Question 1

Assume Health Insurance is provided universally by the government. This would

Accepted Answer

A) eliminate the problems of adverse selection. 
B) result in adverse selection. 
C) eliminate the problems of moral hazard. 
D) All of the above. 
A) eliminate the problems of adverse selection. 
B) result in adverse selection. 
C) eliminate the problems of moral hazard. 
D) All of the above.

Question 2

Some companies subject their applicants to extensive tests. Why?

Accepted Answer

A) to reduce the informational asymmetry between the firm and the applicant 
B) to screen the applicant to avoid the problem of adverse selection 
C) to gather more information about the applicant 
D) All of the above. 
A) to reduce the informational asymmetry between the firm and the applicant 
B) to screen the applicant to avoid the problem of adverse selection 
C) to gather more information about the applicant 
D) All of the above.

Question 3

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

Accepted Answer

A) It provides a screening test. 
B) It provides a signal of quality. 
C) It reduces moral hazard. 
D) It reduces costs of giving surveys. 
A) It provides a screening test. 
B) It provides a signal of quality. 
C) It reduces moral hazard. 
D) It reduces costs of giving surveys.

Question 4

In which type of contract does the agent receive a share of revenues earned?

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 5

If a life insurance company does NOT require a medical exam of its policyholders, it is most likely that the company

Accepted Answer

A) charges above-average premiums. 
B) charges below-average premiums. 
C) charges no premiums. 
D) has only very healthy policyholders. 
A) charges above-average premiums. 
B) charges below-average premiums. 
C) charges no premiums. 
D) has only very healthy policyholders.

Question 6

Which of the following would be considered a contingent contract?

Accepted Answer

A) a piece rate contract 
B) a profit-sharing contract 
C) a contact with a bonus 
D) All of the above. 
A) a piece rate contract 
B) a profit-sharing contract 
C) a contact with a bonus 
D) All of the above.

Question 7

The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of

Accepted Answer

A) government overreach. 
B) screening. 
C) signalling using established standards. 
D) licensing to restrict entry by helmet manufacturers. 
A) government overreach. 
B) screening. 
C) signalling using established standards. 
D) licensing to restrict entry by helmet manufacturers.

Question 8

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 9

In the presence of asymmetric information, a contingent 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 10

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 11

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 12

Which of the following would NOT be used by firms to deter shirking?

Accepted Answer

A) Requiring employees to post a bond 
B) Offering a bonus after five years of service 
C) Paying more than the market wage 
D) Paying less than the market wage 
A) Requiring employees to post a bond 
B) Offering a bonus after five years of service 
C) Paying more than the market wage 
D) Paying less than the market wage

Question 13

Adverse selection occurs when there is

Accepted Answer

A) full information. 
B) unobserved behavior. 
C) an unobserved characteristic. 
D) a worker who shirks because his boss does not watch him. 
A) full information. 
B) unobserved behavior. 
C) an unobserved characteristic. 
D) a worker who shirks because his boss does not watch him.

Question 14

Opportunism may occur when

Accepted Answer

A) both parties have limited information. 
B) both parties have full information. 
C) one party has information the other does not. 
D) All of the above. 
A) both parties have limited information. 
B) both parties have full information. 
C) one party has information the other does not. 
D) All of the above.

Question 15

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 16

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 17

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents

Accepted Answer

A) the amount the employee loses if caught shirking. 
B) the expected value of the amount the employee loses if he shirks. 
C) the cost of monitoring the employee. 
D) the gain to the employee if he shirks. 
A) the amount the employee loses if caught shirking. 
B) the expected value of the amount the employee loses if he shirks. 
C) the cost of monitoring the employee. 
D) the gain to the employee if he shirks.

Question 18

Firms use hostages

Accepted Answer

A) to force employees to work. 
B) to encourage good behavior. 
C) to get employees to work for less money. 
D) None of the above. 
A) to force employees to work. 
B) to encourage good behavior. 
C) to get employees to work for less money. 
D) None of the above.

Question 19

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 20

Which of the following acts as a hostage for employees to behave well?

Accepted Answer

A) deferred payments 
B) efficiency wages 
C) bonding 
D) All of the above. 
A) deferred payments 
B) efficiency wages 
C) bonding 
D) All of the above.

Assume Health Insurance is provided universally by the government. This would

Some companies subject their applicants to extensive tests. Why?

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

In which type of contract does the agent receive a share of revenues earned?

If a life insurance company does NOT require a medical exam of its policyholders, it is most likely that the company

Which of the following would be considered a contingent contract?

The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of

Signals solve the adverse selection problem

In the presence of asymmetric information, a contingent contract

Monitoring of employees

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

Which of the following would NOT be used by firms to deter shirking?

Adverse selection occurs when there is

Opportunism may occur when

If adverse selection exists in a market

Life insurance companies often give applicants a physical examination to prevent

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents

Firms use hostages

The benefit to employers of deferred payments is that

Which of the following acts as a hostage for employees to behave well?

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

Assume Health Insurance is provided universally by the government. This would

Some companies subject their applicants to extensive tests. Why?

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

In which type of contract does the agent receive a share of revenues earned?

If a life insurance company does NOT require a medical exam of its policyholders, it is most likely that the company

Which of the following would be considered a contingent contract?

The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of

Signals solve the adverse selection problem

In the presence of asymmetric information, a contingent contract

Monitoring of employees

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

Which of the following would NOT be used by firms to deter shirking?

Adverse selection occurs when there is

Opportunism may occur when

If adverse selection exists in a market

Life insurance companies often give applicants a physical examination to prevent

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents

Firms use hostages

The benefit to employers of deferred payments is that

Which of the following acts as a hostage for employees to behave well?

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