Question 1

Which of the following is the best example of adverse selection?

Accepted Answer

A)  People who face the highest risks are the people most likely to buy insurance against these risks. 
B)  The residual claimant will have to bear the consequences of the most adverse outcomes. 
C)  An individual can influence the probability that she has an accident. 
D)  Items in the most popular styles sell out the quickest. 
E)  People sometimes mistakenly choose low-quality products. 
A)  People who face the highest risks are the people most likely to buy insurance against these risks. 
B)  The residual claimant will have to bear the consequences of the most adverse outcomes. 
C)  An individual can influence the probability that she has an accident. 
D)  Items in the most popular styles sell out the quickest. 
E)  People sometimes mistakenly choose low-quality products.

Question 2

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16.The community has equal numbers of each type of worker.The local community college offers a course in microeconomics.High-productivity workers think taking this course is as bad as a cut in wages of $4 and low-productivity workers think it is as bad as a wage cut of $8.

Accepted Answer

A)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
B)  There is no separating equilibrium and no pooling equilibrium. 
C)  There is no separating equilibrium,but there is a pooling equilibrium in which everybody is paid $13. 
D)  There is a separating equilibrium in which high-productivity workers take the course and are paid $20 and low-productivity workers do not take the course and are paid $10. 
E)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13. 
A)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
B)  There is no separating equilibrium and no pooling equilibrium. 
C)  There is no separating equilibrium,but there is a pooling equilibrium in which everybody is paid $13. 
D)  There is a separating equilibrium in which high-productivity workers take the course and are paid $20 and low-productivity workers do not take the course and are paid $10. 
E)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13.

Question 3

Enigma,Ohio,has two kinds of workers,klutzes whose labor is worth $1,000 a month and kandos whose labor is worth $2,500 a month.Enigma has exactly twice as many klutzes as kandos.Klutzes look just like kandos and are accomplished liars,so if you ask,they claim to be kandos.It is too expensive to monitor anybody's work.A professor who likes to talk offers to give free lectures on personal hygiene and macroeconomics.Klutzes and kandos find these lectures excruciatingly dull.An hour's lecture is as bad as losing $50 for a kando and as bad as losing $100 for a klutz.If all other firms pay wages equal to the productivity of an average citizen of Enigma,which of these strategies would be most profitable for a new firm?

Accepted Answer

A)  Offer a wage of $2,000 per month and require its workers to listen to 6 hours of lectures per month. 
B)  Offer a wage of $2,000 per month and require its workers to listen to 4 hours of lectures per month. 
C)  Offer a wage of $1,750 per month and require its workers to listen to 6 hours of lectures per month. 
D)  Offer a wage of $1,660 per month and require its workers to attend 1 hour of lectures per month. 
E)  Offer a wage of $2,600 per month and require its workers to attend 8 hours of lectures per month. 
A)  Offer a wage of $2,000 per month and require its workers to listen to 6 hours of lectures per month. 
B)  Offer a wage of $2,000 per month and require its workers to listen to 4 hours of lectures per month. 
C)  Offer a wage of $1,750 per month and require its workers to listen to 6 hours of lectures per month. 
D)  Offer a wage of $1,660 per month and require its workers to attend 1 hour of lectures per month. 
E)  Offer a wage of $2,600 per month and require its workers to attend 8 hours of lectures per month.

Question 4

Ten workers work jointly on a project.All 10 workers are equally skilled.The total value of the output produced is $60 times the sum of the number of hours worked by all 10 workers.Each worker's utility is equal to his income minus the square of the number of hours he works.Each worker is selfish.The employers have no way of keeping track of any individual's work effort,so they decide to let each person work as long as he wants to and they divide the total value of the output equally among the workers.How much income will each worker get?

Accepted Answer

A)  $1,800 
B)  $180 
C)  $30 
D)  $195 
E)  None of the above. 
A)  $1,800 
B)  $180 
C)  $30 
D)  $195 
E)  None of the above.

Question 5

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16.The community has equal numbers of each type of worker.The local community college offers a course in microeconomics.High-productivity workers think taking this course is as bad as a cut in wages of $5 and low-productivity workers think it is as bad as a wage cut of $9.

Accepted Answer

A)  There is no separating equilibrium and no pooling equilibrium. 
B)  There is no separating equilibrium,but there is a pooling equilibrium in which everybody is paid $13. 
C)  There is a separating equilibrium in which high- productivity workers take the course and are paid $21 and low-productivity workers do not take the course and are paid $10. 
D)  There is a separating equilibrium in which high- productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
E)  There is a separating equilibrium in which high- productivity workers take the course and are paid $16 and low-productivity workers are paid $13. 
A)  There is no separating equilibrium and no pooling equilibrium. 
B)  There is no separating equilibrium,but there is a pooling equilibrium in which everybody is paid $13. 
C)  There is a separating equilibrium in which high- productivity workers take the course and are paid $21 and low-productivity workers do not take the course and are paid $10. 
D)  There is a separating equilibrium in which high- productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
E)  There is a separating equilibrium in which high- productivity workers take the course and are paid $16 and low-productivity workers are paid $13.

