Question 1

In which of the following markets is the presence of asymmetric information of little concern to the buyer?

Accepted Answer

A) The market for used textbooks 
B) The market for used houses 
C) The market for used computers 
D) The market for used cars 
A) The market for used textbooks 
B) The market for used houses 
C) The market for used computers 
D) The market for used cars

Question 2

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney's customers have reservation prices of $5. When Sydney's cart is located on a sidewalk in an upscale mall, wealthier customers with reservation prices of $10 buy snow globes. Assume that Sydney can sell the same volume at either location and that marginal and average costs are $3 per globe at both locations. Information about the reservation prices of Sydney's customers increases total surplus by:

Accepted Answer

A) allowing consumers with different incomes to acquire things they value. 
B) helping to ensure that snow globes go to consumers who like them most. 
C) encouraging sellers to locate in underserved areas. 
D) helping to ensure that snow globes go to consumers with the greatest willingness to pay. 
A) allowing consumers with different incomes to acquire things they value. 
B) helping to ensure that snow globes go to consumers who like them most. 
C) encouraging sellers to locate in underserved areas. 
D) helping to ensure that snow globes go to consumers with the greatest willingness to pay.

Question 3

Suppose Jack just booked a ticket to fly home to see his family for Thanksgiving. When he purchases the ticket, he decides to purchase travel insurance that allows him to get a full refund on his ticket if he's too sick to travel. Knowing this, Jack doesn't bother to take care of himself in the weeks leading up to the trip, reasoning that if he ends up being too sick to travel, then he can always get a full refund. Jack's failure to take care of himself in the weeks leading up to his trip is an example of:

Accepted Answer

A) adverse selection. 
B) the lemons model. 
C) a positional externality. 
D) moral hazard. 
A) adverse selection. 
B) the lemons model. 
C) a positional externality. 
D) moral hazard.

Question 4

Suppose Joe has a 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's in excellent condition and only $10,000 for one that's not in excellent condition. Lauren cannot tell whether Joe's car is in excellent condition. She believes that only 20 percent of two-year old Hondas for sale in the market are in excellent condition and that the other 80 percent are not in excellent condition. If Joe offers a warranty in which he makes a legally binding commitment to pay for any major repairs the car needs in the next 18 months, then this ________ serve a credible signal because ________.

Accepted Answer

A) will; it is more costly for people with low-quality cars to offer such a warranty 
B) will; people who own cars that are in excellent condition are usually honest 
C) will not; it is less costly for people with low-quality cars to offer such a warranty 
D) will not; people who sell used cars are rarely honest 
A) will; it is more costly for people with low-quality cars to offer such a warranty 
B) will; people who own cars that are in excellent condition are usually honest 
C) will not; it is less costly for people with low-quality cars to offer such a warranty 
D) will not; people who sell used cars are rarely honest

Question 5

The marginal cost of collecting information:

Accepted Answer

A) rises as more information is collected. 
B) falls as more information is collected. 
C) is now zero because of the Internet. 
D) is independent of the amount of information that has already been acquired. 
A) rises as more information is collected. 
B) falls as more information is collected. 
C) is now zero because of the Internet. 
D) is independent of the amount of information that has already been acquired.

Question 6

Alex, who is risk-neutral, is looking for a one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. Suppose Alex is risk-averse. If the cost to Alex of searching for another apartment is $40, then will he search for another apartment?

Accepted Answer

A) No, because searching for another apartment is a less-than-fair gamble. 
B) Yes, because searching for another apartment is a better-than-fair gamble. 
C) No, because searching for another apartment is a fair gamble. 
D) Yes, because searching for another apartment is a fair gamble. 
A) No, because searching for another apartment is a less-than-fair gamble. 
B) Yes, because searching for another apartment is a better-than-fair gamble. 
C) No, because searching for another apartment is a fair gamble. 
D) Yes, because searching for another apartment is a fair gamble.

Question 7

In the market for used cars, the lemons model predicts that:

Accepted Answer

A) sellers are less likely to sell low-quality cars than high-quality cars. 
B) buyers are more likely to overstate their reservation price. 
C) sellers are more likely to sell low-quality cars than high-quality cars. 
D) sellers are more likely to understate the condition of their cars. 
A) sellers are less likely to sell low-quality cars than high-quality cars. 
B) buyers are more likely to overstate their reservation price. 
C) sellers are more likely to sell low-quality cars than high-quality cars. 
D) sellers are more likely to understate the condition of their cars.

