Deck 12: The Economics of Information

Question 1

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The expected value of project C is:

A) $5.
B) $10.
C) $20.
D) None of the answers are correct.

Answer 1

None of the answers are correct.

Question 2

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The expected value of project A is:

A) $5.
B) $10.
C) $20.
D) None of the preceding statements is correct.

Answer 2

$5.

Question 3

_______ occurs when people smoke more after buying life insurance.

A) Adverse selection
B) Moral hazard
C) Asymmetric information
D) Cournot and Bertrand competition

Answer 3

B

Question 4

In the presence of ______,the market mechanism can break down.

A) extensive form games
B) normal form games
C) common knowledge
D) asymmetric information

Question 5

Joe's search costs are $5 per search.He wants to buy a video player for his wife for Christmas,and the lowest price he's found so far is $300.Joe thinks 80 percent of the stores charge $300 for video players and 20 percent charge $200.Joe's optimal decision is to:

A) continue to search for a lower price since the expected benefit of an additional search is $20, which exceeds his per-unit search costs.
B) stop searching and purchase a video player for $200.
C) continue to search for a lower price since the expected benefit of an additional search is $80, which exceeds his per-unit search costs.
D) None of the preceding statements is correct.

Question 6

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ Which project has the greatest expected value?

A) A
B) B
C) C
D) D

Question 7

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The expected value of project D is:

A) $5.
B) $10.
C) $20.
D) None of the answers are correct.

Question 8

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ Which project yields the greatest return,regardless of whether a boom or a recession occurs?

A) A
B) B
C) C
D) D

Question 9

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ Which project has the greatest variance?

A) A
B) B
C) C
D) D

Question 10

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The variance in the returns of project A is:

A) 900.
B) 225.
C) 0.
D) 1,600.

Question 11

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ A risk-averse manager will prefer project:

A)A.
B)B.
C)C.
D)D.

Question 12

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ Which project has the lowest variance?

A) A
B) B
C) C
D) D

Question 13

Suppose a risk-neutral competitive firm must set output before it knows for sure the market price.Suppose the market price is given by p = p* + e,where p* is the mean price and e is a random term with an expected value of zero.Then in order to maximize expected profits,the firm should produce where:

A) p = MC.
B) p* = MC.
C) p* + e = MC.
D) p > MC.

Question 14

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ Which project has the lowest expected value?

A) A
B) B
C) C
D) D

Question 15

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ A risk-neutral manager will prefer project:

A)A.
B)B.
C)C.
D)D.

Question 16

Joe's search costs are $5 per search.He wants to buy a video player for his wife for Christmas,and the lowest price he's found so far is $200.Joe thinks 50 percent of the stores charge $200 for video players and 50 percent charge $190.Based on this information:

A) Joe should search again.
B) Joe should stop searching and purchase the video player at $200.
C) Joe is indifferent between searching again and stopping.
D) There is insufficient information to make a determination.

Question 17

Suppose a risk-neutral competitive firm must produce output before the market price is known.If the uncertain price is given by p = p* + e,where e is a random term with an expected value of zero,a competitive firm should shut down in the short run if:

A) p* < AVC.
B) p* + e < AFC.
C) p* < AFC.
D) p* < MC.

Question 18

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ A risk-averse manager will prefer project:

A)A.
B)B.
C)C.
D)D.

Question 19

To maximize profit in the face of uncertainty,firms should produce the output where:

A) expected price equals expected marginal cost.
B) expected marginal revenue equals marginal cost.
C) expected marginal revenue equals expected marginal cost.
D) expected price equals marginal cost.

Question 20

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The expected value of project B is:

A) $5.
B) $10.
C) $20.
D) None of the answers are correct.

Question 21

Which of the following phenomena shows that risk aversion is the characteristic of many people?

A) Gambling
B) Looting
C) Investing in one stock rather than a portfolio
D) Auto insurance

Question 22

Risk-averse persons sometimes prefer to play some gambles even if they know that those gambles are not fair,i.e.,on average people lose by playing them.One plausible explanation for this seemingly paradoxical phenomenon is that:

A) The economic theory of uncertainty is not correct.
B) Gambling has entertaining effects which are not treated explicitly as part of the payoffs.
C) People's actions are not reasonable.
D) None of the preceding statements is correct.

