Question 1

When a seller knows more about the condition of a used car than the buyer does, the information is said to be asymmetric.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 14-1     In Exhibit 14-1, suppose each tire produced requires ten pounds of rubber.Which of the following is true?

Accepted Answer

A) The tire manufacturer should integrate backward into producing rubber. 
B) The tire manufacturer should produce more than 200, 000 tires. 
C) The tire manufacturer should buy rubber rather than produce it. 
D) The rubber producer must be a monopolist. 
E) The minimum efficient scale of rubber production is 2 million pounds. 
A) The tire manufacturer should integrate backward into producing rubber. 
B) The tire manufacturer should produce more than 200, 000 tires. 
C) The tire manufacturer should buy rubber rather than produce it. 
D) The rubber producer must be a monopolist. 
E) The minimum efficient scale of rubber production is 2 million pounds.

Question 3

When those on the informed side of a market self-select, the problem of __________ occurs.

Accepted Answer

A) natural selection 
B) external benefits 
C) adverse selection 
D) the winner's curse 
E) the common pool 
A) natural selection 
B) external benefits 
C) adverse selection 
D) the winner's curse 
E) the common pool

Question 4

Which of the following would lead a utility-maximizing consumer to search for additional information?

Accepted Answer

A) an increase in income 
B) an increase in the marginal cost of information 
C) improved technology (e.g., Internet search programs) 
D) a reduction in the dispersion of prices 
E) an increase in the consumer's wage rate 
A) an increase in income 
B) an increase in the marginal cost of information 
C) improved technology (e.g., Internet search programs) 
D) a reduction in the dispersion of prices 
E) an increase in the consumer's wage rate

Question 5

If an employment situation is characterized by adverse selection,

Accepted Answer

A) there are too many applicants for each job 
B) there are too few applicants for each job 
C) there are exactly the right number of applicants for each job 
D) there is an excess supply of overqualified applicants for each job 
E) there is an excess supply of underqualified applicants for each job 
A) there are too many applicants for each job 
B) there are too few applicants for each job 
C) there are exactly the right number of applicants for each job 
D) there is an excess supply of overqualified applicants for each job 
E) there is an excess supply of underqualified applicants for each job

Question 6

Which of the following is the best example of vertical integration

Accepted Answer

A) an auto firm acquires a tire manufacturer 
B) a farmer buys the neighboring farm 
C) a retail store buys an internet retailer 
D) a software company buys a soft drink manufacturer 
E) a hotel chain buys a fast food chain 
A) an auto firm acquires a tire manufacturer 
B) a farmer buys the neighboring farm 
C) a retail store buys an internet retailer 
D) a software company buys a soft drink manufacturer 
E) a hotel chain buys a fast food chain

Question 7

The idea that paying higher wages attracts a more talented labor pool is called the

Accepted Answer

A) winner's curse 
B) efficiency wage theory 
C) marginal productivity theory 
D) lemons problem 
E) theory of the second best 
A) winner's curse 
B) efficiency wage theory 
C) marginal productivity theory 
D) lemons problem 
E) theory of the second best

Question 8

Which of the following would not limit the extent of a firm's vertical integration?

Accepted Answer

A) the managers' bounded rationality 
B) a large minimum efficient scale of producing inputs relative to the firm's input requirements 
C) the fact that the quality of inputs is easily determined at the time of purchase 
D) many interchangeable suppliers of the firm's inputs 
E) high transaction costs of contracting with resource suppliers 
A) the managers' bounded rationality 
B) a large minimum efficient scale of producing inputs relative to the firm's input requirements 
C) the fact that the quality of inputs is easily determined at the time of purchase 
D) many interchangeable suppliers of the firm's inputs 
E) high transaction costs of contracting with resource suppliers

Question 9

An example of screening job applicants is

Accepted Answer

A) listing years of education on résumés 
B) providing college transcripts 
C) sending in letters of recommendation 
D) dressing in a suit for interviews 
E) checking résumés for spelling and typographical errors 
A) listing years of education on résumés 
B) providing college transcripts 
C) sending in letters of recommendation 
D) dressing in a suit for interviews 
E) checking résumés for spelling and typographical errors

Question 10

The more complicated a production process is,

Accepted Answer

A) the lower the transactions cost of using markets 
B) the lower the cost of production 
C) the more likely the market will be used to organize production 
D) the more likely that transaction costs decrease through centralized control of production 
E) the more likely that transaction costs decrease through use of markets 
A) the lower the transactions cost of using markets 
B) the lower the cost of production 
C) the more likely the market will be used to organize production 
D) the more likely that transaction costs decrease through centralized control of production 
E) the more likely that transaction costs decrease through use of markets

Question 11

For the average homeowner, which of the following tasks is most likely to be contracted for?

