Question 1

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

Question 2

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.

Question 3

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

Accepted Answer

The answer of Will consumers spend more time searching when...

Question 4

Fli-By-Nite Airlines has 1,000 customers.These customers are of two types.Day customers are willing to pay $700 for a flight that has a daytime departure and arrival but only $200 for a flight on the red-eye.Night customers will pay $500 for a flight that has a daytime departure and $300 for a flight on the red-eye.You are the manager for Fli-By-Nite and are unable to determine whether any given individual is a day customer or a night customer.Can you think of a self-selection mechanism that would permit you to identify day and night customers?

Accepted Answer

The answer of Fli-By-Nite Airlines has 1,000 customers.These customers are...

Question 5

You are a hotel manager 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. $$\begin{array} { | l | l | l | } 
\hline \text { Praject } & \begin{array} { l } 
\text { Bamn } \
( 50 \% )
\end{array} & \begin{array} { l } 
\text { Recession } \
( 50 \% )
\end{array} \
\hline \text { A } & \$ 40 & - \$ 20 \
\hline \text { B } & - \$ 10 & \$ 30 \
\hline \text { C } & \$ 50 & - \$ 50 \
\hline \text { D } & \$ 60 & \$ 60 \
\hline
\end{array}$$ The expected value of project A is:

Accepted Answer

A)  $5. 
B)  $10. 
C)  $20. 
D)  None of the answers are correct.

Question 6

Which of the following statements is true regarding the expected revenues of auctions with risk-neutral bidders where value estimates are affiliated?

Accepted Answer

A)  English = First price = Dutch = Second price. 
B)  Second price > English > Dutch > First price. 
C)  First price = Dutch > Second price > English. 
D)  English > Second price > Dutch = First price.

Question 7

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 preceding statements is correct.

Question 8

Which of the following is a feature of a Dutch auction?

Accepted Answer

A)  The auctioneer begins with a very low asking price. 
B)  The winner pays exactly what she bid for the item. 
C)  Bidders simultaneously write their valuations on paper and submit them independently. 
D)  Several bidders will announce their valuations.

Question 9

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. $$\begin{array} { | l | l | l | } 
\hline \text { Praject } & \begin{array} { l } 
\text { Bamn } \
( 50 \% )
\end{array} & \begin{array} { l } 
\text { Recession } \
( 50 \% )
\end{array} \
\hline \text { A } & \$ 20 & - \$ 10 \
\hline \text { B } & - \$ 10 & \$ 20 \
\hline \text { C } & \$ 30 & - \$ 30 \
\hline \text { D } & \$ 50 & \$ 50 \
\hline
\end{array}$$ Which project has the lowest expected value?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D

Question 10

"Guaranteed issue" is a controversial topic in the insurance market.It requires firms offering health coverage for one employee to offer the same coverage to all employees,regardless of their health risks.Why is this so controversial?

Accepted Answer

The answer of "Guaranteed issue" is a controversial topic in...

Question 11

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 preceding statements is correct.

Question 12

To maximize profit in the face of uncertainty,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.

Question 13

Susan's search costs are $7 per search.She wants to buy a coat,and the lowest price she has found so far is $180.Susan thinks 25 percent of the stores charge $180 for this coat,50 percent charge $160,and the other 25 percent charge $150.Susan's optimal decision is to:

Accepted Answer

A)  continue to search for a lower price since the expected benefit of an additional search is $7.50, which exceeds her per-unit search costs. 
B)  stop searching and purchase a coat for $180. 
C)  continue to search for a lower price since the expected benefit of an additional search is $10, which exceeds her per-unit search costs. 
D)  continue to search for a lower price since the expected benefit of an additional search is $17.50, which exceeds her per-unit search costs.

Question 14

Suppose a risk-neutral competitive firm must set output before it knows for sure the market price.Suppose the market price is given by p = p* + e,where p* is the mean price and e is a random term with an expected value of zero.Then in order to maximize expected profits,the firm should produce where:

Accepted Answer

A)  p = MC. 
B)  p* = MC. 
C)  p* + e = MC. 
D)  p > MC.

Question 15

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. $$\begin{array} { | l | l | l | } 
\hline \text { Praject } & \begin{array} { l } 
\text { Bamn } \
( 50 \% )
\end{array} & \begin{array} { l } 
\text { Recession } \
( 50 \% )
\end{array} \
\hline \text { A } & \$ 20 & - \$ 10 \
\hline \text { B } & - \$ 10 & \$ 20 \
\hline \text { C } & \$ 30 & - \$ 30 \
\hline \text { D } & \$ 50 & \$ 50 \
\hline
\end{array}$$ The expected value of project A is:

Accepted Answer

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

Question 16

Many tout that the Internet has lowered consumers' search costs.If this is true,ceteris parabis,the 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.

Question 17

Your firm is planning to hold an auction to sell its mining facility.Your boss has asked you to determine the best type of auction to hold to maximize expected profits from selling the facility.Based on your knowledge of auctions,provide your boss with a suggestion.

Accepted Answer

The answer of Your firm is planning to hold an...

Question 18

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$$\begin{array} { | l | l | l | } 
\hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \
\hline \text { Good } & & \
\text { (50\% probability) } & 5,000 & 4,500 \
\hline \text { Bad } & & \
\text { (50\% probability) } & 3,000 & 2,500 \
\hline
\end{array}$$ 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

Question 19

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 an English 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)  Keep bidding until the bid exceeds $200.

Question 20

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)  Homeowners insurance

Exam 12: The Economics of Information