Quiz 14: Transaction Costs, Imperfect Information, and Behavioral Economics

If transaction costs of market exchange are small, then a firm will expand to produce more of its product internally.

If we assume perfect information, perfect mobility of resources, and no transactions costs, then there is little need for firms.

If perfect competition existed everywhere, along with frictionless exchange, perfect information, and constant returns to scale, A)consumers would carry out transactions directly with resource suppliers B)firms would not have the information necessary to calculate marginal productivities of resources C)entrepreneurs would be needed to collect information D)consumers would produce output and then engage in barter E)the economy would be organized into one large firm

In a world of perfect information, if consumers could costlessly contract with private contractors to produce a good and there were no economies of scale, A)firms would be unnecessary B)markets would be unnecessary C)consumers would be unnecessary D)consumers would face greater production costs E)firms would be more efficient than the market

Firms emerge when transaction costs of using the market are less than the cost of hierarchical control.

Ronald Coase's study, "The Nature of the Firm, " argued that firms are formed to take advantage of situations in which hierarchies are more efficient than markets.

If the production of a sofa requires the purchase of 3 types of inputs and the production of a harp requires the purchase of 30 types of inputs, A)the harp-producing firm will buy the sofa-producing firm B)the sofa-producing firm will buy the harp-producing firm C)harp production is more likely to be done by firms than sofa production is D)sofa production is more likely to be done by firms than harp production is E)both harp and sofa production will always be done by firms because there is more than one input involved in each

Suppose that you can either buy a radio from a firm for $50 or find and purchase the components yourself and then either assemble them yourself or hire someone to do so.You should A)buy the radio because it's possible to do so B)assemble the radio yourself because it's possible to do so C)assemble the radio yourself only if you know how to do so D)assemble the radio yourself only if the total price of all the components is less than $50 E)assemble the radio yourself only if the total price of all the components plus the value of your own time is less than $50

It is not uncommon for people to buy all the components for a computer and assemble them rather than purchase a fully assembled computer.What does this behavior demonstrate? A)computers are easy to assemble B)people are irrational C)many people have the knowledge necessary to assemble computers D)the total price of the computer components is less than the price of the computer E)the total price of all the computer components plus the value of the person's time is less than the price of the computer

The firm becomes the dominant organization type whenever A)markets exist B)markets don't exist C)the net value of centralized, organized production exceeds the net value of market-arranged production D)the net value of market-arranged production exceeds the net value of centralized, organized production E)private enterprise eliminates shirking

Which of the following statements about resource allocation is correct? A)Within a firm, resources are allocated by prices; in the market, resources are allocated by the decisions of managers. B)Resources are allocated by prices both in the market and within the firm. C)Within a firm, resources are allocated by the decisions of managers; in the market, resources are allocated by prices. D)Resources are allocated by the decisions of managers both within the firm and in the market. E)In the market, resources are allocated either by prices or by the decisions of managers.

A do-it-yourself approach to production is more likely when A)technology is complex B)inputs are difficult to identify C)resources cannot easily be measured D)the price of inputs is known E)contracts are complex

For the average homeowner, which of the following tasks is most likely to be contracted for? A)fixing a shelf B)hanging a painting C)moving furniture D)rewiring the kitchen lighting E)repainting a bedroom

According to Coase, firms emerge when A)transaction costs in the market are less than the cost of hierarchical control B)transaction costs in the market are more than the cost of hierarchical control C)prices in the market are less than the cost of hierarchical control D)prices in the market are more than the cost of hierarchical control E)implicit contracts in the market can be made explicit in a firm

Ronald Coase's study, "The Nature of the Firm, " argued that A)market exchange is less costly than hierarchical exchange B)markets are more efficient than hierarchies C)firms are formed to take advantage of situations in which hierarchies are more efficient than markets D)the role of the entrepreneur is primarily to deal with central authority E)markets tend to be less competitive over time

According to Coase, firms A)exist because the entrepreneur must prevent shirking B)should not exist C)should not exist if all participants in a market have perfect information D)exist because of the transaction costs of coordinating many resources through markets E)increase production costs and should therefore be limited

According to Coase, the optimal allocation of resources is guided by A)the decisions of a firm's managers B)market prices when market transaction costs are greater than the firm's internal organization costs C)the decisions of a firm's managers when market transaction costs are greater than the firm's internal organization costs D)the decisions of a firm's managers when market transaction costs are less than the firm's internal organization costs E)entrepreneurs

In his article, "The Nature of the Firm, " Ronald Coase A)suggested that monopolies may be more innovative than competitive firms B)argued that the economy should be organized into one large firm C)provided an answer to the question, "Why do firms exist?" D)focused on the concept of adverse selection E)analyzed concentration in U.S.industry

Ronald Coase's insight regarding the firm was that A)firms tend to be more profitable when economies of scale are greater B)uncertainty and information are the keys to perfect competition C)perfectly competitive firms tend to displace monopolies D)economic activity is best understood in terms of the transaction costs of exchange E)consumers often carry out transactions directly with resource suppliers

Production through the firm is often more efficient than market exchange when A)production requires many transactions among many resource owners B)production requires few transactions between two resource owners C)the cost of transacting business through market relations is less than the cost of undertaking the same activity within the firm D)inputs are easily identified, measured, priced, and hired E)the costs of determining inputs and negotiating contracts are low

The more complicated the process used to produce a good, A)the greater are the transaction costs of organizing production through markets B)the lower are the transaction costs of organizing production through markets C)the less likely a firm will use administrative controls to organize the production process D)the more likely a firm will use the market to organize the production process E)the more likely consumers will choose to purchase the good over other alternatives in the market

The more complicated a production process is, A)the lower the transactions cost of using markets B)the lower the cost of production C)the more likely the market will be used to organize production D)the more likely that transaction costs decrease through centralized control of production E)the more likely that transaction costs decrease through use of markets

The simpler a production process is, A)the greater the cost of production B)the greater the transaction cost of using markets C)the more likely a firm will use the market to organize production D)the more likely a firm will used centralized control to organize production E)the more likely that transaction costs increase by using centralized control of production

Vertical integration has no effect on the internal organization of a firm; it only affects the outside markets.