Question 23

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= .01Q².If the farmer is risk neutral:

A) he strictly prefers producing the expected profit-maximizing quantity to producing nothing.
B) he is indifferent between producing the expected profit-maximizing quantity and producing nothing.
C) he should produce at a quantity in between zero and the expected profit-maximizing quantity.
D) he strictly prefers to produce.

Question 24

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= 0.01Q².The farmer's maximum expected profit is:

A) −$7.75.
B) $0.
C) $7.75.
D) None of the answers are correct.

Question 25

Which of the following is a possible critique of the decision theory under uncertainty presented in the text?

A) People do not always know the "true" probability of complicated events.
B) Decision theory assumes that people are good at math.
C) Decision theory assumes that people face the same situation (uncertainty) repeatedly.
D) People are not risk averse.

Question 26

Suppose option A has a higher variance than option B.Which of the following statements is,in general,true?

A)A risk-neutral person is indifferent between options A and B.
B)A risk-averse person prefers option B to option A.
C)A risk-averse person prefers option A to option B.
D)There is insufficient information to determine which is true.

Question 27

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The variance in the returns of project B is:

A) 900.
B) 225.
C) 0.
D) 1,600.

Question 28

Jane wants to buy a beautiful doll as a gift for her sister's birthday.She knows that the same product is offered in different shops with prices of $120,$100,and $80 with odds of one-third of finding each price.She just stopped at a shop and knows that the price is $100.If the search cost is $8 per time,what should she do?

A) Search once more and decide again upon knowing the price.
B) Accept the offer in hand.
C) She should toss a coin.
D) Insufficient information to determine.

Question 29

Which of the following statements is NOT correct?

A) Information plays an important role in the economy.
B) Asymmetric information may lead to the disappearance of a market.
C) It is always desirable to have more information than the person one is trading with.
D) Adverse selection will not occur if there is no asymmetric information.

Question 30

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The variance in the returns of project D is:

A) 900.
B) 225.
C) 0.
D) 1,600.

Question 31

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= 0.01Q².What is the expected price in the world apple market?

A) $1.50
B) $1.80
C) $2.00
D) $1.40

Question 32

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ If a manager adopted both project A and B simultaneously,the variance in returns associated with this joint project would be:

A) 0.
B) 10.
C) 30.
D) 500.

Question 33

A fair coin is flipped.You will be paid $1 when it is heads and penalized $1 otherwise.What is the variance of the payoffs?

A) 0.
B) 1.
C) 0.50.
D) 0.25.

Question 34

An incumbent usually charges a higher price than a new entrant does.Which of the following is a plausible reason for this observation?

A) An incumbent usually has a bigger bureaucratic body than a new entrant does and hence has a higher marginal cost.
B) Consumers are risk averse, hence new firms charge lower prices to attract customers.
C) The incumbent is ignorant of the new entrant, hence it is still charging the old high price.
D) All of the statements associated with this question are correct.

Question 35

Jane wants to buy a beautiful doll as a gift for her sister's birthday.She knows that the same product is offered in different shops with prices of $120,$100,and $80 with odds of one-third of finding each price.She just stopped at a shop and knows that the price is $100.Suppose that there is a search cost of $5 for each search.Should she search one more time?

A) Yes
B) No
C) She should toss a coin.
D) Insufficient information to determine.

Question 36

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ The variance in the returns of project C is:

A) 900.
B) 225.
C) 0.
D) 1,600.

Question 37

Tim is offered two gambles.With gamble A,he either gains $2 or loses $1 with a 50 percent probability.With gamble B,he either gains $3 or loses $2 with a 50 percent probability.Tim prefers gamble B to gamble A.What can we conclude?

A) Tim is risk loving.
B) Tim is risk neutral.
C) Tim is risk averse.
D) Insufficient information to determine.

Question 38

After a person buys insurance for his car,he will generally not care for his car as much as he otherwise would.This is an example of:

A) adverse selection.
B) moral hazard.
C) risk aversion.
D) None of the preceding statements is correct.

