Deck 6: The Economics of Information and Choice Under Uncertainty

Question 1

In general, a firm sends a signal to consumers that their product is high quality when

A)it has high level of fixed costs
B)it has low level fixed costs
C)it spends very little in advertising campaigns
D)it gives huge discounts to large sellers

Answer 1

A

Question 2

A gamble in which you win D dollars if the coin comes up heads, but lose D dollars if the coin comes up tails has an expected value of

A)1/2D
B)-1 /2D
C)D
D)0

Answer 2

D

Question 3

The extensive sunk costs of heavily advertised products suggest a reason for believing that those products will

A)Turn out to have higher quality than unadvertised products
B)Turn out to have lower quality than unadvertised products
C)Cause consumers to question their intrinsic value
D)Be hard to sell to the consumer without heavy persuasion

Answer 3

A

Question 4

The "Lemon's" argument helps to explain why

A)Physical depreciation is the only reason for the sharp price differential between new and used cars
B)Physical depreciation is an insufficient reason for the sharp price differential between new and used cars
C)Used cars fail to satisfy consumer demands for transportation
D)New and used cars sell for more than their intrinsic value would suggest

Question 5

A person's incentive to spend additional money on conspicuous consumption goods will be ____to the amount and reliability of independent information that people have about his abilities.

A)Unrelated
B)Positively related
C)Inversely related
D)Equal

Question 6

A risk-neutral consumer

A)Will always refuse a fair gamble
B)Will always accept a fair gamble
C)Is indifferent between accepting and refusing a fair gamble
D)Avoids all risks

Question 7

Where important decisions involving people we do not know well are involved,

A)Even weak signals of ability are often decisive
B)Weak signals of ability are never decisive
C)We are more likely to be risk neutral
D)We are less likely to self-insure

Question 8

Which of the following gambles should be consider more attractive:

A)If heads, you win $200; if tails, you lose $198
B)If heads, you win $5; if tails, you lose $10
C)If heads, you win $6; if tails, you lose $4
D)If heads, you win $9; if tails, you lose $6

Question 9

Conspicuous consumption as an ability signal

A)Completely different from a prisoner's dilemma
B)Is more effective if the positional goods nature of consumption causes everyone to consume elaborately
C)Will likely continue even if it is wasteful for all involved
D)Characterized by lower levels of consumption

Question 10

When a job applicant discloses information that could be seen as favorable by potential employers, other job candidates:

A)must do the same in order to get hired
B)will be seen as more unfavorable by potential employers
C)will earn less compensation
D)will be seen as more favorable by potential employers

Question 11

For a signal between two adversaries to be credible, it must

A)Be verified by a third party
B)Be costly to fake or duplicate
C)Be part of a sequence of transactions
D)Have both a good news-bad news component

Question 12

Persons whose utility functions are concave with respect to wealth are said to be

A)Risk-seekers
B)Risk-neutral
C)Risk-averse
D)Fair gamblers

Question 13

For the average person, insurance is a

A)Fair gamble
B)An unfair gamble
C)Not a gamble
D)Useless option

Question 14

Assuming there is no pleasure in the gambling process, a risk-averse person with perfect information will

A)Always refuse a fair gamble
B)Consider all gambles unfair
C)Always accept a fair gamble
D)Sometimes refuse a fair gamble

Question 15

Competitive pressure in the insurance market will, in general,

A)Make insurance premiums unattractive to drivers who are much riskier than average
B)Make insurance premiums attractive to low risk drivers
C)Induce risky drivers to self-insure
D)Induce the least risky drivers to self-insure

Question 16

The utility function of wealth for a risk-seeker has

A)An increasing slope as wealth rises
B)A decreasing slope as wealth rises
C)A constant slope as wealth rises
D)A slope that could be any of the above since utility of wealth is unrelated to risk-seeking

Question 17

Adverse selection is the process by which

A)"Undesirable" members of a particular market are more likely to participate in exchange
B)"Undesirable" members of a particular market are less likely to participate in exchange
C)Adversaries communicate negative messages
D)Full-disclosure becomes impossible

Question 18

When the size of the potential loss is small, most people will

A)Insure because insurance costs less than the expected loss
B)Self-insure because they can afford it and the expected loss < the insurance premium
C)Self-insure because the expected loss can not be calculated
D)Self-insure because insurance companies do not like to insure for small losses

Question 19

The general message of the full disclosure principle is that

A)Information is costly to fake
B)Producers should offer lifetime warranties for low quality products
C)The lack of evidence that something resides in a favored category will often suggest that it belongs to a less favored one
D)Information is symmetric

Question 20

In insurance markets, adverse selection often

A)Creates exchange possibilities that are beneficial to consumers and insurance companies
B)Creates an abundance of lawsuits
C)Brings down prices for insurance premiums
D)Eliminates exchange possibilities that would be beneficial to both consumers and insurance companies alike

Question 21

Next suppose your utility function for value is U = 100(money).Are you risk averse, a risk lover, or risk neutral.

