Question 1

Ronald Coase's study, "The Nature of the Firm, " argued that

Accepted Answer

A) market exchange is less costly than hierarchical exchange 
B) markets are more efficient than hierarchies 
C) firms are formed to take advantage of situations in which hierarchies are more efficient than markets 
D) the role of the entrepreneur is primarily to deal with central authority 
E) markets tend to be less competitive over time 
A) market exchange is less costly than hierarchical exchange 
B) markets are more efficient than hierarchies 
C) firms are formed to take advantage of situations in which hierarchies are more efficient than markets 
D) the role of the entrepreneur is primarily to deal with central authority 
E) markets tend to be less competitive over time

Question 2

Which of the following is an example of a producer taking advantage of economies of scope?

Accepted Answer

A) A farmer buys more land so he can produce more soybeans. 
B) GM closes a Chevy truck plant in response to a decline in the demand for trucks. 
C) Disney World stays open later to serve more customers per day. 
D) A dairy farmer produces cow's milk and butter. 
E) A mouthwash firm expands production by improving management efficiency. 
A) A farmer buys more land so he can produce more soybeans. 
B) GM closes a Chevy truck plant in response to a decline in the demand for trucks. 
C) Disney World stays open later to serve more customers per day. 
D) A dairy farmer produces cow's milk and butter. 
E) A mouthwash firm expands production by improving management efficiency.

Question 3

A signal is

Accepted Answer

A) a proxy measure of job conditions 
B) a proxy measure of a job applicant's skills 
C) used by employers to indicate that a job interview is over 
D) an indication of an excess supply of labor 
E) an indication of an excess supply of qualified labor 
A) a proxy measure of job conditions 
B) a proxy measure of a job applicant's skills 
C) used by employers to indicate that a job interview is over 
D) an indication of an excess supply of labor 
E) an indication of an excess supply of qualified labor

Question 4

One reason many people make their own Hollandaise sauce rather than buy it is that

Accepted Answer

A) they can maintain control over the quality during production 
B) the total cost of ingredients is the same as the price of store-bought sauce 
C) firms do not make high-quality Hollandaise sauce 
D) people place a high value on their time 
E) firms do not produce goods that can be made at home 
A) they can maintain control over the quality during production 
B) the total cost of ingredients is the same as the price of store-bought sauce 
C) firms do not make high-quality Hollandaise sauce 
D) people place a high value on their time 
E) firms do not produce goods that can be made at home

Question 5

When sellers have more information about hidden characteristics of a good than buyers have, more low-quality units are likely to be sold than high-quality units.This is

Accepted Answer

A) the law of diminishing marginal returns 
B) the law of natural selection 
C) the winner's curse 
D) the lemons problem 
E) the problem of common pools 
A) the law of diminishing marginal returns 
B) the law of natural selection 
C) the winner's curse 
D) the lemons problem 
E) the problem of common pools

Question 6

Which of the following is true of vertical integration?

Accepted Answer

A) It leads to the formation of larger firms from smaller ones. 
B) It occurs when a firm adds more layers of management. 
C) It occurs when firms try to buy up their competitors and corner the market. 
D) It has no effect on the internal organization of a firm; it only affects outside markets. 
E) It occurs when a firm buys another firm in a completely unrelated market. 
A) It leads to the formation of larger firms from smaller ones. 
B) It occurs when a firm adds more layers of management. 
C) It occurs when firms try to buy up their competitors and corner the market. 
D) It has no effect on the internal organization of a firm; it only affects outside markets. 
E) It occurs when a firm buys another firm in a completely unrelated market.

Question 7

A service like CARFAX, which provides a used car buyer with the complete history of a used car, is profitable because of the problem of moral hazard.

Accepted Answer

A) True 
 B)False

Question 8

Copious Corp.is owned by 2 million stockholders who elect a board of directors that selects a management team responsible for hiring workers to serve customers by selling and repairing computer mice.Which of the following statements is true?

Accepted Answer

A) In the principal-agent relationship between workers and customers, the customers are the agents. 
B) In the principal-agent relationship between workers and managers, the managers are the agents. 
C) In the principal-agent relationship between the stockholders and the board of directors, the stockholders are the agents. 
D) In the principal-agent relationship between the stockholders and the customers, the stockholders are the agents. 
E) In the principal-agent relationship between management and the board of directors, the managers are the agents. 
A) In the principal-agent relationship between workers and customers, the customers are the agents. 
B) In the principal-agent relationship between workers and managers, the managers are the agents. 
C) In the principal-agent relationship between the stockholders and the board of directors, the stockholders are the agents. 
D) In the principal-agent relationship between the stockholders and the customers, the stockholders are the agents. 
E) In the principal-agent relationship between management and the board of directors, the managers are the agents.