Question 39

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= 0.01Q².The expected profit-maximizing quantity is:

A) 0.
B) 90.
C) 75.
D) 150.

Question 40

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ If a manager adopted both project A and B simultaneously,the expected value of this joint project would be:

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

Question 41

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array}$$ Suppose that both buyers and sellers observe the quality.What happens?

A) Both good and bad cars are traded.
B) Only good cars are traded.
C) Only bad cars are traded.
D) Neither good nor bad cars are traded.

Question 42

To avoid the winner's curse,a bidder should:

A) not participate in Dutch auctions.
B) only participate in second-price and English auctions.
C) revise upward his private estimate of the value of the item.
D) revise downward his private estimate of the value of the item.

Question 43

People with a bad driving record find it difficult to buy automobile insurance because insurance companies fear that ___________ may happen if they raise the premiums.

A) adverse selection
B) moral hazard
C) risk aversion
D) none of the statements associated with this question are correct

Question 44

Which of the following auction examples has a common value information structure?

A) Three firms bid for an oil lease.
B) An auction of a famous painting.
C) A college in need of money decides to name a building on campus after the person willing to pay the most for the privilege.
D) An auction of a famous painting and a college in need of money decides to name a building on campus after the person willing to pay the most for the privilege.

Question 45

John is a seller in an independent private-values auction environment where bidders are risk neutral.Which auction yields John the greatest expected revenue?

A) English
B) First price
C) Second price
D) All of the choices are revenue equivalent.

Question 46

If insurance companies are required to offer coverage to all interested people,it is said that premiums for each person will be increased.Assume that the insurance market is perfectly competitive.What is the major reason for raising the premium?

A) The insurance companies take advantage of the increased demand and collude.
B) Medical services are more expensive because of increased demand.
C) Less healthy people join the pool of insured and hence increase the risk and the premium.
D) None of the preceding statements is correct.

Question 47

The winner's curse occurs:

A) only in English auctions.
B) only in second-price, sealed-bid auctions.
C) in a common-values auction.
D) in a private-values auction.

Question 48

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array}$$ When buyers do not observe the quality,what happens in the market?

A) Both good and bad cars are traded.
B) Only good cars are traded.
C) Only bad cars are traded.
D) Neither good nor bad cars are traded.

Question 49

Which of the following statements is NOT true?

A) The Dutch and first-price, sealed-bid auctions are strategically equivalent.
B) A mineral rights auction is a common value auction.
C) An auctioneer is always indifferent between different kinds of auctions.
D) An English auction yields higher expected revenues than a second-price, sealed-bid auction when bidders are risk averse.

Question 50

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array}$$ When a buyer does not observe the quality,what is the highest price she will offer for a used car if she ignores adverse selection?

A) $2,500
B) $3,000
C) $4,000
D) $4,500

Question 51

When each bidder in an auction knows what the item is worth to that bidder,but does not know the valuations of other bidders,the auction exhibits:

A) perfect information.
B) common values.
C) private values.
D) partially private values.

Question 52

Which of the following types of auctions was NOT described in the text?

A) English auction
B) Second-price sealed bid auction
C) Third-price sealed bid auction
D) Dutch auction

Question 53

A consumer spends more time searching for a good when her reservation price is:

A) increased.
B) reduced.
C) fixed.
D) None of the preceding statements is correct.

Question 54

Which of the following is a means of eliminating the undesirable effects of adverse selection?

A) A long-term relationship
B) Writing a contract to guarantee the quality
C) Both a long-term relationship and writing a contract to guarantee the quality
D) None of the preceding statements is correct.

Question 55

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array}$$ Now suppose that sellers value a good car at $4,500 and a bad car at $2,500,and quality is not observed by the buyers.What is the highest price that risk-neutral buyers will offer for a used car if they recognize adverse selection?

A) $2,500
B) $3,000
C) $4,000
D) $4,500

Question 56

Which of the following is a feature of a Dutch auction?

A) The auctioneer begins with a very high asking price.
B) The winner pays the second-highest bidder's valuation.
C) Bidders write their valuation in a paper simultaneously and separately.
D) More than one bidder will announce their valuation.

