Question 1

The quality of a product

Accepted Answer

A) is usually unknown to the seller and the buyer. 
B) leads to adverse selection. 
C) creates noise in a market. 
D) is a hidden characteristic. 
A) is usually unknown to the seller and the buyer. 
B) leads to adverse selection. 
C) creates noise in a market. 
D) is a hidden characteristic.

Question 2

A person starts practicing poisonous snake charming after signing a contract with a health insurance company. This is an example of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) signaling. 
D) screening. 
A) moral hazard. 
B) adverse selection. 
C) signaling. 
D) screening.

Question 3

Requiring that barbers have licenses, restricts entry and

Accepted Answer

A) raises the average quality of haircuts. 
B) increases the costs of getting a haircut. 
C) may increase or decrease welfare. 
D) All of the above. 
A) raises the average quality of haircuts. 
B) increases the costs of getting a haircut. 
C) may increase or decrease welfare. 
D) All of the above.

Question 4

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Accepted Answer

A) The agent pays a fixed fee to the principal for the right to all future payoffs. 
B) The agent works for the principal on an hourly basis. 
C) The agent receives a share of the profit. 
D) The agent works for the principal on a per unit basis. 
A) The agent pays a fixed fee to the principal for the right to all future payoffs. 
B) The agent works for the principal on an hourly basis. 
C) The agent receives a share of the profit. 
D) The agent works for the principal on a per unit basis.

Question 5

Signals solve the adverse selection problem

Accepted Answer

A) if the signal is an advertisement placed in the New York Times or other top-tier publication. 
B) only if the signal is viewed as credible. 
C) when the signal is expensive to produce. 
D) if the signaling firm is known to be a profit-maximizer. 
A) if the signal is an advertisement placed in the New York Times or other top-tier publication. 
B) only if the signal is viewed as credible. 
C) when the signal is expensive to produce. 
D) if the signaling firm is known to be a profit-maximizer.

Question 6

Asymmetric information will always cause

Accepted Answer

A) efficiency problems. 
B) equity problems. 
C) Both A and B. 
D) None of the above. 
A) efficiency problems. 
B) equity problems. 
C) Both A and B. 
D) None of the above.

Question 7

Life insurance companies often give applicants a physical examination to prevent

Accepted Answer

A) the person from dying before obtaining the policy. 
B) signaling. 
C) adverse selection. 
D) profit maximization. 
A) the person from dying before obtaining the policy. 
B) signaling. 
C) adverse selection. 
D) profit maximization.

Question 8

In a store that sells souvenirs, suppose an agent receives a $1 commission for each unit sold, and the principal receives the residual profit. As a result,

Accepted Answer

A) joint profit is maximized. 
B) the agent will sell until the principal's marginal cost equals $1. 
C) no agent would enter into such a contract. 
D) the agent wishes to sell as many units as he can. 
A) joint profit is maximized. 
B) the agent will sell until the principal's marginal cost equals $1. 
C) no agent would enter into such a contract. 
D) the agent wishes to sell as many units as he can.

Question 9

An efficiency wage is

Accepted Answer

A) lower than a living wage. 
B) unfair to employers. 
C) a wage rate above the employees' opportunity cost. 
D) unlikely to be paid when monitoring is available. 
A) lower than a living wage. 
B) unfair to employers. 
C) a wage rate above the employees' opportunity cost. 
D) unlikely to be paid when monitoring is available.

Question 10

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will receive a share of the settlement if the plaintiff wins. Under this contract,

Accepted Answer

A) efficiency cannot be achieved. 
B) the client bears all of the risk. 
C) the lawyer bears all of the risk. 
D) the risk is shared. 
A) efficiency cannot be achieved. 
B) the client bears all of the risk. 
C) the lawyer bears all of the risk. 
D) the risk is shared.

Question 11

Suppose a plaintiff hires a lawyer to represent her in a court case. Under which of the following contracts is efficiency in risk bearing assured?

Accepted Answer

A) The lawyer is paid by the hour. 
B) The lawyer receives a share of the settlement. 
C) The lawyer receives a fixed fee. 
D) It is impossible to determine without the degree of risk aversion for each. 
A) The lawyer is paid by the hour. 
B) The lawyer receives a share of the settlement. 
C) The lawyer receives a fixed fee. 
D) It is impossible to determine without the degree of risk aversion for each.

Question 12

In the market for used cars, if buyers and sellers have perfect information about the quality of cars, then

Accepted Answer

A) all cars will sell for the same price and there is no asymmetric information problem. 
B) all cars will sell for the same price and there is an asymmetric information problem. 
C) cars sell for their true value and there is no asymmetric information problem. 
D) all cars will sell for the same price and there is a moral hazard problem. 
A) all cars will sell for the same price and there is no asymmetric information problem. 
B) all cars will sell for the same price and there is an asymmetric information problem. 
C) cars sell for their true value and there is no asymmetric information problem. 
D) all cars will sell for the same price and there is a moral hazard problem.

Question 13

If adverse selection exists in a market,

Accepted Answer

A) the government steps in and shuts it down. 
B) the market is considered a "grey market." 
C) consumers may not participate in the market at all. 
D) total surplus is maximized. 
A) the government steps in and shuts it down. 
B) the market is considered a "grey market." 
C) consumers may not participate in the market at all. 
D) total surplus is maximized.

