is lazy
D) is not; the publisher has more information than the author

Question 28

Vivaan, a musician, frequently plays at large parties and nightclubs. Vivaan has musical equipment worth $8,000, and he takes precautions to prevent theft. The marginal benefit of these precautions is given by MB = 60 - 3A, where A is the number of precautions Vivaan takes. The marginal cost of preventing theft (i.e., the time, energy, and effort expended) is given by MC = 2A. Suppose Vivaan purchases full insurance that pays him $8,000 if his gear is stolen. What is Vivaan's optimal level of precautions?

A) 0
B) 2
C) 5
D) 20

Question 29

Consumers value high-quality dirt bikes at $6,000 and low-quality dirt bikes at $2,500. The supply of used high-quality dirt bikes is Q_H = 0.5P_H - 2,000; the supply of used low-quality dirt bikes is Q_L = P_L - 1,000. Potential buyers cannot distinguish between the two. If buyers believe that half the used dirt bikes are high quality, what price are buyers willing to pay for a used dirt bike?

A) $3,500
B) $1,250
C) $3,000
D) $4,250

Question 30

Suppose there are two types of fruit pickers. Fast pickers bring in more than 10 units of fruit per day, while the slow pickers bring in fewer than 10 units per day. Johnson Farm pays pickers a flat rate of $50 per day, and Henry Farm pays pickers $5 for every unit picked. The pickers know their productivity level, but the farms don't know a picker's productivity until he or she starts working. Slow pickers will choose to apply at _____.

A) Johnson Farm
B) Henry Farm
C) both farms
D) neither farm

Question 31

Suppose there are two types of fruit pickers. Fast pickers bring in more than 10 units of fruit per day, while the slow pickers bring in fewer than 10 units per day. Johnson Farm pays pickers a flat rate of $50 per day, and Henry Farm pays pickers $5 for every unit picked. The pickers know their productivity level, but the farms don't know a picker's productivity until he or she starts working. Fast pickers will choose to apply at _____.

A) Johnson Farm
B) Henry Farm
C) both farms
D) neither farm

Question 32

Suppose there are two types of fruit pickers. Fast pickers bring in more than 10 units of fruit per day, while the slow pickers bring in fewer than 10 units per day. Johnson Farm pays pickers a flat rate of $50 per day, and Henry Farm pays pickers $5 for every unit picked. The pickers know their productivity level, but the farms don't know a picker's productivity until he or she starts working. There will be an adverse selection problem in applications at _____.

A) Johnson Farm
B) Henry Farm
C) both farms
D) neither farm

Question 33

A stand-up paddleboard outfitter operates without insurance. The outfitter's marginal cost of safety (e.g., staff training, rescue equipment) is MC_A = 100 + 14A, where A is the number of safety actions taken. The marginal benefit of those actions is given by MB_B = 200 - 6A. The optimal number of precautions for this outfitter to take is ____.

A) 100
B) 14
C) 5
D) 2

Question 34

Which of the following practices mitigates moral hazard?
I) A health insurance company's policy requires a $500 deductible and a 20% coinsurance rate.
II) Progressive Insurance offers drivers a discount for using a black box that records miles driven and the number of sudden stops.
III) Homeowner insurance does not cover claims arising from backyard swimming pools.

A) I
B) I, II, and III
C) III
D) II and III

Question 35

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. Without insurance coverage, Paula will make ____ physician visits.

A) 12
B) 10
C) 6
D) 5

Question 36

Lenny, who has no mechanical knowledge of automobiles, takes his car to a mechanic because of a pinging noise in the engine. The transaction between Lenny and the mechanic is characterized by:

A) symmetric information with complete ignorance.
B) asymmetric information.
C) symmetric information.
D) complete information.

Question 37

Eric works at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard. If Eric works hard, there is a 90% probability that electronics goods profits will equal $400 a day and a 10% probability that electronics goods profits will equal $100 a day. If Eric shirks, there is a 90% probability that electronics goods profits will equal $100 a day and a 10% probability that electronics goods profits will equal $400 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. Eric will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.

A) shirk; $50; more; $45
B) shirk; $75; more; $65
C) work hard; $45; less; $185
D) work hard; $65; less; $85

Question 38

Community rating regulations require insurance companies to charge everyone the same premium, with sometimes slight adjustment for age and gender, regardless of a person's health status. This regulation _____ adverse selection. _____ people and _____ people are _____ likely to buy insurance because the companies cannot legally offer them _____ premiums based on their risk factors.

