Question 1

What is one of the most important benefits of the Internet?

Accepted Answer

A) The Internet has increased asymmetric information. 
B) The Internet has reduced asymmetric information. 
C) The Internet has increased moral hazard. 
D) The Internet has increased transaction costs. 
A) The Internet has increased asymmetric information. 
B) The Internet has reduced asymmetric information. 
C) The Internet has increased moral hazard. 
D) The Internet has increased transaction costs. B

Question 2

A noisy monopoly

Accepted Answer

A) will be regulated by the Federal Trade Commission until it reduces its noise emissions. 
B) sells products under its own label for a low price, and sells the virtually identical product with the same quality under a private label for a higher price. 
C) sells products under its own label for a high price, and sells the virtually identical product with the same quality under a private label for a lower price. 
D) leverages the Lemon Law to sell both good and poor quality goods for the same price. 
A) will be regulated by the Federal Trade Commission until it reduces its noise emissions. 
B) sells products under its own label for a low price, and sells the virtually identical product with the same quality under a private label for a higher price. 
C) sells products under its own label for a high price, and sells the virtually identical product with the same quality under a private label for a lower price. 
D) leverages the Lemon Law to sell both good and poor quality goods for the same price. C

Question 3

In a contingent contract

Accepted Answer

A) the risk neutral party bears the risk. 
B) monitoring is not possible. 
C) the principal will be at a disadvantage. 
D) the payoffs are dependent upon another variable, such as revenue or profit. 
A) the risk neutral party bears the risk. 
B) monitoring is not possible. 
C) the principal will be at a disadvantage. 
D) the payoffs are dependent upon another variable, such as revenue or profit. D

Question 4

Many companies monitor their employees' Internet use and email. Why might they be doing this?

Accepted Answer

A) Because they like to spy. 
B) In order to improve morale. 
C) To gain inside information on new consumer trends. 
D) To reduce shirking. 
A) Because they like to spy. 
B) In order to improve morale. 
C) To gain inside information on new consumer trends. 
D) To reduce shirking.

Question 5

Which of the following workers is most likely to be asked to post a performance bond?

Accepted Answer

A) construction contractor 
B) fast food worker 
C) economics professor 
D) book author 
A) construction contractor 
B) fast food worker 
C) economics professor 
D) book author

Question 6

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract

Accepted Answer

A) efficiency is achieved. 
B) the client bears all of the risk. 
C) the lawyer has an incentive to lie about his hours worked. 
D) All of the above. 
A) efficiency is achieved. 
B) the client bears all of the risk. 
C) the lawyer has an incentive to lie about his hours worked. 
D) All of the above.

Question 7

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract

Accepted Answer

A) efficiency is not achieved. 
B) the client bears all of the risk. 
C) the lawyer has an incentive to lie about his hours worked. 
D) All of the above. 
A) efficiency is not achieved. 
B) the client bears all of the risk. 
C) the lawyer has an incentive to lie about his hours worked. 
D) All of the above.

Question 8

If reckless drivers are more likely to buy automobile insurance than safe drivers are

Accepted Answer

A) a moral hazard has occurred. 
B) adverse selection has occurred. 
C) the market for insurance is efficient. 
D) then automobile insurance will be fairly priced. 
A) a moral hazard has occurred. 
B) adverse selection has occurred. 
C) the market for insurance is efficient. 
D) then automobile insurance will be fairly priced.

Question 9

Adverse selection occurs when

Accepted Answer

A) a person takes more risks that are not known to the life insurance company because he has life insurance. 
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company. 
C) a person is a risk lover. 
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women. 
A) a person takes more risks that are not known to the life insurance company because he has life insurance. 
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company. 
C) a person is a risk lover. 
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women.

Question 10

A physical examination is NOT a good screening device for life insurance companies if

Accepted Answer

A) life-threatening diseases are usually undetected. 
B) doctors cannot be easily bribed to write a good report. 
C) medical history is a good predictor of life expectancy. 
D) one's current state of health is a good predictor of life expectancy. 
A) life-threatening diseases are usually undetected. 
B) doctors cannot be easily bribed to write a good report. 
C) medical history is a good predictor of life expectancy. 
D) one's current state of health is a good predictor of life expectancy.

Question 11

If some consumers think that two detergents have differing qualities, such as brand-name vs. private label detergents, wheres other consumers know that the detergents are identical, then the detergent producer can

Accepted Answer

A) reduce its costs. 
B) engage in a special type of price discrimination. 
C) avoid moral hazard. 
D) None of the above. 
A) reduce its costs. 
B) engage in a special type of price discrimination. 
C) avoid moral hazard. 
D) None of the above.