Question 57

John is a seller in an affiliated-values auction environment where bidders are risk neutral.Which auction yields John the greatest expected revenue?

A) English
B) First price
C) Second price
D) All of the choices are revenue equivalent.

Question 58

Holding the mean constant,the larger the standard deviation,the ____________ the gamble will be.

A) more risky
B) less risky
C) higher utility
D) None of the preceding statements is correct.

Question 59

The optimal bid in a first-price,sealed-bid auction with independent private values is to bid:

A) the true value of the item.
B) more than the true value of the item.
C) less than the true value of the item.
D) the true value of the item and more than the true value of the item, depending upon whether value estimates are affiliated.

Question 60

The optimal strategy for a risk-neutral bidder in a second-price,sealed-bid auction with independent private values is to bid:

A) slightly less than his or her valuation.
B) slightly higher than his or her valuation.
C) his or her true valuation.
D) None of the preceding statements is correct.

Question 61

A risk-neutral monopoly must set output before it knows the market price.There is a 50 percent chance the firm's demand curve will be P = 20 − Q and a 50 percent chance it will be P = 40 − Q.The marginal cost of the firm is MC = Q.The profits are maximized in the expected sense when:

A) Expected value of price = E(MR).
B) MC = Expected value of price.
C) MC < E(MR).
D) MC = E(MR).

Question 62

Which of the following phenomena shows that risk aversion is the characteristic of many people?

A) The popularity of high-stakes poker tournaments
B) Horse-race betting
C) Investing in one stock rather than a portfolio
D) Homeowners insurance

Question 63

A risk-neutral monopoly must set output before it knows the market price.There is a 50 percent chance the firm's demand curve will be P = 20 − Q and a 50 percent chance it will be P = 40 − Q.The marginal cost of the firm is MC = Q.The expected profit-maximizing price is:

A) $5.
B) $10.
C) $15.
D) $20.

Question 64

When managers of firms are given fixed salaries,which are not tied to the firm's profits,they generally put forth less effort than they otherwise would.This is an example of:

A) adverse selection.
B) moral hazard.
C) risk aversion.
D) None of the answers are correct.

Question 65

Consider an antique auction where bidders have independent private values.There are two bidders,each of whom perceives that valuations are uniformly distributed between $100 and $1,000.One of the bidders is Sue,who knows her own valuation is $200.What is Sue's optimal bidding strategy in a first-price,sealed-bid auction?

A) Submit a bid of $150.
B) Submit a bid of $200.
C) Submit a bid that is less than $150.
D) Yell "mine" when the bid reaches $150.

Question 66

A risk-neutral monopoly must set output before it knows the market price.There is a 50 percent chance the firm's demand curve will be P = 20 − Q and a 50 percent chance it will be P = 40 − Q.The marginal cost of the firm is MC = Q.What is the expression for the expected marginal revenue function?

A) E(MR) = 20 − 2Q
B) E(MR) = 30 − 2Q
C) E(MR) = 40 − 2Q
D) E(MR) = 50 − 2Q

Question 67

Which of the following statements is true?

A) A mineral rights auction is not the same as a common-value auction.
B) An auctioneer is always indifferent between different kinds of auctions.
C) The Dutch and first-price, sealed-bid auctions are strategically equivalent.
D) An English auction always yields lower expected revenues than a second-price, sealed-bid auction.

Question 68

Consumers spend a lot more time searching for good bargains during recessions because:

A) goods are more expensive during recessions and hence expected benefits of a search are higher.
B) in recessions, many individuals are out of work, which lowers their opportunity cost of time.
C) goods are more expensive during recessions and hence expected benefits of a search are higher and in recessions, many individuals are out of work, which lowers their opportunity cost of time.
D) None of the preceding statements is correct.

Question 69

You are a hotel manager considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 40 & - \$ 20 \\\hline \text { B } & - \$ 10 & \$ 30 \\\hline \text { C } & \$ 50 & - \$ 50 \\\hline \text { D } & \$ 60 & \$ 60 \\\hline\end{array}$$ Which of the following statements is true?

