Question 1

The problem of adverse selection was first studied by economist ________ who showed how it can undermine the possibilities for trade in the market for _______.

Accepted Answer

A)  Joseph Stiglitz; used cars 
B)  Joseph Stiglitz; college education 
C)  George Akerloff; used cars 
D)  George Akerloff; college education

Question 2

A salesperson works for a car dealership for 40 hours per week,but may choose not to work hard all of the time.The dealership's owner cannot observe the salesperson's effort,but can observe the number of cars sold.The salesperson's personal cost of working at the dealership is C(H)= 1,200 + H2,where H is the number of hours during which he works hard.The corresponding marginal cost of effort is MC = 2H.Without any effort,the salesperson will,on average,generate a profit of $1,200.With each hour of high effort,he has a 5 percent chance of selling a car.Each car sale generates a profit of $900.How much surplus does the relationship generate?

Accepted Answer

A)  $506.25 
B)  $906.25 
C)  $1,518.75 
D)  $2,212.50

Question 3

Explain in your own words how the government can create Pareto efficiency by mandating participation in a social health insurance program.

Accepted Answer

The answer of Explain in your own words how the...

Question 4

Screening is a process that is employed by:

Accepted Answer

A)  a party at an informational advantage. 
B)  a party at an informational disadvantage. 
C)  both parties in cases of information asymmetry. 
D)  both parties in cases of equal and perfect information.

Question 5

The requirement by some life insurance companies that applicants must undergo medical examinations is an attempt on the part of the life insurance company to mitigate the problem of adverse selection by:

Accepted Answer

A)  collecting information. 
B)  sharing information. 
C)  sending hard-to-interpret signals. 
D)  providing social insurance.

Question 6

Private organizations,such as Consumer Reports,are able to earn a profit by serving as quality certifiers because:

Accepted Answer

A)  some well-informed buyers are willing to provide good information. 
B)  some well-informed sellers want to send signals to buyers. 
C)  some poorly informed buyers are willing to pay for better information. 
D)  some poorly informed sellers are willing to pay to reduce the quality of buyers' information.

Question 7

When one party to a transaction has more information about the characteristics of the good or service to be trade than does the other party,economists say that information is:

Accepted Answer

A)  uneven. 
B)  asymmetric. 
C)  imperfect. 
D)  disequilibriated.

Question 8

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is QsH = 0.04(W - 1,500)and the supply of low-quality workers is QsL = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,what is the deadweight loss due to asymmetric information?

Accepted Answer

A)  $750,000 
B)  $1,500,000 
C)  $1,125,000 
D)  $500,000

Question 9

Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is QsH = 0.04(W - 1,500)and the supply of low-quality workers is QsL = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are observable to employers,how many workers of each type do employers hire?

Accepted Answer

A)  QH = 440; QL = 440 
B)  QH = 540; QL = 480 
C)  QH = 440; QL = 880 
D)  QH = 270; QL = 240

Question 10

If Vincent van Gogh cut off his ear to demonstrate his love for someone,this would be an example of:

Accepted Answer

A)  signaling. 
B)  screening. 
C)  social insurance. 
D)  perfect mental health.

Question 11

In many cases,signaling offers a partial solution to problems that arise from:

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  separating equilibria. 
D)  market unraveling.

Question 12

Government intervention is frequently justified in insurance markets due to the presence of market failures caused by:

Accepted Answer

A)  adverse selection and competitive screening. 
B)  competitive screening and competitive signaling. 
C)  over-signaling and under-screening. 
D)  advantageous selection and market unraveling.

Question 13

One way to confront an individual employee with the full benefits and costs of their actions is through:

Accepted Answer

A)  ownership. 
B)  an incentive scheme. 
C)  moral hazard. 
D)  screening.

Question 14

Figure 21.2 shows the benefit functions for low-ability workers and high-ability workers (A and B),along with one indifference curve for each worker type (C and D).The employer cannot observe worker type directly but has created two positions,E and F,as a screening mechanism.The equilibrium shown here is:

Accepted Answer

A)  a separating equilibrium. 
B)  a pooling equilibrium. 
C)  a market unraveling equilibrium. 
D)  an example of adverse selection.

Question 15

If in the model for educational attainment among workers a pooling equilibrium emerges then workers' choices about education send:

Accepted Answer

A)  no signals. 
B)  weak signals. 
C)  strong signals. 
D)  contradictory signals.

Question 16

The value of a worker's marginal product is $50 per hour for high-ability workers and $15 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function UH(E,W)= W - 4E,and the preferences of low-ability workers correspond to the utility function UL(E,W)= W - 10E.By law,everyone is required to attend at least ten years of school.Three-fifths of the population has low ability,and two-fifths has high ability.Would it be Pareto efficient for the government to ban schooling beyond 10 years rather than allow a separating equilibrium?

Accepted Answer

A)  Yes, because both UL and UH would rise. 
B)  Yes, because although UH would fall, UL would rise. 
C)  No, because although UL would rise, UH would fall. 
D)  No, because both UL and UH would fall.

Question 17

In situations where there is a potential for moral hazard,the increased efficiency achieved through incentive schemes is:

Accepted Answer

A)  due to the reduction in resources that are dedicated to observing behavior. 
B)  not certain, because incentive schemes can also create costs. 
C)  easily achieved because incentive schemes are easy to design and yield predictable results. 
D)  controversial because it usually comes at the expense of equity.

Question 18

Moral hazard occurs if one party to a transaction takes actions that the trading partner ________ and that ________ the benefits the trading partner receives from the trade.

Accepted Answer

A)  observes; affect 
B)  observes; do not affect 
C)  cannot observe; affect 
D)  cannot observe; do not affect

Question 19

When employers use screening to distinguish high-ability workers from sufficiently numerous low-ability workers,the burden of asymmetric information falls on _________ because they ________ than when employers are well-informed.

Accepted Answer

A)  low-ability workers; perform more tasks 
B)  low-ability workers; are paid less per task 
C)  high-ability workers; perform more tasks 
D)  high-ability workers; are paid less per task

Question 20

The individual mandate in the Affordable Care Act is a means of preventing:

Accepted Answer

A)  asymmetric information. 
B)  adverse selection. 
C)  market unraveling. 
D)  social insurance.

Exam 21: Asymmetric Information

The problem of adverse selection was first studied by economist __ who showed how it can undermine the possibilities for trade in the market for _.