Question 1

Can sales agents, such as realtors, generate economic surplus?

Accepted Answer

A) No, because the value of a product is based purely on the cost of producing it and not on who buys it. 
B) No, because sales agents don't produce anything new. 
C) Yes, but only if they work for free, otherwise they are a waste of resources. 
D) Yes, because they help ensure that goods are purchased by consumers who value them the most highly. 
A) No, because the value of a product is based purely on the cost of producing it and not on who buys it. 
B) No, because sales agents don't produce anything new. 
C) Yes, but only if they work for free, otherwise they are a waste of resources. 
D) Yes, because they help ensure that goods are purchased by consumers who value them the most highly. D

Question 2

Refer to the figure below. The growth of access to the Internet will cause the marginal:

Accepted Answer

A) benefit curve to shift from MB₂ to MB₁. 
B) benefit curve to shift from MB₁ to MB₂. 
C) cost curve to shift from MC₂ to MC₁. 
D) cost curve to shift from MC₁ to MC₂. 
A) benefit curve to shift from MB₂ to MB₁. 
B) benefit curve to shift from MB₁ to MB₂. 
C) cost curve to shift from MC₂ to MC₁. 
D) cost curve to shift from MC₁ to MC₂. D

Question 3

The lemons model is used to analyze:

Accepted Answer

A) the market for citrus fruit. 
B) markets with asymmetric information. 
C) markets in which search is costly. 
D) the Low-Hanging-Fruit Principle. 
A) the market for citrus fruit. 
B) markets with asymmetric information. 
C) markets in which search is costly. 
D) the Low-Hanging-Fruit Principle. B

Question 4

Suppose you are planning to sell your house. You value your house at $200,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $220,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $250,000. Assume that the realtor's opportunity cost of negotiating the sale is $5,000. In this case, how much additional economic surplus is generated by using a realtor to sell your house?

Accepted Answer

A) None, because you value the house at $200,000 no matter who buys it. 
B) $250,000. 
C) $200,000. 
D) $25,000. 
A) None, because you value the house at $200,000 no matter who buys it. 
B) $250,000. 
C) $200,000. 
D) $25,000.

Question 5

The lemons model predicts that the market price of high-quality used cars will be ________ the true value of high-quality used cars, so that only relatively ________ cars will be put up for sale in market.

Accepted Answer

A) greater than; high-quality 
B) less than; high-quality 
C) greater than; low-quality 
D) less than; low-quality 
A) greater than; high-quality 
B) less than; high-quality 
C) greater than; low-quality 
D) less than; low-quality

Question 6

If a gamble has an expected value of $10, then one can predict that:

Accepted Answer

A) only risk-averse people will take the gamble. 
B) no risk-averse person will take the gamble. 
C) all risk-neutral people will take the gamble. 
D) the gamble never pays out more than $10. 
A) only risk-averse people will take the gamble. 
B) no risk-averse person will take the gamble. 
C) all risk-neutral people will take the gamble. 
D) the gamble never pays out more than $10.

Question 7

Suppose you are planning to sell your house. You value your house at $150,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $180,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $200,000. Assume that the realtor's opportunity cost of negotiating the sale is $10,000. In this case, does using a realtor to sell your house increase total economic surplus?

Accepted Answer

A) No, because you value the house at $150,000 no matter who buys it. 
B) No, because your house only generated economic surplus when it was first built. 
C) It depends on the sales price of the house, which isn't given in the question. 
D) Yes, using a realtor increases total economic surplus by $10,000. 
A) No, because you value the house at $150,000 no matter who buys it. 
B) No, because your house only generated economic surplus when it was first built. 
C) It depends on the sales price of the house, which isn't given in the question. 
D) Yes, using a realtor increases total economic surplus by $10,000.

Question 8

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. For Vinnie, the expected value of searching for another vacation rental is:

Accepted Answer

A) $200. 
B) $50. 
C) $45. 
D) $5. 
A) $200. 
B) $50. 
C) $45. 
D) $5.

Question 9

Suppose Joe has a reliable two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that is reliable and only $10,000 for one that's not reliable. Lauren cannot tell whether Joe's car is reliable, but she believes that only 20 percent of two-year old Hondas for sale in the market are reliable and that the other 80 percent are not reliable. To Lauren, Joe's car looks just like every other two-year Honda that's for sale. What's the most Lauren is willing to pay for Joe's car?

Accepted Answer

A) $10,000 
B) $10,800 
C) $13,000 
D) $14,000 
A) $10,000 
B) $10,800 
C) $13,000 
D) $14,000

Question 10

The major prediction of the lemons model is that:

Accepted Answer

A) asymmetric information reduces the average quality of goods offered for sale. 
B) people will generally choose "low-hanging fruit". 
C) a used car in good condition can be sold for a higher-than-average price. 
D) used cars offered for sale are generally in better-than-average condition. 
A) asymmetric information reduces the average quality of goods offered for sale. 
B) people will generally choose "low-hanging fruit". 
C) a used car in good condition can be sold for a higher-than-average price. 
D) used cars offered for sale are generally in better-than-average condition.

Question 11

Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If new lightsabers sell for $2,500, then buying a new lightsaber is a:

Accepted Answer

A) fair gamble. 
B) better-than-fair gamble. 
C) less-than-fair gamble. 
D) less-than-fair gamble if Obi-Wan risk neutral. 
A) fair gamble. 
B) better-than-fair gamble. 
C) less-than-fair gamble. 
D) less-than-fair gamble if Obi-Wan risk neutral.

