Question 1

Why would fire insurance claims be more numerous in bad economic times?

Accepted Answer

The moral hazard problem offers an answe...

Question 2

A signalling equilibrium occurs where:

Accepted Answer

A)  the cost of obtaining the signal is the same for both high and low risk drivers.
B)  the cost of obtaining the signal is low for high risk drivers and high for low risk drivers.
C)  the cost of obtaining the signal is high for high risk drivers and low for low risk drivers.
D)  the cost of the signal is not too high for either type of driver.E) A) and B)
F) All of the above

Question 3

A hold- up problem is:

Accepted Answer

A)  when a firm tries to capture the rents caused by a sunk investment.
B)  when you get robbed.
C)  when a firm demands more money for completing a task.
D)  when nature prevents you from completing a task.E) A) and B)
F) A) and C)

Question 4

A plausible reason the price of new cars falls sharply when they are bought is that:

Accepted Answer

A)  few high quality used cars are sold.
B)  new car buyers pay too much for their cars.
C)  used cars are unreliable.
D)  the demand for used cars is weak.E) A) and B)
F) B) and D)

Question 5

Firms might not commit to spending sunk costs because of:

Accepted Answer

A)  the property rights problem.
B)  the bankruptcy problem.
C)  the free rider problem.
D)  the hold- up problem.E) B) and C)
F) A) and D)

Question 6

Which of the following is and example of a market failure caused by asymmetric information?

Accepted Answer

A)  The generation of electricity from fossil fuels creates an externality.
B)  Automobile dealers offer warranties on their used cars.
C)  Low risk individuals choose not to buy insurance.
D)  High risk individuals pay higher premiums than low risk individuals.E) A) and B)
F) A) and C)

Question 7

The lemons principle refers to the situation where:

Accepted Answer

A)  neither type of good is offered on the market.
B)  high quality goods are never offered on the market.
C)  low quality goods are never offered on the market.
D)  low quality and high quality goods are sold in the same market.E) A) and D)
F) A) and C)

Question 8

Vertical integration refers to:

Accepted Answer

A)  mergers taking place in industries subject to double hold- ups.
B)  merging with a competitor.
C)  merging taking place among multinationals.
D)  merging with a firm upstream.E) A) and B)
F) B) and C)

Question 9

Skimming the cream:

Accepted Answer

A)  means that a firm takes only the best of a group.
B)  benefits all firms.
C)  allows markets to offer everyone the same contract.
D)  is a farming term.E) A) and B)
F) A) and C) A

Question 10

Empirical studies indicate that people with safe and healthy lifestyles tend to buy more life and health insurance than people with unsafe and risky lifestyles. Is this the opposite of what the usual "adverse selection" story predicts?

Accepted Answer

Yes. The "adverse selection" story claim...

Question 11

In the case of the insurance equilibrium with low and high risk drivers, market failure represents:

Accepted Answer

A)  the choice by high- risk drivers to buy insurance.
B)  low premiums.
C)  the choice by low- risk drivers not to buy insurance.
D)  the choice by low- risk drivers to buy insurance.E) C) and D)
F) A) and B)

Question 12

In order for a firm to produce high quality goods in an asymmetric information market with high and low quality producers:

Accepted Answer

A)  the present value of revenue must be positive.
B)  the present value of profits has to be higher than the costs of operating.
C)  the present value of the premium for high quality goods must be higher than the gain from cheating.
D)  the present value of cheating must be higher than the gain from producing high quality goods.E) A) and B)
F) A) and D)

Question 13

The lemons principle

Accepted Answer

A)  indicates that jewels can pass as lemons.
B)  indicates that lemons can pass as jewels.
C)  has the moral hazard problem at it root.
D)  states that making good lemonade is as tough as learning economics.E) A) and D)
F) All of the above

Question 14

Figure 20A

-The cheating strategy for a firm in Figure 20A is at:

Accepted Answer

A)  point A.
B)  point B.
C)  point C.
D)  point 0.E) None of the above
F) B) and C)

Question 15

Which of the following is not an example of sunk costs?

Accepted Answer

A)  advertising
B)  locate the firm is a huge warehouse.
C)  spending money in the community
D)  undertake costly actions to inform customers about itselfE) A) and B)
F) All of the above

Question 16

Which of the following is likely a result of adverse selection?

Accepted Answer

A)  Young women pay less for automobile insurance than young men.
B)  New life insurance policies have a one- year suicide exclusion.
C)  Smokers pay more for life insurance than nonsmokers.
D)  Employment insurance premiums increase with income.E) B) and C)
F) A) and C)

Question 17

Signaling:

Accepted Answer

A)  is a method of solving moral hazard problems.
B)  benefits the sellers of low quality goods.
C)  involves a pure transfer of wealth from employers to employees.
D)  is a method of solving an adverse selection problem.E) A) and B)
F) B) and C) D

Question 18

Duels of honour:

Accepted Answer

A)  was employed mostly by low- class individuals.
B)  was a barbaric tradition.
C)  was a screening device.
D)  was a risky attempt to impress the ladies.E) C) and D)
F) B) and D)

Question 19

Explain why punishing a cheating firm by never shopping there again will have no affect on the behavior of the firm.

Accepted Answer

If the firm is cheating they have alread...

Question 20

A pooling contract:

Accepted Answer

A)  is the contract offered to all types of people in an insurance market.
B)  can never be a bona fide equilibrium.
C)  refers to the deal signed with the pool services worker.
D)  is always preferred to discriminating contracts.E) None of the above
F) B) and D) A

Exam 20: Assymetric Information and Market Behaviour

Why would fire insurance claims be more numerous in bad economic times?

Correct AnswerverifiedThe moral hazard problem offers an answe...View AnswerShow Answer

A signalling equilibrium occurs where:

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A hold- up problem is:

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A plausible reason the price of new cars falls sharply when they are bought is that:

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Firms might not commit to spending sunk costs because of:

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Which of the following is and example of a market failure caused by asymmetric information?

Correct AnswerverifiedShow Answer

The lemons principle refers to the situation where:

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Vertical integration refers to:

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Skimming the cream:

Correct AnswerverifiedA

Empirical studies indicate that people with safe and healthy lifestyles tend to buy more life and health insurance than people with unsafe and risky lifestyles. Is this the opposite of what the usual "adverse selection" story predicts?

Correct AnswerverifiedYes. The "adverse selection" story claim...View AnswerShow Answer

In the case of the insurance equilibrium with low and high risk drivers, market failure represents:

Correct AnswerverifiedShow Answer

In order for a firm to produce high quality goods in an asymmetric information market with high and low quality producers:

Correct AnswerverifiedShow Answer

The lemons principle

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Figure 20A -The cheating strategy for a firm in Figure 20A is at:

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Which of the following is not an example of sunk costs?

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Which of the following is likely a result of adverse selection?

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Signaling:

Correct AnswerverifiedD

Duels of honour:

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Explain why punishing a cheating firm by never shopping there again will have no affect on the behavior of the firm.

Correct AnswerverifiedIf the firm is cheating they have alread...View AnswerShow Answer

A pooling contract:

Correct AnswerverifiedA

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The moral hazard problem offers an answe...
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A

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Yes. The "adverse selection" story claim...
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D

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If the firm is cheating they have alread...
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A