Question 1

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

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) The lawyer pays the client a fee for the right to the entire settlement. 
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) The lawyer pays the client a fee for the right to the entire settlement.

Question 2

If adverse selection exists in a market

Accepted Answer

A) it increases consumer surplus but reduces producer surplus. 
B) it reduces consumer and producer surplus. 
C) it reduces producer surplus but has no impact on consumer surplus. 
D) it increases both consumer and producer surplus. 
A) it increases consumer surplus but reduces producer surplus. 
B) it reduces consumer and producer surplus. 
C) it reduces producer surplus but has no impact on consumer surplus. 
D) it increases both consumer and producer surplus.

Question 3

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

Accepted Answer

A) True 
 B)False

Question 4

What is one reason the eBay seller reputation system is important?

Accepted Answer

A) eBay transactions tend to be isolated, one-off transactions. 
B) eBay transactions tend to be repeat sales between the same seller and buyers. 
C) eBay transactions often involve stolen products. 
D) eBay transactions require a larger percentage than, say, Amazon transactions. 
A) eBay transactions tend to be isolated, one-off transactions. 
B) eBay transactions tend to be repeat sales between the same seller and buyers. 
C) eBay transactions often involve stolen products. 
D) eBay transactions require a larger percentage than, say, Amazon transactions.

Question 5

If all consumers are uninformed about the quality of a product

Accepted Answer

A) firms can increase profit by selling the same product under a different name at a different price. 
B) firms will not be able to price discriminate. 
C) firms will price discriminate. 
D) firms will increase profits by charging different prices for the same product. 
A) firms can increase profit by selling the same product under a different name at a different price. 
B) firms will not be able to price discriminate. 
C) firms will price discriminate. 
D) firms will increase profits by charging different prices for the same product.

Question 6

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

Accepted Answer

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

Question 7

In the presence of asymmetric information, a fixed-fee contract

Accepted Answer

A) achieves production efficiency. 
B) can lead to opportunistic behavior on the part of the agent. 
C) is impossible to write. 
D) will result in the principal earning all of the profit. 
A) achieves production efficiency. 
B) can lead to opportunistic behavior on the part of the agent. 
C) is impossible to write. 
D) will result in the principal earning all of the profit.

Question 8

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

Accepted Answer

A) use drivers' driving record as a signal. 
B) use drivers' driving record as a screening device. 
C) not be able to use drivers' driving record as a screening device. 
D) request driving records directly from the police and not from the individual applicant. 
A) use drivers' driving record as a signal. 
B) use drivers' driving record as a screening device. 
C) not be able to use drivers' driving record as a screening device. 
D) request driving records directly from the police and not from the individual applicant.

Question 9

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 10

In the market for used cars, if there is asymmetric information yet all cars sell for the same price

Accepted Answer

A) there is an efficiency problem and there are equity implications. 
B) there is no efficiency problem, but there are equity implications. 
C) buyers of lemons win at the expense of buyers of good cars. 
D) there is no efficiency problem and there are no equity implications. 
A) there is an efficiency problem and there are equity implications. 
B) there is no efficiency problem, but there are equity implications. 
C) buyers of lemons win at the expense of buyers of good cars. 
D) there is no efficiency problem and there are no equity implications.

Question 11

In a principal-agent relationship, moral hazard might occur if

Accepted Answer

A) the agent can hide his actions from the principal. 
B) the principal and agent are married. 
C) payoffs are based on a state of nature. 
D) the principal can hide her actions from the agent. 
A) the agent can hide his actions from the principal. 
B) the principal and agent are married. 
C) payoffs are based on a state of nature. 
D) the principal can hide her actions from the agent.

Question 12

Selling the same product under different brand names allows a firm to price discriminate as long as

Accepted Answer

A) customers know the products are identical. 
B) customers do not know the products are identical. 
C) the products really are not the same. 
D) the firm lets customers know that the products are identical. 
A) customers know the products are identical. 
B) customers do not know the products are identical. 
C) the products really are not the same. 
D) the firm lets customers know that the products are identical.

Question 13

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Accepted Answer

A) a warranty on a lemon is costly to the seller. 
B) warranties are offered on all cars. 
C) warranties are only offered on lemons. 
D) a warranty on a good car is a false signal. 
A) a warranty on a lemon is costly to the seller. 
B) warranties are offered on all cars. 
C) warranties are only offered on lemons. 
D) a warranty on a good car is a false signal.

Question 14

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 15

The requirement that all drivers must carry auto insurance reduces

Accepted Answer

A) moral hazard. 
B) the effectiveness of signaling. 
C) adverse selection. 
D) the chance of auto accidents. 
A) moral hazard. 
B) the effectiveness of signaling. 
C) adverse selection. 
D) the chance of auto accidents.

Question 16

Requiring that barbers have licenses, restricts entry and

Accepted Answer

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

Question 17

In which type of contract is the agent paid per unit of output?

Accepted Answer

A) A commission based contract. 
B) A sharecropping contract. 
C) A piece rate contract. 
D) A contract with stock options as salary. 
A) A commission based contract. 
B) A sharecropping contract. 
C) A piece rate contract. 
D) A contract with stock options as salary.

Question 18

What is one potential problem with nationalized health care?

Accepted Answer

A) It might not reduce moral hazard. 
B) It is guaranteed to solve the principal-agent problem. 
C) It would be efficient in risk bearing. 
D) It might cost too much. 
A) It might not reduce moral hazard. 
B) It is guaranteed to solve the principal-agent problem. 
C) It would be efficient in risk bearing. 
D) It might cost too much.

Question 19

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 20

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

Accepted Answer

A) Firm A, which uses an independent accounting firm for auditing. 
B) Firm B, which uses an internal group for auditing. 
C) Firm C, which has seen its stock go up by $20 per share in the last week. 
D) Firm D, which hasn't been under SEC investigation for over 5 years. 
A) Firm A, which uses an independent accounting firm for auditing. 
B) Firm B, which uses an internal group for auditing. 
C) Firm C, which has seen its stock go up by $20 per share in the last week. 
D) Firm D, which hasn't been under SEC investigation for over 5 years.

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

If adverse selection exists in a market

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

What is one reason the eBay seller reputation system is important?

If all consumers are uninformed about the quality of a product

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

In the presence of asymmetric information, a fixed-fee contract

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

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

In the market for used cars, if there is asymmetric information yet all cars sell for the same price

In a principal-agent relationship, moral hazard might occur if

Selling the same product under different brand names allows a firm to price discriminate as long as

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

An efficiency wage is

The requirement that all drivers must carry auto insurance reduces

Requiring that barbers have licenses, restricts entry and

In which type of contract is the agent paid per unit of output?

What is one potential problem with nationalized health care?

Asymmetric information will always cause

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

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

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

If adverse selection exists in a market

When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

What is one reason the eBay seller reputation system is important?

If all consumers are uninformed about the quality of a product

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

In the presence of asymmetric information, a fixed-fee contract

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

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

In the market for used cars, if there is asymmetric information yet all cars sell for the same price

In a principal-agent relationship, moral hazard might occur if

Selling the same product under different brand names allows a firm to price discriminate as long as

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

An efficiency wage is

The requirement that all drivers must carry auto insurance reduces

Requiring that barbers have licenses, restricts entry and

In which type of contract is the agent paid per unit of output?

What is one potential problem with nationalized health care?

Asymmetric information will always cause

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

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