Question 1

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

Accepted Answer

A)  $10,000 
B)  $5,000 
C)  $7,500 
D)  $7,000 
A)  $10,000 
B)  $5,000 
C)  $7,500 
D)  $7,000

Question 2

A manager is attempting to assess the probability of a recession ending in the next six months, and its impact on expected profitability. The manager believes there is a 75 percent chance the recession will end in six months and profits will return to $400 million. However, there is a 25 percent chance the recession will not end in six months, resulting in a $5 million loss. The standard deviation of profits over the next six months is:

Accepted Answer

A)  $175.37million. 
B)  $320.18 million. 
C)  $286.39 million. 
D)  $0 million. 
A)  $175.37million. 
B)  $320.18 million. 
C)  $286.39 million. 
D)  $0 million.

Question 3

Consumers spend a lot more time searching for good bargains during recessions because:

Accepted Answer

A)  goods are more expensive during recessions and hence expected benefits of a search are higher. 
B)  in recessions, many individuals are out of work, which lowers their opportunity cost of time. 
C)  goods are more expensive during recessions and hence expected benefits of a search are higher and in recessions, many individuals are out of work, which lowers their opportunity cost of time. 
D)  None of the statements is correct. 
A)  goods are more expensive during recessions and hence expected benefits of a search are higher. 
B)  in recessions, many individuals are out of work, which lowers their opportunity cost of time. 
C)  goods are more expensive during recessions and hence expected benefits of a search are higher and in recessions, many individuals are out of work, which lowers their opportunity cost of time. 
D)  None of the statements is correct.

Question 4

_______ occurs when people smoke more after buying life insurance.

Accepted Answer

A)  Adverse selection 
B)  Moral hazard 
C)  Asymmetric information 
D)  Cournot and Bertrand competition 
A)  Adverse selection 
B)  Moral hazard 
C)  Asymmetric information 
D)  Cournot and Bertrand competition

Question 5

A manager is attempting to assess the probability of a recession ending in the next six months and its impact on expected profitability. The manager believes there is a 33 percent chance the recession will end in six months and profits will return to $100 million. However, there is a 67 percent chance the recession will not end in six months, resulting in a $7 million loss. The expected profits over the next six months are:

Accepted Answer

A)  $28.31 million. 
B)  $33 million. 
C)  $64.69 million. 
D)  -$2.31 million. 
A)  $28.31 million. 
B)  $33 million. 
C)  $64.69 million. 
D)  -$2.31 million.

Question 6

According to Wikipedia.com, former Philippines President Marcos authorized construction of a new nuclear power plant on a known earthquake fault line in the province of Bataan. The projected $500 million power plant was to be constructed by Westinghouse. The project was backed by EXIR-a U.S. government-backed Export Credit Agency-which guaranteed the Philippine loan to Westinghouse. The actual cost of the completed project was $2.3 billion. Westinghouse was paid despite the fact that the nuclear plant never went online since it was built on a fault line. This is an example of:

Accepted Answer

A)  signaling. 
B)  screening. 
C)  moral hazard. 
D)  adverse selection. 
A)  signaling. 
B)  screening. 
C)  moral hazard. 
D)  adverse selection.

Question 7

A risk-loving individual would:

Accepted Answer

A)  prefer $5 with certainty to a risky prospect with the expected value of $5. 
B)  prefer a risky prospect with an expected value of $5 to a certain amount of $5. 
C)  be indifferent between a risky prospect with an expect value of $5 and a certain amount of $5. 
D)  prefer a risky prospect with the expected value of $0.50 to $5 with certainty. 
A)  prefer $5 with certainty to a risky prospect with the expected value of $5. 
B)  prefer a risky prospect with an expected value of $5 to a certain amount of $5. 
C)  be indifferent between a risky prospect with an expect value of $5 and a certain amount of $5. 
D)  prefer a risky prospect with the expected value of $0.50 to $5 with certainty.

Question 8

Suppose a consumer has determined that her reservation price, R, is $75. The expected benefit of an additional search at this reservation price is $25. Based on this information we can conclude that:

Accepted Answer

A)  search costs are $25 per search. 
B)  this consumer will reject any price above $25. 
C)  this consumer will accept any price below $75. 
D)  search costs are $25 per search, and this consumer will accept any price below $75. 
A)  search costs are $25 per search. 
B)  this consumer will reject any price above $25. 
C)  this consumer will accept any price below $75. 
D)  search costs are $25 per search, and this consumer will accept any price below $75.

Question 9

Consider an antique auction where bidders have independent private values. There are two bidders, each of whom perceives that valuations are uniformly distributed between $100 and $1,000. 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?

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 10

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

Accepted Answer

A)  more risky 
B)  less risky 
C)  higher utility 
D)  None of the statements is correct. 
A)  more risky 
B)  less risky 
C)  higher utility 
D)  None of the statements is correct.

Question 11

A risk-neutral monopoly must set output before it knows the market price. There is a 50 percent chance the firm's demand curve will be P = 40 - Q and a 50 percent chance it will be P = 60 - Q. The marginal cost of the firm is MC = 3Q. What is the expression for the expected marginal revenue function?

Accepted Answer

A)  E(MR) = 30 - 2Q 
B)  E(MR) = 40 - 2Q 
C)  E(MR) = 50 - 2Q 
D)  E(MR) = 60 - 2Q 
A)  E(MR) = 30 - 2Q 
B)  E(MR) = 40 - 2Q 
C)  E(MR) = 50 - 2Q 
D)  E(MR) = 60 - 2Q

Question 12

You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table.   The expected value of project A is:

Accepted Answer

A)  $5. 
B)  $10. 
C)  $20. 
D)  None of the statements is correct. 
A)  $5. 
B)  $10. 
C)  $20. 
D)  None of the statements is correct.