Question 22

One thousand tickets are sold at $1 each for a color television valued at $350.What is the expected value of the gain if a person purchases one ticket?

A)$-349
B)$-0.65
C)$-0.001
D)$-0.80

Question 23

Faced with the gamble: heads you win $100; tails you lose $50, we would predict that a risk-neutral person would

A)Take the gamble
B)Refuse the gamble
C)Be indifferent between taking and not taking the gamble
D)Take the gamble but insure against any loses

Question 24

Consider John, who purchases an insurance policy on a racquetball racket that he has acquired.He then proceeds to hit his racket against the wall every time he losses a point .This is an example of

A)An adverse selection problem
B)A moral hazard problem
C)Signaling
D)Co-insurance

Question 25

(Appendix) The winner in an auction bidding process will

A)Get less value than was paid in the bidding
B)Get more value than was paid in the bidding
C)On average pay an amount equal to the product's true value
D)Win the bid if he takes the average of his best estimate of the starting bid and the items true value

Question 26

Your utility function is given by U = M^1/2.What is the expected utility of the following coin toss: heads you win $81, tails you win $100?

A)90.5
B)19
C)9.5
D)0

Question 27

For a large group of individuals, the proportion of people who will have accidents is

A)extremely predictable.
B)extremely unpredictable
C)always constant
D)extremely unstable

Question 28

What is the maximum you would pay security to check in your bike?

Question 29

Your bike is worth $100 and if you park it outside at school there is a 25% chance that it will be stolen.Your utility function for money is U = (money)².Are you a risk taker?

Question 30

Megan is trying to decide whether to buy house insurance for her home in Miami.Her house is worth $200,000 and analysts have determined that the average loss from a Hurricane could be $45,000.They have also determined there is a 50 percent chance that she will face a hurricane.Suppose Megan is a risk averse person with a utility-of-income function such as the one given above.If the policy costs $22,500, Megan will

A)Buy the insurance
B)Not buy the insurance
C)Be indifferent between buying or not buying the insurance
D)We can't say

Question 31

Your utility function is given by U = M².You are

A)Risk averse
B)Risk neutral
C)A risk seeker
D)At is impossible to say

Question 32

(Appendix) If the cost of search is $3, and wages are uniformly distributed between $20 and $50, what is the smallest wage you should accept if you are risk neutral?

A)$36.58
B)$33.42
C)$46.58
D)28.73

Question 33

Your utility function is given by U = M^1/2.You have a choice: take $100 in cash or flip a coin.If you flip a coin, the outcomes are as follows: heads, you win $225; tails, you win $49.You will

A)Take the $100 in cash
B)Take the gamble
C)Be indifferent between the cash and the gamble
D)It is impossible to say with the information given

Question 34

What is the expected value of your bike in the scenario described in the question above?

Question 35

(Appendix) If you have an offer of $10/hour and the relevant range of offers is $5/hour to $15/hour with the offers proportionately distributed across the range, what is your expected gain from engaging in a search for another offer?

A)$2.50
B)$1.25
C)Zero
D)$5.00

Question 36

You are given the following gamble: behind one door is $500; behind another is $100; behind another is $0.What is the expected value of the gamble?

A)$600
B)$200
C)$300
D)We need more information in order to answer

Question 37

When a trading opportunity is presented to a heterogeneous group of potential traders, those who accept it will be often:

A)worse-on the average, than those who do not accept it.
B)better, on average, than those who do not accept it
C)no different than those who do not.
D)smarter, on average, than those who do not accept it than those who do not.

Question 38

You are thinking of buying a new computer.Before purchasing a particular model, you have decided to gather some information about all the computer models available to you.The amount of information you collect should only be dependent on:

A)The cost of the information
B)How much you want the computer
C)How much information you are able to find
D)The cost of the information and on how much you want the computer

Question 39

Campus security has a bike check in that will guard your bike for $15 so there will be no risk of loss.Do you take the campus security deal?

Question 40

If the slope of a person's utility function for different money prizes is linear, the person

A)Is risk averse
B)Is a risk lover
C)Is indifferent to risk
D)We can't really say

Question 41

Now suppose your utility function for money is

Question 42

What is the maximum you will pay the campus security for the safekeeping service now?

Question 43

What is the maximum you will pay for the bike check-in now?

Question 44

Evaluate computer database dating services in terms of efficiency.Why have many people avoided these services despite their vast amounts of information? Why might these services become more popular in the future?

Question 45

Using the simple supply and demand model for the information market, show what the full disclosure principle does to the market.Start from an equilibrium point and apply the concept.