Question 8

Pascal is risk-averse while Marion is risk-neutral. Both are confronted with the following gamble: win $5,000 with the probability of 65 percent or lose $9,000 with a probability of 35 percent. One can predict that:

Accepted Answer

A) both might accept the gamble. 
B) only Pascal will accept the gamble. 
C) only Marion will accept the gamble. 
D) neither will accept the gamble. 
A) both might accept the gamble. 
B) only Pascal will accept the gamble. 
C) only Marion will accept the gamble. 
D) neither will accept the gamble.

Question 9

The free-rider problem occurs when:

Accepted Answer

A) buyers pay less than their reservation price. 
B) sellers receive more than their reservation price. 
C) people who do not pay for a good or service cannot be excluded from enjoying it. 
D) people who pay for a good or service cannot be excluded from enjoying it. 
A) buyers pay less than their reservation price. 
B) sellers receive more than their reservation price. 
C) people who do not pay for a good or service cannot be excluded from enjoying it. 
D) people who pay for a good or service cannot be excluded from enjoying it.

Question 10

Refer to the figure below. Suppose MC₁ is the marginal cost of information and MB₁ is the marginal benefit of information. Should a rational consumer pay $6 to get a 5ᵗʰ unit of information?

Accepted Answer

A) Yes, because at this price, the marginal benefit of the 5ᵗʰ unit exceeds its marginal cost. 
B) No, because at this price, the marginal cost of the 5ᵗʰ unit exceeds its marginal benefit. 
C) Yes, because at this price, the marginal benefit of the 5ᵗʰ unit equals its marginal cost. 
D) No, because at this price the marginal benefit of the 5ᵗʰ unit exceeds its marginal cost. 
A) Yes, because at this price, the marginal benefit of the 5ᵗʰ unit exceeds its marginal cost. 
B) No, because at this price, the marginal cost of the 5ᵗʰ unit exceeds its marginal benefit. 
C) Yes, because at this price, the marginal benefit of the 5ᵗʰ unit equals its marginal cost. 
D) No, because at this price the marginal benefit of the 5ᵗʰ unit exceeds its marginal cost.

Question 11

When attorneys, accountants and other professionals wear expensive clothing, it:

Accepted Answer

A) only serves as a useful signal of ability if they already have well-established reputations. 
B) does not serve as a credible signal of ability because anyone can wear nice clothes. 
C) is a waste of money because professionals do not need to signal their ability. 
D) can serve as a credible signal of ability. 
A) only serves as a useful signal of ability if they already have well-established reputations. 
B) does not serve as a credible signal of ability because anyone can wear nice clothes. 
C) is a waste of money because professionals do not need to signal their ability. 
D) can serve as a credible signal of ability.

Question 12

A gamble that offers a 1 percent chance of winning $699.93 and a 99 percent chance of losing $7.07 would be classified as a(n):

Accepted Answer

A) better-than-fair gamble. 
B) less-than-fair gamble. 
C) fair gamble. 
D) unfair gamble. 
A) better-than-fair gamble. 
B) less-than-fair gamble. 
C) fair gamble. 
D) unfair gamble.

Question 13

When buyers and sellers are not equally informed about the characteristics of the goods and services offered for sale, information is said to be:

Accepted Answer

A) costly-to-fake. 
B) asymmetric. 
C) credible. 
D) symmetric. 
A) costly-to-fake. 
B) asymmetric. 
C) credible. 
D) symmetric.

Question 14

The pattern in which insurance is purchased more frequently by those who are the most costly for companies to insure is referred to as:

Accepted Answer

A) adverse selection. 
B) statistical discrimination. 
C) risk aversion. 
D) moral hazard. 
A) adverse selection. 
B) statistical discrimination. 
C) risk aversion. 
D) moral hazard.

Question 15

Because of ________, the market will provide ________ the socially optimal level of information.

Accepted Answer

A) the credibility problem; more 
B) the problem of adverse selection; less 
C) moral hazard; more 
D) the free-rider problem; less 
A) the credibility problem; more 
B) the problem of adverse selection; less 
C) moral hazard; more 
D) the free-rider problem; less

Question 16

In markets with incomplete information, middlemen tend to ________ total economic surplus by ________.