Question 12

If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling

Accepted Answer

A) that she does not plan to shirk in the future, regardless of whether she did so in the past. 
B) that she did shirk and she will do so in the future. 
C) that she did shirk but won't do so in the future. 
D) that she didn't shirk and she won't do so in the future. 
A) that she does not plan to shirk in the future, regardless of whether she did so in the past. 
B) that she did shirk and she will do so in the future. 
C) that she did shirk but won't do so in the future. 
D) that she didn't shirk and she won't do so in the future.

Question 13

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 14

Firms are able to price discriminate

Accepted Answer

A) when all customers are uninformed about quality differences. 
B) when no customers are uninformed about quality differences. 
C) when some customers are uninformed about quality differences. 
D) when there is full information about quality available to all customers. 
A) when all customers are uninformed about quality differences. 
B) when no customers are uninformed about quality differences. 
C) when some customers are uninformed about quality differences. 
D) when there is full information about quality available to all customers.

Question 15

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 16

Author A accepts a $5,000 advance from a publisher and a 10% royalty after 5,000 books are sold. Author B foregoes the publisher's advance and negotiates for a 15% royalty on all books sold. Author C decides to self publish his book and keep 100% of all sales revenue. Which of these authors is most likely to have 10 books published?

Accepted Answer

A) Author A 
B) Author C 
C) Author B 
D) They are all equally likely. 
A) Author A 
B) Author C 
C) Author B 
D) They are all equally likely.

Question 17

Restricting entry to a profession through licensing or certification requirements

Accepted Answer

A) increases welfare. 
B) decreases welfare. 
C) may increase or decrease welfare. 
D) leaves welfare unchanged. 
A) increases welfare. 
B) decreases welfare. 
C) may increase or decrease welfare. 
D) leaves welfare unchanged.

Question 18

Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews)review its product rather than doing it within the firm?

Accepted Answer

A) J.D. Power provides less credibility. 
B) J.D. Power provides greater credibility. 
C) J.D. Power is more honest than the average firm. 
D) J.D. Power has a government monopoly in providing product satisfaction reviews. 
A) J.D. Power provides less credibility. 
B) J.D. Power provides greater credibility. 
C) J.D. Power is more honest than the average firm. 
D) J.D. Power has a government monopoly in providing product satisfaction reviews.

Question 19

Contingent contracts

Accepted Answer

A) are inefficient when monitoring is possible. 
B) equally divide the risk between principal and agent. 
C) can be used when monitoring is not reasonably possible. 
D) put the risk on the principal. 
A) are inefficient when monitoring is possible. 
B) equally divide the risk between principal and agent. 
C) can be used when monitoring is not reasonably possible. 
D) put the risk on the principal.

Question 20

In the presence of asymmetric information, a piece-rate contract

Accepted Answer

A) is not as good as a contract based on commissions. 
B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C) is impossible to write. 
D) will result in the principal earning all of the profit. 
A) is not as good as a contract based on commissions. 
B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract. 
C) is impossible to write. 
D) will result in the principal earning all of the profit.

What is one of the most important benefits of the Internet?

A noisy monopoly

In a contingent contract

Many companies monitor their employees' Internet use and email. Why might they be doing this?

Which of the following workers is most likely to be asked to post a performance bond?

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract

If reckless drivers are more likely to buy automobile insurance than safe drivers are

Adverse selection occurs when

A physical examination is NOT a good screening device for life insurance companies if

If some consumers think that two detergents have differing qualities, such as brand-name vs. private label detergents, wheres other consumers know that the detergents are identical, then the detergent producer can

If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling

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

Firms are able to price discriminate

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?

Restricting entry to a profession through licensing or certification requirements

Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews)review its product rather than doing it within the firm?

Contingent contracts

In the presence of asymmetric information, a piece-rate contract

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

What is one of the most important benefits of the Internet?

A noisy monopoly

In a contingent contract

Many companies monitor their employees' Internet use and email. Why might they be doing this?

Which of the following workers is most likely to be asked to post a performance bond?

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract

If reckless drivers are more likely to buy automobile insurance than safe drivers are

Adverse selection occurs when

A physical examination is NOT a good screening device for life insurance companies if

If some consumers think that two detergents have differing qualities, such as brand-name vs. private label detergents, wheres other consumers know that the detergents are identical, then the detergent producer can

If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling

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

Firms are able to price discriminate

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?

Restricting entry to a profession through licensing or certification requirements

Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews)review its product rather than doing it within the firm?

Contingent contracts

In the presence of asymmetric information, a piece-rate contract

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