Question 14

In the market for used cars,

Accepted Answer

A) the market is efficient because the cars are bought by the people who value them the most. 
B) the market is inefficient because lemons drive out the high quality cars. 
C) no cars are sold, because people don't like buying lemons. 
D) Not enough information to determine. 
A) the market is efficient because the cars are bought by the people who value them the most. 
B) the market is inefficient because lemons drive out the high quality cars. 
C) no cars are sold, because people don't like buying lemons. 
D) Not enough information to determine.

Question 15

The benefit to employers of deferred payments is that

Accepted Answer

A) adverse selection is eliminated. 
B) employers cannot engage in any opportunistic behavior. 
C) these payments raise the cost of being fired, so more monitoring is needed. 
D) these payments raise the cost of being fired, so less monitoring is needed. 
A) adverse selection is eliminated. 
B) employers cannot engage in any opportunistic behavior. 
C) these payments raise the cost of being fired, so more monitoring is needed. 
D) these payments raise the cost of being fired, so less monitoring is needed.

Question 16

If a health insurer charges a rate equal to the average cost of health care for the entire population, then it is likely that

Accepted Answer

A) everyone buys health insurance. 
B) unhealthy people will not buy health insurance. 
C) healthy people will not buy health insurance. 
D) nobody will buy health insurance. 
A) everyone buys health insurance. 
B) unhealthy people will not buy health insurance. 
C) healthy people will not buy health insurance. 
D) nobody will buy health insurance.

Question 17

If a principal and agent have an efficient contract, then

Accepted Answer

A) one of them must be more risk-averse than the other. 
B) neither can be made better off without harming the other. 
C) they must have symmetric information. 
D) the principal bears more of the risk. 
A) one of them must be more risk-averse than the other. 
B) neither can be made better off without harming the other. 
C) they must have symmetric information. 
D) the principal bears more of the risk.

Question 18

If all used cars in a market with symmetric information about quality are sold at the same price, then

Accepted Answer

A) sellers of good quality cars are subsidizing sellers of lemons. 
B) buyers of good quality cars are subsidizing buyers of lemons. 
C) sellers of lemons are subsidizing sellers of good quality cars. 
D) sellers of good quality cars are subsidizing buyers of lemons. 
A) sellers of good quality cars are subsidizing sellers of lemons. 
B) buyers of good quality cars are subsidizing buyers of lemons. 
C) sellers of lemons are subsidizing sellers of good quality cars. 
D) sellers of good quality cars are subsidizing buyers of lemons.

Question 19

Monitoring of employees

Accepted Answer

A) is only effective while the employees are working, so that payment may be withheld for shirking. 
B) can be effective after-the-fact if the shirking behavior can be detected later and the employee punished. 
C) is only effective after-the-fact when it is possible to fire them for shirking. 
D) None of the above. 
A) is only effective while the employees are working, so that payment may be withheld for shirking. 
B) can be effective after-the-fact if the shirking behavior can be detected later and the employee punished. 
C) is only effective after-the-fact when it is possible to fire them for shirking. 
D) None of the above.

Question 20

A consumer could screen the quality of a pizza joint by

Accepted Answer

A) asking friends. 
B) using online rating sites. 
C) watching the chef prepare the pizza. 
D) All of the above. 
A) asking friends. 
B) using online rating sites. 
C) watching the chef prepare the pizza. 
D) All of the above.

The quality of a product

A person starts practicing poisonous snake charming after signing a contract with a health insurance company. This is an example of

Requiring that barbers have licenses, restricts entry and

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Signals solve the adverse selection problem

Asymmetric information will always cause

Life insurance companies often give applicants a physical examination to prevent

In a store that sells souvenirs, suppose an agent receives a $1 commission for each unit sold, and the principal receives the residual profit. As a result,

An efficiency wage is

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will receive a share of the settlement if the plaintiff wins. Under this contract,

Suppose a plaintiff hires a lawyer to represent her in a court case. Under which of the following contracts is efficiency in risk bearing assured?

In the market for used cars, if buyers and sellers have perfect information about the quality of cars, then

If adverse selection exists in a market,

In the market for used cars,

The benefit to employers of deferred payments is that

If a health insurer charges a rate equal to the average cost of health care for the entire population, then it is likely that

If a principal and agent have an efficient contract, then

If all used cars in a market with symmetric information about quality are sold at the same price, then

Monitoring of employees

A consumer could screen the quality of a pizza joint by

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Managerial Decision-Making Under Uncertainty

Government and Business

Global Business

Filters

Exam 15: Asymmetric Information

The quality of a product

A person starts practicing poisonous snake charming after signing a contract with a health insurance company. This is an example of

Requiring that barbers have licenses, restricts entry and

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

Signals solve the adverse selection problem

Asymmetric information will always cause

Life insurance companies often give applicants a physical examination to prevent

In a store that sells souvenirs, suppose an agent receives a $1 commission for each unit sold, and the principal receives the residual profit. As a result,

An efficiency wage is

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will receive a share of the settlement if the plaintiff wins. Under this contract,

Suppose a plaintiff hires a lawyer to represent her in a court case. Under which of the following contracts is efficiency in risk bearing assured?

In the market for used cars, if buyers and sellers have perfect information about the quality of cars, then

If adverse selection exists in a market,

In the market for used cars,

The benefit to employers of deferred payments is that

If a health insurer charges a rate equal to the average cost of health care for the entire population, then it is likely that

If a principal and agent have an efficient contract, then

If all used cars in a market with symmetric information about quality are sold at the same price, then

Monitoring of employees

A consumer could screen the quality of a pizza joint by

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Managerial Decision-Making Under Uncertainty

Government and Business

Global Business

Filters