Deck 12: The Economics of Information

Question 1

When auctions, such as those used on eBay, are used to sell a product, then:

A)information about consumers' true reservation prices is minimized.
B)information about consumers' true reservation prices is revealed.
C)consumers have an incentive to bid above their true reservation prices.
D)consumers have an incentive to bid below their true reservation prices.

Answer 1

information about consumers' true reservation prices is revealed.

Question 2

Information about the quality of a product is

A)intangible, and therefore not subject to economic principles.
B)impossible to objectively assess, and therefore not subject to economic principles.
C)both beneficial to have and costly to obtain, and therefore subject to economic principles.
D)subject to economic principles only when it is paid for, for example by subscribing to Consumer Reports or by hiring a financial advisor.

Answer 2

both beneficial to have and costly to obtain, and therefore subject to economic principles.

Question 3

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney's customers have reservation prices of $5. When Sydney's cart is located on a sidewalk in an upscale mall, wealthier customers with reservation prices of $10 buy snow globes. Assume that Sydney can sell the same volume at either location and that marginal and average costs are $3 per globe at both locations. Information about the reservation prices of Sydney's customers increases total surplus by:

A)allowing consumers with different incomes to acquire things they value.
B)helping to ensure that snow globes go to consumers who like them most.
C)encouraging sellers to locate in underserved areas.
D)helping to ensure that snow globes go to consumers with the greatest willingness to pay.

Answer 3

helping to ensure that snow globes go to consumers with the greatest willingness to pay.

Question 4

Gasoline prices tend to be higher at stations that are just off the freeway than they are at stations in the middle of town. The most likely reason for this is that:

A)freeway exit stations sell a higher quality product.
B)people who buy gas at freeway exit stations tend to have higher search costs.
C)freeway exit stations are more likely to have an attached convenience store.
D)demand for gas at freeway exits is lower than it is in the middle of town.

Question 5

Suppose you are planning to sell your house. You value your house at $150,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $180,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $200,000. Assume that the realtor's opportunity cost of negotiating the sale is $10,000. In this case, does using a realtor to sell your house increase total economic surplus?

A)No, because you value the house at $150,000 no matter who buys it.
B)No, because your house only generated economic surplus when it was first built.
C)It depends on the sales price of the house, which isn't given in the question.
D)Yes, using a realtor increases total economic surplus by $10,000.

Question 6

The optimal amount of information to acquire before making a purchase is:

A)zero.
B)as much as possible.
C)the amount such that the total cost of acquiring information equals the total benefit.
D)the amount such that the marginal cost of acquiring information equals the marginal benefit.

Question 7

The marginal cost curve for information is upward sloping because:

A)most information is provided by sources that have a vested interest in offering false information.
B)consumers tend to start with the least expensive sources of information and then progress to more expensive sources.
C)there is only so much to learn about a product.
D)most information is misleading.

Question 8

Better information about consumers' reservation prices generally leads to:

A)a reduction in producer surplus.
B)acquisition of goods by consumers who are willing to pay the highest price.
C)equitable distribution of goods among low income consumers.
D)acquisition of goods by consumers with the greatest need.

Question 9

The reason the marginal benefit of information curve is downward sloping is because

A)some information is useless.
B)most information is useless.
C)information adds less and less benefit as more of it is acquired.
D)there is only so much to learn about a product.

Question 10

This graph illustrates the marginal costs and marginal benefits of acquiring information before making a major purchase. Suppose the marginal cost and marginal benefit curves were MC₀ and MB₀ several decades ago. However, because information about this product is now available online, the:

A)optimal amount of information will decrease.
B)optimal amount of information will increase.
C)optimal amount of information will stay the same, but it will cost less to acquire.
D)demand for information will increase.

Question 11

Suppose you are planning to sell your house. You value your house at $200,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $220,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $250,000. Assume that the realtor's opportunity cost of negotiating the sale is $5,000. In this case, how much additional economic surplus is generated by using a realtor to sell your house?

A)None, because you value the house at $200,000 no matter who buys it.
B)$250,000.
C)$200,000.
D)$25,000.

