Deck 17: Markets With Asymmetric Information

Question 1

When sellers have more information about products than buyers do,we would expect

A)sellers to get higher prices for their goods than they could otherwise.
B)buyers to pay lower prices for goods than they would otherwise.
C)high-quality goods to drive low-quality goods out of the market.
D)low-quality goods to drive high-quality goods out of the market.

Answer 1

D

Question 2

If grades are to be a successful signal to potential employers of a student's qualities,then higher grades must be

A)easier for high-productivity students to earn than for low-productivity students to earn.
B)easier for low-productivity students to earn than for high-productivity students to earn.
C)easy for employers to check.
D)used for all future promotions within the firm.
E)often referred to in the hiring process.

Answer 2

A

Question 3

Assume that both high and low quality appliances are sold in the used appliance market.If we assume asymmetric information with sellers having more information regarding quality than buyers,which of the following is necessarily true? The

A)fraction of high quality appliances will be greater than under perfect knowledge.
B)fractions of high and low quality appliances will be the same as with perfect information.
C)fraction of high quality appliances will be less than with perfect information.
D)none of the above

Answer 3

C

Question 4

John is a 55-year-old male smoker,about 50 pounds overweight,who has high blood sugar and drinks to excess a couple of times each month.Because of adverse selection in health insurance,

A)John is less likely to buy health insurance than the average person,because the average person's policy premiums will be based on his risk,not the average risk.
B)John is more likely to buy health insurance than the average person,because his policy premiums will be based on the average risk,not his personal risk.
C)when John gets health insurance,he will be less likely to take care of himself.
D)when John gets health insurance,he will be more likely to take care of himself.
E)if John doesn't have health insurance already,he will not be able to get it.

Question 5

When firms participate in group health insurance for all employees,it

A)raises rates for everyone,because it brings unhealthy people into the pool.
B)raises rates for unhealthy people.
C)may lower rates for all people to the extent that it keeps healthy people in the pool.
D)prevents unhealthy people from "selecting out," to the detriment of healthy people.
E)increases the amount of information available to insurers about the population.

Question 6

How do online auction sites like Ebay attempt to overcome the asymmetric information problems associated with goods that the buyer cannot personally inspect before purchase?

A)The online auction firm only allows high-quality merchandise to be sold at their site.
B)The previous performance (reputations)of the buyer and seller are posted for public review.
C)Buyers can take receipt of any goods before they have to pay the seller.
D)all of the above

Question 7

When states make car insurance mandatory for all drivers,it

A)raises rates for everyone because it brings bad drivers into the pool.
B)raises rates for high-risk drivers.
C)may lower rates for all drivers to the extent that it keeps low-risk drivers in the pool.
D)prevents high-risk drivers from "selecting out," to the detriment of low-risk drivers.
E)increases the amount of information available to insurers about the population.

Question 8

The problem of adverse selection in health insurance leads to a situation in which

A)health insurance covers inappropriate items for the population it serves.
B)overinsurance of the premium-paying population occurs.
C)underinsurance of the premium-paying population occurs.
D)the percentage of the premium-paying population that is healthy rises,squeezing unhealthy individuals out of the market.
E)the percentage of the premium-paying population that is unhealthy rises,squeezing healthy individuals out of the market.

Question 9

Credit histories allow firms to

A)identify high-risk borrowers,so they can be eliminated and interest rates kept down for others.
B)increase the number of credit cards issued,and interest rates go up as a result.
C)increase the number of credit cards issued,and interest rates go down as a result.
D)lower the number of credit cards issued,and interest rates go up as a result.
E)increase market power in the credit card industry,raising interest rates.

Question 10

Julia is a 28-year-old nonsmoking,non-drinking female of normal weight.Because of adverse selection in health insurance,

A)She will be charged less for her premiums than people who are higher risks.
B)She is less likely to buy health insurance than the average person,because policy premiums are based on expected medical expenditures of people who are less healthy than she is.
C)When she get health insurance,she will be less likely to take care of herself.
D)She must get health insurance early in life,and is likely to lose health insurance if she smokes,drinks to excess,or gains weight.
E)She is more likely than the average person to buy health insurance,because she is more likely to be offered it.

Question 11

When asymmetric information problems drive high quality products from a market,we refer to this situation as:

A)adverse selection.
B)moral hazard.
C)a lemons problem.
D)A and C are correct.
E)B and C are correct.

