Assignment

Question 1
From whom would you prefer to buy a used car, everything else being equal?
A mechanic.
A used-car dealer.
A family that is moving to China.
A person who is buying a new car.
You would have no preference among these choices.

Question 2
Suppose that in Milford, Connecticut, owners of used cars that are lemons value their cars at $2,500, and owners of used cars that are reliable value their cars at $6,000. There are equal quantities of each type of car on the market. Buyers value low-quality cars at $1,500 and high-quality cars at $7,000. In this market:
only low-quality cars will be sold at a price of $1,500.
only low-quality cars will be sold at a price of $2,500.
all cars will sell at a price of $4,250.
only high-quality cars will be sold at a price of $6,000.
only high-quality cars will be sold at a price of $7,000.

Question 3
Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400. An accident will leave divers with a wealth of $100. The company divides the divers into two classes, safe (probability of an accident = 0.2) and unsafe (probability of an accident = 0.5). The utility of wealth for all divers is given by the function: U(w) = w0.5. Given this information, the divers are:
risk-averse.
risk seeking.
risk-neutral.
indifferent to risk.
risk-averse, risk seeking, or risk-neutral; we cannot tell from this information.

Question 4
Good drivers have a 20% chance, and bad drivers have a 50% chance, of getting into an accident. A car is worth $900, and an accident would reduce its value to $400. Both types of drivers have utility U = (car value)0.5. What is a bad driver's expected utility without insurance?
20.
25.
28.
30.
None of the above.

Question 5
Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400. An accident will leave divers with a wealth of $100. The company divides the divers into two classes: safe (probability of an accident = 0.2) and unsafe (probability of an accident = 0.5). The utility of wealth for all divers is given by the function: U(w) = w0.5. The utility of no insurance for the safe diver is:
15.
17.3.
18.
18.3.
none of the above.

Question 6
Good drivers have a 20% chance, and bad drivers have a 50% chance, of getting into an accident. A car is worth $900, and an accident would reduce its value to $400. Both types of drivers have utility U = (car value)0.5. What is a good driver's expected utility without insurance?
20.
25.
28.
30.
None of the above.

Question 7
Which of the following is the best example of adverse selection?
Smokers are more likely to obtain health insurance.
Safe drivers tend to get auto insurance.
All drivers are required to have auto insurance if they are to register their cars legally in Connecticut.
Both healthy and unhealthy people tend to buy life insurance.
Given the existence of government-funded flood insurance, people continue to build homes in floodplains.

Question 8
Most states require car owners to provide evidence that they have auto insurance when they register their cars and obtain license plates. For the sellers of insurance policies, this may help to limit the severity of the:
information asymmetry.
moral hazard problem.
signaling problem.
adverse selection problem.
Akerlof problem.

Question 9
Optimal employment contracts for managers, given revenue risk and unobservable output, consist of:
a flat salary alone.
a flat salary plus some return to estimates of effort.
only a profit share.
a flat salary plus a profit share related only indirectly to individual effort.
a flat salary plus a profit share that is equal to the share accruing to owners.

Question 10
The savings and loan crisis of the early 1990s was caused by a moral-hazard problem because:
government insurance encouraged bank managers to take on more risk than they would have without such insurance.
bank managers no longer attempted to maximize the profits of the firm.
insurance attracted depositors who would not have used banks otherwise.
depositors had more information about the banks than shareholders had.
government insurance encouraged bank managers to take on less risk than they would have without such insurance.

Question 11
Consider Mr. Ed, who purchases an insurance policy on a thoroughbred that he has acquired. He then proceeds to run the horse even though the horse has tendinitis. This is an example of:
an adverse-selection problem.
a moral-hazard problem.
coinsurance.
signaling.
all the above.

Question 12
In recent years, individuals and state governments have sued various tobacco companies to compensate for illness and injury allegedly caused by cigarette smoking. Courts have awarded millions of dollars to victims in these cases. This product liability law:
encourages firms to ignore safety issues when developing products.
creates an incentive incompatibility between producers and consumers.
encourages incentive compatibility between producers and consumers.
is the only way to achieve compatible incentives when consumer safety is at issue.
forces firms to declare bankruptcy and to default on bondholders.

Question 13
In insurance markets, moral hazard occurs when the behavior of
A) the insurer changes in a way that raises costs for the insured person, since the insurer no longer bears the full costs of that behavior.
B) the insured person changes in a way that eliminates rising health care costs for the insurer, since the insured person no longer bears the full costs of that behavior.
C) the insured person has an incentive to under consume medical services, simply because the insured person no longer bears the full cost of medical services.
D) the insured person changes in a way that raises costs for the insurer, since the insured person no longer bears the full costs of that behavior.

Question 14
As a result of moral hazard
A) physicians and hospital administrators have no incentive to raise costs.
B) both physicians and hospitals have a financial interest in trying to keep hospital costs down.
C) both physicians and hospitals order more procedures.
D) patients increasingly have to worry about the expense of operations and other medical procedures.

