Microeconomics Study Set 46

Business

Quiz 16 :

Asymmetric Information

Quiz 16 :

Asymmetric Information

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The costs of obtaining a college degree for high-productivity and low-productivity workers are as follows: High productivity: CH = $120,000 Low productivity: CL = $180,000 Suppose workers with a college degree are paid a lifetime income of $400,000 and workers without a college degree are paid $230,000. Which of the following statements is (are) TRUE?
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C

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Carfax offers a report on used cars for $39.99. It details the ownership type and history, vehicle mileage, accident reports, and other information. Carfax is an example of how markets try to:
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B

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Kulap, a soybean farmer, acts to prevent crop failure. The marginal benefit is represented by MB = 80 - A, where A is the number of precautions. The marginal cost of these precautions (e.g., soil preparation and pesticide and fertilizer use) is MC = 20 - 0.5A. Suppose the government offers Kulap crop insurance, which changes the marginal benefit of taking precautions to MB = 65 - 2A. The number of precautions Kulap takes _____ from _____ without insurance to _____ with insurance.
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C

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In the market for karate lessons, the instructors know more about the quality of their instruction than their students do. This situation may set up a:
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(Figure: Fire Insurance) Lilly, who owns the Cigar Bar and Grill, is considering whether to purchase fire insurance. Without insurance, the marginal benefit of precautions to reduce the risk of fire is given by MB1.Which of the following statements is (are) TRUE? img I. With full insurance, the marginal benefit of acting to reduce the risk of fire is given by MB3. II) If Lilly purchases fire insurance, whether it is full or partial coverage, the marginal benefits of acting to reduce the risk of fire will increase. III) With partial insurance, the marginal benefit of acting to reduce the risk of fire is given by MB2.
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(Table: Car Quality Rating) At a sale of used cars, nine people are trying to sell their cars. Each of the sellers knows the quality rating of his car, all of which the table displays, and which range from 0 to 2. img Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the value of any given car, but they do know the average quality rating of all cars that are available at the going price. Buyers value any given car at img , where img Is the average quality rating of the cars available for sale. At an auction price of $2,000, there will be ____ cars for sale.
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(Table: Insurance Claims) Five people vary in health status. Each person knows his or her own health status and expected medical bills, which are given in the table. These people are considering buying health insurance. Assume that each person is equally likely to file a claim. img Suppose that the insurance company does not know the health status of any one person but does know the expected claims of the group as a whole. If the insurance company sets the premium based on the average expected claims of these five people, then the premium is ____.
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Consumers value high-quality dirt bikes at $6,000 and low-quality dirt bikes at $2,500. The supply of used high-quality dirt bikes is QH = 0.5PH - 2,000, while the supply of used low-quality dirt bikes is QL = PL - 1,000. Potential buyers cannot distinguish between the two. Buyers base their willingness to pay on the belief that half the used dirt bikes are high quality. At the buyers' willingness to pay, sellers will offer _____ high-quality bikes and _____ low-quality ones.
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Ideally, regulations that address low-quality cars should:
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Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is QR = 6, and Paula's demand curve for physician visits is QP = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. Without insurance coverage, Troy will make ____ physician visits.
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The supply of used high-quality motorcycles is QH = 0.2PH - 1,000, and the supply of used low-quality motorcycles is QL = 0.5PL - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, ____ high-quality motorcycles will be offered for sale at the consumers' willingness to pay.
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Warranties on products _____ asymmetric information, but they _____ the lemons problem.
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Adverse selection can occur when the: I. buyer has more information than the seller. II. seller has more information than the buyer. III. buyer and seller have complete information.
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At a swap meet, 10 sellers each have a used 5.7-L Chevy engine for sale. Half the engines are in mint condition, with each valued by its seller at $3,000. The other engines need repair, and each is valued by its seller at $1,000. Buyers value a mint engine at $3,500 and an engine that needs repair at $1,600. Sellers know whether their engine is in mint condition or needs repair, and buyers can distinguish between engines in mint condition and those needing repair. How many engines will be sold at the swap meet?
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Eric has a job at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard or not. If Eric works hard, there is a 75% probability that electronics goods profits will equal $400 a day and a 25% probability that electronics goods profits will equal $100 a day. If Eric shirks, there is a 75% probability that electronics goods profits will equal $100 a day and a 25% probability that electronics goods profits will equal $400 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. Eric will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.
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(Figure: Principal-Agent Game I) What is the equilibrium in this principal-agent game? img
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Consider Troy and Paula, each of whom recently purchased health insurance with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a physician visit). Troy's demand curve for physician visits is QR = 6, and Paula's demand curve for physician visits is QP = 20 - 0.10P, where Q represents the number of physician visits and P is the price per visit. Suppose that the market price, P, for physician visits is $100. With insurance coverage, Troy will visit the physician ____ times.
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(Figure: Theft Prevention) If an individual with no insurance purchases partial coverage, the marginal _____ curve will shift _____, leading her to _____ theft prevention measures. img
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Some employers no longer consider a prospective employee's grade point average as a useful signal. Why might this be the case?
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The supply of used high-quality motorcycles is QH = 0.2PH - 1,000, and the supply of used low-quality motorcycles is QL = 0.5PL - 1,000. In the used-motorcycle market, potential buyers cannot tell them apart. Consumers value high-quality motorcycles at $10,000 and low-quality motorcycles at $6,000. If consumers believe there is a 50% probability that a used motorcycle is high quality, consumers are willing to pay ____ for any used motorcycle.
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