Question 1

After a person buys insurance for his car, he will generally not care for his car as much as he otherwise would.This is an example of:

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) risk aversion. 
D) none of the statements associated with this question are correct. 
A) adverse selection. 
B) moral hazard. 
C) risk aversion. 
D) none of the statements associated with this question are correct.

Question 2

Suppose option A has a higher standard deviation than option B.Which of the following statements is, in general, true?

Accepted Answer

A) A risk averse person prefers option B to option A. 
B) A risk neutral person is indifferent between options A and B. 
C) A risk averse person prefers option A to option B. 
D) Insufficient information to determine. 
A) A risk averse person prefers option B to option A. 
B) A risk neutral person is indifferent between options A and B. 
C) A risk averse person prefers option A to option B. 
D) Insufficient information to determine.

Question 3

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 profits are maximized in the expected sense when:

Accepted Answer

A) Expected value of price = E(MR). 
B) MC = Expected value of price. 
C) MC < E(MR). 
D) MC = E(MR). 
A) Expected value of price = E(MR). 
B) MC = Expected value of price. 
C) MC < E(MR). 
D) MC = E(MR).

Question 4

A risk-averse manager is considering two projects.The first is to introduce a new product; the second is to revamp the production facilities at the existing plant.There is a 20 percent chance a rival will enter the market and an 80 percent chance it will not.If the rival enters, the firm will lose $20,000 if it introduces the new product, whereas revamping the production facilities will earn it $50,000 in profits.If the rival does not enter, the firm will earn $15,000 if it introduces the new product, and revamping the production facilities will earn net profits of $60,000.What should the manager do? Why?

Accepted Answer

The expected profits of introducing a ne

Question 5

Many tout that the Internet has lowered consumers' search cost.If this is true, ceteris parabis, consumer reservation price should

Accepted Answer

A) be higher. 
B) be lower. 
C) remain the same. 
D) there is insufficient information to determine the impact of lower search costs on reservation prices. 
A) be higher. 
B) be lower. 
C) remain the same. 
D) there is insufficient information to determine the impact of lower search costs on reservation prices.

Question 6

When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?

Accepted Answer

A) $2,500. 
B) $3,000. 
C) $4,000. 
D) $4,500. 
A) $2,500. 
B) $3,000. 
C) $4,000. 
D) $4,500.

Question 7

Which of the following phenomena shows that risk aversion is the characteristic of many people?

Accepted Answer

A) The popularity of high-stakes poker tournaments. 
B) Horse-race betting. 
C) Investing in one stock rather than a portfolio. 
D) Home-owners insurance. 
A) The popularity of high-stakes poker tournaments. 
B) Horse-race betting. 
C) Investing in one stock rather than a portfolio. 
D) Home-owners insurance.

Question 8

Determine the most likely information structure (independent private values, affiliated values, or common values) for an auction involving:
a.A music CD.
b.An offshore oil lease.
c.A used car.

Accepted Answer

a.Individual private values (a

Question 9

Suppose you are a risk-neutral manager attempting to hire a new sales manager.All of the workers in the market have the same ability to manage and sell, but differ with respect to the wage at which they are willing to work for your company.The market for sales managers is composed of three types of individuals: 85 percent are willing to work for $75,000 and 15 percent are willing to work for $85,000.If the first interviewee is only willing to work for $85,000.If the human resource director spends five hours interviewing each candidate and the opportunity cost of this director's time is $500, then the director should

Accepted Answer

A) search again since the expected benefit of an additional search exceeds the cost. 
B) stop searching since the expected benefit of an additional search is less than the cost. 
C) search again since the expected benefit of an additional search is less than the cost. 
D) stop searching since the expected benefit of an additional search exceeds the cost. 
A) search again since the expected benefit of an additional search exceeds the cost. 
B) stop searching since the expected benefit of an additional search is less than the cost. 
C) search again since the expected benefit of an additional search is less than the cost. 
D) stop searching since the expected benefit of an additional search exceeds the cost.

Question 10

Which of the following is a possible critique of the decision theory under uncertainty presented in the text?

Accepted Answer

A) People do not always know the "true" probability of complicated events. 
B) Decision theory assumes that people are good at math. 
C) Decision theory assumes that people face the same situation (uncertainty) repeatedly. 
D) People are not risk averse. 
A) People do not always know the "true" probability of complicated events. 
B) Decision theory assumes that people are good at math. 
C) Decision theory assumes that people face the same situation (uncertainty) repeatedly. 
D) People are not risk averse.

Question 11

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

Accepted Answer

A) A risk averse person prefers option B to option A. 
B) A risk neutral person is indifferent between options A and B. 
C) A risk averse person prefers option A to option B. 
D) Insufficient information to determine. 
A) A risk averse person prefers option B to option A. 
B) A risk neutral person is indifferent between options A and B. 
C) A risk averse person prefers option A to option B. 
D) Insufficient information to determine.

Question 12

Will consumers spend more time searching when stores are located in a mall or when they are spread all over town? Explain.

Accepted Answer

In Figure 12-9, we see that the marginal

Question 13

You are the bidder in an independent private values auction.Each bidder perceives that valuations are evenly distributed between $0 and $1,000.Your own valuation of the item is $900.Determine your optimal bidding strategy in a first-price, sealed-bid auction with:
a.Two bidders.
b.Three bidders.
c.20 bidders.

