Question 1

Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews) review its product rather than doing it within the firm?

Accepted Answer

A)  J.D. Power provides less credibility.
B)  J.D. Power provides greater credibility.
C)  J.D. Power is more honest than the average firm.
D)  J.D. Power has a government monopoly in providing product satisfaction reviews.E) None of the above
F) A) and B)

Question 2

Shirking is most likely to occur when

Accepted Answer

A)  the principal monitors the agents extensively.
B)  employees are paid an hourly wage.
C)  a piece rate contract is used.
D)  an assembly line is used for production.E) None of the above
F) A) and C) B

Question 3

Explain how product liability laws can reduce adverse selection.

Accepted Answer

Product liability laws force p...

Question 4

Adverse selection occurs when

Accepted Answer

A)  a person takes more risks that are not known to the life insurance company because he has life insurance.
B)  a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.
C)  a person is a risk lover.
D)  pregnant women with health insurance make more doctor visits than uninsured pregnant women.E) A) and B)
F) A) and C)

Question 5

Adverse selection can occur when

Accepted Answer

A)  all persons involved in a transaction have full information.
B)  one person has information not available to others.
C)  post-agreement incentives result in workers shirking.
D)  nobody has any information about a particular product.E) B) and C)
F) All of the above

Question 6

A common incentive owners offer managers is

Accepted Answer

A)  the year-end bonus.
B)  stock options.
C)  profit sharing.
D)  All of the above.E) A) and C)
F) None of the above

Question 7

If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage,

Accepted Answer

A)  the principal bears all the risk.
B)  the agent bears all the risk.
C)  the principal and agent share the risk.
D)  Unable to determine with the information given.E) B) and C)
F) All of the above

Question 8

Which of the following acts as a hostage for employees to behave well?

Accepted Answer

A)  On-site childcare where employees take their children while working
B)  Performance bonuses
C)  Training
D)  BondingE) All of the above
F) None of the above

Question 9

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Accepted Answer

A)  a warranty on a lemon is costly to the seller.
B)  warranties are offered on all cars.
C)  warranties are only offered on lemons.
D)  a warranty on a good car is a false signal.E) B) and C)
F) A) and D)

Question 10

Assume health insurance is provided universally by the government. This would

Accepted Answer

A)  force every taxpayer to bear the costs of adverse selection.
B)  force every taxpayer to bear the costs of moral hazard.
C)  force the government to deal with adverse selection problems.
D)  force foreign governments to deal with moral hazard problems.E) A) and D)
F) A) and C)

Question 11

eBay has a seller reputation system to provide

Accepted Answer

A)  consumers with a signal concerning seller quality.
B)  sellers a chance to signal other sellers concerning their quality.
C)  a reduction in monopoly power.
D)  improvements in investor relations.E) All of the above
F) A) and B)

Question 12

Moral hazard is due to

Accepted Answer

A)  hidden characteristics.
B)  hidden actions.
C)  symmetric information.
D)  adverse selection.E) B) and C)
F) All of the above

Question 13

The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

Accepted Answer

A)  use the Internet
B)  complain to management
C)  telecommute
D)  change jobsE) All of the above
F) A) and C) C

Question 14

Which of the following acts as a hostage for employees to behave well?

Accepted Answer

A)  Deferred payments
B)  Efficiency wages
C)  Bonding
D)  All of the above.E) B) and C)
F) All of the above D

Question 15

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract,

Accepted Answer

A)  efficiency is not achieved.
B)  the client bears all of the risk.
C)  the lawyer has an incentive to lie about his hours worked.
D)  All of the above.E) C) and D)
F) A) and C)

Question 16

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

Accepted Answer

A) True 
 B)False

Question 17

The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of

Accepted Answer

A)  government overreach.
B)  screening.
C)  signaling using established standards.
D)  licensing to restrict entry by helmet manufacturers.E) A) and C)
F) None of the above

Question 18

Asymmetric information occurs when

Accepted Answer

A)  everyone has the same information.
B)  one person in a transaction has more information than the other.
C)  people engaging in a transaction are uncertain about future events.
D)  the information available to the people in a transaction is misleading or incomplete.E) A) and B)
F) C) and D)

Question 19

Which of the following reduces the effects of asymmetric information?

Accepted Answer

A)  Repeat purchases
B)  Warranties
C)  Building a reputation
D)  All of the above.E) A) and D)
F) All of the above

Question 20

In the market for used cars, if there is asymmetric information yet all cars sell for the same price,

Accepted Answer

A)  there is an efficiency problem and there are equity implications.
B)  there is no efficiency problem, but there are equity implications.
C)  buyers of lemons win at the expense of buyers of good cars.
D)  there is no efficiency problem and there are no equity implications.E) None of the above
F) B) and C)

Exam 15: Asymmetric Information

Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews) review its product rather than doing it within the firm?

Correct AnswerverifiedShow Answer

Shirking is most likely to occur when

Correct AnswerverifiedB

Explain how product liability laws can reduce adverse selection.

Correct AnswerverifiedProduct liability laws force p...View AnswerShow Answer

Adverse selection occurs when

Correct AnswerverifiedShow Answer

Adverse selection can occur when

Correct AnswerverifiedShow Answer

A common incentive owners offer managers is

Correct AnswerverifiedShow Answer

If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage,

Correct AnswerverifiedShow Answer

Which of the following acts as a hostage for employees to behave well?

Correct AnswerverifiedShow Answer

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Correct AnswerverifiedShow Answer

Assume health insurance is provided universally by the government. This would

Correct AnswerverifiedShow Answer

eBay has a seller reputation system to provide

Correct AnswerverifiedShow Answer

Moral hazard is due to

Correct AnswerverifiedShow Answer

The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

Correct AnswerverifiedC

Which of the following acts as a hostage for employees to behave well?

Correct AnswerverifiedD

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract,

Correct AnswerverifiedShow Answer

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

Correct AnswerverifiedShow Answer

The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of

Correct AnswerverifiedShow Answer

Asymmetric information occurs when

Correct AnswerverifiedShow Answer

Which of the following reduces the effects of asymmetric information?

Correct AnswerverifiedShow Answer

In the market for used cars, if there is asymmetric information yet all cars sell for the same price,

Correct AnswerverifiedShow Answer

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B

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Product liability laws force p...
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C

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D

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