When a firm is operating at its minimum efficient scale, its short-run average total cost of production is minimized.

If the minimum efficient scale in the production of aluminum exceeds the quantity of aluminum any individual siding producer buys, siding producers should integrate backward into aluminum production.

If the minimum efficient scale in toaster production is 500, 000 units per year, the average cost of producing 300, 000 toasters is greater than the average cost of producing 500, 000.

One reason a computer manufacturer may produce its own microchips rather than buy them is that it can maintain control over production quality.

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

Managers experience bounded rationality when they focus narrowly on maximizing their firm's profits and ignore the broader perspective of society's preferences.

By integrating vertically, A)firms trade with one another through markets B)firms trade with one another through government intermediation C)firm and market processes are connected to produce a good or service most efficiently D)the various procedures involved in producing a good are collected within one firm E)the various procedures involved in producing a good are parceled out among various contractors

Which of the following is true of vertical integration? A)It leads to the formation of larger firms from smaller ones. B)It occurs when a firm adds more layers of management. C)It occurs when firms try to buy up their competitors and corner the market. D)It has no effect on the internal organization of a firm; it only affects outside markets. E)It occurs when a firm buys another firm in a completely unrelated market.

Spacely Sprockets, Inc., usually pays $1, 000 for a million flanges, which it uses as inputs in the manufacture of sprockets.It also spends an average of $20 per million flanges on finding manufacturers and negotiating contracts.Spacely is capable of making its own flanges at a cost of $980 per million.Given these costs, A)Spacely should continue to contract out for flanges B)Spacely should start to manufacture its own flanges C)it's not possible to say what Spacely should do D)Spacely should stop paying the additional $20 to find and negotiate contracts and just buy the flanges outright for $1, 000 per million E)Spacely should move away from the use of flanges and toward an input that it can produce by itself

Don's Pasture Apple Cider Company buys four inputs: apples, glass bottles, apple presses, and computers for record keeping.If the company decides to become more vertically integrated, it will A)probably start growing apples next B)probably start making glass bottles next C)probably start making apple presses next D)probably start making computers next E)have to grow apples and make glass bottles, apple presses, and computers

Wendy's restaurants must decide whether to grow their own potatoes for French fries or buy them.If they buy rather than grow, then they have opted to A)integrate horizontally B)allow market prices to guide resource allocation C)integrate vertically D)allow hierarchical control to guide resource allocation E)form an authority relation

Vertical integration is A)the expansion of a firm into earlier or later stages of production B)an attempt by a firm to allow market prices to coordinate more transactions C)an attempt by a firm to minimize shirking D)an attempt by a firm to minimize the need to coordinate transactions within its boundaries E)a way for a firm to accumulate information about its competitors

Which of the following is the best example of vertical integration A)an auto firm acquires a tire manufacturer B)a farmer buys the neighboring farm C)a retail store buys an internet retailer D)a software company buys a soft drink manufacturer E)a hotel chain buys a fast food chain

When several resources are combined in the production of a good, A)it is easy to determine the marginal products of the various resources B)the marginal contribution of each input often cannot be observed C)allocating revenue among the various resources is easy D)there is more competition for each of the resources used E)there is less competition for each of the resources used

Wendy's must decide whether to grow its own potatoes for French fries.Growing potatoes is a very different process from running a fast-food restaurant.Based on this information alone, should Wendy's grow its own potatoes? A)No, because Wendy's managers have bounded rationality. B)Yes, because Wendy's managers have bounded rationality. C)No, because there is a small number of potato suppliers. D)Yes, because there is a small number of potato suppliers. E)No, because it is easy to observe the quality of potatoes.

The McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly.Growing potatoes is very different from running a fast-food restaurant.One could say of McDonald's decision to grow its own potatoes for the Russian franchise that A)the bounded rationality criterion outweighs the need for quality control B)the bounded rationality criterion is outweighed by the need for quality control C)both bounded rationality and the need for quality control are factors that make it rational for McDonald's to grow its own potatoes D)growing potatoes is irrational E)there must not be many potato suppliers in Russia

The limit on the amount of information a manager can comprehend about a firm's operation is known as A)adverse selection B)bounded rationality C)diseconomies of scope D)managerial incompetence E)moral hazard

When a firm is operating at its minimum efficient scale, its A)short-run average total cost of production is minimized B)long-run marginal cost of production is minimized C)long-run average cost of production is minimized D)long-run profit is maximized E)profit is at a maximum

The Criminal Records Corporation is operating at its minimum efficient scale, selling 10, 000 records per month via late-night cable TV advertising.It currently buys pressed records from Hole-in-the-Middle, Inc., which has a minimum efficient scale of 100, 000 records per month.Which of the following should Criminal Records do? A)Continue to buy 10, 000 records from Hole-in-the-Middle, which can make the records more cheaply. B)Buy 100, 000 records from Hole-in-the-Middle, so that company can reach its minimum efficient scale too. C)Buy Hole-in-the-Middle and use its facilities to manufacture the 10, 000 records it needs. D)Buy Hole-in-the-Middle and stop operating as Criminal Records because Hole-in-the-Middle is the more efficient business. E)Buy Hole-in-the-Middle and stop operating as Criminal Records because Hole-in-the-Middle is the larger business.