A) worsens; Low-risk; healthy; more; higher
B) improves; High-risk; healthy; less; lower
C) improves; High-risk; sick; more; higher
D) worsens; Low-risk; healthy; less; lower

Question 39

Suppose half of workers have high productivity and half of workers have low productivity. High-productivity workers are valued at $100,000 a year and low-productivity workers are valued at $40,000 a year. Because of asymmetric information, employers cannot tell them apart, so all workers are paid according to the average economy-wide value of productivity. If high-productivity workers found a method to signal their productivity to employers, high-productivity pay would _____ by $30,000, and low-productivity pay would _____.

A) increase; increase by $30,000
B) increase; decrease by $30,000
C) decrease; increase by $30,000
D) increase; remain unchanged

Question 40

Suppose that, at an auction, there are four lawn mowers-two with a quality rating of 4 and two with a quality rating of 1. The scale runs from 1 to 4, with 1 being worst and 4 being near-mint condition. Sellers know the quality rating of their lawn mower and value it at 100Q, where Q is the quality rating. Buyers do not know the quality rating of any specific lawn mower, but assume here that buyers know the average quality rating of all the lawn mowers being offered for sale. Buyers value lawn mowers at , where
Is the average quality rating of lawn mowers being offered for sale at the current auction price. Which of the following statements is (are) TRUE?
I) At an auction price of $500 each, all four sellers are willing to sell their lawn mowers but will be unsuccessful.
II) At an auction price of $300 each, two sellers are willing to sell their 1-quality-rated lawn mowers, but buyers are only willing to pay $150.
III) At an auction price of $120 each, two 1-quality-rated lawn mowers will be sold.

A) I and II
B) I, II, and III
C) I and III
D) III

Question 41

(Figure: Principal-Agent Game III) What is the likely outcome of this game?

A) The landlord will not require a $500 damage deposit, and the tenant will not play golf inside.
B) The landlord will require a $500 damage deposit, and the tenant will not play golf inside.
C) The landlord will require a $500 damage deposit, and the tenant will play golf inside.
D) The landlord will not require a $500 damage deposit, and the tenant will play golf inside.

Question 42

(Figure: Principal-Agent Game II) If the principal chooses a flat salary, the agent will _____ and earn a payoff of _____.

A) shirk; 150
B) shirk; 75
C) work hard; 133
D) work hard; 100

Question 43

(Table: Car Quality Rating) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at
, where
Is the average quality rating of the cars available for sale. At an auction price of $1,000, there will be ____ cars for sale.

A) nine
B) seven
C) five
D) three

Question 44

Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort. In this example, the agent is ____.

A) the publisher
B) the author
C) neither the publisher nor the author
D) both the publisher and the author

Question 45

Which of the following statements is (are) TRUE?
I) The lemons problem causes an inefficiently high number of sales in high-quality goods.
II) The lemons problem affects how much buyers are willing to pay for goods.
III) The lemons problem does not affect the market for services.

A) I and II
B) II
C) III
D) I, II, and III

Question 46

Each of the following is an example of an institution that helps limit the lemons problem in the used car market EXCEPT:

A) a mechanic's inspection of the vehicle.
B) Carfax (a website that provides verified information about the vehicle's history).
C) a warranty offered by the seller.
D) a statement from the seller regarding the vehicle history.

Question 47

In the market for used air rifles, the overwhelming majority of rifles for sale do not shoot very accurately. This situation is an example of _____ and results from _____.

A) signaling; adverse selection
B) moral hazard; asymmetric information
C) adverse selection; asymmetric information
D) an agent problem; moral hazard

Question 48

In a small island population, half of the people are healthy and half are sick. The annual expected medical claims of the healthy and sick are $200 and $4,000, respectively. Assume that the health insurance company does not know whether people are healthy or sick before they buy insurance. If the health insurance company charges an annual premium of $2,100 (the average expected claim), only the _____ will buy insurance, driving future premiums _____.

A) sick; up
B) healthy; down
C) sick; down
D) healthy; up

Question 49

(Figure: Theft Prevention) An individual who buys full-coverage automobile insurance will choose to take _____ unit(s) of action to prevent theft.

A) 0
B) 1
C) 2
D) 3

Question 50

(Figure: Theft Prevention) An individual with no automobile insurance will choose to take _____ units of action to prevent theft.

A) 0
B) between 1 and 3
C) 4
D) 8

Question 51

The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of every 10 used kayaks are of high quality. In this market, ____ low-quality used kayaks will be sold.