Accepted Answer

A) reduce; raising prices 
B) reduce; giving misleading information 
C) increase; raising prices 
D) increase; matching sellers with buyers who have high reservation prices 
A) reduce; raising prices 
B) reduce; giving misleading information 
C) increase; raising prices 
D) increase; matching sellers with buyers who have high reservation prices

Question 17

It is spring, and several graduates of State U are seeking employment. State U graduates have evenly distributed GPAs, from 2.0 to 4.0, with an average GPA of 3.0. The largest employer in town, Acme Dynamite, is interviewing candidates, hoping to hire a few hard workers. While Acme does not require students to submit a transcript with their applications, the hiring officer believes that high GPAs signal a willingness to work hard. Gerry is a recent graduate if State U and is applying for a job with Acme. Gerry's GPA is 2.9. Should Gerry include a transcript with his job application?

Accepted Answer

A) No, because his GPA is worse than average. 
B) No, because Acme did not request it. 
C) Yes, because students with higher-than-average GPAs will always include a transcript, so if Gerry doesn't send a transcript, Acme will infer that Gerry's GPA is even lower than it is. 
D) Yes, because if he doesn't send a transcript, Acme will infer that Gerry is willing to work harder than he actually wants to work. 
A) No, because his GPA is worse than average. 
B) No, because Acme did not request it. 
C) Yes, because students with higher-than-average GPAs will always include a transcript, so if Gerry doesn't send a transcript, Acme will infer that Gerry's GPA is even lower than it is. 
D) Yes, because if he doesn't send a transcript, Acme will infer that Gerry is willing to work harder than he actually wants to work.

Question 18

For a signal to convey credible information about the quality of a good, the signal must:

Accepted Answer

A) not be costly to send. 
B) be equally costly to send, regardless of the good's quality. 
C) be less costly to send if the good is low quality than high quality. 
D) be less costly to send if the good is high quality than low quality. 
A) not be costly to send. 
B) be equally costly to send, regardless of the good's quality. 
C) be less costly to send if the good is low quality than high quality. 
D) be less costly to send if the good is high quality than low quality.

Question 19

The marginal benefit of additional information:

Accepted Answer

A) rises as more information is collected. 
B) is independent of the amount of information that has already been acquired. 
C) tends to be lower for expensive items than inexpensive items. 
D) falls as more information is collected. 
A) rises as more information is collected. 
B) is independent of the amount of information that has already been acquired. 
C) tends to be lower for expensive items than inexpensive items. 
D) falls as more information is collected.

Question 20

The reason the marginal benefit of information curve is downward sloping is because

Accepted Answer

A) some information is useless. 
B) most information is useless. 
C) information adds less and less benefit as more of it is acquired. 
D) there is only so much to learn about a product. 
A) some information is useless. 
B) most information is useless. 
C) information adds less and less benefit as more of it is acquired. 
D) there is only so much to learn about a product.

Exam 12: The Economics of Information

In which of the following markets is the presence of asymmetric information of little concern to the buyer?

The marginal cost of collecting information:

In the market for used cars, the lemons model predicts that:

Pascal is risk-averse while Marion is risk-neutral. Both are confronted with the following gamble: win $5,000 with the probability of 65 percent or lose $9,000 with a probability of 35 percent. One can predict that:

The free-rider problem occurs when:

Refer to the figure below. Suppose MC₁ is the marginal cost of information and MB₁ is the marginal benefit of information. Should a rational consumer pay $6 to get a 5ᵗʰ unit of information?

When attorneys, accountants and other professionals wear expensive clothing, it:

A gamble that offers a 1 percent chance of winning $699.93 and a 99 percent chance of losing $7.07 would be classified as a(n):

When buyers and sellers are not equally informed about the characteristics of the goods and services offered for sale, information is said to be:

The pattern in which insurance is purchased more frequently by those who are the most costly for companies to insure is referred to as:

Because of ________, the market will provide ________ the socially optimal level of information.

In markets with incomplete information, middlemen tend to ________ total economic surplus by ________.

For a signal to convey credible information about the quality of a good, the signal must:

The marginal benefit of additional information:

The reason the marginal benefit of information curve is downward sloping is because

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

Because of , the market will provide the socially optimal level of information.

In markets with incomplete information, middlemen tend to total economic surplus by .