If the minimum efficient scale in aluminum production exceeds the quantity of aluminum any individual aluminum siding producer buys, A)siding producers should integrate backward into aluminum production B)there will be a monopoly in aluminum production C)siding producers should not integrate backward into aluminum production D)siding producers will be charged prices above what the cost of producing aluminum themselves would be E)siding companies will switch to vinyl

If the minimum efficient scale in the production of rubber exceeds the quantity of rubber any individual tire producer buys, A)tire producers should integrate backward into rubber production B)there will be a monopoly in rubber production C)tire producers should not integrate backward into rubber production D)tire producers will be charged prices above what the cost of producing rubber themselves would be E)tire companies will switch to fiberglass

If the minimum efficient scale in toaster production is 500, 000 units per year, A)the average cost of producing 300, 000 toasters is greater than the average cost of producing 500, 000 B)the average cost of producing 300, 000 toasters is equal to the average cost of producing 500, 000 C)the total cost of producing 300, 000 toasters is greater than the total cost of producing 500, 000 D)the firm should not produce more than 500, 000 toasters E)MC exceeds AC at 500, 000 toasters

If the minimum efficient scale in woodstove production is 100, 000 units per year, A)the average cost of producing 50, 000 stoves is greater than the average cost of producing 100, 000 B)the average cost of producing 50, 000 stoves is equal to the average cost of producing 100, 000 C)the total cost of producing 50, 000 stoves is greater than the total cost of producing 100, 000 D)the firm should not produce more than 100, 000 woodstoves E)MC exceeds AC at 100, 000 stoves

Used car dealers are able to make a profit by buying used cars at a low price and selling them at a higher price because A)they sell lemons B)they can take advantage of unsuspecting consumers C)they are attempting to maximize their profits D)the transaction costs to some buyers is less than it would be without the used car dealers E)there are no transaction costs associated with the process of buying a used car

Exhibit 14-1 In Exhibit 14-1, suppose each tire produced requires ten pounds of rubber.Which of the following is true? A)The tire manufacturer should integrate backward into producing rubber. B)The tire manufacturer should produce more than 200, 000 tires. C)The tire manufacturer should buy rubber rather than produce it. D)The rubber producer must be a monopolist. E)The minimum efficient scale of rubber production is 2 million pounds.

Exhibit 14-1 Which of the following is indicated in Exhibit 14-1? A)Rubber is cheaper to produce than tires. B)The total cost of producing 100, 000 tires is greater than the total cost of producing 200, 000 tires. C)The minimum efficient scale of producing rubber is 4 million pounds. D)The minimum efficient scale of producing tires is greater than 200, 000 tires. E)The marginal cost of the 200, 000th tire must exceed the average cost of 200, 000 tires.

Exhibit 14-1 Which of the following is indicated in Exhibit 14-1? A)Rubber is cheaper to produce than tires. B)The total cost of producing 100, 000 tires is greater than the total cost of producing 200, 000 tires. C)The minimum efficient scale of producing tires is 200, 000 tires. D)The minimum efficient scale of producing tires is greater than 200, 000 tires. E)The marginal cost of the 200, 000th tire must exceed the average cost of 200, 000 tires.

One reason many people make their own Hollandaise sauce rather than buy it is that A)they can maintain control over the quality during production B)the total cost of ingredients is the same as the price of store-bought sauce C)firms do not make high-quality Hollandaise sauce D)people place a high value on their time E)firms do not produce goods that can be made at home

One reason many people make their own pickles rather than buy them is that A)they can maintain control over the quality during production B)the total cost of ingredients is the same as the price of store-bought pickles C)firms do not make high-quality pickles D)people place a high value on their time E)firms do not produce goods that can be made at home

One reason a computer manufacturer may make its own microchips rather than buy them is that A)it can maintain control over the quality during production B)the total cost of components is the same as the price of chips purchased from a chip manufacturer C)firms do not make high-quality microchips D)managers at the computer firm place a high value on their time E)firms do not produce goods for the market that can be made in-house

Suppose there is only one producer of frames, a necessary component in manufacturing computer monitors.Because of the threat of entry, this firm charges its customers a price equal to average cost.One reason that a producer of computer monitors may make rather than buy frames is A)the frame supplier may be unreliable B)the total cost of the components of frames is the same as the price of frames purchased in the market C)the frame manufacturer has no incentive to make high-quality frames D)managers at the computer monitor firm place a high value on their time E)the frame manufacturer will soon go out of business because firms do not produce goods for the market that can be made in-house

Apple Computer is more likely to continue to use input markets rather than manufacture its own inputs internally when A)the quality of inputs is difficult to determine B)switching among input suppliers is easy C)there are very few firms producing the input D)the input is difficult to identify and define E)transaction costs go up