A) 2,000
B) 960
C) 270
D) 0

Question 52

Which of the following statements is (are) TRUE of selling agents in residential real estate transactions?

A) Because agents are paid on commission, there is no principal-agent problem.
B) Because agents are paid on commission, they have an incentive to sell quickly, without waiting for slightly higher offers.
C) If an agent sells an owner's home for an additional $20,000, the agent stands to gain more than the owner.
D) Owners know more than agents about the state of the real estate market and the value of comparable homes.

Question 53

A small town has 1,000 people, 600 of whom are healthy and 400 of whom are sick. The annual expected medical claims of the healthy and sick are $500 and $9,000, respectively. If the insurance company cannot determine who is healthy and who is sick prior to the purchase of insurance, adverse selection ___ likely to happen because ____.

A) is; sick people will likely buy insurance and healthy people will likely forgo insurance
B) is; healthy people will likely buy insurance and sick people will likely forgo insurance
C) is not; sick people will likely buy insurance and healthy people will likely forgo insurance
D) is not; healthy people will likely buy insurance and sick people will likely forgo insurance

Question 54

A small town has 1,000 people, 600 of whom are healthy and 400 of whom are sick. The annual expected medical claims of the healthy and sick are $500 and $9,000, respectively. If the insurance company cannot determine who is healthy and who is sick prior to the purchase of insurance, the annual premium must be at least $____.

A) 9,000
B) 4,750
C) 3,900
D) 2,000

Question 55

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. With insurance coverage, Paula will visit the physician ____ times.

A) 18
B) 10
C) 6
D) 5

Question 56

Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort. In this example, the principal is ____.

A) the publisher
B) the author
C) neither the publisher nor the author
D) both the publisher and the author

Question 57

Which of the following is (are) examples of moral hazard?
I) An unemployed worker reduced his effort to find a job after he became eligible for unemployment insurance.
II) Banks make exceptionally risky investments because they expect government bailouts if their investments fail.
III) After a university made the morning-after pill available on campus, more students became sexually promiscuous.

A) I, II, and III
B) I
C) II
D) I and II

Question 58

(Table: Car Quality Rating) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at
, where
Is the average quality rating of the cars available for sale. At an auction price of $1,000, buyers value the cars for sale at $____ each.

A) 1,500
B) 1,125
C) 750
D) 375

Question 59

Which of the following methods reduce adverse selection in insurance markets?
I) selling insurance policies to groups of employees in a firm
II) requiring medical exams for anyone purchasing life insurance
III) denying insurance coverage to people with preexisting health conditions
IV) mandating by law that all people must buy health insurance

A) I, II, III, and IV
B) I and III
C) III
D) I and II

Question 60

The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of every 10 used kayaks are of high quality. In this market, ____ high-quality used kayaks will be sold.

A) 2,000
B) 1,460
C) 270
D) 0

Question 61

The signaling model of education assumes that attending college will:

A) improve the productivity only of people with high innate ability.
B) improve the productivity only of people with low innate ability.
C) not improve productivity.
D) improve the productivity of all people.

Question 62

Vehicle leasing _____ the number of high-quality used cars and _____ adverse selection.

A) increases; reduces
B) increases; increases
C) decreases; reduces
D) decreases; increases

Question 63

Which of the following statements is (are) TRUE?
I) Moral hazard can either increase or decrease the likelihood of an insurance claim.
II) Moral hazard is the result of asymmetric information.
III) Insurance coverage sets up moral hazard because people don't respond to the incentives offered by the coverage.

A) I
B) I and II
C) III
D) II

Question 64

A stand-up paddleboard outfitter operates without insurance. The outfitter's marginal cost of safety (e.g., staff training, rescue equipment) is MC_A = 100 + 14A, where A is the number of safety actions taken. The marginal benefit of those actions is given by MB_B = 200 - 6A. The government has mandated that all SUP outfitters carry insurance, leading to a change in the outfitter's marginal benefit curve to MB_B = 140 - 6A. The optimal number of precautions taken by the outfitter is ____.

A) 100
B) 14
C) 5
D) 2

Question 65

Suppose workers with a college degree are paid a lifetime income of $500,000 and workers without a college degree are paid $300,000. The cost of obtaining a college degree for high-productivity workers is $100,000. For a college degree to serve as a useful productivity signal, the cost of a college degree for low-productivity workers must be:

A) greater than $200,000.
B) less than $200,000.
C) greater than $100,000.
D) less than $100,000.