Question 15
In the market for used cars, if buyers and sellers have perfect information about the quality of cars, then
all cars will sell for the same price and there is no asymmetric information problem.
all cars will sell for the same price and there is an asymmetric information problem.
cars sell for their true value and there is no asymmetric information problem.
all cars will sell for the same price and there is a moral hazard problem.

Question 16
A firm that can sell essentially the same product with the same quality under different brand names that have different perceived quality, the firm
has a moral hazard problem.
creates noise in the market.
creates an arbitrage opportunity.
is engaging in unfair trading practices.

Question 17
If some consumers think that two detergents have differing qualities, such as brand-name vs. private label detergents, wheres other consumers know that the detergents are identical, then the detergent producer can
reduce its costs.
engage in a special type of price discrimination.
avoid moral hazard.
None of these.

Question 18
Firms are able to price discriminate
when all customers are uninformed about quality differences.
when no customers are uninformed about quality differences.
when some customers are uninformed about quality differences.
when there is full information about quality available to all customers.

Question 19
Selling the same product under different brand names allows a firm to price discriminate as long as
customers know the products are identical.
customers do not know the products are identical.
the products really are not the same.
the firm lets customers know that the products are identical.

Question 20
Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid
adverse selection.
moral hazard.
screening.
signaling.

Question 21
Assume Health Insurance is provided universally by the government. This would
eliminate the problems of adverse selection.
result in adverse selection.
eliminate the problems of moral hazard.
All of these.

Question 22
The requirement that all drivers must carry auto insurance reduces
moral hazard.
the effectiveness of signaling.
adverse selection.
the chance of auto accidents.

Question 23
Life insurance companies often give applicants a physical examination to prevent
the person from dying before obtaining the policy.
signaling.
adverse selection.
profit maximization.

Question 24
If bad drivers can usually avoid being ticketed by the police, then insurance companies will
use drivers' driving record as a signal.
use drivers' driving record as a screening device.
not be able to use drivers' driving record as a screening device.
request driving records directly from the police and not from the individual applicant.

Question 25
When a person has health insurance, they often have to pay nothing or very little (called a "copay") to see a doctor. This might result in
their being overly healthy.
a principal-agent problem.
some moral hazard, since people might overuse the benefit.
an adverse selection problem.

Question 26
In a store that sells souvenirs, suppose an agent receives a $1 commission for each unit sold, and the principal receives the residual profit. As a result
joint profit is maximized.
the agent will sell until the principal's marginal cost equals $1.
no agent would enter into such a contract.
the agent wishes to sell as many units as he can.

Question 27
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
a warranty on a lemon is costly to the seller.
warranties are offered on all cars.
warranties are only offered on lemons.
a warranty on a good car is a false signal.

Question 28
What role does a company like J.D. Power (which provides product satisfaction reviews) serve?
It provides a screening test.
It provides a signal of quality.
It reduces moral hazard.
It reduces costs of giving surveys.

Question 29
eBay has a seller reputation system to provide
consumers with a signal concerning seller quality.
sellers a chance to signal other sellers concerning their quality.
a reduction in monopoly power.
improvements in investor relations.

Question 30
The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of
government overreach.
screening.
signalling using established standards.
licensing to restrict entry by helmet manufacturers.

Question 31
Restricting entry to a profession through licensing or certification requirements
increases welfare.
decreases welfare.
may increase or decrease welfare.
leaves welfare unchanged.

Question 32
Which of the following would be considered a contingent contract?
a piece rate contract
a profit-sharing contract
a contact with a bonus
All of these.

Question 33
In the presence of asymmetric information, a piece-rate contract
is not as good as a contract based on commissions.
can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract.
is impossible to write.
will result in the principal earning all of the profit.

Question 34
In which type of contract is the agent paid per unit of output?
A commission based contract.
A sharecropping contract.
A piece rate contract.
A contract with stock options as salary.

Question 35
Author A accepts a $5,000 advance from a publisher and a 10% royalty after 5,000 books are sold. Author B foregoes the publisher's advance and negotiates for a 15% royalty on all books sold. Author C decides to self publish his book and keep 100% of all sales revenue. Which of these authors is most likely to have 10 books published?
Author A
Author C
Author B
They are all equally likely.

Question 36
Many companies monitor their employees' Internet use and email. Why might they be doing this?
Because they like to spy.
In order to improve morale.
To gain inside information on new consumer trends.
To reduce shirking.

Question 37
If a firm has established monitoring devices that have a 50% chance of detecting shirking, and an employee gains $5,000 from shirking, the employer can deter shirking by having employees post a bond equal to
$2,500.
$5,000.
$10,000.
$50,000.

Question 38
If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling
that she does not plan to shirk in the future, regardless of whether she did so in the past.
that she did shirk and she will do so in the future.
that she did shirk but won't do so in the future.
that she didn't shirk and she won't do so in the future.

Question 39
An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents
the amount the employee loses if caught shirking.
the expected value of the amount the employee loses if he shirks.
the cost of monitoring the employee.
the gain to the employee if he shirks.

Question 40
A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until
the worker requires no monitoring.
the worker receives the market wage and requires full-time monitoring.
the cost of monitoring the worker equals the efficiency wage.
the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.