Which of the following would not limit the extent of a firm's vertical integration? A)the managers' bounded rationality B)a large minimum efficient scale of producing inputs relative to the firm's input requirements C)the fact that the quality of inputs is easily determined at the time of purchase D)many interchangeable suppliers of the firm's inputs E)high transaction costs of contracting with resource suppliers

If the quality of an input is easily determined at the time of purchase, then it is likely to A)be the cause of high transaction costs of using markets B)encourage vertical integration of a firm C)encourage supplier firms to produce low-quality inputs D)be produced internally by the firm E)be purchased in the market

Which of the following is the best example of a vertically integrated firm? A)General Electric, which produces light bulbs, jet engines, washing machines, and so on B)Kinko's, which has a photocopy store near many colleges and universities C)USX Corporation, which owns ore and coal mines, coke ovens, blast furnaces, mills, and foundries D)Intel, which makes computer chips for most of the computer manufacturers E)Century 21, which has real estate offices that help people sell a house in one city and buy another house in another city

Which of the following is the best example of a vertically integrated firm? A)General Electric, which produces light bulbs, jet engines, washing machines, and so on B)Kinko's, which has a photocopy store near many colleges and universities C)Americam Apparel, which from a single building in downtowm LA, controls the dyeing, finishing, designing, sewing, cutting, marketing and distribution of the company's product. D)Intel, which makes computer chips for most of the computer manufacturers E)Century 21, which has real estate offices that help people sell a house in one city and buy another house in another city

If a firm experiences economies of scope, per unit production costs fall as it produces more than one kind of product.

A tire manufacturer decides to expand into the production of rubber roofing and as a result finds that its per unit production costs for tires falls.This is an example of economies of scope.

A farmer doubles her acreage of corn and as a result finds that her costs per bushel of corn drop.She has experienced economies of scope.

If a firm experiences economies of scope, per unit production costs fall as it produces more and more of its product.

A horizontally integrated firm produces products in a variety of industries (e.g., General Electric, which produces jet engines, air conditioners and microwave ovens).

Economies of scope exist when it is less expensive to produce two or more product lines in a single firm than it is to produce them separately.

If a firm that experiences economies of scope doubles its production of an item, its costs will less than double.

Economies of scope is the term used to describe an industry that is composed of firms having substantial economies of scale.

Suppose a company that produces mouthwash branches out into producing toothpaste.If this expansion reduces the average cost per unit, the company must A)benefit from vertical integration B)benefit from horizontal integration C)experience economies of scale D)experience economies of scope E)have no transaction costs

If a firm experiences economies of scope, A)its average cost falls as it increases output B)its average cost rises as it increases output C)average production costs fall when it produces more than one kind of product D)it should integrate vertically E)average production costs rise as it produces more kinds of products

Suppose a company that produces furniture wax branches out into producing a dusting product like Lemon-Dust-Away.If this expansion is efficient, the company must A)benefit from vertical integration B)benefit from horizontal integration C)experience economies of scale D)experience economies of scope E)have no transaction costs

Which of the following is an example of a producer taking advantage of economies of scope? A)A farmer buys more land so he can produce more soybeans. B)GM closes a Chevy truck plant in response to a decline in the demand for trucks. C)Disney World stays open later to serve more customers per day. D)A dairy farmer produces cow's milk and butter. E)A mouthwash firm expands production by improving management efficiency.

Which of the following is the most likely result when there are economies of scope? A)outsourcing B)vertical integration C)natural monopoly D)multi-product firms E)adverse selection

Reliable information is A)costly for consumers, but not for producers B)costly for producers and consumers C)freely available D)costly for producers, but not for consumers E)not relevant to economic decision making

According to the search model, Consumer Reports magazine benefits consumers by increasing the marginal benefit of information.

According to the search model, the marginal benefit of acquiring information about a product is greater for expensive items than for cheap items.

The optimal searcher is likely to not even attempt to secure perfect information even if it is possible to achieve it.

For most consumers, the process of gathering information can be considered A)irrational B)unproductive C)a vocation D)nonmarket work E)costless

For most consumers, the process of learning about the efficiency and durability of various brands of refrigerators can be considered A)irrational B)unproductive C)a vocation D)nonmarket work E)costless

Consumer Reports magazine benefits consumers by A)increasing the marginal benefit of information B)reducing the marginal benefit of information C)reducing the marginal cost of information D)increasing the marginal cost of information E)showing which products are in vogue

Publications such as Consumer Reports magazine A)increase the optimal amount of information gathered B)reduce the optimal amount of information gathered C)reduce the amount of common knowledge D)raise the marginal benefit of information curve E)make consumers perfectly informed

Exhibit 14-2 In Exhibit 14-2, the optimal level of search is A)I₁ B)I₂ C)I₃ D)0 E)not shown

Exhibit 14-2 In Exhibit 14-2, the point I₁ indicates A)the optimal amount of information gathered B)common knowledge C)the opportunity cost of the consumer's time D)adverse selection E)that all information is costly

Exhibit 14-2 In Exhibit 14-2, the marginal benefit curve reflects A)the fact that as consumers become more familiar with a market, additional information yields less and less improvement in product quality or value B)the opportunity cost of the consumer's time C)the fact that greater and greater distances must be covered to acquire a marginal piece of information D)the fact that the cost of gathering information diminishes as more is gathered E)the fact that there is much common knowledge about consumption