Question 12

Medical histories used by insurance firms allow them to

A)identify high-risk people,so they can be denied insurance and premiums kept down for low risk people.
B)increase the number of policies issued,raising premiums as a result.
C)increase the number of policies issued,lowering premiums as a result.
D)lower the number of policies issued,raising premiums.
E)increase market power in the insurance industry,raising premiums.

Question 13

In the arena of asymmetric information,standardization (for example,menus at McDonald's restaurants)is a substitute for

A)quality.
B)government regulation.
C)reputation of individual sellers.
D)firms' distinguishing among buyers.
E)firms' segregation of buyers.

Question 14

Consider a market in which high-quality and low-quality television sets are sold.Before consumers make a purchase,they do not know the quality of the sets,but the sellers do know.As compared to a situation where both consumers and sellers know the quality of the sets,this situation would

A)cause no change in the ratio of low to high-quality sets sold.
B)increase the fraction of high-quality sets sold.
C)increase the fraction of low-quality sets sold.
D)cause the average price of goods sold to rise.

Question 15

Which of the following represent examples of adverse selection?

A)Unhealthy people are more likely to want health insurance.
B)Careless drivers purchasing extra auto insurance.
C)Risk averse individuals choosing to buy extra insurance.
D)all of the above
E)A and B only

Question 16

Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition.He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons.As a result:

A)he should be able to sell my car at a premium price because of its excellent condition.
B)he will have to accept a lower price for his car because buyers might think that it is a lemon.
C)he will not be able to sell his car unless he offers some sort of guarantee.
D)he will get the best price for his car by selling it to a dealer.

Question 17

The problem of adverse selection in insurance results in a situation in which

A)people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies.
B)people choose too much coverage because they do not understand the complex information in the policies.
C)people choose too little coverage because they do not understand the complex information in the policies.
D)unhealthy people become more likely to buy insurance than healthy people,which drives premiums up,which drives even more healthy people away from the market.
E)healthy people become more likely to buy insurance than unhealthy people,which drives premiums up,which drives even more unhealthy people away from the market even though they are the ones who need it most.

Question 18

Assume that a particular state has decided to outlaw the sharing of individuals' credit histories as an illegal invasion of privacy.As a result of this action we would expect the

A)cost of borrowing money to rise.
B)number of loans to unworthy credit risks to rise.
C)problems of asymmetric information to become more severe.
D)all of the above
E)none of the above

Question 19

You want to add a new room on your house,but you are not familiar with the local building contractors and are not sure who to consider for the job.If you ask your friends for referrals,you are using their past experience as a way to evaluate the __________ of the builders.

A)efficiency wages
B)moral hazard
C)asymmetric information
D)reputation

Question 20

Used cars sell for much less than new cars because

A)of imperfect competition in the automobile industry.
B)buyers know much more about the quality of used cars than sellers do.
C)sellers know much more about the quality of used cars than buyers do.
D)physical depreciation of used cars is very high.
E)of licensing arrangements by the government.

Question 21

Which of the following is TRUE about a college education as a signaling device?

A)It is a useful signal only if individuals choose majors related to their ultimate field of employment.
B)It is a useful signal only if a college education is open to all individuals,no matter what their previous level of educational accomplishment was.
C)It is a useful signal whether or not people actually learn anything in college.
D)It is a useful signal only if the job in question cannot be done without the preparatory coursework the college degree required.
E)It is less and less a useful signal in the post-industrial economy,where the skill sets employers need change so rapidly.

Question 22

When a moral hazard problem exists for automobile driving,the marginal cost of driving

A)is lowered,and the amount of driving done is raised above the efficient level.
B)is lowered,and the amount of driving done is lowered below the efficient level.
C)is raised,and the amount of driving done is raised above the efficient level.
D)is raised,and the amount of driving done is lowered below the efficient level.
E)is raised above the efficient level,but market forces keep the total amount of driving is kept at the efficient level.

Question 23

The process by which sellers send signals to buyers conveying information about product quality is known as:

A)asymmetric information.
B)market signaling.
C)a lemons problem.
D)moral hazard.

Question 24

Because the presence of a warranty for a good is a signal that the good is of high quality,

A)consumers are willing and able to pay more for a good that carries a warranty.
B)consumers are willing to buy goods if and only if the goods come with warranties.
C)producers do not need to charge extra for warranties.
D)producers can use warranties to sort out high-risk customers.
E)producers must make warranties available on all goods.

