Question 1

According to Coase, the optimal allocation of resources is guided by

Accepted Answer

A) the decisions of a firm's managers 
B) market prices when market transaction costs are greater than the firm's internal organization costs 
C) the decisions of a firm's managers when market transaction costs are greater than the firm's internal organization costs 
D) the decisions of a firm's managers when market transaction costs are less than the firm's internal organization costs 
E) entrepreneurs 
A) the decisions of a firm's managers 
B) market prices when market transaction costs are greater than the firm's internal organization costs 
C) the decisions of a firm's managers when market transaction costs are greater than the firm's internal organization costs 
D) the decisions of a firm's managers when market transaction costs are less than the firm's internal organization costs 
E) entrepreneurs

Question 2

When several resources are combined in the production of a good,

Accepted Answer

A) it is easy to determine the marginal products of the various resources 
B) the marginal contribution of each input often cannot be observed 
C) allocating revenue among the various resources is easy 
D) there is more competition for each of the resources used 
E) there is less competition for each of the resources used 
A) it is easy to determine the marginal products of the various resources 
B) the marginal contribution of each input often cannot be observed 
C) allocating revenue among the various resources is easy 
D) there is more competition for each of the resources used 
E) there is less competition for each of the resources used

Question 3

Which of the following is the most likely result when there are economies of scope?

Accepted Answer

A) outsourcing 
B) vertical integration 
C) natural monopoly 
D) multi-product firms 
E) adverse selection 
A) outsourcing 
B) vertical integration 
C) natural monopoly 
D) multi-product firms 
E) adverse selection

Question 4

"It doesn't hurt to get more information ..." is good advice

Accepted Answer

A) especially when the opportunity cost of acquiring the information is high 
B) when information is less than perfect 
C) only if the marginal benefit of information is greater than the marginal cost of information 
D) only if the marginal benefit of information is equal to the marginal cost of information 
E) only if the marginal benefit of information is less than the marginal cost of information 
A) especially when the opportunity cost of acquiring the information is high 
B) when information is less than perfect 
C) only if the marginal benefit of information is greater than the marginal cost of information 
D) only if the marginal benefit of information is equal to the marginal cost of information 
E) only if the marginal benefit of information is less than the marginal cost of information

Question 5

According to Coase, firms

Accepted Answer

A) exist because the entrepreneur must prevent shirking 
B) should not exist 
C) should not exist if all participants in a market have perfect information 
D) exist because of the transaction costs of coordinating many resources through markets 
E) increase production costs and should therefore be limited 
A) exist because the entrepreneur must prevent shirking 
B) should not exist 
C) should not exist if all participants in a market have perfect information 
D) exist because of the transaction costs of coordinating many resources through markets 
E) increase production costs and should therefore be limited

Question 6

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 rubber is 4 million pounds. 
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 rubber is 4 million pounds. 
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 7

One effect of the lemons problem in the used car market is that

Accepted Answer

A) the market is efficient 
B) without reliable information, lemons become increasingly common 
C) no good cars are offered on the market 
D) no lemons are offered on the market 
E) good cars sell at more than their market value 
A) the market is efficient 
B) without reliable information, lemons become increasingly common 
C) no good cars are offered on the market 
D) no lemons are offered on the market 
E) good cars sell at more than their market value

Question 8

The search model predicts that

Accepted Answer

A) singles bars will be popular 
B) computer dating services would reduce the amount of search 
C) supermarket price advertisements in the newspaper provide consumers no benefit 
D) as a consumer's wage rises, they search more, ceteris paribus 
E) common knowledge has no value 
A) singles bars will be popular 
B) computer dating services would reduce the amount of search 
C) supermarket price advertisements in the newspaper provide consumers no benefit 
D) as a consumer's wage rises, they search more, ceteris paribus 
E) common knowledge has no value

Question 9

Suppose a company that produces mouthwash branches out into producing toothpaste.If this expansion reduces the average cost per unit, the company must

Accepted Answer

A) benefit from vertical integration 
B) benefit from horizontal integration 
C) experience economies of scale 
D) experience economies of scope 
E) have no transaction costs 
A) benefit from vertical integration 
B) benefit from horizontal integration 
C) experience economies of scale 
D) experience economies of scope 
E) have no transaction costs

Question 10

In which of the following situations is the principal-agent problem least likely to occur?

Accepted Answer

A) a hospital stay 
B) a doctor's visit 
C) a bartender serves you at the bar 
D) your TV is repaired 
E) a stockbroker calls with financial advice 
A) a hospital stay 
B) a doctor's visit 
C) a bartender serves you at the bar 
D) your TV is repaired 
E) a stockbroker calls with financial advice

Question 11

If the quality of an input is easily determined at the time of purchase, then it is likely to

Accepted Answer

A) be the cause of high transaction costs of using markets 
B) encourage vertical integration of a firm 
C) encourage supplier firms to produce low-quality inputs 
D) be produced internally by the firm 
E) be purchased in the market 
A) be the cause of high transaction costs of using markets 
B) encourage vertical integration of a firm 
C) encourage supplier firms to produce low-quality inputs 
D) be produced internally by the firm 
E) be purchased in the market

Question 12

If the minimum efficient scale in toaster production is 500, 000 units per year, the average cost of producing 300, 000 toasters is greater than the average cost of producing 500, 000.