Question 6

A certain city has two kinds of workers,alphas and betas.An alpha can produce $100 worth of output per day working for himself.If he works in the local factory,he produces $120 worth of output a day.A beta produces $60 worth of output per day working for himself,and he produces $80 worth of output per day if he works for the local factory.Workers either work for themselves or work in the factory.The factory owner can't tell alphas from betas.He pays a wage equal to the average product of his labor force and he has at least some alphas working for him.Workers are free to choose to work for themselves or the factory,depending on which offers more money.

Accepted Answer

A)  At least 5/6 of the factory's employees must be alphas. 
B)  At least half of the factory's employees must be betas. 
C)  At least half of the factory's employees must be alphas. 
D)  None of the factory's employees can be betas. 
E)  No more than 5/6 of the betas can work in the factory. 
A)  At least 5/6 of the factory's employees must be alphas. 
B)  At least half of the factory's employees must be betas. 
C)  At least half of the factory's employees must be alphas. 
D)  None of the factory's employees can be betas. 
E)  No more than 5/6 of the betas can work in the factory.

Question 7

Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16.The community has equal numbers of each type of worker.The local community college offers a course in microeconomics.High-productivity workers think taking this course is as bad as a cut in wages of $5 and low-productivity workers think it is as bad as a wage cut of $9.

Accepted Answer

A)  There is no separating equilibrium,but there is a pooling equilibrium in which everybody is paid $13. 
B)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
C)  There is a separating equilibrium in which high-productivity workers take the course and are paid $21 and low-productivity workers do not take the course and are paid $10. 
D)  There is no separating equilibrium and no pooling equilibrium. 
E)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13. 
A)  There is no separating equilibrium,but there is a pooling equilibrium in which everybody is paid $13. 
B)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10. 
C)  There is a separating equilibrium in which high-productivity workers take the course and are paid $21 and low-productivity workers do not take the course and are paid $10. 
D)  There is no separating equilibrium and no pooling equilibrium. 
E)  There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13.

Question 8

There are two types of used cars,high quality and low quality.Buyers cannot distinguish the two types until after they have purchased them.Owners of high-quality cars will sell them if the price is $2,000 or higher.Owners of low-quality cars will sell them if the price is $1,000 or higher.Buyers value a high-quality used car at $4,266 and a low-quality used car at $1,200.Suppose that 30% of used cars are of high quality and 70% of used cars are of low quality.In equilibrium,

Accepted Answer

A)  only high-quality used cars will be sold. 
B)  only low-quality used cars will be sold. 
C)  all used cars will be sold. 
D)  no used cars will be sold. 
E)  high-quality used cars will sell for a uniformly higher price than low-quality used cars. 
A)  only high-quality used cars will be sold. 
B)  only low-quality used cars will be sold. 
C)  all used cars will be sold. 
D)  no used cars will be sold. 
E)  high-quality used cars will sell for a uniformly higher price than low-quality used cars.

Question 9

In a market where there is a pooling equilibrium,different types of agents choose the same action.

Accepted Answer

A) True 
 B)False

Exam 38:Asymmetric Information-Part A

Which of the following is the best example of adverse selection?

In a market where there is a pooling equilibrium,different types of agents choose the same action.

Demand-Part A

Revealed Preference-Part A

Revealed Preference-Part B

Slutsky Equation-Part A

Slutsky Equation-Part B

Buying and Selling-Part A

Buying and Selling-Part B

Intertemporal Choice-Part A

Intertemporal Choice-Part B

Asset Markets-Part A

Asset Markets-Part B

Uncertainty-Part A

Uncertainty-Part B

Risky Assets-Part A

Risky Assets-Part B

Consumers Surplus-Part A

Consumers Surplus-Part B

Market Demand-Part A

Market Demand-Part B

Equilibrium-Part A

Equilibrium-Part B

Auctions-Part A

Auctions-Part B

Technology-Part A

Technology-Part B

Profit Maximization-Part A

Profit Maximization-Part B

Cost Minimization-Part A

Cost Minimization-Part B

Cost Curves-Part A

Cost Curves-Part B

Firm Supply-Part A

Firm Supply-Part B

Industry Supply-Part A

Industry Supply-Part B

Monopoly-Part A

Monopoly-Part B

Monopoly Behavior-Part A

Monopoly Behavior-Part B

Factor Markets-Part A

Factor Markets-Part B

Oligopoly-Part A

Oligopoly-Part B

Game Theory-Part A

Game Theory-Part B

Game Applications-Part A

Game Applications-Part B

Behavioral Economics-Part A

Exchange-Part A

Exchange-Part B

Production-Part A

Production-Part B

Welfare-Part A

Welfare-Part B

Externalities-Part A

Externalities-Part B

Information Technology-Part A

Information Technology-Part B

Public Goods-Part A

Public Goods-Part B

Asymmetric Information-Part B

Filters