Question 25

A warranty is most valuable as a signaling device when

A)the buyer has much more information about the product than the seller does.
B)the seller has much more information about the product than the buyer does.
C)the buyer has much more information about his or her own preferences than the seller does.
D)neither the buyer nor the seller has good information about the product.
E)neither the buyer nor the seller has good information about consumer preferences.

Question 26

Job market signals like dressing well for interviews are not especially effective because:

A)the cost of dressing well is about the same for high-quality and low-quality workers.
B)many businesses have adopted casual office attire,so dressing well is not important to the firm.
C)federal labor laws prohibit firms from using dress or appearance as an employment criterion.
D)none of the above

Question 27

In insurance markets,moral hazard creates economic inefficiency because:

A)insurance companies are price setters rather than price takers.
B)insurance products are not homogenous goods.
C)there are many buyers but only a few sellers.
D)insured individuals do not correctly perceive the costs or benefits of their actions.

Question 28

Managers' pursuit of which of the following objectives would NOT lead to a principal-agent problem in a corporation?

A)The corporation's growth
B)Increased market share for the corporation
C)The maximum possible profit for the corporation
D)A great "golden parachute" or retirement package
E)Increased current salary and fringe benefits

Question 29

Which of the following job market signals are less costly for high-quality workers to send than low-quality workers?

A)Spending long hours at the office
B)Sending emails to coworkers and supervisors at night and on weekends
C)Leaving voice-mail message for colleagues before or after regular business hours
D)all of the above

Question 30

If the moral hazard problem in automobile driving were to be eliminated,the marginal cost of driving would be

A)lowered enough to pull the amount of driving back down to the efficient level.
B)lowered enough to raise the amount of driving back up to the efficient level.
C)raised enough to pull the amount of driving back down to the efficient level.
D)raised enough to raise the amount of driving back up to the efficient level.
E)lowered back down to the efficient level,relieving the stress on market forces.

Question 31

The principal-agent problem in corporations exists because the managers of a firm

A)may pursue their own goals even when the result is lower profit for owners.
B)may know how to operate the business better than absentee owners do,and yet not be allowed to.
C)are generally unable to do the monitoring that would result in the firm's avoiding moral hazard problems.
D)are generally unable to do the monitoring that would result in the firm's avoiding adverse selection.
E)are generally unable to monitor workers,who do not care about the profits due the managers.

Question 32

Traditionally,the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood.However,the government has recently denied requests to rebuild some homes that were situated in flood-prone areas.This action represents an attempt to __________ the moral hazard problem associated with building private homes in risky areas.

A)enhance
B)mitigate
C)legalize
D)support

Question 33

A bumper-to-bumper warranty on a used car is a signaling device that

A)identifies a high-quality car as a high-quality car,because putting such a warranty on a low-quality car would be prohibitively costly.
B)disguises a low-quality car as a high-quality car,and thus makes it easier to sell.
C)is necessary in order to sell a low-quality car at all.Without it no one would risk buying the car.
D)isn't necessary if there is a mix of high-quality and low-quality cars in the market.
E)helps sellers determine whether the buyer is truly looking for a high-quality car.

Question 34

Over the past several years,the federal government has rescued a few financially distressed banks and other large private companies,and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem.However,critics of these interventions argue that these actions generate a moral hazard problem.Why?

A)Government oversight of rescued firms is typically based on limited information,so the outcome is economically inefficient.
B)Rescued firms will have a difficult time buying insurance in private markets,so the government will also have to insure the firm against losses from fire,theft,etc.
C)Managers have more information about the financial strength of their firm than government officials,so the rescue attempts may be unnecessary.
D)Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure.

Question 35

Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers?

A)Provide medical coverage to all drivers,their passengers,and any and all individuals involved in the accident,no matter who was at fault.
B)Provide medical coverage and car repair/replacement coverage to drivers,their passengers,and any and all individuals involved in the accident,no matter who was at fault.
C)Modify all cars to remove the driver's seat belt and the steering wheel air bag.
D)Pass a law limiting the amount of damages that juries may award in accident cases.
E)Make automobile insurance mandatory for all drivers.

Question 36

Which of the following is TRUE about producers' willingness to offer warranties on products?

A)Producers are equally likely to offer warranties on high-quality and low-quality goods.
B)Producers are more likely to offer warranties on low-quality goods,because without the signal that the warranty provides,the low-quality good wouldn't sell.
C)Producers are more likely to offer warranties on high-quality goods,because the expected cost of repairs is lower for those goods.
D)Producers have an incentive to deal with third-party companies to provide the warranties,so that an "impartial" view of the product is given to the consumer.
E)Producers will not offer warranties in any market that suffers from asymmetric information.