Question 12

Dan owns an autographed copy of a Brittany Spears CD that he values at $100. If he sells the CD at the garage sale he's planning to hold in a few weeks, it will be sold to a buyer with a reservation price of $175. If he sells it on eBay, it will be sold to a buyer with a reservation price of $500. eBay will charge Dan $50 to auction the CD, which just covers eBay's opportunity cost of running the auction. Relative to selling the CD at his garage sale, auctioning the CD on eBay will lead:

A)to no change in total economic surplus.
B)total economic surplus to increase by $500.
C)total economic surplus to increase by $275.
D)total economic surplus to increase by $100.

Question 13

Judy is planning to sell an antique grandfather clock that she values at $200. If she sells the clock on Craigslist, it will be bought by someone who values it at $450. If she uses an antique dealer to sell the clock, it will be bought by someone who values it at $850. The antique dealer will charge Judy $100 to sell the clock, which just covers the antique dealer's opportunity cost of selling the clock. Relative to selling the clock on Craigslist, selling the clock through an antique dealer will lead:

A)to no change in total economic surplus.
B)total economic surplus to decrease by $100.
C)total economic surplus to increase by $400.
D)total economic surplus to increase by $300.

Question 14

Can sales agents, such as realtors, generate economic surplus?

A)No, because the value of a product is based purely on the cost of producing it and not on who buys it.
B)No, because sales agents don't produce anything new.
C)Yes, but only if they work for free, otherwise they are a waste of resources.
D)Yes, because they help ensure that goods are purchased by consumers who value them the most highly.

Question 15

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney's customers have reservation prices of $5. When Sydney's cart is located on a sidewalk in an upscale mall, wealthier customers with reservation prices of $10 buy snow globes. Assume that Sydney can sell the same volume at either location and that marginal and average costs are $3 per globe at both locations. Total economic surplus will be maximized if Sydney:

A)alternates between the two locations and price discriminates.
B)sells only near the discount store and charges $5.
C)sells only in the upscale mall and charges $10.
D)alternates between the two locations and charges $5 at both locations.

Question 16

Adam Smith's invisible hand only leads to an efficient outcome when

A)buyers are fully informed about all relevant aspects of a product and the market in which it is traded.
B)buyers collect information up to the point at which the marginal cost of having more information equals the marginal benefit of having more information.
C)buyers have more information about the product being traded than do sellers.
D)buyers have less information about the product being traded than do sellers.

Question 17

In markets with incomplete information, middlemen tend to ________ total economic surplus by ________.

A)reduce; raising prices
B)reduce; giving misleading information
C)increase; raising prices
D)increase; matching sellers with buyers who have high reservation prices

Question 18

This graph illustrates the marginal costs and marginal benefits of acquiring information before making a major purchase. If the original curves are MB₀ and MC₀, the optimal quantity of information about this product is:

A)I₁.
B)I₂.
C)I₃.
D)I₄.

Question 19

Morgan lives in San Francisco and likes to dine out. Morgan has noticed that prices at restaurants near popular tourist destinations in the city tend to be higher than at restaurants of the same quality in other neighborhoods. One reason for this is that:

A)search costs are higher for people who are unfamiliar with the area.
B)residents don't like to eat in restaurants frequented by tourists.
C)tourists don't worry about money while on vacation.
D)restaurant meals are a small fraction of the total cost of a vacation.

Question 20

According to the textbook, middlemen:

A)add no value to economic activity.
B)only add value if the consumer gets a good deal.
C)only add value to themselves.
D)provide value through information and coordination.

Question 21

Alison decides to play the lottery. She has a 5 percent probability of winning $100 and a 95 percent probability of winning zero. The expected value of playing the lottery is:

A)$100.
B)$5.
C)$10.
D)$50.

Question 22

The difference between the price of electronic equipment in a retail store and on the Internet partly reflects:

A)the extent to which middlemen drive the price up for extra profit.
B)the lack of competition between brick and mortar stores and online stores.
C)the value of personal attention and support at a retail store.
D)excessive markup.

Question 23

If a gamble has an expected value of zero, then it is termed a(n):

A)better-than-fair gamble.
B)unfair gamble.
C)zero gamble.
D)fair gamble.

Question 24

Refer to the figure below. If the original curves are MB₁ and MC₁, rational consumers will gather ________ units of information.  

A)4
B)5
C)6
D)9

Question 25

Rationally, search should continue until:

A)all search options have been explored.
B)the marginal benefit of search equals the marginal cost of search.
C)the marginal benefit of search is zero.
D)the marginal cost of search is zero.

Question 26

The sum of the possible outcomes of a gamble multiplied by their respective probabilities is known as:

A)a fair gamble.
B)the variance of the gamble.
C)a better-than-fair gamble.
D)the expected value of the gamble.

Question 27

Because of ________, the market will provide ________ the socially optimal level of information.

A)the credibility problem; more
B)the problem of adverse selection; less
C)moral hazard; more
D)the free-rider problem; less

Question 28

The free-rider problem arises when people:

A)obtain a good for less than the market equilibrium price.
B)who do not pay for a good cannot be excluded from consuming it.
C)who do not pay for a good cannot consume it.
D)who pay for a good cannot consume it.

Question 29

Suppose Ginger is going to buy a house and a dishwasher. Assuming the marginal cost of searching for both is the same, one can predict that Ginger will

A)spend more time searching for the house than the dishwasher.
B)spend more time searching for the dishwasher than the house.
C)spend equal amounts of time searching for the dishwasher and the house.
D)trust the information from her real estate agent but not from the dishwasher salesperson.

Question 30

Frank is considering moving to Denver. There is a 70 percent chance that he will find a job that pays $1,000 more than what he currently earns and a 30 percent chance he will find one that pays $3,000 less. The expected value of moving to Denver is:

A)-$200.
B)$200.
C)$700.
D)$900.

Question 31

The free-rider problem occurs when:

A)buyers pay less than their reservation price.
B)sellers receive more than their reservation price.
C)people who do not pay for a good or service cannot be excluded from enjoying it.
D)people who pay for a good or service cannot be excluded from enjoying it.

Question 32

Pat goes to the local electronics store to learn about high-end audio equipment. The salesperson spends an hour talking with Pat and demonstrating equipment. Pat then leaves and orders an audio system on the Internet for $250 less than the price at the store. Pat's behavior:

A)is illegal.
B)is a form of statistical discrimination.
C)illustrates the free-rider problem.
D)illustrates the problem of adverse selection.

Question 33

Grace and Will are moving to LA at the same time and both wish to find apartments to rent. Grace is staying with her aunt for free while Will is paying to stay at a motel. If their search costs are otherwise identical, one can predict that:

A)Grace and Will will spend the same number of days searching.
B)Will will spend more days searching than Grace.
C)Grace will spend more days searching than Will.
D)Will will have better information.

Question 34

Refer to the figure below. The growth of access to the Internet will cause the marginal:

A)benefit curve to shift from MB₂ to MB₁.
B)benefit curve to shift from MB₁ to MB₂.
C)cost curve to shift from MC₂ to MC₁.
D)cost curve to shift from MC₁ to MC₂.

Question 35

This graph illustrates the marginal costs and marginal benefits of acquiring information before making a major purchase. Suppose this graph describes a town in which the only way to gather any information about the good is through Consumer Reports. If the subscription price of Consumer Reports increases, then the impact of this could be portrayed by the marginal:

A)benefit curve shifting from MB₀ to MB₁.
B)cost curve shifting from MC₁ to MC₀.
C)benefit curve shifting from MB₁ to MB₀.
D)cost curve shifting from MC₀ to MC₁.

Question 36

Refer to the figure below. If the relevant curves are MC₁ and MB₂, a rational consumer will acquire ________ units of information, the amount for which marginal benefit for information is ________ its marginal cost.

A)4; equal to
B)4; more than
C)5; more than
D)5; equal to

Question 37

The marginal benefit of additional information:

A)rises as more information is collected.
B)is independent of the amount of information that has already been acquired.
C)tends to be lower for expensive items than inexpensive items.
D)falls as more information is collected.

Question 38

The marginal cost of collecting information:

A)rises as more information is collected.
B)falls as more information is collected.
C)is now zero because of the Internet.
D)is independent of the amount of information that has already been acquired.

Question 39

In the presence of the free-rider problem, the market will provide ________ of a good or service.

A)more than the socially optimal quantity
B)the socially optimal quantity
C)less than the socially optimal quantity
D)either more than or less than the socially optimal quantity

Question 40

Refer to the figure below. Suppose MC₁ is the marginal cost of information and MB₁ is the marginal benefit of information. Should a rational consumer pay $6 to get a 5ᵗʰ unit of information?

A)Yes, because at this price, the marginal benefit of the 5ᵗʰ unit exceeds its marginal cost.
B)No, because at this price, the marginal cost of the 5ᵗʰ unit exceeds its marginal benefit.
C)Yes, because at this price, the marginal benefit of the 5ᵗʰ unit equals its marginal cost.
D)No, because at this price the marginal benefit of the 5ᵗʰ unit exceeds its marginal cost.

Question 41

Pascal is risk-averse while Marion is risk-neutral. Both are confronted with the following gamble: win $5,000 with the probability of 65 percent or lose $9,000 with a probability of 35 percent. One can predict that: 

A)both might accept the gamble.
B)only Pascal will accept the gamble.
C)only Marion will accept the gamble.
D)neither will accept the gamble.

Question 42

Consider the gamble inherent in looking for an apartment. If the expected value of going to see another apartment is zero, then

A)both risk-averse and risk-neutral people will consider seeing another apartment.
B)only risk-averse people will consider seeing another apartment.
C)risk-averse people will not consider seeing another apartment.
D)risk-neutral people will not consider seeing another apartment.

Question 43

Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If new lightsabers sell for $2,500, then buying a new lightsaber is a:

A)fair gamble.
B)better-than-fair gamble.
C)less-than-fair gamble.
D)less-than-fair gamble if Obi-Wan risk neutral.

Question 44

Suppose Chris is offered the following gamble:  with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. The expected value of this gamble is ________. 

A)-$1
B)$0
C)$1
D)$2

Question 45

Curly is offered the following gamble: a 25 percent chance of winning $1,500 and a 75 percent chance of losing $500. This is a(n):

A)fair gamble.
B)unfair gamble.
C)almost-fair gamble.
D)better-than-fair gamble.

Question 46

A risk-averse individual will:

A)never accept any gamble.
B)accept a fair gamble.
C)only choose certain events.
D)accept only better-than-fair gambles.

Question 47

A risk-neutral individual will:

A)accept only better-than-fair gambles.
B)see risk as neither good nor bad.
C)accept only gambles with an expected value of zero or greater.
D)accept only gambles with an expected value of zero.

Question 48

Lou and Toby both live in a little town and are trying to sell their cars. Both of their cars have a blue book value of $10,000. Lou has an American car like most of the people in town own. Toby owns the only Bulgarian car in town. If people in their town are risk averse, then who will get closest to the blue book value for his car?

A)Lou will because American cars are better than Bulgarian cars.
B)Toby will because there is less uncertainty about the quality of Lou's car.
C)Lou will because there is less uncertainty about the quality of Lou's car.
D)Both should get the same price for their cars because both cars have the same blue book value.

Question 49

Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. Suppose that the price of the cruise is $1,200. If Mel is risk-neutral, then Mel should:

A)not buy trip insurance.
B)only buy trip insurance if it costs less than $780.
C)only buy trip insurance if it costs less than $20.
D)only buy trip insurance if it costs less than $50.

Question 50

Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. The amount of money that Mel is willing to pay for trip insurance will be:

A)higher if she is risk-averse instead of risk-neutral.
B)lower if she is risk-averse instead of risk-neutral.
C)the same regardless of whether she is risk-averse or risk-neutral.
D)positive if she is risk-neutral and negative if she is risk-averse.

Question 51

Suppose Chris is offered the following gamble:  with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. The expected value of this gamble is found by solving:

A)0.1 × ($90 - $60)+ 0.4 × ($50 - $60)
B)0.1 × $90 + 0.4 × $50
C)0.1 × $90 + 0.4 × $50 - 0.5 × $60
D)($90 + $50 - $60)/3

Question 52

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. For Vinnie, the expected value of searching for another vacation rental is:

A)$200.
B)$50.
C)$45.
D)$5.