Question 66

Principal-agent problems arise from:

A) asymmetric information.
B) hyperbolic discounting.
C) risk aversion.
D) deadweight losses.

Question 67

(Table: Car Quality Rating) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at
, where
Is the average quality rating of the cars available for sale. At an auction price of $500, there will be ____ cars for sale.

A) nine
B) seven
C) five
D) three

Question 68

Many states have laws requiring that health insurance policies cover the treatment of diabetes. One study found that after the passage of these laws, diabetics became fatter, which complicates the treatment. This study's finding is an example of:

A) cost lag.
B) hysteresis.
C) the multiplier.
D) moral hazard.

Question 69

Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is Q_R = 6, and Paula's demand curve for physician visits is Q_P = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. With a 20% coinsurance rate and a market price of $100, Paula pays $____ out-of-pocket per visit.

A) 40
B) 30
C) 20
D) 10

Question 70

The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of every 10 used kayaks are of high quality. In this market, buyers are willing to pay $____ for used kayaks.

A) 2,000
B) 1,460
C) 270
D) 0

Question 71

Based on John List's research on sports memorabilia shows, buyers of antique furniture at a flea market should be advised to:

A) purchase from local dealers.
B) pay with cash.
C) use an alias.
D) pay with a check.

Question 72

Li is an unsupervised outside salesperson for a small electronics firm. Instead of working on commission, Li is a salaried employee. What issue may this compensation arrangement lead to? Give a possible solution.

Question 73

Ted purchased a comprehensive insurance policy for his car. Which of the following is an example of moral hazard?

A) Because of his insurance coverage, Ted avoids driving when the roads are icy.
B) Because of his insurance coverage, Ted no longer locks his car doors.
C) Because of his insurance coverage, Ted uses a designated driver for the nights he spends bar hopping.
D) Because of his insurance coverage, Ted replaced his worn-out tires with Michelin tires.

Question 74

(Figure: Work Productivity) The figure shows the cost of college for high- and low-productivity workers. Based on the college wage premium:

A) high-productivity workers will get a four-year degree.
B) all workers will get a four-year degree.
C) high-productivity workers will choose six years of college.
D) neither type of worker will get a four-year degree.

Question 75

(Table: Car Quality Rating) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at
, where
Is the average quality rating of the cars available for sale. At an auction price of $2,000, buyers value the cars for sale at $____ each.

A) 1,500
B) 1,125
C) 750
D) 375

Question 76

The supply of used high-quality motorcycles is Q_H = 0.2P_H - 1,000, and the supply of used low-quality motorcycles is Q_L = 0.5P_L - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart.
a. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, what price are consumers willing to pay for any used motorcycle?
b. At the price determined in part a, how many high-quality and low-quality motorcycles will be offered for sale? What will happen over time to the consumers' willingness to pay for used motorcycles?

Question 77

Eric has a job at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard. If Eric works hard, there is a 75% probability that electronics goods profits will equal $400 a day and a 25% probability that electronics goods profits will equal $100 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. What is Eric's expected pay for working hard?

A) $250
B) $100
C) $225.75
D) $162.50

Question 78

Vivaan, a musician, frequently plays at large parties and nightclubs. Vivaan has musical equipment worth $8,000, and he takes precautions to prevent theft. The marginal benefit of these precautions is given by MB = 60 - 3A, where A is the number of precautions Vivaan takes to reduce theft. The marginal cost of preventing theft (i.e., the time, energy, and effort expended) is given by MC = 2A. What is Vivaan's optimal level of precautions?

A) 20
B) 12
C) 30
D) 60

Question 79

Suppose there are four boats available at an auction. The sellers know the quality of their boats but the prospective buyers do not. The buyers know that two of the boats are high quality and two of the boats are low quality. Buyers value high-quality boats at $100,000 and low-quality boats at $60,000. Sellers value high-quality boats at $80,000 and low-quality boats at $40,000. If the auctioneer sets a price per boat at $50,000, how many boats and of which type will sellers make available?

A) all four boats
B) two high-quality boats
C) two low-quality boats
D) one high-quality and one low-quality boat

Question 80

(Table: Insurance Claims) Five people vary in health status. Each person knows his or her own health status and expected medical bills, which are given in the table. These people are considering buying health insurance. Assume that each person is equally likely to file a claim. Suppose that the insurance company does not know the health status of any one person but does know the expected claims of the group as a whole. If the insurance company sets the premium based on the average expected claims of these five people, then ____ people would be willing to pay the premium.

A) five
B) four
C) three
D) two