Question 9

Apple Computer is more likely to continue to use input markets rather than manufacture its own inputs internally when

Accepted Answer

A) the quality of inputs is difficult to determine 
B) switching among input suppliers is easy 
C) there are very few firms producing the input 
D) the input is difficult to identify and define 
E) transaction costs go up 
A) the quality of inputs is difficult to determine 
B) switching among input suppliers is easy 
C) there are very few firms producing the input 
D) the input is difficult to identify and define 
E) transaction costs go up

Question 10

According to the search model, a computerized used car search service should

Accepted Answer

A) reduce the amount of search 
B) not affect the amount of search 
C) increase price dispersion 
D) reduce price dispersion 
E) lower the marginal benefit of search 
A) reduce the amount of search 
B) not affect the amount of search 
C) increase price dispersion 
D) reduce price dispersion 
E) lower the marginal benefit of search

Question 11

The winner's curse is more likely

Accepted Answer

A) when there is only one bidder 
B) when demand for the good being auctioned is increasing 
C) when the value of the good being auctioned is common knowledge 
D) when the value of the good being auctioned is uncertain 
E) when the marginal cost of information is low 
A) when there is only one bidder 
B) when demand for the good being auctioned is increasing 
C) when the value of the good being auctioned is common knowledge 
D) when the value of the good being auctioned is uncertain 
E) when the marginal cost of information is low

Question 12

There is less of a principal-agent problem between managers and apple pickers than between managers and secretaries because

Accepted Answer

A) apple pickers naturally work harder 
B) secretaries get paid less than their worth 
C) productivity is easier to measure in apple picking than in secretarial services 
D) a secretary's marginal product is easier to estimate than an apple picker's 
E) managers can watch apple-pickers more closely than they can secretaries 
A) apple pickers naturally work harder 
B) secretaries get paid less than their worth 
C) productivity is easier to measure in apple picking than in secretarial services 
D) a secretary's marginal product is easier to estimate than an apple picker's 
E) managers can watch apple-pickers more closely than they can secretaries

Question 13

Exhibit 14-1     Which of the following is indicated in Exhibit 14-1?

Accepted Answer

A) Rubber is cheaper to produce than tires. 
B) The total cost of producing 100, 000 tires is greater than the total cost of producing 200, 000 tires. 
C) The minimum efficient scale of producing tires is 200, 000 tires. 
D) The minimum efficient scale of producing tires is greater than 200, 000 tires. 
E) The marginal cost of the 200, 000th tire must exceed the average cost of 200, 000 tires. 
A) Rubber is cheaper to produce than tires. 
B) The total cost of producing 100, 000 tires is greater than the total cost of producing 200, 000 tires. 
C) The minimum efficient scale of producing tires is 200, 000 tires. 
D) The minimum efficient scale of producing tires is greater than 200, 000 tires. 
E) The marginal cost of the 200, 000th tire must exceed the average cost of 200, 000 tires.

Question 14

A service like CARFAX, which provides a used car buyer with the complete history of a used car, is profitable because of the problem of asymmetric information.

Accepted Answer

A) True 
 B)False

Question 15

The McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly.Growing potatoes is very different from running a fast-food restaurant.One could say of McDonald's decision to grow its own potatoes for the Russian franchise that

Accepted Answer

A) the bounded rationality criterion outweighs the need for quality control 
B) the bounded rationality criterion is outweighed by the need for quality control 
C) both bounded rationality and the need for quality control are factors that make it rational for McDonald's to grow its own potatoes 
D) growing potatoes is irrational 
E) there must not be many potato suppliers in Russia 
A) the bounded rationality criterion outweighs the need for quality control 
B) the bounded rationality criterion is outweighed by the need for quality control 
C) both bounded rationality and the need for quality control are factors that make it rational for McDonald's to grow its own potatoes 
D) growing potatoes is irrational 
E) there must not be many potato suppliers in Russia

Question 16

At the December meeting of the American Economic Association, 2, 500 new Ph.D.s look for college teaching jobs.If the average wage offer is $40, 000 and Tedium University makes that offer, it is likely to

