Question 1

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Accepted Answer

Drivers (buyers and potential buyers of ...

Question 2

The ultimatum game reveals that

Accepted Answer

A)  	it does not make sense to try to maximise profits.
B)  	people may have an innate sense of fairness that economic theory does not capture.
C)  	offering someone a wildly unfair outcome is usually acceptable since people tend to make decisions using a "something is better than nothing" philosophy.
D)  	Both a and b.E) B) and D)
F) A) and B)

Question 3

Mandla, who knew nothing about construction, paid Shaun to build an extension on his house. Two years later, a wall of the new extension crumbled because Shaun used poor quality materials. This is an example of

Accepted Answer

A)   adverse selection.
B)   screening.
C)   moral hazard.
D)   signalling.E) None of the above
F) All of the above

Question 4

Which of the following would be an example of a principal trying to deal with a moral hazard problem?

Accepted Answer

A)   The parents of an infant secretly place video cameras in their house before the baby-sitter arrives.
B)   An insurance company checks police records to determine if its policyholders have received traffic fines.
C)   An employer examines his workers' output on a daily basis.
D)   All of the above are correct.E) B) and C)
F) C) and D)

Question 5

William is preparing to study for the economics final exam. William is happy to get an honours degree, even though he could likely earn his honours degree cum laude if he would study harder. William is a(n)

Accepted Answer

A)   rational maximiser.
B)   satisficer.
C)   agent.
D)   screener.E) A) and B)
F) None of the above

Question 6

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

Accepted Answer

A)   signal.
B)   screen.
C)   efficiency wage.
D)   agent.E) B) and C)
F) All of the above

Question 7

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

Accepted Answer

A)   moral hazard problem.
B)   screening device.
C)   signal of how much she cares for him.
D)   All of the above are correct.E) All of the above
F) A) and B)

Question 8

Which of the following is an example of a signal that is used to reveal private information?

Accepted Answer

A)   Erick carefully chooses a special gift for Suzanne.
B)   Henry graduates from university.
C)   Lexus advertises its cars during the Soccer World Cup Final.
D)   All of these answers are correct.E) A) and D)
F) All of the above

Question 9

Which of the following is an example of an adverse selection problem?

Accepted Answer

A)   A customer purchases four apples, two of which are bruised.
B)   A card shop puts its Halloween merchandise on sale after Halloween.
C)   A young worker is fired after she is late for work three times in one month.
D)   A man whose father had a heart attack wants to increase his life insurance coverage.E) A) and B)
F) A) and C)

Question 10

Which is an example of people trying to make better choices for themselves?

Accepted Answer

A)   Take out a pension plan with monthly contributions to provide a better future pension.
B)   Insist that your partner doesn't buy chocolate or sugary drinks when at the supermarket, to help with your diet plans.
C)   Pay for gym membership and go regularly in order to improve your fitness.
D)   All of the above.E) A) and D)
F) A) and C)

Question 11

How does the prospect theory work?

Accepted Answer

Prospect theory suggests that when prese...

Question 12

Which of the following relationships involves asymmetric information?

Accepted Answer

A)   Patients can look up information regarding certain prescription drugs giving them the same information as their doctors.
B)   Consumer Reports allows customers of DVD players to know as much about the quality of various players as the store salesperson.
C)   CarCheck allows car buyers to obtain used vehicle histories, providing them with the same information as the dealership salesperson.
D)   The goalkeeper in a soccer game must guess whether the penalty taker will shoot to the goalkeeper's right or left side.E) All of the above
F) A) and C)

Question 13

Which of the following offers an explanation as to why the principal-agent problem exists for a firm?

Accepted Answer

A)   The firm cares less about profit and more about cost when there are many competitors in the market.
B)   The firm offers an employee-incentive program in which employees share in the firm's profits.
C)   The firm operates in a market with many competitors forcing the firm to pay its employees more to keep them from switching to another firm.
D)   The firm operates to maximise profit while the employees attempt to work as little as possible to earn their paychecks.E) A) and C)
F) A) and B)

Question 14

People seem to naturally engage in delayed gratification and they tend to follow through plans made today to do something unpleasant in the future.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is not correct?

Accepted Answer

A)   Based on studies of human decision-making, most people value fairness.
B)   Based on studies of human decision-making, some people's preferences are inconsistent over time.
C)   Government intervention is the best remedy for the problems caused by asymmetric information.
D)   Advertising can be an example of a company signalling the quality of its products.E) A) and D)
F) B) and C)

Question 16

The principal-agent problem is more serious in large firms than in small firms because

Accepted Answer

A)   monitoring employee activity in large firms is generally more difficult.
B)   employees in large firms have less information.
C)   profits increase with the size of the firm.
D)   customers expect better treatment from small firms and they usually get it.E) All of the above
F) A) and B)

Question 17

When one party is better informed about an economic situation than another party, economists describe the problem as one of

Accepted Answer

A)   asymmetric information.
B)   moral hazard.
C)   political economy.
D)   behavioural economics.E) None of the above
F) All of the above

Question 18

Which of the following relationships involves asymmetric information?

Accepted Answer

A)   An employee knows more than his employer knows about his work effort.
B)   A borrower knows more than the lender about his ability to repay the loan.
C)   The seller of a 30-year-old house knows more than the buyer about the condition of the house.
D)   All of the above are correct.E) A) and D)
F) B) and C)

Question 19

Signals to convey high quality are most effective when they are costless to all firms in the industry.

Accepted Answer

A) True 
 B)False

Question 20

The ultimatum game demonstrates that people will always make choices according to their self-interest.

Accepted Answer

A) True 
 B)False

Exam 12: Information and Behavioural Economics

Which of the following relationships involves asymmetric information?

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Mandla, who knew nothing about construction, paid Shaun to build an extension on his house. Two years later, a wall of the new extension crumbled because Shaun used poor quality materials. This is an example of

Correct AnswerverifiedShow Answer

Which of the following statements is not correct?

Correct AnswerverifiedShow Answer

William is preparing to study for the economics final exam. William is happy to get an honours degree, even though he could likely earn his honours degree cum laude if he would study harder. William is a(n)

Correct AnswerverifiedShow Answer

The ultimatum game reveals that

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People seem to naturally engage in delayed gratification and they tend to follow through plans made today to do something unpleasant in the future.

Correct AnswerverifiedShow Answer

Which of the following is an example of an adverse selection problem?

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A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

Correct AnswerverifiedShow Answer

The principal-agent problem is more serious in large firms than in small firms because

Correct AnswerverifiedShow Answer

Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.

Correct AnswerverifiedDrivers (buyers and potential buyers of ...View AnswerShow Answer

Which of the following would be an example of a principal trying to deal with a moral hazard problem?

Correct AnswerverifiedShow Answer

When one party is better informed about an economic situation than another party, economists describe the problem as one of

Correct AnswerverifiedShow Answer

Which of the following offers an explanation as to why the principal-agent problem exists for a firm?

Correct AnswerverifiedShow Answer

Which of the following relationships involves asymmetric information?

Correct AnswerverifiedShow Answer

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

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Which is an example of people trying to make better choices for themselves?

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The ultimatum game demonstrates that people will always make choices according to their self-interest.

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How does the prospect theory work?

Correct AnswerverifiedProspect theory suggests that when prese...View AnswerShow Answer

Signals to convey high quality are most effective when they are costless to all firms in the industry.

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Which of the following is an example of a signal that is used to reveal private information?

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Drivers (buyers and potential buyers of ...
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Prospect theory suggests that when prese...
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