Exam 12: The Economics of Information

Suppose that sellers value a good car at $4,500 and a bad car at $2,500, and quality is not observed by the buyers.What is the highest price that risk-neutral buyers will offer for a used car if they recognize adverse selection?

You are a hotel manager, and are considering four projects that yield different payoffs, depending upon whether there is an economic boom or recession.The potential payoffs and corresponding payoffs are summarized in the following table. -A risk-loving manager will prefer project

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1, a one-third probability that it will be $1.5, and a one-third probability that it will be $2.His cost function is C(Q) = .01Q².If the farmer is risk neutral:

A risk neutral individual would

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1, a one-third probability that it will be $1.5, and a one-third probability that it will be $2.His cost function is C(Q) = 0.01Q².The farmer's maximum expected profit is:

In order to reduce the undesirable effects of moral hazard, an insurance company can

At Econ Tech, the average grade in a course that all students know to be a "blow-off" course is the same as the average grade in the toughest math course.Why?

Jane wants to buy a beautiful doll as a gift for her sister's birthday.She knows that the same product is offered in different shops with prices of $120, $100 and $80 with odds of 1/3 of each price.She just stopped at a shop and knows that the price is $100.If the search cost is $8 per time, what should she do?

Joe's search costs are $5 per search.He wants to buy a VCR for his wife for Christmas, and the lowest price he's found so far is $200.Joe thinks 50 percent of the stores charge $200 for VCR's and 50 percent charge $190.Based on this information

If a manager adopted both project A and B simultaneously, the variance in returns associated with this joint project would be

You are a hotel manager, and are considering four projects that yield different payoffs, depending upon whether there is an economic boom or recession.The potential payoffs and corresponding payoffs are summarized in the following table. -A risk-averse manager will prefer project

Risk averse persons sometimes prefer to play some gambles even if they know that those gambles are not fair, i.e., on average people lose by playing them.One plausible explanation of this seemingly paradoxical phenomenon is that:

Suppose option A has a lower expected value than option B.Which of the following statements is, in general, true?

Consider an antique auction where bidders have independent private values.There are two bidders, each of which perceives that valuations are uniformly distributed between $100 and $1000.One of the bidders is Sue, who knows her own valuation is $200.What is Sue's optimal bidding strategy in a first-price sealed-bid auction:

A consumer spends more time searching for a good when her reservation price is:

What is the expression for the expected marginal revenue function?

Holding the mean constant, the larger the standard deviation, the ____________ the gamble will be.

Explain why a used car that is only six months old and has been driven only 5,000 miles typically sells for 20 percent less than a new car with the same options.

A risk neutral monopoly must set output before it knows for sure the market price.There is a 50% chance the firm's demand curve will be P = 20 - Q and a 50% chance it will be P = 40 - Q.The marginal cost of the firm is MC = Q.The expected profit-maximizing quantity is:

As the manager of We Do It Right Construction, you need to make a decision on how many homes to build in a new residential area.There is a 20 percent chance of a recession, a 60 percent chance the economy will remain as it is, and a 20 percent chance there will be an economic upturn.If a recession hits, your inverse demand curve for new homes will be