Accepted Answer

a.With only two bidders, n = 2.The lowes

Question 14

You are the manager of a firm that has just created a new and improved version of a product you know to be superior to every other product on the market.To signal your quality, you have instructed your marketing department to change the label of your firm's product to include the phrase, "New and Improved." Based on this information, do you think it is prudent to contact your production department and instruct them to significantly expand capacity? Explain.

Accepted Answer

No.Since this type of signal c

Question 15

Which of the following statements is not correct?

Accepted Answer

A) Information plays an important role in the economy. 
B) Asymmetric information may lead to the disappearance of a market. 
C) It is always desirable for a person to have more information than the person he is trading with. 
D) Adverse selection will not occur if there is no asymmetric information. 
A) Information plays an important role in the economy. 
B) Asymmetric information may lead to the disappearance of a market. 
C) It is always desirable for a person to have more information than the person he is trading with. 
D) Adverse selection will not occur if there is no asymmetric information.

Question 16

The expected value of project A is

Accepted Answer

A) $5. 
B) $10. 
C) $20. 
D) none of the statements associated with this question are correct. 
A) $5. 
B) $10. 
C) $20. 
D) none of the statements associated with this question are correct.

Question 17

The winner's curse occurs:

Accepted Answer

A) only in English auctions. 
B) only in second-price sealed bid auctions. 
C) in a common-values auction. 
D) in a private-values auction. 
A) only in English auctions. 
B) only in second-price sealed bid auctions. 
C) in a common-values auction. 
D) in a private-values auction.

Question 18

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 Dutch auction:

Accepted Answer

A) submit a bid of $150. 
B) submit a bid of $200. 
C) submit a bid that is less than $150. 
D) yell "mine" when the bid reaches $150. 
A) submit a bid of $150. 
B) submit a bid of $200. 
C) submit a bid that is less than $150. 
D) yell "mine" when the bid reaches $150.

Question 19

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 second-price sealed-bid auction:

Accepted Answer

A) submit a bid of $150. 
B) submit a bid of $200. 
C) submit a bid that is less than $150. 
D) yell "mine" when the bid reaches $150. 
A) submit a bid of $150. 
B) submit a bid of $200. 
C) submit a bid that is less than $150. 
D) yell "mine" when the bid reaches $150.

Question 20

To maximize profit in the face of certainty, firms should produce the output where

Accepted Answer

A) expected price equals expected marginal cost. 
B) expected marginal revenue equals marginal cost. 
C) expected marginal revenue equals expected marginal cost. 
D) expected price equals marginal cost. 
A) expected price equals expected marginal cost. 
B) expected marginal revenue equals marginal cost. 
C) expected marginal revenue equals expected marginal cost. 
D) expected price equals marginal cost.

After a person buys insurance for his car, he will generally not care for his car as much as he otherwise would.This is an example of:

Suppose option A has a higher standard deviation than option B.Which of the following statements is, in general, true?

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 profits are maximized in the expected sense when:

Many tout that the Internet has lowered consumers' search cost.If this is true, ceteris parabis, consumer reservation price should

When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?

Which of the following phenomena shows that risk aversion is the characteristic of many people?

Determine the most likely information structure (independent private values, affiliated values, or common values) for an auction involving: a.A music CD. b.An offshore oil lease. c.A used car.

Which of the following is a possible critique of the decision theory under uncertainty presented in the text?

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

Will consumers spend more time searching when stores are located in a mall or when they are spread all over town? Explain.

Which of the following statements is not correct?

The expected value of project A is

The winner's curse occurs:

To maximize profit in the face of certainty, firms should produce the output where

The Fundamentals of Managerial Economics

Market Forces: Demand and Supply

Quantitative Demand Analysis

The Theory of Individual Behavior

The Production Process and Costs

The Organization of the Firm

The Nature of Industry

Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Basic Oligopoly Models

Game Theory: Inside Oligopoly

Pricing Strategies for Firms With Market Power

Advanced Topics in Business Strategy

A Managers Guide to Government in the Marketplace

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Exam 12: The Economics of Information

After a person buys insurance for his car, he will generally not care for his car as much as he otherwise would.This is an example of:

Suppose option A has a higher standard deviation than option B.Which of the following statements is, in general, true?

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 profits are maximized in the expected sense when:

Many tout that the Internet has lowered consumers' search cost.If this is true, ceteris parabis, consumer reservation price should

When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?

Which of the following phenomena shows that risk aversion is the characteristic of many people?

Determine the most likely information structure (independent private values, affiliated values, or common values) for an auction involving: a.A music CD. b.An offshore oil lease. c.A used car.

Which of the following is a possible critique of the decision theory under uncertainty presented in the text?

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

Will consumers spend more time searching when stores are located in a mall or when they are spread all over town? Explain.

Which of the following statements is not correct?

The expected value of project A is

The winner's curse occurs:

To maximize profit in the face of certainty, firms should produce the output where

The Fundamentals of Managerial Economics

Market Forces: Demand and Supply

Quantitative Demand Analysis

The Theory of Individual Behavior

The Production Process and Costs

The Organization of the Firm

The Nature of Industry

Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Basic Oligopoly Models

Game Theory: Inside Oligopoly

Pricing Strategies for Firms With Market Power

Advanced Topics in Business Strategy

A Managers Guide to Government in the Marketplace

Filters