Exhibit 14-2 In Exhibit 14-2, if a consumer gathers an amount of information equal to I₃, A)she has made the optimal search B)she is relying solely on common knowledge C)she has acquired all available information that is beneficial to her D)further information will be costless to her E)she should increase her search

Exhibit 14-2 In Exhibit 14-2, if a consumer gathers an amount of information equal to I₃, A)he has made the optimal search B)he has avoided the cost of acquiring information C)he has searched too much D)further information will be costless to him E)he should increase his search

Exhibit 14-2 In Exhibit 14-2, if a consumer gathers an amount of information equal to I₂, A)he has made the optimal search B)he has avoided the cost of acquiring information C)he has searched too much D)further information will be costless to him E)he should increase his search

According to the search model, the marginal cost of acquiring information about a product A)is greater for a doctor than a nurse's aide B)is the same for high-income consumers as for low-income consumers C)is greater for expensive items than for cheap items D)is greater for cheap items than for expensive items E)diminishes as more information is acquired

According to the search model, the marginal benefit of acquiring information about a product A)is greater for a doctor than a nurse's aide B)is the same for high-income consumers as for low-income consumers C)is greater for expensive items than for cheap items D)is greater for cheap items than for expensive items E)increases as more information is acquired

According to the search model, we should expect greater price dispersion for a given good A)if the good is a luxury B)if the good is inferior C)if there is much common knowledge about the good D)during a recession E)if a computerized search service is offered

According to the search model, a computerized used car search service should A)reduce the amount of search B)not affect the amount of search C)increase price dispersion D)reduce price dispersion E)lower the marginal benefit of search

According to the search model, a computerized dating service should A)reduce the amount of search B)not affect the amount of search C)increase quality dispersion D)reduce quality dispersion E)lower the marginal benefit of search

The search model predicts that A)singles bars will be popular B)computer dating services would reduce the amount of search C)supermarket price advertisements in the newspaper provide consumers no benefit D)as a consumer's wage rises, they search more, ceteris paribus E)common knowledge has no value

Personal dating advertisements in the newspaper are popular because they A)increase the marginal benefit of search B)reduce the marginal cost of search C)increase the marginal cost of search D)reduce the optimal amount of search E)increase quality dispersion

For which of the following goods is the marginal benefit of search likely to be greatest? A)a toaster B)an apple C)a radio D)a tube of toothpaste E)a color TV

For which of the following goods is the marginal benefit of search likely to be greatest? A)a pair of shoes B)an automobile C)a jar of honey D)a loaf of bread E)a pair of jeans

For which of the following goods is the marginal benefit of search likely to be greatest? A)a haircut B)a maid C)a jar of peanut butter D)a heart bypass E)a new lamp

The marginal benefit of acquiring additional information tends to A)be zero if the marginal cost of information is zero B)increase and then decrease as additional information is obtained C)be smaller, the smaller the quantity of information the individual already has obtained D)increase as additional information is obtained E)decrease as additional information is obtained

"It doesn't hurt to get more information ..." is good advice A)especially when the opportunity cost of acquiring the information is high B)when information is less than perfect C)only if the marginal benefit of information is greater than the marginal cost of information D)only if the marginal benefit of information is equal to the marginal cost of information E)only if the marginal benefit of information is less than the marginal cost of information

Which of the following would lead a utility-maximizing consumer to search for additional information? A)an increase in income B)an increase in the marginal cost of information C)improved technology (e.g., Internet search programs) D)a reduction in the dispersion of prices E)an increase in the consumer's wage rate

The winner's curse is more likely when the value of a good at auction is uncertain.

The winner's curse is more likely when the value of a good at auction is common knowledge.

If the value of a cable TV franchise is uncertain, too much may be bid for the franchise.This is an example of A)moral hazard B)an authority relation C)the winner's curse D)the principal-agent problem E)adverse selection

The winner's curse is more likely A)when there is only one bidder B)when demand for the good being auctioned is increasing C)when the value of the good being auctioned is common knowledge D)when the value of the good being auctioned is uncertain E)when the marginal cost of information is low

The publisher that paid Arthur Arthur, the popular novelist, a $2 million advance on his recent novel, which sold only 42 copies, fell victim to A)moral hazard B)an authority relation C)the winner's curse D)the principal-agent problem E)adverse selection

Asymmetric information exists when both sides of a market approach perfect information.

Asymmetric information exists when one participant in a market transaction has more information than the other participant.

If a seller knows more about the good than the buyer does, there exists A)perfect information B)an externality C)a low marginal benefit of information for the buyer D)asymmetric information E)optimal search

The two types of asymmetric information situations are those with A)hidden costs and hidden actions B)hidden characteristics and hidden costs C)hidden actions and hidden selection D)hidden characteristics and hidden actions E)moral hazard and natural selection

Suppose the new doctor you found in the yellow pages turns out to be a charlatan.This is an example of A)natural selection B)moral hazard C)hidden actions D)external costs E)hidden characteristics

The timeshare condominium in Florida you bought last year turned out to involve many extra costs and restrictions that were not apparent when you bought it.This is an example of A)natural selection B)moral hazard C)hidden actions D)open-access resources E)hidden characteristics

One result of asymmetric information in the market for used cars is that few lemons are sold.

One result of asymmetric information in the market for used cars is that buyers benefit at the expense of sellers.

When a seller knows more about the condition of a used car than the buyer does, the information is said to be asymmetric.

When sellers have better information about product quality than do buyers, lower-quality products tend to become more common in the market.

