TESTTEST
BANK FOR
BANK FORCHAPTER 15Asymmetric
CHAPTER 15: : ASYMETRIC INFORMATION
Information
MULTIPLE CHOICE
1. The principal is distinct from the agent in the principal-agent model because
a. the principal offers the contract to the agent.
b. the principal is fully informed.
c. both a and b.
d. neither a nor b.
ANS: a
2. Which of the following is an application of the adverse selection problem?
a. a customer driving more recklessly after buying car insurance.
b. a teenager “hanging out” with friends his or her parents do not approve of.
c. shareholders offering a high-powered incentive contract to a manager.
d. an auto repairman claiming that the repairs are more extensive than they actually are.
ANS: d
3. Adverse selection arises in insurance markets because
a. insurance buyers have more information than insurance sellers.
b. insurance sellers have more information than insurance buyers.
c. individuals can select which insurance company to patronize.
d. insurance companies can exercise too much control over whom they insure.
ANS: a
4. Adverse selection in competitive insurance markets harms
a. high risk individuals.
b. low risk individuals.
c. owners of competitive insurance companies.
d. everyone.
ANS: b
5. An example of adverse selection is
a. purchasing a new car sight unseen based on the recommendation of a neighbor.
b. high health insurance premiums resulting from the poor health of people who buy
policies.
c. suppliers who charge more for better quality clothing than for lower quality clothing.
d. being talked into buying a low-quality item because the price is lower.
ANS: b
6. Which of the following is an application of the moral hazard problem?
a. a person buying insurance after a cancer diagnosis.
b. an salesperson who is not paid on commission being rude to customers.
c. coffee hounds buying the menu item meant for lower-demand consumers.
d. only inexperienced workers applying for a managerial job advertised with a relatively
low salary.
ANS: b
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, 2 Chapter 15: Asymmetric Information
7. A risk-averse manager is hired to run a firm for shareholders. If the manager’s effort can be
observed and specified in a contract, which would be the best employment contract?
a. a high-powered incentive contract to elicit the most effort.
b. a fixed salary paid as long as the required effort is undertaken.
c. a proportion of profits paid as long as the required effort is undertaken.
d. a wage well in excess of his or her outside opportunity .
ANS: b
8. 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. a high-powered incentive contract to elicit maximum effort.
b. a fixed salary.
c. a moderately powered incentive scheme that elicits some effort without exposing the
manager to too much risk.
d. an incentive scheme that provides maximum incentives and maximum insurance.
ANS: c
9. Given a series of employment contracts with the same slope (where slope refers to how the
contract varies with changes in the firm’s gross profits) but different intercepts (referring to
the overall generosity of the contract). Which of these is not a consideration in figuring out
which of these intercepts the shareholders would decide to build into the contract offered to
the manager?
a. if too generous a contract is offered, this comes out of the firm’s bottom-line profit.
b. if too generous a contract is offered, the manager may become lazy and not exert the
required effort.
c. if the contract isn’t generous enough, the manager will decide to work elsewhere.
d. if the contract isn’t generous enough, only low-ability managers will apply.
ANS: b
10.Which are social costs associated with the inability of shareholders to observe a manager’s
effort? (You may choose more than one.)
a. excessive insurance offered.
b. the manager has to be exposed to risk to induce effort, and risk is costly.
c. the manager ends up exerting less than first-best effort.
d. excessive effort induced.
ANS: b and c
11. A monopoly coffee shop is deciding on a menu of different cup sizes to sell to a population of
consumers, some of whom are high demanders and some low demanders. How would the
optimal menu differ depending on whether the consumers can be observably separated into
the different types or not?
a. the menu is unaffected by type observability.
b. if types aren’t observable, the large cup size should be increased to separate the high
demander.
c. if types aren’t observable, the small cup size should be increased to make it more
attractive to low demanders.
d. if types aren’t observable, the small cup size should be reduced to make it less attractive
to high demanders.
ANS: d
This study source was downloaded by 100000841341657 from CourseHero.com on 03-23-2022 10:09:31 GMT -05:00
https://www.coursehero.com/file/12388264/TEST-BANK-FOR-CHAPTER-15/
BANK FOR
BANK FORCHAPTER 15Asymmetric
CHAPTER 15: : ASYMETRIC INFORMATION
Information
MULTIPLE CHOICE
1. The principal is distinct from the agent in the principal-agent model because
a. the principal offers the contract to the agent.
b. the principal is fully informed.
c. both a and b.
d. neither a nor b.