Question 37

The principal-agent problem of ownership vs.control of the corporation arises when owners and managers

A)are the same people.
B)pursue objectives that differ from those their customers wish them to pursue.
C)pursue objectives that differ from those their workers wish them to pursue.
D)pursue objectives that differ from those the government wishes them to pursue.
E)pursue different objectives.

Question 38

In the insurance market,"moral hazard" refers to the problem that

A)insurers can't tell high-risk customers from low-risk customers.
B)high-risk customers have an incentive to give false signals to make themselves look like low-risk customers.
C)companies may unfairly lump individuals together by race,sex,age or other characteristics in an attempt to use demographic data to pinpoint high-risk populations.
D)individuals are willing and able to pay different amounts for insurance,but must all be charged the same amount.
E)individuals may change their behavior after the insurance is bought,so that they behave in a more high-risk manner than they did before.

Question 39

The completion of a degree or course of study is a good labor market signal

A)only if what is learned in that educational process relates directly to the job the individual is being considered for.
B)only if there is a positive correlation between academic success and wage income.
C)primarily because individuals develop good habits in college that serve them well in other areas later on.
D)because all individuals have the opportunity (in the United States)to pursue higher education.
E)because people who possess the traits that make them more productive in the workplace have an easier time completing an education than those who don't.

Question 40

Which of the following statements is NOT a reason that the cost of a college education is greater for the low-productivity group than for the high-productivity group?

A)The wages they give up by going to college instead of working will tend to be higher for them.
B)They may have to pay for tutoring services or other extra help to accomplish the same educational goal.
C)They may have to take remedial classes,which would increase the length of time it takes to accomplish the same goal.
D)Even if they take no remedial classes,they may have to spend more time studying for each class,and the value of their leisure time needs to be considered in the calculation.
E)Based on previous signaling,such as from their high school grades or SATs,they may receive less merit-based financial assistance,and thus be under a greater financial strain during their college years.

Question 41

Suppose new electronic devices make it easier to monitor the effort levels of workers.If some shirking is still possible in the efficiency wage model,what happens to the level of unemployment?

A)Increases,but some unemployment remains
B)Increases,and the labor market reaches full employment
C)Decreases
D)Does not change

Question 42

The "no shirking constraint" (NSC)curve never crosses the supply of labor curve,so

A)the market never reaches equilibrium.
B)there is always full employment in equilibrium.
C)there is always some unemployment in equilibrium.
D)the efficiency wage is always lower than the market-clearing wage.
E)the gap between the NSC curve and the supply of labor curve equals the difference between the efficiency wage and the market-clearing wage.

Question 43

Firms that have several plants that produce the same or related products are said to be:

A)horizontally integrated.
B)vertically integrated.
C)conglomerates.
D)cooperatives.

Question 44

Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be:

A)horizontally integrated.
B)vertically integrated.
C)multinationals.
D)corporations.

Question 45

The "no shirking constraint" (NSC)curve is

A)downward-sloping to reflect the fact that at higher wages,firms will monitor workers more to see whether they are shirking.
B)downward-sloping to reflect the fact that shirking tends to be higher in lower-paying industries.
C)upward-sloping because at high levels of unemployment,workers will refrain from slacking without much other incentive.
D)upward-sloping because at high levels of employment,many "slacking" individuals have been hired.
E)vertical because the constraint represents the absolute amount of time a firm will tolerate workers' slacking without laying them off.

Question 46

The market for used cars in a particular region includes both high quality and low quality cars.High quality cars are sold primarily to quality sensitive customers,while low quality cars are sold to price sensitive buyers.The submarkets for high quality and low quality cars can be described by the supply and demand curves:
Q_D^H = 160,000 12.5P^H
Q_S^H = - 48,000 + 13.5P^H
Q_D^L = 110,000 - 12.5P^L
Q_S^L = 20,000 + 10P^L,
where Q_D^H,Q_S^H refer to the quantities demanded and supplied of high quality cars,Q_D^L,Q_S^L refer to the quantities demanded and supplied of low quality cars,P^H and P^L refer to the prices of high quality and low quality cars.All quantities are measured in cars per month,prices are measured in dollars.
a.Assuming that buyers and sellers are both able to distinguish low quality and
high quality cars,determine the price and quantity that will prevail in each
submarket.
b.Examine the case where sellers are able to accurately determine used car quality
but buyers are not.You may assume that buyers assume that all cars are of
average quality so that an average demand curve is appropriate.Determine the
price and quantity in each submarket.
c.Using diagrams,analyze the additional developments in the market until final
long run equilibrium is reached.You must describe the eventual outcome,but
no calculations are required for this part of the problem.