A service like CARFAX, which provides a used car buyer with the complete history of a used car, is profitable because of the problem of asymmetric information.

A service like CARFAX, which provides a used car buyer with the complete history of a used car, is profitable because of the problem of moral hazard.

One result of asymmetric information in the market for used cars is that A)few used cars are offered on the market B)few lemons are sold C)more lemons may be offered for sale than good cars D)buyers benefit at the expense of sellers E)good cars will sell for more than they are worth

One result of asymmetric information in the market for bank loans is that A)few loans are offered B)few bad loans are made C)more bad loans than good loans may be made D)lenders benefit at the expense of borrowers E)the interest on good loans will be higher than otherwise

The used car market may be inefficient because the purchase of a used car often involves A)natural selection B)moral hazard C)hidden actions D)open-access resources E)hidden characteristics

The lemons problem is that when there are hidden characteristics known only to the seller of a used car, A)the ratio of lemons to high-quality cars is likely to be high B)the ratio of lemons to high-quality cars is likely to be low C)good used cars will sell for more than their market value D)no lemons will be offered on the market E)the price of lemons will be below their market value

One effect of the lemons problem in the used car market is that A)the market is efficient B)without reliable information, lemons become increasingly common C)no good cars are offered on the market D)no lemons are offered on the market E)good cars sell at more than their market value

When sellers have more information about hidden characteristics of a good than buyers have, more low-quality units are likely to be sold than high-quality units.This is A)the law of diminishing marginal returns B)the law of natural selection C)the winner's curse D)the lemons problem E)the problem of common pools

When those on the informed side of a market self-select, the problem of __________ occurs. A)natural selection B)external benefits C)adverse selection D)the winner's curse E)the common pool

Bad risks may be the most willing to pay high interest rates and thus get loans.This describes an example of A)symmetrical information B)adverse selection C)natural selection D)moral hazard E)the winner's curse

Adverse selection is more likely when a job requires intangible or unmeasurable abilities.

Suppose the refrigerator repairman charges you for two hours of labor even though he could have fixed it in ten minutes.This is an example of A)natural selection B)moral hazard C)hidden actions D)external costs E)hidden characteristics

The principal-agent problem arises because of A)natural selection B)diminishing marginal returns C)hidden actions D)the winner's curse E)hidden characteristics

In which of the following situations is the principal-agent problem least likely to occur? A)a hospital stay B)a doctor's visit C)a bartender serves you at the bar D)your TV is repaired E)a stockbroker calls with financial advice

Why is the principal-agent problem less likely when getting a haircut than when getting a car repaired? A)Haircuts are less expensive than car repairs. B)There are no hidden actions when getting your hair cut. C)There are no hidden actions when getting your car repaired. D)Auto mechanics are less honest than hair stylists. E)There is no principal-agent relationship in car repair.

Which of the following will not reduce the likelihood of a principal-agent problem when getting your car repaired? A)asking to see the replaced parts B)staying to watch the repair being done C)gathering information on car repair D)not paying until after the repair job is finished E)persuading the mechanic you know a lot about cars

Which of the following is not a principal-agent relationship? A)Adam and Gloria get married. B)Payless, Getless, Inc., hires a salesperson. C)Dixie hires a lawyer. D)Citizens elect a state senator. E)Opal gets her car repaired.

With increased specialization in the economy, principal-agent problems become A)more numerous B)less numerous C)more severe, but there are fewer of them D)less severe, but there are more of them E)easier to solve

Copious Corp.is owned by 2 million stockholders who elect a board of directors that selects a management team responsible for hiring workers to serve customers by selling and repairing computer mice.Which of the following statements is true? A)In the principal-agent relationship between workers and customers, the customers are the agents. B)In the principal-agent relationship between workers and managers, the managers are the agents. C)In the principal-agent relationship between the stockholders and the board of directors, the stockholders are the agents. D)In the principal-agent relationship between the stockholders and the customers, the stockholders are the agents. E)In the principal-agent relationship between management and the board of directors, the managers are the agents.

The academic dean at Esoteric University hires a philosopher to teach one of the 12 sections of a course called "Why Nerf Balls Ingest Hair." Which of the following is true? A)The academic dean is the agent; the philosopher is the principal. B)The academic dean is the agent; the students are the principals. C)The academic dean is the principal; the students are the agents. D)The philosopher is the principal to both the academic dean and the students. E)The philosopher is an agent to both the academic dean and the students.

A principal-agent problem arises when A)only less-qualified workers apply for a job B)a firm must find a proxy for unobservable qualities needed in employees C)potential employees have more information about their own productivity than do prospective employers D)a customer knows little about the service provided by a business E)a customer knows little about the service provided by a business and is, therefore, given poor service

A situation in which one party makes a contractual agreement with a second party in the expectation that the second party will act on its behalf is known as A)an adverse selection relation B)a signaling relation C)an authority relation D)a principal-agent relation E)a nonmarket relation

An employer-employee relationship is A)a nonmarket relation B)a principal-agent relation C)a comparable worth relation D)a substitution relation E)a winner's curse

Principal-agent problems are less likely to arise A)if it is easy for principals to know agents' actions and if there is less conflict between their goals B)if it is difficult for principals to know agents' actions and if there is less conflict between their goals C)if it is easy for principals to know agents' actions and if there is some difference in their goals D)if it is difficult for principals to know agents' actions and if there is some difference in their goals E)if agents have higher incomes

Which of the following problems best describes what may occur when Dixie hires an attorney to help in her child-custody suit? A)the winner's curse B)a signaling problem C)a principal-agent problem D)an adverse selection problem E)unemployment

The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as moral hazard and adverse selection, respectively.