Question 13

Consider a consumer who is searching for the lowest price for good X. The consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the times she will find a store charging $7. The expected benefit from an additional search is:

Accepted Answer

A)  $3. 
B)  $0.75. 
C)  $2.25. 
D)  $0. 
A)  $3. 
B)  $0.75. 
C)  $2.25. 
D)  $0.

Question 14

Your firm is planning to hold an auction to sell its oil field. What type of auction should you suggest to your boss?

Accepted Answer

A)  Dutch auction 
B)  English auction 
C)  Second-price, sealed-bid auction 
D)  None of the statements is correct. 
A)  Dutch auction 
B)  English auction 
C)  Second-price, sealed-bid auction 
D)  None of the statements is correct.

Question 15

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.

Accepted Answer

Adverse selection. A relatively "new" us

Question 16

A risk-neutral, price-taking firm must set output before it knows the market price. There is a 50 percent chance the market demand curve will be Qd = 10 - 2P and a 50 percent chance it will be Qd = 20 - 2P. The market supply curve is estimated to be QS = 2 + P.
a. Calculate the expected (mean) market price.
b. Calculate the variance of the market price.
c. If the firm's marginal cost is given by MC = 0.01 + 5Q, what level of output maximizes expected profits?

Accepted Answer

a. When demand is Q^d = 10 - 2P, the mark

Question 17

In the presence of ______, the market mechanism can break down.

Accepted Answer

A)  extensive form games 
B)  normal form games 
C)  common knowledge 
D)  asymmetric information 
A)  extensive form games 
B)  normal form games 
C)  common knowledge 
D)  asymmetric information

Question 18

The optimal bid in a first-price, sealed-bid auction with independent private values is to bid:

Accepted Answer

A)  the true value of the item. 
B)  more than the true value of the item. 
C)  less than the true value of the item. 
D)  the true value of the item and more than the true value of the item, depending upon whether value estimates are affiliated. 
A)  the true value of the item. 
B)  more than the true value of the item. 
C)  less than the true value of the item. 
D)  the true value of the item and more than the true value of the item, depending upon whether value estimates are affiliated.

Question 19

Consider an auction with 1,000 risk-neutral bidders. It is known that these bidders have affiliated values. Based on this information, we know the expected revenues for the different auction types will be:

Accepted Answer

A)  English > Second-price, sealed-bid > First-price, sealed-bid = Dutch. 
B)  English = Second-price, sealed-bid = First-price, sealed-bid = Dutch. 
C)  First-price, sealed-bid = Dutch > English > Second-price, sealed-bid. 
D)  First-price, sealed-bid > Second-price, sealed-bid > English > Dutch. 
A)  English > Second-price, sealed-bid > First-price, sealed-bid = Dutch. 
B)  English = Second-price, sealed-bid = First-price, sealed-bid = Dutch. 
C)  First-price, sealed-bid = Dutch > English > Second-price, sealed-bid. 
D)  First-price, sealed-bid > Second-price, sealed-bid > English > Dutch.

Question 20

Which of the following auction examples has a common value information structure?

Accepted Answer

A)  Three firms bid for an oil lease. 
B)  An auction of a famous painting. 
C)  A college in need of money decides to name a building on campus after the person willing to pay the most for the privilege. 
D)  An auction of a famous painting and a college in need of money decides to name a building on campus after the person willing to pay the most for the privilege. 
A)  Three firms bid for an oil lease. 
B)  An auction of a famous painting. 
C)  A college in need of money decides to name a building on campus after the person willing to pay the most for the privilege. 
D)  An auction of a famous painting and a college in need of money decides to name a building on campus after the person willing to pay the most for the privilege.

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

Consumers spend a lot more time searching for good bargains during recessions because:

_______ occurs when people smoke more after buying life insurance.

A risk-loving individual would:

Suppose a consumer has determined that her reservation price, R, is $75. The expected benefit of an additional search at this reservation price is $25. Based on this information we can conclude that:

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

You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. The expected value of project A is:

Consider a consumer who is searching for the lowest price for good X. The consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the times she will find a store charging $7. The expected benefit from an additional search is:

Your firm is planning to hold an auction to sell its oil field. What type of auction should you suggest to your boss?

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.

In the presence of ______, the market mechanism can break down.

The optimal bid in a first-price, sealed-bid auction with independent private values is to bid:

Consider an auction with 1,000 risk-neutral bidders. It is known that these bidders have affiliated values. Based on this information, we know the expected revenues for the different auction types will be:

Which of the following auction examples has a common value information structure?

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

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

Consumers spend a lot more time searching for good bargains during recessions because:

_______ occurs when people smoke more after buying life insurance.

A risk-loving individual would:

Suppose a consumer has determined that her reservation price, R, is $75. The expected benefit of an additional search at this reservation price is $25. Based on this information we can conclude that:

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

You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table. The expected value of project A is:

Consider a consumer who is searching for the lowest price for good X. The consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the times she will find a store charging $7. The expected benefit from an additional search is:

Your firm is planning to hold an auction to sell its oil field. What type of auction should you suggest to your boss?

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.

In the presence of ______, the market mechanism can break down.

The optimal bid in a first-price, sealed-bid auction with independent private values is to bid:

Consider an auction with 1,000 risk-neutral bidders. It is known that these bidders have affiliated values. Based on this information, we know the expected revenues for the different auction types will be:

Which of the following auction examples has a common value information structure?

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