Question 47

Use the following statements to answer this question: I.Efficiency wage theory was developed to help explain persistent unemployment and wage discrimination in labor markets.
II)Efficiency wage theory recognizes that labor productivity may be affected by the wage rate.

A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

Question 48

Ford Motor Company was one of the first major companies to adopt a wage structure that is comparable to efficiency wages.What was the outcome of Ford's experiment with efficiency wages?

A)Lower labor force turnover
B)Higher labor productivity
C)Less absenteeism
D)all of the above

Question 49

Suppose new electronic devices make it easier to monitor the effort levels of workers.If some shirking is still possible in the efficiency wage model,what happens to the efficiency wage?

A)Declines,but remains above the competitive wage
B)Declines,and falls below the competitive wage
C)Increases
D)Does not change

Question 50

Suppose new electronic devices make it easier to monitor the effort levels of workers.What happens to the NSC curve in the efficiency wage model?

A)Shifts upward
B)Shifts downward
C)Remains the same
D)The NSC curve remains the same,and the labor supply curve shifts leftward because shirking workers will leave the labor force.

Question 51

As part of the most recent collective bargaining agreement with state employees,a state government must offer dental insurance at "reasonable,nonprofit rates." The state plans to self insure in place of using a private insurance company.Statistical evidence suggests that the average household currently spends $300 per year for corrective dental work and $80 for routine checkups.Administrative costs are expected to average $20 per family.The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of three years.The auditor considers the choice of the plan to be extremely important.Consequently,the auditor has asked you to evaluate the three proposals listed below in terms of their propensity to result in adverse selection and/or moral hazard.Proposal 1 would charge a $400 premium with no deductible.Coverage is extended to preexisting conditions,but to cover the nondeductible clause,routine checkups are not covered.Proposal 2 charges a $200 premium with a $200 deductible.The plan does not cover preexisting conditions,but does cover routine office visits.Proposal 3 charges a $150 premium with a $150 deductible.This plan doesn't cover preexisting conditions or routine checkups.The collective bargaining agreement dictates that participation in the plan must be at the employee's option.

Question 52

The "efficiency wage" is the wage at which

A)employees have no incentive to shirk.
B)employees have an incentive to do the optimal (positive)amount of shirking.
C)the cost of looking for work is equal to the value of the leisure time for the unemployed individual.
D)there is no unemployment.
E)there is only frictional unemployment.

Question 53

The efficiency wage is

A)lower than the market-clearing wage,to penalize shirking.
B)higher than the market-clearing wage,to penalize shirking.
C)lower than the market-clearing wage,to allow managers the resources to monitor shirking.
D)higher than the market-clearing wage,to reward workers for informing on others who shirk.
E)lower than the market-clearing wage,because of shirking done by managers.

Question 54

In this problem,a labor market exists where employers hire and pay workers according to how much formal education workers possess.Education is a proxy for the level of productivity that employers can expect from workers.Therefore,employers follow a strategy in which they hire workers and pay salaries according to the following conditions:
Degrees Above the Values of Post High School
High School Level Education During Working Life,B(y)
None 0
(y = 0 years)
Associate's Degree $30,000
(y = 2 years)
Bachelor's Degree $51,000
(y = 4 years)
Master's Degree $58,000
(y = 6 years)
Assume that there are only two types of worker abilities,those who are less productive (type L)and those who are highly productive (type H).The less productive workers have to study harder than highly productive workers in order to earn any degree.Consequently,the costs (including the psychic costs of study effort)of attaining various levels of education for these two types of employees are different.
For less productive workers: C_L(y)= $13,000y
For highly productive workers: C_H(y)= $10,000y
a.Draw a diagram with years of education on the horizontal axis.Graph the benefits to education B(y)and the costs of education for each of the two types of workers.Discuss what level of education each type of worker should obtain.
b.Now use the equations above to verify your answer from part (a)mathematically.
c.Explain the value of formal education above the high school level in the market place to employers.

Question 55

If all of the divisions in a vertically integrated firm are owned by the same company,why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

A)Divisions that produce parts for other divisions have effective monopoly power,so the outcome for these division must be inefficient.
B)This outcome is no longer possible in the U.S.after passage of the Sarbanes-Oxley law.
C)Vertically integrated firms are often subject to antitrust investigations,so managers routinely limit the amount of information that flows between divisions.
D)Managers in some divisions may not have information about production capacities or costs in related divisions.

