Question 1

Asymmetric information occurs when

Accepted Answer

A) everyone has the same information. 
B) one person in a transaction has more information than the other. 
C) people engaging in a transaction are uncertain about future events. 
D) the information available to the people in a transaction is misleading or incomplete. 
A) everyone has the same information. 
B) one person in a transaction has more information than the other. 
C) people engaging in a transaction are uncertain about future events. 
D) the information available to the people in a transaction is misleading or incomplete.

Question 2

If information in the market for used motorcycles is symmetric and both buyers and sellers are equally ignorant, then

Accepted Answer

A) the market is efficient. 
B) both good and bad motorcycles will sell for the same price. 
C) if only good motorcycles are sold, the price would be higher. 
D) All of the above. 
A) the market is efficient. 
B) both good and bad motorcycles will sell for the same price. 
C) if only good motorcycles are sold, the price would be higher. 
D) All of the above.

Question 3

A person practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance. 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 4

Which of the following is a method for solving the problem of adverse selection?

Accepted Answer

A) truth in advertising laws 
B) product liability laws 
C) food labeling requirements 
D) All of the above. 
A) truth in advertising laws 
B) product liability laws 
C) food labeling requirements 
D) All of the above.

Question 5

When a person has health insurance, they often have to pay nothing or very little (called a "copay")to see a doctor. This might result in

Accepted Answer

A) their being overly healthy. 
B) a principal-agent problem. 
C) some moral hazard, since people might overuse the benefit. 
D) an adverse selection problem. 
A) their being overly healthy. 
B) a principal-agent problem. 
C) some moral hazard, since people might overuse the benefit. 
D) an adverse selection problem.

Question 6

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 7

A college education can be a signal because

Accepted Answer

A) a college education is expensive. 
B) those who graduate college have successful parents, and are therefore also likely to be successful. 
C) highly capable people are more likely to finish college than those with low capabilities. 
D) college teaches useful skills and gives valuable training. 
A) a college education is expensive. 
B) those who graduate college have successful parents, and are therefore also likely to be successful. 
C) highly capable people are more likely to finish college than those with low capabilities. 
D) college teaches useful skills and gives valuable training.

Question 8

If a student achieves a high SAT score, this

Accepted Answer

A) sends a signal to a college that the applicant will be a good college student. 
B) does not act as a screening device. 
C) is a moral hazard. 
D) provides a college with no information. 
A) sends a signal to a college that the applicant will be a good college student. 
B) does not act as a screening device. 
C) is a moral hazard. 
D) provides a college with no information.

Question 9

Adverse selection can occur when

Accepted Answer

A) all persons involved in a transaction have full information. 
B) one person has information not available to others. 
C) post-agreement incentives result in workers shirking. 
D) nobody has any information about a particular product. 
A) all persons involved in a transaction have full information. 
B) one person has information not available to others. 
C) post-agreement incentives result in workers shirking. 
D) nobody has any information about a particular product.

Question 10

As the probability of detecting shirking increases, the size of the bond necessary to deter shirking

Accepted Answer

A) also increases. 
B) stays the same. 
C) decreases. 
D) increases at an exponential rate. 
A) also increases. 
B) stays the same. 
C) decreases. 
D) increases at an exponential rate.

Question 11

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. In what order of risk aversion (from most to least)would you rank these authors?

Accepted Answer

A) Author A, Author B, Author C 
B) Author A, Author C, Author B 
C) Author B, Author A, Author C 
D) Author C, Author B, Author A 
A) Author A, Author B, Author C 
B) Author A, Author C, Author B 
C) Author B, Author A, Author C 
D) Author C, Author B, Author A

Question 12

An informed party can use ________ to give information to an uninformed or lesser-informed party.

Accepted Answer

A) signaling 
B) screening 
C) an individual mandate 
D) market noise 
A) signaling 
B) screening 
C) an individual mandate 
D) market noise

Question 13

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 expects to sell the fewest books?

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 14

The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

Accepted Answer

A) use the Internet 
B) complain to management 
C) telecommute 
D) change jobs 
A) use the Internet 
B) complain to management 
C) telecommute 
D) change jobs

Question 15

If an agent is risk averse and a principal is risk neutral, if the agent pays the principal a fixed fee

Accepted Answer

A) all risk is eliminated. 
B) the risk neutral person bears all the risk while the risk averse person bears none. 
C) the risk averse person bears all the risk while the risk neutral person bears none. 
D) the principal and agent share risk equally. 
A) all risk is eliminated. 
B) the risk neutral person bears all the risk while the risk averse person bears none. 
C) the risk averse person bears all the risk while the risk neutral person bears none. 
D) the principal and agent share risk equally.

Question 16

Suppose employees pay a bond of $1,000 to an employer. The gain from shirking is $400. Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking. The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%. They feel this is needed to deter all shirking. What is your recommendation to the company? Explain.

Accepted Answer

Shirking is already deterred;

Question 17

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 18

One drawback of deferred payments is that

Accepted Answer

A) employees may shirk anyway. 
B) employers might fire high achievers to avoid paying higher wages or bonuses. 
C) it is difficult to determine who are the good and who are the bad workers. 
D) employees have to work for the firm for a long time. 
A) employees may shirk anyway. 
B) employers might fire high achievers to avoid paying higher wages or bonuses. 
C) it is difficult to determine who are the good and who are the bad workers. 
D) employees have to work for the firm for a long time.

Question 19

If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage

Accepted Answer

A) the principal bears all the risk. 
B) the agent bears all the risk. 
C) the principal and agent share the risk. 
D) Unable to determine with the information given. 
A) the principal bears all the risk. 
B) the agent bears all the risk. 
C) the principal and agent share the risk. 
D) Unable to determine with the information given.

Question 20

How can a warranty at the seller's expense signal that a product is of high quality?

Accepted Answer

If the product is of low quali

Asymmetric information occurs when

If information in the market for used motorcycles is symmetric and both buyers and sellers are equally ignorant, then

A person practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance. This is an example of

Which of the following is a method for solving the problem of adverse selection?

When a person has health insurance, they often have to pay nothing or very little (called a "copay")to see a doctor. This might result in

In the market for used cars

A college education can be a signal because

If a student achieves a high SAT score, this

Adverse selection can occur when

As the probability of detecting shirking increases, the size of the bond necessary to deter shirking

An informed party can use ________ to give information to an uninformed or lesser-informed party.

The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

If an agent is risk averse and a principal is risk neutral, if the agent pays the principal a fixed fee

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

One drawback of deferred payments is that

If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage

How can a warranty at the seller's expense signal that a product is of high quality?

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

Asymmetric information occurs when

If information in the market for used motorcycles is symmetric and both buyers and sellers are equally ignorant, then

A person practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance. This is an example of

Which of the following is a method for solving the problem of adverse selection?

When a person has health insurance, they often have to pay nothing or very little (called a "copay")to see a doctor. This might result in

In the market for used cars

A college education can be a signal because

If a student achieves a high SAT score, this

Adverse selection can occur when

As the probability of detecting shirking increases, the size of the bond necessary to deter shirking

An informed party can use ________ to give information to an uninformed or lesser-informed party.

The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

If an agent is risk averse and a principal is risk neutral, if the agent pays the principal a fixed fee

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

One drawback of deferred payments is that

If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage

How can a warranty at the seller's expense signal that a product is of high quality?

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