Question 12

Suppose that there is not enough parking at an urban university. Sometimes students come to campus, spend a few minutes searching for a parking spot, and then decide that going to class isn't worth the effort of continuing to search for a parking spot, so they go home. Assume that all professors give midterm exams on the same day. You would expect the optimal amount of time spent searching for a parking spot on that day to ________ because ________.

Accepted Answer

A) decrease; the marginal cost of search is higher 
B) increase; the marginal cost of search is lower 
C) increase; the marginal benefit of search is higher 
D) decrease; the marginal benefit of search is lower 
A) decrease; the marginal cost of search is higher 
B) increase; the marginal cost of search is lower 
C) increase; the marginal benefit of search is higher 
D) decrease; the marginal benefit of search is lower

Question 13

Conspicuous consumption is an effective signal of ability if high-ability people:

Accepted Answer

A) tend to have low-paying but prestigious jobs. 
B) are famous. 
C) tend to receive the highest salaries. 
D) save most of what they earn. 
A) tend to have low-paying but prestigious jobs. 
B) are famous. 
C) tend to receive the highest salaries. 
D) save most of what they earn.

Question 14

Information about the quality of a product is

Accepted Answer

A) intangible, and therefore not subject to economic principles. 
B) impossible to objectively assess, and therefore not subject to economic principles. 
C) both beneficial to have and costly to obtain, and therefore subject to economic principles. 
D) subject to economic principles only when it is paid for, for example by subscribing to Consumer Reports or by hiring a financial advisor. 
A) intangible, and therefore not subject to economic principles. 
B) impossible to objectively assess, and therefore not subject to economic principles. 
C) both beneficial to have and costly to obtain, and therefore subject to economic principles. 
D) subject to economic principles only when it is paid for, for example by subscribing to Consumer Reports or by hiring a financial advisor.

Question 15

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. Since searching for another apartment is a ________ gamble, if Vinnie is risk-neutral, then he ________ search for another apartment.

Accepted Answer

A) better-than-fair; will not 
B) better-than-fair; will 
C) fair; will not 
D) fair; will 
A) better-than-fair; will not 
B) better-than-fair; will 
C) fair; will not 
D) fair; will

Question 16

A risk-averse individual will:

Accepted Answer

A) never accept any gamble. 
B) accept a fair gamble. 
C) only choose certain events. 
D) accept only better-than-fair gambles. 
A) never accept any gamble. 
B) accept a fair gamble. 
C) only choose certain events. 
D) accept only better-than-fair gambles.

Question 17

Suppose that there are two employers in Tinytown. CareCo offers a generous health insurance package to all employees, while ApathyInc pays slightly higher wages than CareCo, but does not offer health insurance. All else equal, a person who is unhealthy and expects to have high healthcare costs will:

Accepted Answer

A) prefer to work for CareCo. 
B) stop going to the doctor. 
C) be equally happy working for either firm. 
D) prefer to work for ApathyInc. 
A) prefer to work for CareCo. 
B) stop going to the doctor. 
C) be equally happy working for either firm. 
D) prefer to work for ApathyInc.

Question 18

The optimal amount of information to acquire before making a purchase is:

Accepted Answer

A) zero. 
B) as much as possible. 
C) the amount such that the total cost of acquiring information equals the total benefit. 
D) the amount such that the marginal cost of acquiring information equals the marginal benefit. 
A) zero. 
B) as much as possible. 
C) the amount such that the total cost of acquiring information equals the total benefit. 
D) the amount such that the marginal cost of acquiring information equals the marginal benefit.

Question 19

When an individual is judged by the characteristics of the groups to which he or she belongs rather than on his or her own characteristics, it is called:

Accepted Answer

A) adverse selection. 
B) statistical discrimination. 
C) the lemons model. 
D) moral hazard. 
A) adverse selection. 
B) statistical discrimination. 
C) the lemons model. 
D) moral hazard.

Question 20

This graph illustrates the marginal costs and marginal benefits of acquiring information before making a major purchase.   If the original curves are MB₀ and MC₀, the optimal quantity of information about this product is:

Accepted Answer

A) I₁. 
B) I₂. 
C) I₃. 
D) I₄. 
A) I₁. 
B) I₂. 
C) I₃. 
D) I₄.

Exam 12: The Economics of Information

Can sales agents, such as realtors, generate economic surplus?

Refer to the figure below. The growth of access to the Internet will cause the marginal:

The lemons model is used to analyze:

The lemons model predicts that the market price of high-quality used cars will be ________ the true value of high-quality used cars, so that only relatively ________ cars will be put up for sale in market.

If a gamble has an expected value of $10, then one can predict that:

The major prediction of the lemons model is that:

Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If new lightsabers sell for $2,500, then buying a new lightsaber is a:

Conspicuous consumption is an effective signal of ability if high-ability people:

Information about the quality of a product is

A risk-averse individual will:

The optimal amount of information to acquire before making a purchase is:

When an individual is judged by the characteristics of the groups to which he or she belongs rather than on his or her own characteristics, it is called:

This graph illustrates the marginal costs and marginal benefits of acquiring information before making a major purchase. If the original curves are MB₀ and MC₀, the optimal quantity of information about this product is:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Aggregate Demand, Aggregate Supply, and Inflation

Exchange Rates and the Open Economy

Filters

The lemons model predicts that the market price of high-quality used cars will be the true value of high-quality used cars, so that only relatively cars will be put up for sale in market.