An example of a moral hazard would be Andrew leaving the washer, dryer, and dishwasher running at home while he goes to class since he is fully insured and he will not be at risk if a fire occurs.

By requiring that applicants for insurance policies fill out lengthy forms and take a physical examination, insurers attempt to guard against A)symmetrical information B)adverse selection C)natural selection D)moral hazard E)the winner's curse

Moral hazard occurs when a person's behavior changes in a way that A)is immoral B)is inherently dangerous C)increases the chances of an unfavorable outcome D)increases the likelihood of profit E)raises the net welfare of society

Suppose Sally buys a Volvo because they are safe and, as a result, drives faster and pays less attention to other cars on the road.This is an example of A)the winner's curse B)a positive externality C)irrational behavior D)moral hazard E)adverse selection

Which of the following is not an example of moral hazard? A)People with health insurance take poor care of themselves. B)Reckless drivers own the safest cars. C)Banks make risky loans because deposit insurance protects them. D)People give more to charity just because it is tax deductible. E)A quarterback holds on to the ball longer before passing because he has a good offensive line.

Savers have less incentive to care what their bank is doing with their money because their deposits are federally insured.This is a problem of A)nominal interest B)adverse selection C)moral hazard D)the winner's curse E)a positive externality

The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as A)moral hazard and adverse selection, respectively B)the winner's curse and adverse selection, respectively C)adverse selection and natural selection, respectively D)adverse selection and moral hazard, respectively E)the winner's curse and moral hazard, respectively

Lemon laws are an attempt to reduce __________ in used car markets. A)symmetrical information B)adverse selection C)natural selection D)moral hazard E)the winner's curse

When applying for a loan, a borrower tends to know more about her ability to pay it back than does the bank.This is an example of A)perfect information B)moral hazard C)a low marginal benefit of information for the bank D)asymmetric information E)optimal search

Insurance companies try to avoid adverse selection and moral hazard problems through all of the following methods except one.Which is the exception? A)offering group policies B)requiring lengthy application forms C)requiring physical examinations D)setting uniform premiums (i.e., prices of insurance policies)for all policies E)requiring policyholders to pay a deductible

By requiring that policyholders pay a deductible on a claim, insurers guard against A)symmetrical information B)adverse selection C)natural selection D)moral hazard E)the winner's curse

Waiters, barbers, and bellhops are paid primarily through tips because A)managers can easily assess their productivity B)managers are better at judging their productivity than are consumers C)consumers can judge their productivity easily D)it's always been done that way E)union regulations require this form of payment

There is less of a principal-agent problem between managers and apple pickers than between managers and secretaries because A)apple pickers naturally work harder B)secretaries get paid less than their worth C)productivity is easier to measure in apple picking than in secretarial services D)a secretary's marginal product is easier to estimate than an apple picker's E)managers can watch apple-pickers more closely than they can secretaries

At Tony's Car Wash, a team of four workers washes and rinses each car by hand, and one worker dries the car by hand.Which of the following is true? A)Tony will have no principal-agent problems. B)Tony will have more principal-agent problems in washing and rinsing than in drying the cars. C)Tony will have more principal-agent problems in drying than in washing and rinsing the cars. D)Tony will be awash in severe principal-agent problems. E)Tony will have no incentive to monitor the car wash.

The adverse selection problem is most likely in which of the following occupations? A)waiter/waitress B)barber C)college professor D)supermarket cashier E)tightrope walker

The adverse selection problem is least likely in which of the following occupations? A)lawyer B)barber C)college professor D)marketing analyst E)manager

Adverse selection is more likely when A)a job requires specific training B)a job requires intangible or unmeasurable abilities C)the wage offered is above the average of all wages in the market D)the wage is based on true marginal revenue products E)performance can be monitored closely

If an employment situation is characterized by adverse selection, there is an excess supply of underqualified applicants for each job.

Adverse selection refers to a situation in which A)employers have more information about a job's salary than the job candidate does B)a job candidate has more information about the job's salary than the employer does C)employers have more information about a job candidate's abilities than the candidate does D)a job candidate has more information about her abilities than the employer does E)only below-average job candidates apply for a job

The law firm of Cheep, Cheeper, and Cheeperstill offers a salary of $35, 000 to first-year lawyers.This firm will attract applications from A)exactly the number of lawyers the firm wishes to hire B)many lawyers whose marginal revenue product is greater than $35, 000 C)many lawyers whose marginal revenue product is less than $35, 000 D)only lawyers whose marginal revenue product is equal to $35, 000 E)many lawyers whose marginal revenue cost is equal to $35, 000

If an employment situation is characterized by adverse selection, A)there are too many applicants for each job B)there are too few applicants for each job C)there are exactly the right number of applicants for each job D)there is an excess supply of overqualified applicants for each job E)there is an excess supply of underqualified applicants for each job

At the December meeting of the American Economic Association, 2, 500 new Ph.D.s look for college teaching jobs.If the average wage offer is $40, 000 and Tedium University makes that offer, it is likely to A)be ignored B)attract only average Ph.D.s C)attract applicants from top schools D)attract Ph.D.s with strong dissertations E)attract applicants of below-average quality