Accepted Answer

A) be ignored 
B) attract only average Ph.D.s 
C) attract applicants from top schools 
D) attract Ph.D.s with strong dissertations 
E) attract applicants of below-average quality 
A) be ignored 
B) attract only average Ph.D.s 
C) attract applicants from top schools 
D) attract Ph.D.s with strong dissertations 
E) attract applicants of below-average quality

Question 17

With increased specialization in the economy, principal-agent problems become

Accepted Answer

A) more numerous 
B) less numerous 
C) more severe, but there are fewer of them 
D) less severe, but there are more of them 
E) easier to solve 
A) more numerous 
B) less numerous 
C) more severe, but there are fewer of them 
D) less severe, but there are more of them 
E) easier to solve

Question 18

The adverse selection problem is most likely in which of the following occupations?

Accepted Answer

A) waiter/waitress 
B) barber 
C) college professor 
D) supermarket cashier 
E) tightrope walker 
A) waiter/waitress 
B) barber 
C) college professor 
D) supermarket cashier 
E) tightrope walker

Question 19

The lemons problem is that when there are hidden characteristics known only to the seller of a used car,

Accepted Answer

A) the ratio of lemons to high-quality cars is likely to be high 
B) the ratio of lemons to high-quality cars is likely to be low 
C) good used cars will sell for more than their market value 
D) no lemons will be offered on the market 
E) the price of lemons will be below their market value 
A) the ratio of lemons to high-quality cars is likely to be high 
B) the ratio of lemons to high-quality cars is likely to be low 
C) good used cars will sell for more than their market value 
D) no lemons will be offered on the market 
E) the price of lemons will be below their market value

Question 20

A farmer doubles her acreage of corn and as a result finds that her costs per bushel of corn drop.She has experienced economies of scope.

Accepted Answer

A) True 
 B)False

Exam 14: Transaction Costs, Imperfect Information, and Behavioral Economics

Ronald Coase's study, "The Nature of the Firm, " argued that

Which of the following is an example of a producer taking advantage of economies of scope?

A signal is

One reason many people make their own Hollandaise sauce rather than buy it is that

When sellers have more information about hidden characteristics of a good than buyers have, more low-quality units are likely to be sold than high-quality units.This is

Which of the following is true of vertical integration?

A service like CARFAX, which provides a used car buyer with the complete history of a used car, is profitable because of the problem of moral hazard.

Copious Corp.is owned by 2 million stockholders who elect a board of directors that selects a management team responsible for hiring workers to serve customers by selling and repairing computer mice.Which of the following statements is true?

Apple Computer is more likely to continue to use input markets rather than manufacture its own inputs internally when

According to the search model, a computerized used car search service should

The winner's curse is more likely

There is less of a principal-agent problem between managers and apple pickers than between managers and secretaries because

Exhibit 14-1 Which of the following is indicated in Exhibit 14-1?

A service like CARFAX, which provides a used car buyer with the complete history of a used car, is profitable because of the problem of asymmetric information.

The McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly.Growing potatoes is very different from running a fast-food restaurant.One could say of McDonald's decision to grow its own potatoes for the Russian franchise that

At the December meeting of the American Economic Association, 2, 500 new Ph.D.s look for college teaching jobs.If the average wage offer is $40, 000 and Tedium University makes that offer, it is likely to

With increased specialization in the economy, principal-agent problems become

The adverse selection problem is most likely in which of the following occupations?

The lemons problem is that when there are hidden characteristics known only to the seller of a used car,

A farmer doubles her acreage of corn and as a result finds that her costs per bushel of corn drop.She has experienced economies of scope.

The Art and Science of Economic Analysis

Appendix--Understanding Graphs

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Elasticity of Demand and Supply

Appendix--Price Elasticity and Tax Incidence

Consumer Choice and Demand

Appendix--Indifference Curves and Utility Maximization

Production and Cost in the Firm

A--Perfect Competition

B--Perfect Competition

A--Monopoly

B--Monopoly

Monopolistic Competition and Oligopoly

Resource Markets

Labor Markets and Labor Unions

Capital, Interest, and Corporate Finance

Economic Regulation and Antitrust Policy

Public Goods and Public Choice

Externalities and the Environment

Income Distribution and Poverty

International Trade

International Finance

Economic Development

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