Accepted Answer

A) fixing a shelf 
B) hanging a painting 
C) moving furniture 
D) rewiring the kitchen lighting 
E) repainting a bedroom 
A) fixing a shelf 
B) hanging a painting 
C) moving furniture 
D) rewiring the kitchen lighting 
E) repainting a bedroom

Question 12

A signal is

Accepted Answer

A) anything used to show employees in a market that demand in a profession has increased 
B) anything used to show employees in a market that supply in a profession has increased 
C) a proxy used to indicate possession of unobservable qualities required for a particular job 
D) a way for employers to discriminate against certain groups of people 
E) a way for employees to learn to stay out of certain professions 
A) anything used to show employees in a market that demand in a profession has increased 
B) anything used to show employees in a market that supply in a profession has increased 
C) a proxy used to indicate possession of unobservable qualities required for a particular job 
D) a way for employers to discriminate against certain groups of people 
E) a way for employees to learn to stay out of certain professions

Question 13

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

Accepted Answer

A) lawyer 
B) barber 
C) college professor 
D) marketing analyst 
E) manager 
A) lawyer 
B) barber 
C) college professor 
D) marketing analyst 
E) manager

Question 14

Managers experience bounded rationality when they focus narrowly on maximizing their firm's profits and ignore the broader perspective of society's preferences.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is the best example of a vertically integrated firm?

Accepted Answer

A) General Electric, which produces light bulbs, jet engines, washing machines, and so on 
B) Kinko's, which has a photocopy store near many colleges and universities 
C) USX Corporation, which owns ore and coal mines, coke ovens, blast furnaces, mills, and foundries 
D) Intel, which makes computer chips for most of the computer manufacturers 
E) Century 21, which has real estate offices that help people sell a house in one city and buy another house in another city 
A) General Electric, which produces light bulbs, jet engines, washing machines, and so on 
B) Kinko's, which has a photocopy store near many colleges and universities 
C) USX Corporation, which owns ore and coal mines, coke ovens, blast furnaces, mills, and foundries 
D) Intel, which makes computer chips for most of the computer manufacturers 
E) Century 21, which has real estate offices that help people sell a house in one city and buy another house in another city

Question 16

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

Accepted Answer

A) True 
 B)False

Question 17

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 moral hazard and adverse selection, respectively.

Accepted Answer

A) True 
 B)False

Question 18

Consumer Reports magazine benefits consumers by

Accepted Answer

A) increasing the marginal benefit of information 
B) reducing the marginal benefit of information 
C) reducing the marginal cost of information 
D) increasing the marginal cost of information 
E) showing which products are in vogue 
A) increasing the marginal benefit of information 
B) reducing the marginal benefit of information 
C) reducing the marginal cost of information 
D) increasing the marginal cost of information 
E) showing which products are in vogue

Question 19

The two types of asymmetric information situations are those with

Accepted Answer

A) hidden costs and hidden actions 
B) hidden characteristics and hidden costs 
C) hidden actions and hidden selection 
D) hidden characteristics and hidden actions 
E) moral hazard and natural selection 
A) hidden costs and hidden actions 
B) hidden characteristics and hidden costs 
C) hidden actions and hidden selection 
D) hidden characteristics and hidden actions 
E) moral hazard and natural selection

Question 20

In his article, "The Nature of the Firm, " Ronald Coase

Accepted Answer

A) suggested that monopolies may be more innovative than competitive firms 
B) argued that the economy should be organized into one large firm 
C) provided an answer to the question, "Why do firms exist?" 
D) focused on the concept of adverse selection 
E) analyzed concentration in U.S.industry 
A) suggested that monopolies may be more innovative than competitive firms 
B) argued that the economy should be organized into one large firm 
C) provided an answer to the question, "Why do firms exist?" 
D) focused on the concept of adverse selection 
E) analyzed concentration in U.S.industry

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

When a seller knows more about the condition of a used car than the buyer does, the information is said to be asymmetric.

Exhibit 14-1 In Exhibit 14-1, suppose each tire produced requires ten pounds of rubber.Which of the following is true?

When those on the informed side of a market self-select, the problem of __________ occurs.

Which of the following would lead a utility-maximizing consumer to search for additional information?

If an employment situation is characterized by adverse selection,

Which of the following is the best example of vertical integration

The idea that paying higher wages attracts a more talented labor pool is called the

Which of the following would not limit the extent of a firm's vertical integration?

An example of screening job applicants is

The more complicated a production process is,

For the average homeowner, which of the following tasks is most likely to be contracted for?

A signal is

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

Managers experience bounded rationality when they focus narrowly on maximizing their firm's profits and ignore the broader perspective of society's preferences.

Which of the following is the best example of a vertically integrated firm?

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

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 moral hazard and adverse selection, respectively.

Consumer Reports magazine benefits consumers by

The two types of asymmetric information situations are those with

In his article, "The Nature of the Firm, " Ronald Coase

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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