A)A risk-neutral manager will prefer project D.
B)A risk-averse manager will prefer project D.
C)A risk-loving manager will prefer project D.
D)All of the statements are correct.

Question 70

Consider an antique auction where bidders have independent private values.There are two bidders,each of whom perceives that valuations are uniformly distributed between $100 and $1,000.One of the bidders is Sue,who knows her own valuation is $200.What is Sue's optimal bidding strategy in an English auction?

A) Submit a bid of $150.
B) Submit a bid of $200.
C) Submit a bid that is less than $150.
D) Keep bidding until the bid exceeds $200.

Question 71

Consider an antique auction where bidders have independent private values.There are two bidders,each of whom perceives that valuations are uniformly distributed between $100 and $1,000.One of the bidders is Sue,who knows her own valuation is $200.What is Sue's optimal bidding strategy in a Dutch auction?

A) Submit a bid of $150.
B) Submit a bid of $200.
C) Submit a bid that is less than $150.
D) Yell "mine" when the bid reaches $150.

Question 72

A risk-neutral monopoly must set output before it knows the market price.There is a 50 percent chance the firm's demand curve will be P = 20 − Q and a 50 percent chance it will be P = 40 − Q.The marginal cost of the firm is MC = Q.The expected profit-maximizing quantity is:

A) 5.
B) 10.
C) 15.
D) 20.

Question 73

You are a hotel manager considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 40 & - \$ 20 \\\hline \text { B } & - \$ 10 & \$ 30 \\\hline \text { C } & \$ 50 & - \$ 50 \\\hline \text { D } & \$ 60 & \$ 60 \\\hline\end{array}$$ The expected value of project A is:

A) $5.
B) $10.
C) $20.
D) None of the answers are correct.

Question 74

Consider an antique auction where bidders have independent private values.There are two bidders,each of whom perceives that valuations are uniformly distributed between $100 and $1,000.One of the bidders is Sue,who knows her own valuation is $200.What is Sue's optimal bidding strategy in a second-price,sealed-bid auction?

A) Submit a bid of $150.
B) Submit a bid of $200.
C) Submit a bid that is less than $150.
D) Yell "mine" when the bid reaches $150.

Question 75

Which of the following statements is NOT correct about information?

A) It is always desirable for some people to have more information than others.
B) Adverse selection will not occur if there is full information given to all market participants.
C) Information plays an important role in how the economy functions.
D) Asymmetric information may lead to the disappearance of a market.

Question 76

Which of the following is a feature of a Dutch auction?

A) The auctioneer begins with a very low asking price.
B) The winner pays exactly what she bid for the item.
C) Bidders simultaneously write their valuations on paper and submit them independently.
D) Several bidders will announce their valuations.

Question 77

You are a hotel manager considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 40 & - \$ 20 \\\hline \text { B } & - \$ 10 & \$ 30 \\\hline \text { C } & \$ 50 & - \$ 50 \\\hline \text { D } & \$ 60 & \$ 60 \\\hline\end{array}$$ Which project has the highest variance?

A) A
B) B
C) C
D) D

Question 78

Your firm is planning to hold an auction to sell its oil field.What type of auction should you suggest to your boss?

A) Dutch auction
B) English auction
C) Second-price, sealed-bid auction
D) None of the preceding statements is correct.

Question 79

In order to reduce the undesirable effects of moral hazard,an insurance company can:

A) introduce a deductible.
B) classify clients into different types according to their history.
C) reject the renewal of policies of those people with really bad records.
D) All of the statements associated with this question are correct.

Question 80

You are a hotel manager considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% )\end{array} & \begin{array} { l } \text { Recession } \\( 50 \% )\end{array} \\\hline \text { A } & \$ 40 & - \$ 20 \\\hline \text { B } & - \$ 10 & \$ 30 \\\hline \text { C } & \$ 50 & - \$ 50 \\\hline \text { D } & \$ 60 & \$ 60 \\\hline\end{array}$$ If a manager adopted both project A and project B simultaneously,the expected value of this joint project would be:

A) $20.
B) $30.
C) $40.
D) None of the statements are correct.