Question 56

If individuals are paid the wage at which the supply of labor is equal to the demand for labor,

A)no unemployment exists,and workers have no incentive to shirk.
B)no unemployment exists,and workers have an incentive to shirk.
C)some unemployment still exists,but workers have no incentive to shirk.
D)some unemployment still exists,but managers can tell whether or not workers are shirking.

Question 57

The principal-agent problem of ownership vs.control of the corporation tends to get worse when

A)stock in a corporation is held exclusively by a small number of people who control the company's day-to-day operations.
B)stock in the company is tightly held,but there are some "outsider" stockholders.
C)stock in the company is very diffusely held,with no individual or group having control over a large block of stock.
D)managers have profit-sharing schemes as part of their incentive package.
E)managers focus on maximizing the firm's profits,rather than the firm's market share.

Question 58

Explain the nature and consequences of asymmetric information for each of the following cases.What options are available in each instance to reduce the problem?
a.medical insurance
b.issuance of credit cards
c.professional athletes
d.market for used appliances

Question 59

A certain firm can hire two types of workers: Group A workers who have high productivity and Group B workers with low productivity.Group A workers will add $27,500 to the firm's revenues per year,while Group B workers will increase the firm's revenues by $15,000 per year.The firm's managers expect workers to be employed for eight years.The differences in the workers' productivity levels are reflected in their costs per year of education.Each year of education (which includes the psychic costs of study effort)costs an A worker $12,500,while each year costs a B worker $25,000.
a.Under competitive conditions,how much would A and B workers earn?
b.Assuming that the firm is unable to distinguish A from B workers and that it is equally likely that a worker is of either type,what pay scale will the firm offer?
c.Suppose that the firm decides to use education as a market signaling device to distinguish A workers from B workers.What education requirement could the firm set?

Question 60

The efficiency wage is

A)a wage at which there is no unemployment,and shirking workers are not counted in the pool of total labor.
B)a wage at which there is a positive amount of unemployment.Individuals who are fired for shirking will be penalized with a period of unemployment.
C)a wage at which there is a shortage of labor.Firms who fire a worker for shirking will be able to hire another one easily.
D)the wage that is paid to high-quality,non-shirking workers.Other workers are paid the market-clearing wage.
E)the wage that subtracts the cost of shirking from the market-clearing wage to determine that which is really paid.

Question 61

Glen's friend Andre is a big strong guy.Andre will not allow anyone to harm Glen.Glen enjoys teasing people.In fact,Glen's marginal benefit of teasing people is given by: MB(Q)= 75 - 10Q.Generally,people do not enjoy Glen teasing them.Thus,they retaliate to Glen's teasing.Without Andre around to protect Glen from the retaliation,Glen's marginal cost of teasing people is MC(Q)= 20Qdue to the retaliation.However,with Andre around,Glen perceives his marginal costs of teasing to always be zero as no one will retaliate with Andre around.This is because Andre will step in to protect Glen from retaliation.Without Andre around,what is Glen's choice for teasing? How much does Glen increase teasing when Andre's around? Is Glen's behavior characteristic of a moral hazard or adverse selection?

Question 62

Ty's Sporting Goods is considering rewarding employees with profit sharing for good performance.Without the sharing plan,Ty's total cost function is: TC(Q)= 250Q + and his marginal cost function is: MC(Q)= 250 + .Ty can sell all his output for $500.Calculate Ty's optimal output level.What is his level of profits? If Ty implements the profit sharing plan,his total cost function is: TC(Q)= 125Q + and his marginal cost function is:
MC(Q)= 125 + .If the profit sharing plan entitles his employees to 25% of the profits,should Ty institute the plan?

Question 63

Wiz-Bang Games is a new video game maker for the latest game console.As a new game maker,they have not established a reputation of providing quality games.The marginal cost to Wiz-Bang for manufacturing games is: MC(Q)= 0.05Q.The market price for low-quality games is $20.The market price for high-quality games is $65.If Wiz-Bang sells their product in the low quality market,calculate their producer surplus.If Wiz-Bang sells their product in the high quality market,calculate their producer surplus.If Wiz-Bang spends $12,500 on marketing and packaging,they will be perceived as a high quality producer of video games.Should Wiz-Bang spend the $12,500 to provide a signal to video game consumers of producing high quality games?

