Question 1

Suppose Chris is offered the following gamble:  with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. The expected value of this gamble is found by solving:

Accepted Answer

A) 0.1 × ($90 - $60)+ 0.4 × ($50 - $60) 
B) 0.1 × $90 + 0.4 × $50 
C) 0.1 × $90 + 0.4 × $50 - 0.5 × $60 
D) ($90 + $50 - $60)/3

Question 2

If sellers have more information about the quality of goods than do buyers, then:

Accepted Answer

A) buyers always will be exploited. 
B) buyers will never make purchases. 
C) sellers of better-than-average goods will have difficulty getting their asking price. 
D) sellers of lower-than-average goods will have difficulty getting their asking price.

Question 3

Carson and Fran are both thrill seekers. Carson has health insurance and Fran does not. One can predict that:

Accepted Answer

A) Fran will engage in fewer dangerous activities. 
B) Carson will engage in fewer dangerous activities. 
C) Carson and Fran will participate in the same number of dangerous activities. 
D) Carson's health insurance will not affect Carson's behavior.

Question 4

Suppose that there are two types of houses for sale: those with solid foundations and those with cracked foundations. In all other respects, the two types of houses are identical. Houses with solid foundations are worth $200,000, while those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack, or $180,000. Sellers know which type of house they have, but buyers cannot detect whether the foundation has a crack. Suppose that 80 percent of the houses for sale have a solid foundation and 20 percent of the houses for sale have a cracked foundation. In the long run, we would expect:

Accepted Answer

A) 80 percent of the houses for sale to have a solid foundation, 20 percent to have a cracked foundation, and houses to sell for $196,000. 
B) 100 percent of the houses for sale to have a cracked foundation and to sell for $180,000. 
C) 100 percent of the houses for sale to have a solid foundation and to sell for $200,000. 
D) 100 percent of the houses for sale to have a cracked foundation and to sell for more than $180,000.

Question 5

According to the textbook, middlemen:

Accepted Answer

A) add no value to economic activity. 
B) only add value if the consumer gets a good deal. 
C) only add value to themselves. 
D) provide value through information and coordination.

Question 6

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. Suppose that all State U students have the same academic ability when they enter college and do not learn anything in college that will be useful to them while working at Acme. Students differ only in their willingness to work hard and study for their classes. In this case:

Accepted Answer

A) Acme will not care about a student's GPAs because all students enter college with the same academic ability. 
B) Acme will not care about a student's GPAs because the students at State U don't learn anything useful in their classes. 
C) there is no benefit to studying hard in college. 
D) Acme will use a student's GPA as a signal of the student's willingness to work hard.

Question 7

A risk-neutral individual will:

Accepted Answer

A) accept only better-than-fair gambles. 
B) see risk as neither good nor bad. 
C) accept only gambles with an expected value of zero or greater. 
D) accept only gambles with an expected value of zero.

Question 8

The difference between the price of electronic equipment in a retail store and on the Internet partly reflects:

Accepted Answer

A) the extent to which middlemen drive the price up for extra profit. 
B) the lack of competition between brick and mortar stores and online stores. 
C) the value of personal attention and support at a retail store. 
D) excessive markup.

Question 9

Lou and Toby both live in a little town and are trying to sell their cars. Both of their cars have a blue book value of $10,000. Lou has an American car like most of the people in town own. Toby owns the only Bulgarian car in town. If people in their town are risk averse, then who will get closest to the blue book value for his car?

Accepted Answer

A) Lou will because American cars are better than Bulgarian cars. 
B) Toby will because there is less uncertainty about the quality of Lou's car. 
C) Lou will because there is less uncertainty about the quality of Lou's car. 
D) Both should get the same price for their cars because both cars have the same blue book value.

Question 10

In the absence of laws requiring individuals to purchase insurance, insurance is most attractive to:

Accepted Answer

A) the poor. 
B) the wealthy. 
C) those with lowest likelihood of filing a claim. 
D) those with the highest likelihood of filing a claim.

Question 11

Several web sites, like Pricewatch.com, allow consumers to input the name of a product, and the site then returns a list of suppliers with their respective prices for the product. This:

Accepted Answer

A) increases the benefit of search. 
B) increases the free-rider problem. 
C) reduces the benefit of search. 
D) reduces the cost of search.

Question 12

Statistical discrimination occurs when:

Accepted Answer

A) individuals are judged solely on the basis of their personal characteristics. 
B) individuals are judged on the basis of the groups to which they belong. 
C) firms have perfect information about each potential buyer. 
D) statistics are used to make employment decisions.

Question 13

Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. If Mel is risk-neutral, then in the absence of trip insurance, the most she will be willing to pay for the cruise is:

Accepted Answer

A) $1,200. 
B) $1,250. 
C) $1,220. 
D) $1,000.

Question 14

Suppose that there are two types of houses for sale: those with solid foundations and those with cracked foundations. In all other respects, the two types of houses are identical. Houses with solid foundations are worth $200,000, while those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack, or $180,000. Sellers know which type of house they have, but buyers cannot detect whether the foundation has a crack. Suppose that 80 percent of the houses for sale have a solid foundation and 20 percent of the houses for sale have a cracked foundation. If buyers are risk-neutral and know the that 80 percent of the houses for sale have a solid foundation while 20 percent have a cracked foundation, then how much will buyers be willing to pay for a house?

Accepted Answer

A) $200,000 
B) $196,000 
C) $180,000 
D) $160,000

Question 15

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. If the cost to Alex of searching for an apartment is $40, then searching for another apartment is a gamble with an expected value of:

Accepted Answer

A) -$10. 
B) $0. 
C) $10. 
D) $20.

Question 16

Suppose Ginger is going to buy a house and a dishwasher. Assuming the marginal cost of searching for both is the same, one can predict that Ginger will

Accepted Answer

A) spend more time searching for the house than the dishwasher. 
B) spend more time searching for the dishwasher than the house. 
C) spend equal amounts of time searching for the dishwasher and the house. 
D) trust the information from her real estate agent but not from the dishwasher salesperson.

Question 17

Frank is considering moving to Denver. There is a 70 percent chance that he will find a job that pays $1,000 more than what he currently earns and a 30 percent chance he will find one that pays $3,000 less. The expected value of moving to Denver is:

Accepted Answer

A) -$200. 
B) $200. 
C) $700. 
D) $900.

Question 18

Adam Smith's invisible hand only leads to an efficient outcome when

Accepted Answer

A) buyers are fully informed about all relevant aspects of a product and the market in which it is traded. 
B) buyers collect information up to the point at which the marginal cost of having more information equals the marginal benefit of having more information. 
C) buyers have more information about the product being traded than do sellers. 
D) buyers have less information about the product being traded than do sellers.

Question 19

Even though conspicuous consumption can serve as a credible signal of ability, it can lead to socially inefficient outcomes because:

Accepted Answer

A) conspicuous consumption has been demonstrated to be poorly correlated with ability. 
B) conspicuous consumption is not highly correlated with earnings. 
C) conspicuous consumption can lead to positional arms races. 
D) earnings and ability are very poorly correlated.

Question 20

The free-rider problem arises when people:

Accepted Answer

A) obtain a good for less than the market equilibrium price. 
B) who do not pay for a good cannot be excluded from consuming it. 
C) who do not pay for a good cannot consume it. 
D) who pay for a good cannot consume it.

Exam 12: The Economics of Information

Suppose Chris is offered the following gamble: with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. The expected value of this gamble is found by solving: