Question 1

Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of

Accepted Answer

A)   moral hazard.
B)   screening.
C)   adverse selection.
D)   the principal-agent problem.E) B) and C)
F) None of the above

Question 2

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 3

Asymmetric information is a problem that occurs when one person in a transaction knows more about what is going on than the other.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

In the principal-agent relationship, the principal performs a task on behalf of the agent.

Accepted Answer

A) True 
 B)False  False

Question 6

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Accepted Answer

A)   a moral hazard problem.
B)   adverse selection.
C)   behavioral economics.
D)   signalling.E) A) and D)
F) All of the above

Question 7

Frequently it is the case that: (1)  A worker knows more than his employer about how much effort he puts into his job, and (2)  the seller of a used car knows more than the buyer about the car's condition.

Accepted Answer

A)   Neither (1)  nor (2)  serves as an example of asymmetric information.
B)   Both (1)  and (2)  serve as examples of asymmetric information.
C)   Neither (1)  nor (2)  serves as an example of a hidden action.
D)   Both (1)  and (2)  serve as examples of hidden action.E) None of the above
F) A) and B)

Question 8

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 preference 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 signaling the quality of its products.E) All of the above
F) A) and B) C

Question 9

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 10

Explain and provide examples of what is meant by "asymmetric information."

Accepted Answer

Asymmetric information is present when there is a difference in access to relevant information. Examples include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and his insurer.

Question 11

According to one survey most Europeans said they were not saving enough for retirement. This example of inconsistency over time

Accepted Answer

A)   is rational behavior.
B)   likely occurs because saving requires a sacrifice in the present for a reward in the distant future.
C)   likely occurs because Europeans don't care about retirement.
D)   definitely would not happen if Europeans earned a greater return on their investments.E) A) and D)
F) C) and D)

Question 12

Which of the following must be true about a signal that is used to reveal private information in order for the signal to be effective? It must be:

Accepted Answer

A)   "as seen on TV."
B)   free to the signalling party.
C)   costly to the signalling party but less costly to the party with the higher-quality product.
D)   applied to an inexpensive product.E) B) and C)
F) A) and B)

Question 13

In the ultimatum game, what split would be rational for both the person proposing the split and the person who must accept or reject the split?

Accepted Answer

A)   There is no rational solution.
B)   75/25
C)   99/1
D)   1/99
E)   50/50F) B) and C)
G) A) and E)

Question 14

What is herd mentality?

Accepted Answer

Herd mentality is a tendency for people ...

Question 15

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 C)
F) None of the above

Question 16

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)   Car Fax allows car buyers to obtain used-vehicle histories providing them with the same information as the dealership salesperson.
D)   The goalkeeper in a football game must guess whether the penalty taker will shot to the goalkeeper's right or left side.E) A) and B)
F) None of the above

Question 17

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) None of the above
F) All of the above

Question 18

An apparel company employs Jean as a designer. In this employment relationship, the apparel company is the

Accepted Answer

A)   agent.
B)   principal.
C)   screener.
D)   signaller.E) None of the above
F) B) and C)

Question 19

Moral hazard occurs when

Accepted Answer

A)   the principal monitors an agent.
B)   two people might trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks.
C)   an agent lacks an incentive to promote the best interests of the principal, and the principal cannot observe the actions of the agent.
D)   an agent monitors the principal.E) A) and B)
F) C) and D)

Question 20

A person's tendency to smoke a cigarette after promising to quit is an example of the behavioral economics insight that people are inconsistent over time.

Accepted Answer

A) True 
 B)False

Exam 12: Information and Behavioural Economics

Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of

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

Asymmetric information is a problem that occurs when one person in a transaction knows more about what is going on than the other.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In the principal-agent relationship, the principal performs a task on behalf of the agent.

Correct AnswerverifiedFalse

Your friend works at a coffee shop on campus and regularly gives away free coffee to you and your friends when you visit. This is an example of

Correct AnswerverifiedShow Answer

Frequently it is the case that: (1) A worker knows more than his employer about how much effort he puts into his job, and (2) the seller of a used car knows more than the buyer about the car's condition.

Correct AnswerverifiedShow Answer

Which of the following statements is not correct?

Correct AnswerverifiedC

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

Correct AnswerverifiedShow Answer

Explain and provide examples of what is meant by "asymmetric information."

Correct AnswerverifiedAsymmetric information is present when there is a difference in access to relevant information. Examples include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and his insurer.

According to one survey most Europeans said they were not saving enough for retirement. This example of inconsistency over time

Correct AnswerverifiedShow Answer

Which of the following must be true about a signal that is used to reveal private information in order for the signal to be effective? It must be:

Correct AnswerverifiedShow Answer

In the ultimatum game, what split would be rational for both the person proposing the split and the person who must accept or reject the split?

Correct AnswerverifiedShow Answer

What is herd mentality?

Correct AnswerverifiedHerd mentality is a tendency for people ...View AnswerShow Answer

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

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)

Correct AnswerverifiedShow Answer

An apparel company employs Jean as a designer. In this employment relationship, the apparel company is the

Correct AnswerverifiedShow Answer

Moral hazard occurs when

Correct AnswerverifiedShow Answer

A person's tendency to smoke a cigarette after promising to quit is an example of the behavioral economics insight that people are inconsistent over time.

Correct AnswerverifiedShow Answer

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Drivers (buyers and potential buyers of ...
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False

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C

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Asymmetric information is present when there is a difference in access to relevant information. Examples include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and his insurer.

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Herd mentality is a tendency for people ...
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