Question 64

Jim's Hardware Supply has theft insurance.Jim also has an alarm system.The alarm system has just recently malfunctioned.If Jim has the alarm system repaired,it will cost him $100.The probability of a theft occurring is p = 0.0001.If a theft occurs and there is no alarm system,the value of stolen materials will be $125,000.However,Jim's insurance will compensate him fully for the loss.No thefts will occur if the alarm system is in place.What is the expected cost to Jim of repairing the alarm system? What is the expected cost to society of not repairing the alarm system?

Question 65

In a competitive labor market,shirking on the job can be a problem.In this market for labor services,the demand for labor is expressed as:
W = where W is wage rate (dollars per hour)and L is number employed per unit of time.The no shirking constraint (NSC)is expressed as:
NSC = where NSC is the minimum wage workers need not to shirk,and L is the number employed per unit of time.Assume that the labor force L^* = 150,000.Determine the following:
a.the level of unemployment that would result when firms pay the efficiency wage
b.the market clearing wage
c.the efficiency wage

Question 66

Explain what the principal-agent problem is,and explain evidence of its existence in hospitals in the United States.

Question 67

Explain what the principal-agent problem is,and discuss evidence of its existence in the banking industry in the United States.

Question 68

Ron owns an automotive repair center.Ron provides high quality automotive repair.The market price for high quality service is $225 while the market price for standard service is $150.Currently,Ron only has a reputation for providing standard service.Ron's marginal cost function of providing high quality service is: MC_H(Q)= 0.25Q.Ron's marginal cost function of providing standard service is: MC_S(Q)= 0.0625Q.Butch's Marketing has told Ron that if he hires Butch's firm to advertise and market Ron's high quality services,consumers will pay him the high quality service market price providing he delivers that quality.What is the most amount of money Ron is willing to pay for Butch's services?

Question 69

Prestige University grants degrees only to high skill students who perform well for their eventual employers.Mediocre University grants degrees only to low skill students.The market demand for newly graduated high skilled workers is: = 5,000 - P_H.The market demand for newly graduated low skilled workers is: = 15,000 - P_L.Currently,Prestige University graduates 1,000 students while Mediocre University graduates 5,000.Determine the equilibrium prices for low and high skilled graduates.Suppose that in an effort to cut costs,the State has merged Prestige University and Mediocre University into State University.This merger has eliminated the signal that employers use to rely on to discern graduate quality.As a result,the demand for State University graduates is: Q^D = 10,000 - P.The number of graduates from State University will be 6,000.Calculate the equilibrium price for State University graduates.Before the merger,would students at both Universities be willing to pay higher tuition in an effort to prevent the Universities from merging? Why or why not?

Question 70

The professional baseball league on planet Economus allows team owners to draft players for life.Once a player is acquired in the draft,team owners may trade players to other teams.The demand for high quality players is: = 2,000 - .The supply of high quality players is: = - 500.What is the lowest price necessary to induce an owner to trade a high quality player.Determine the equilibrium price and quantity of high quality players.The demand for low quality players is: = 400 - .The supply of low quality players is: = - 125.
Determine the equilibrium price and quantity of low skill players.Now,suppose that only the team that has the rights to the player knows the quality of the player.This implies the new demand for players of uncertain quality is: Q^D = 1,200 - .The supply of players becomes: Derive the equilibrium price and quantity for players of uncertain ability.Do you believe any high quality players are being traded at this new market price?

Question 71

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees.Currently,the employees receive an annual bonus.In a "Boom" market,Trisha can sell all the output she produces for $225 per unit.In a "Bust" market,Trisha can sell all the output she produces for $125 per unit.The probability of a "Boom" market is 75% and the probability of a bust market is 25%.Trisha's total cost function (including bonus payments to employees)is:
TC(Q)= 75Q + 2.5Q².The marginal cost function is: MC(Q)= 75 + 5Q.The profit sharing plan would pay employees 30% of profits.However,due to greater cost saving initiatives from employees,Trisha's total cost function becomes: TC(Q)= 505Q + 2Q².The relevant marginal cost function becomes: MC(Q)= 50 + 4Q.Which plan offers Trisha the greatest expected profits for herself? Suppose the employees will only approve a profit sharing plan if they are guaranteed their portion of profits will be at least $400.Will the employees approve of the profit sharing program?