A wage offer that is above the market wage, intended to avoid the adverse selection problem, is called a(n) A)efficiency wage B)union wage C)selection wage D)spurious wage E)opportunity cost wage

Which of the following may result when workers have much better information about their own productivities than employers have? A)discrimination B)natural selection C)principal-agent problems D)unemployment E)adverse selection

Adverse selection is a situation in which A)only men are hired for particular jobs B)comparable worth laws actually reduce the number of women in certain professions C)people who use illegal drugs apply for jobs where employers do not use drug testing D)employers have a better knowledge of the productivity of labor suppliers than do the labor suppliers E)employers attempt to quantify the productivity of their workers

The idea that paying higher wages attracts a more talented labor pool is called the A)winner's curse B)efficiency wage theory C)marginal productivity theory D)lemons problem E)theory of the second best

By paying a higher-than-market wage, a firm can avoid the problem of A)reputation as hostage B)moral hazard C)the winner's curse D)adverse selection E)symmetrical information

Darryl graduated with honors from college.However, he obtained his outstanding grades by cheating on every final exam with help from his best friend; Darryl actually has the talent of a C student.Nevertheless, he gets a job with a top accounting firm in Boston.The fact that he is hired illustrates a failure of A)comparable worth B)signaling and screening C)marginal productivity D)supply and demand E)specialization

Which of the following would not be considered a signal for a job as a public relations representative? A)the number of minutes the candidate is allotted in the interview B)a high grade point average C)the suit the candidate wears to an interview D)the reputation of the college the candidate attended E)past salary history

A signal is A)a proxy measure of job conditions B)a proxy measure of a job applicant's skills C)used by employers to indicate that a job interview is over D)an indication of an excess supply of labor E)an indication of an excess supply of qualified labor

Employers rely on a job applicant's signals A)because they are always an accurate indication of the applicant's skills B)because actual abilities are not observable prior to employment C)because actual abilities are not observable after the applicant is hired D)only when hiring someone for an entry-level position E)only when hiring someone who has a college degree

Universities sometimes hire professors who are poor teachers but have good research skills because A)research ability is more important in education than teaching ability B)students don't listen to professors anyway C)teaching can be learned; research ability cannot D)research skills are easier to measure than teaching skills E)research skills are difficult to measure

A signal is A)anything used to show employees in a market that demand in a profession has increased B)anything used to show employees in a market that supply in a profession has increased C)a proxy used to indicate possession of unobservable qualities required for a particular job D)a way for employers to discriminate against certain groups of people E)a way for employees to learn to stay out of certain professions

A signal works best if A)it is acquired with equal ease by all workers B)it is not acquired with equal ease by all workers C)it is not understood by the employer D)it is not understood by the employee E)wages are allowed to vary

Which of the following involves signaling? A)high wage rates attracting a larger pool of applicants for a job B)firms taking advantage of outsourcing when transactions costs are low C)reporting one's college GPA on a resume D)paying higher wages to workers who produce more E)requiring the sales staff to work strictly on commission

Which of the following is not related to adverse selection in insurance markets? A)An insurance company has no way of distinguishing among applicants B)An insurance company must charge a higher price to applicants who are good health risks C)The price of insurance is attractive to poor health risks, but not to good ones D)The insured group becomes less healthy on average E)Because of the relative unhealthiness of the insured group, rates must rise

Screening is the attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party.

Signaling is the attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party.

An example of screening job applicants is A)listing years of education on résumés B)providing college transcripts C)sending in letters of recommendation D)dressing in a suit for interviews E)checking résumés for spelling and typographical errors

Compared to the pay increase from just a third year of college, the actual pay increase resulting from a fourth year that results in graduation is A)several times smaller B)the same C)only very slightly greater D)several times greater E)No economist has ever studied this issue

Exhibit 14-3 Jira is searching for a big screen television.Exhibit 14-3 shows her marginal cost and marginal benefit from searching for the television.How many minutes should she search? A)0 minutes B)5 minutes C)15 minutes D)40 minutes E)cannot tell from the information given

Exhibit 14-3 In Exhibit 14-3, the point where the marginal cost of information is 0 and the amount of information is 5 minutes worth is A)the optimal amount of information gathered B)common knowledge C)the opportunity cost of the consumer's time D)adverse selection E)that all information is costly

Exhibit 14-3 In Exhibit 14-3, the marginal benefit curve reflects A)the fact that as Jira spends more time searching for information about HD televisions, additional information yields less and less improvement in the value of the product she will get B)the opportunity cost of the Jira's time C)the fact that greater and greater distances must be covered to acquire a marginal piece of information D)the fact that the cost of gathering information diminishes as more is gathered E)the fact that there is much common knowledge about consumption

Exhibit 14-3 In Exhibit 14-3 if Jira gathers an amount of information equal to 40 minutes, A)she has made the optimal search B)she is relying solely on common knowledge C)she has acquired all available information that is beneficial to her D)further information will be costless to her E)she should increase her search

Exhibit 14-3 In Exhibit 14-3, if Jira gathers an amount of information equal to 40 minutes, A)she has made the optimal search B)she has avoided the cost of acquiring information C)she has searched too much D)further information will be costless to her E)she should increase her search

Exhibit 14-3 In Exhibit 14-3, if Jira gathers an amount of information equal to 15 minutes, A)she has made the optimal search B)she has avoided the cost of acquiring information C)she has searched too much D)further information will be costless to her E)she should increase her search