ANS: a
2. Which of the following is an application of the adverse selection problem?
a. a customer driving more recklessly after buying car insurance.
b. a teenager “hanging out” with friends his or her parents do not approve of.
c. shareholders offering a high-powered incentive contract to a manager.
d. an auto repairman claiming that the repairs are more extensive than they actually are.
ANS: d
3. Adverse selection arises in insurance markets because
a. insurance buyers have more information than insurance sellers.
b. insurance sellers have more information than insurance buyers.
c. individuals can select which insurance company to patronize.
d. insurance companies can exercise too much control over whom they insure.
ANS: a
4. Adverse selection in competitive insurance markets harms
a. high risk individuals.
b. low risk individuals.
c. owners of competitive insurance companies.
d. everyone.
ANS: b
5. An example of adverse selection is
a. purchasing a new car sight unseen based on the recommendation of a neighbor.
b. high health insurance premiums resulting from the poor health of people who buy
policies.
c. suppliers who charge more for better quality clothing than for lower quality clothing.
d. being talked into buying a low-quality item because the price is lower.
ANS: b
6. Which of the following is an application of the moral hazard problem?
a. a person buying insurance after a cancer diagnosis.
b. an salesperson who is not paid on commission being rude to customers.
c. coffee hounds buying the menu item meant for lower-demand consumers.
d. only inexperienced workers applying for a managerial job advertised with a relatively
low salary.
ANS: b
This study source was downloaded by 100000841341657 from CourseHero.com on 03-23-2022 10:09:31 GMT -05:00
1
https://www.coursehero.com/file/12388264/TEST-BANK-FOR-CHAPTER-15/
, 2 Chapter 15: Asymmetric Information
7. A risk-averse manager is hired to run a firm for shareholders. If the manager’s effort can be
observed and specified in a contract, which would be the best employment contract?
a. a high-powered incentive contract to elicit the most effort.
b. a fixed salary paid as long as the required effort is undertaken.
c. a proportion of profits paid as long as the required effort is undertaken.
d. a wage well in excess of his or her outside opportunity .
ANS: b
8. 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. a high-powered incentive contract to elicit maximum effort.
b. a fixed salary.
c. a moderately powered incentive scheme that elicits some effort without exposing the
manager to too much risk.
d. an incentive scheme that provides maximum incentives and maximum insurance.
ANS: c
9. Given a series of employment contracts with the same slope (where slope refers to how the
contract varies with changes in the firm’s gross profits) but different intercepts (referring to
the overall generosity of the contract). Which of these is not a consideration in figuring out
which of these intercepts the shareholders would decide to build into the contract offered to
the manager?
a. if too generous a contract is offered, this comes out of the firm’s bottom-line profit.
b. if too generous a contract is offered, the manager may become lazy and not exert the
required effort.
c. if the contract isn’t generous enough, the manager will decide to work elsewhere.
d. if the contract isn’t generous enough, only low-ability managers will apply.
ANS: b
10.Which are social costs associated with the inability of shareholders to observe a manager’s
effort? (You may choose more than one.)
a. excessive insurance offered.
b. the manager has to be exposed to risk to induce effort, and risk is costly.
c. the manager ends up exerting less than first-best effort.
d. excessive effort induced.
ANS: b and c
11. A monopoly coffee shop is deciding on a menu of different cup sizes to sell to a population of
consumers, some of whom are high demanders and some low demanders. How would the
optimal menu differ depending on whether the consumers can be observably separated into
the different types or not?
a. the menu is unaffected by type observability.
b. if types aren’t observable, the large cup size should be increased to separate the high
demander.
c. if types aren’t observable, the small cup size should be increased to make it more
attractive to low demanders.
d. if types aren’t observable, the small cup size should be reduced to make it less attractive
to high demanders.
ANS: d
This study source was downloaded by 100000841341657 from CourseHero.com on 03-23-2022 10:09:31 GMT -05:00
https://www.coursehero.com/file/12388264/TEST-BANK-FOR-CHAPTER-15/
