Question 1
Adverse selection in competitive insurance markets harms
high risk individuals.
low risk individuals.
owners of competitive insurance companies.
everyone
Question 2
Which of the following is an application of the adverse selection problem?
a customer driving more recklessly after buying car insurance.
a teenager "hanging out" with friends his or her parents do not approve of.
shareholders offering a high-powered incentive contract to a manager.
an auto repairman claiming that the repairs are more extensive than they acnts
Question 3
The "lemons model" predicts quality deterioration in the used car market because
used cars require increasing maintenance.
suppliers and demanders have different information about cars' quality.
used cars are generally of a lower quality than new cars.
people will usually buy new cars if they are available.
Question 4
There are two types of worker, high ability and low ability. High ability workers generate gross profit of A on the job and low ability generate nothing. Education does not make workers more productive, but is costly to obtain (cH for high ability workers and cL for low ability ones). Let w be the wage that all firms in the economy pay by regulatory mandate. Suppose the worker obtains utility given by the wage (if the worker is employed, 0 if not) minus the cost of education (if any). There is no disutility from work. Which condition is required if only the high ability type is to obtain an education in equilibrium?
cH < w < cL..
cL < w < cH.
cH < cL < w.
cL < cH < w.
Question 5
A manager can either slack (effort e = 0) or work hard (e = 1) on behalf of shareholders. If she slacks, the firm earns a gross return of 1,000 for sure. If she works hard, there is an even chance of the gross return being 10,000 or 80,000. Her overall utility equals her utility from wage income (of the form w1/2, where w is the wage) minus the disutility of work (simply d), or in other words U = w1/2 - d. If she slacks, she experiences no disutility of work (d = 0) but if she works hard, the disutility of work is d = 50. Assume that U = 0 in her next best available job. What is the optimal wage contract that shareholders would offer if they can observe the effort of the manager?
A flat wage w = 0 and no requirement to work hard.
A flat wage w = 50 and a requirement to work hard.
A flat wage w = 2,500 and a requirement to work hard.
A share of 50% of the profits and a requirement to work hard.
ANS: c
Question 6
A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot observe the manager's effort, which would be the best employment contract?
a high-powered incentive contract to elicit maximum effort.
a fixed salary.
a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk.
an incentive scheme that provides maximum incentives and maximum insurance.
Question 7
Concerning auctions, what is the definition of a "common-values setting"?
bids are submitted using open outcries.
bids are submitted simultaneously, and the highest is selected as the winner.
bidders value the object the same, but are uncertain as to what that value is.
bids are submitted by syndicates of cooperating bidder
Question 8
In the Spence education signaling model, what is the social value of education?
employees improve their ability to perform on the job.
employers can use education as a screen to match talented employees with high-skill jobs.
employers can save the costs of on-the-job training, which is less efficient than a general education.
it allows low-ability employees to apply for high-salary job
Question 9
Suppose that your personal valuation for a painting is $200. Which auction format would induce you to bid more?
first price.
second price.
you would bid the same in any format.
depends on the environment.
Question 10
How do participants in an auction respond to the problem of the "winner's curse"?
they bid more aggressively to win the auction and avoid the "curse".
they exit the auction because winning can only be a bad sign of the object's worth.
all bid less aggressively, so that the winner ends up not regretting having won.
Question 11
Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. If regulators limited production to 200 bushels, the deadweight loss relative to the option of setting the optimal tax would be would be
$0
$200
$500
$1000
Question 12
Which of the following "externalities" does not distort the allocation of resources?
I.
An individual's unwillingness to cut his or her own lawn in an otherwise immaculately kept neighborhood.
II.
Smoke produced by a new firm in an area that raises the costs of other firms.
III.
A new firm's bidding up skilled wages in an area, thus raising costs of other firms.
IV.
An individual's unwillingness to obtain job training, thereby lowering the total GNP.
I, III, and IV.
III and IV.
II only.
IV only.
Question 13
Each of the following is by definition an attribute of a public good except
nonrivalry.
increasing returns to scale.
nonexclusivity.
none of these.
Question 14
Perfectly competitive markets will tend to underallocate resources to nonexclusive public goods because
these goods are produced under conditions of increasing returns to scale.
no single individual can appropriate the total benefits provided by the purchase of such goods.
these goods are best produced under conditions of monopoly.
no private producer can provide the capital necessary to produce such good
Question 15
Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people.
Type A Demand QD = 100 - P
Type B Demand QD = 50 - P
where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of Toadhop gather for a town hall meeting to find the socially optimal level of flood control, and they are successful, how much will each type B individual contribute in total?
1875
1500
875
625
Question 16
In the case of a negative externality, the social marginal cost will
exceed the private marginal cost.
be equal to private marginal cost.
fall short of private marginal cost.
bear no significant relation to private marginal cost.
Question 17
Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The market equilibrium quantity is
400
450
500
Question 18
Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The price consumers would have to pay for the market to achieve the socially optimal level of production is
5
5.5
6
6
Question 19
To reach an economically efficient output level, the size of an excise tax imposed on a firm generating a negative externality should be
the firm's marginal cost.
the social marginal cost.
the difference between the social marginal cost and the firm's marginal cost.
the sum of the social marginal cost and the firm's marginal cost
Question 20
Efficient production of a public good requires
that individuals pay for such goods according to benefits received.
that each individual's MRS be equal to the RPT of public goods for private goods.
that the sum of individuals' MRSs be equal to the RPT of public goods for private goods.
that governments produce at the low point of the average cost curve for the public good.