Question 72

Matthew drives a truck for Overtheroad Haulers.Matthew's marginal benefit for driving per day is: MB(m)= 2,400 - 2m,where m is the number of miles driven.The marginal social cost per mile is MSC(m)- 2m.Calculate the efficient number of miles driven for Matthew in a day.Since Overtheroad Haulers has full insurance on Matthew's truck,Matthew's personal marginal cost is: MPC(m)= m.How many miles per day will Matthew drive? Would it be efficient for society if Overtheroad Haulers places a limit on the number of miles Matthew drives? If so,what limit should they set?

Question 73

Hart's Pinefall Lodge provides guided hunts and fishing trips to their customers in Ontario,Canada.The market price for high quality hunting and fishing trips is $1,250.The market price for standard quality hunting and fishing trips is $750.The marginal cost of providing high quality trips each season is: MC(Q)= 156.25Q.The marginal cost of providing standard quality trips each season is: MC(Q)= 62.5Q.In order to be able to sell their hunting and fishing trips at high quality prices,Hart's Pinefall Lodge must pay an advertising fee of $500 each season.Should the Lodge pay the fee and sell high quality trips?

Question 74

Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees.Currently,the employees receive an annual bonus.Trisha can sell all the output she produces for $150 per unit.Trisha's total cost function (including bonus payments to employees)is:
TC(Q)= 75Q + 2.5Q².The marginal cost function is: MC(Q)= 75 + 5Q.The profit sharing plan would pay employees 30% of profits.However,due to greater cost saving initiatives from employees,Trisha's total cost function becomes: TC(Q)= 505Q + 2Q².The relevant marginal cost function becomes: MC(Q)= 50 + 4Q.Which plan offers Trisha the greatest profits for herself?

Question 75

Mr.Barnes operates a power plant in the local market.His marginal revenue of average employee effort level is: MR(e)= 25 - e.The marginal cost of effort to Mr.Barnes is:
MC(e)= w.Employees set their effort level according to: e = ,where is the average wage at all other jobs in the local market.Currently,this average is $7.50.If Mr.Barnes pays a wage rate of $7.50,is he maximizing profits? If not,what wage rate should Mr.Barnes pay?

Question 76

Assume that the owners of a firm know that the firm's profits will depend upon two parameters: (1)how hard the managers work,and (2)the state of the economy.For simplicity,assume that the managers can exert either maximum or minimum effort and that the economy can be either favorable or unfavorable.The profits under various situations are represented by the matrix below.
Favorable Unfavorable
Economy Economy
Maximum Effort 700,000 400,000
Minimum Effort 400,000 200,000
The firm considers there to be an equal probability of either state of the economy.The manager considers the cost of effort to be C = 55,000 x,where x = 1 for maximum effort,0 for minimum effort.The firm is considering the pay scheme described below.Evaluate each alternative in terms of their incentive effects for the manager and their effect on the firm's profitability.
a.a flat salary of $30,000 that is not tied to the firm's performance
b.a bonus of 0 if profit equals 200,000 or 400,000 and a bonus of 120,000
if profit equals 700,000
c.a bonus determined by the formula: B = 0.20(PROFIT - 300,000)
d.a bonus determined by the formula: B = 0.24(PROFIT - 300,000)

Question 77

Cecil's Home Appliances sells high quality washing machines.Cecil's marginal cost function is: Zach's Appliances sells low quality washing machines.Zach's marginal cost function is: The market demand for high quality washing machines is: The market demand for low quality washing machines is: If Consumer's can distinguish between the quality of Cecil's and Zach's machines (and Cecil and Zach behave as price takers),determine the equilibrium price of washing machines.Calculate Cecil's producer surplus.Now,suppose that consumers can not distinguish between the quality of Cecil's and Zach's washing machines.In this case,the demand for washing machines is:
Q^D = 6,625 - 10P.Determine the joint market supply curve.Calculate the equilibrium price of washing machines and the quantity brought to market by Cecil and Zach.What is Cecil's producer surplus? If Cecil offers a warranty on his washing machines,his marginal cost function becomes: However,consumers will then perceive his machines to be high quality.Should Cecil offer the warranty?

Question 78

Ms.Moneynickel operates a retail store in the local mall.The marginal product of labor at the mall is a function of employee effort level.The marginal product of employee effort is: MP_e(e)= 20 - e.Ms.Moneynickel can sell all the product she stocks for $20.Employees determine their effort level according to the function: e = 10(w - ),where is the minimum wage.Currently,the minimum wage is $6.The marginal cost to Ms.Moneynickel of effort is: MC(e)= .What is the wage rate Ms.Moneynickel should offer her employees to maximize profits? If the minimum wage is increased by $1,how much should Ms.Moneynickel increase the wage rate paid to her employees?