Accepted Answer

A) True 
 B)False

Question 13

The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as

Accepted Answer

A) moral hazard and adverse selection, respectively 
B) the winner's curse and adverse selection, respectively 
C) adverse selection and natural selection, respectively 
D) adverse selection and moral hazard, respectively 
E) the winner's curse and moral hazard, respectively 
A) moral hazard and adverse selection, respectively 
B) the winner's curse and adverse selection, respectively 
C) adverse selection and natural selection, respectively 
D) adverse selection and moral hazard, respectively 
E) the winner's curse and moral hazard, respectively

Question 14

It is not uncommon for people to buy all the components for a computer and assemble them rather than purchase a fully assembled computer.What does this behavior demonstrate?

Accepted Answer

A) computers are easy to assemble 
B) people are irrational 
C) many people have the knowledge necessary to assemble computers 
D) the total price of the computer components is less than the price of the computer 
E) the total price of all the computer components plus the value of the person's time is less than the price of the computer 
A) computers are easy to assemble 
B) people are irrational 
C) many people have the knowledge necessary to assemble computers 
D) the total price of the computer components is less than the price of the computer 
E) the total price of all the computer components plus the value of the person's time is less than the price of the computer

Question 15

If perfect competition existed everywhere, along with frictionless exchange, perfect information, and constant returns to scale,

Accepted Answer

A) consumers would carry out transactions directly with resource suppliers 
B) firms would not have the information necessary to calculate marginal productivities of resources 
C) entrepreneurs would be needed to collect information 
D) consumers would produce output and then engage in barter 
E) the economy would be organized into one large firm 
A) consumers would carry out transactions directly with resource suppliers 
B) firms would not have the information necessary to calculate marginal productivities of resources 
C) entrepreneurs would be needed to collect information 
D) consumers would produce output and then engage in barter 
E) the economy would be organized into one large firm

Question 16

Adverse selection is a situation in which

Accepted Answer

A) only men are hired for particular jobs 
B) comparable worth laws actually reduce the number of women in certain professions 
C) people who use illegal drugs apply for jobs where employers do not use drug testing 
D) employers have a better knowledge of the productivity of labor suppliers than do the labor suppliers 
E) employers attempt to quantify the productivity of their workers 
A) only men are hired for particular jobs 
B) comparable worth laws actually reduce the number of women in certain professions 
C) people who use illegal drugs apply for jobs where employers do not use drug testing 
D) employers have a better knowledge of the productivity of labor suppliers than do the labor suppliers 
E) employers attempt to quantify the productivity of their workers

Question 17

Which of the following would not be considered a signal for a job as a public relations representative?

Accepted Answer

A) the number of minutes the candidate is allotted in the interview 
B) a high grade point average 
C) the suit the candidate wears to an interview 
D) the reputation of the college the candidate attended 
E) past salary history 
A) the number of minutes the candidate is allotted in the interview 
B) a high grade point average 
C) the suit the candidate wears to an interview 
D) the reputation of the college the candidate attended 
E) past salary history

Question 18

The optimal searcher is likely to not even attempt to secure perfect information even if it is possible to achieve it.

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 14-2   In Exhibit 14-2, if a consumer gathers an amount of information equal to I3,

Accepted Answer

A) he has made the optimal search 
B) he has avoided the cost of acquiring information 
C) he has searched too much 
D) further information will be costless to him 
E) he should increase his search 
A) he has made the optimal search 
B) he has avoided the cost of acquiring information 
C) he has searched too much 
D) further information will be costless to him 
E) he should increase his search

Question 20

One result of asymmetric information in the market for used cars is that

Accepted Answer

A) few used cars are offered on the market 
B) few lemons are sold 
C) more lemons may be offered for sale than good cars 
D) buyers benefit at the expense of sellers 
E) good cars will sell for more than they are worth 
A) few used cars are offered on the market 
B) few lemons are sold 
C) more lemons may be offered for sale than good cars 
D) buyers benefit at the expense of sellers 
E) good cars will sell for more than they are worth

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

According to Coase, the optimal allocation of resources is guided by

When several resources are combined in the production of a good,

Which of the following is the most likely result when there are economies of scope?

"It doesn't hurt to get more information ..." is good advice

According to Coase, firms

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

One effect of the lemons problem in the used car market is that

The search model predicts that

Suppose a company that produces mouthwash branches out into producing toothpaste.If this expansion reduces the average cost per unit, the company must

In which of the following situations is the principal-agent problem least likely to occur?

If the quality of an input is easily determined at the time of purchase, then it is likely to

If the minimum efficient scale in toaster production is 500, 000 units per year, the average cost of producing 300, 000 toasters is greater than the average cost of producing 500, 000.

The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as

It is not uncommon for people to buy all the components for a computer and assemble them rather than purchase a fully assembled computer.What does this behavior demonstrate?

If perfect competition existed everywhere, along with frictionless exchange, perfect information, and constant returns to scale,

Adverse selection is a situation in which

Which of the following would not be considered a signal for a job as a public relations representative?

The optimal searcher is likely to not even attempt to secure perfect information even if it is possible to achieve it.

Exhibit 14-2 In Exhibit 14-2, if a consumer gathers an amount of information equal to I3,

One result of asymmetric information in the market for used cars is that

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

Filters

Exhibit 14-2 In Exhibit 14-2, if a consumer gathers an amount of information equal to I₃,