Question 53

Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If Obi-Wan is risk averse, then he will be willing to pay ________ for a new lightsaber.

A)more than $4,000
B)more than $2,500
C)less than $4,000
D)less than $2,500

Question 54

Suppose someone offers Max the following gamble: with probability 0.50 he will win $10 and with probability 0.50 he will lose $8. The expected value of this gamble is:

A)$5.
B)$2.
C)$1.
D)$0.

Question 55

Suppose Mo is considering whether to see Zombie Revenge III at her local movie theater. Tickets cost $12 each, but Mo isn't sure how much she's going to like the movie. There's a 40 percent chance she'll get $20 worth of enjoyment from seeing the movie, and there's a 60 percent chance she'll only get $10 worth of enjoyment from seeing the movie. Mo's expected value of seeing the movie is:

A)$20.
B)$14.
C)$4.
D)$2.

Question 56

Suppose Chris is offered the following gamble: with probability 0.1 he will win $90, with probability 0.4 he will win $50, and with probability 0.5 he will lose $60. Chris will:

A)accept this gamble if he is risk-averse, but not if he is risk-neutral.
B)accept this gamble if he is risk neutral, but not if he is risk-averse.
C)accept this gamble if he is either risk neutral or risk-averse.
D)not accept this gamble if he is risk-neutral.

Question 57

Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. If Mel is risk-neutral, then in the absence of trip insurance, the most she will be willing to pay for the cruise is:

A)$1,200.
B)$1,250.
C)$1,220.
D)$1,000.

Question 58

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. Since searching for another apartment is a ________ gamble, if Vinnie is risk-neutral, then he ________ search for another apartment.

A)better-than-fair; will not
B)better-than-fair; will
C)fair; will not
D)fair; will

Question 59

A 65 percent chance of winning $10 and a 35 percent chance of losing $5 would be classified as a(n)

A)better-than-fair gamble.
B)worse-than-fair gamble.
C)unfair gamble.
D)fair gamble.

Question 60

Cal has a choice between two gambles. The first gamble offers a 50 percent chance of winning $20 and a 50 percent chance of losing $20. The second gamble offers a 20 percent chance of winning $100 and an 80% chance of losing $20. Which choice has the higher expected value?

A)The expected value of both gambles is the same, so Cal would be indifferent between the two.
B)The expected value of the first gamble is higher.
C)The expected value of both gambles is the same, but Cal would prefer the first gamble since the chances of winning are higher.
D)The expected value of the second gamble is higher.

Question 61

Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. The expected starting salary for a college graduate with a bachelor's degree in economics is:

A)$30,000.
B)$40,000.
C)$45,000.
D)$50,000.

Question 62

The existence of long term leases agreements in rental markets:

A)benefits landlords by keeping occupancy rates high and harms tenants by reducing their mobility.
B)harms landlords and benefits tenants by preventing landlords from raising the rent each month.
C)creates an informational advantage for landlords.
D)solves a commitment problem that is inherent in markets with imperfect information.

Question 63

Alex, who is risk-neutral, is looking for a one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. If the cost to Alex of searching for an apartment is $40, then searching for another apartment is a gamble with an expected value of:

A)-$10.
B)$0.
C)$10.
D)$20.

Question 64

If sellers have more information about the quality of goods than do buyers, then:

A)buyers always will be exploited.
B)buyers will never make purchases.
C)sellers of better-than-average goods will have difficulty getting their asking price.
D)sellers of lower-than-average goods will have difficulty getting their asking price.

Question 65

Suppose Sandy is moving to Washington, D.C. for a year-long job working for the government.  She has decided to rent one of two apartments.  Both apartments cost $1,000 per month and are identical except for the fact that one is a monthly rental and the other has a year-long lease.  Which of the following best explains why Sandy might pick the year-long lease?

A)There is no good reason for Sandy to pick the year-long lease because the two apartments are identical.
B)Sandy might worry that if she picks the monthly rental, she will get kicked out if the landlord finds someone willing to pay more than $1,000 per month.
C)Sandy might worry that if she picks the monthly rental, she will have to move if she finds another apartment for less than $1,000 per month.
D)There is no good reason for Sandy to pick the year-long lease because the monthly rental allows her more flexibility.

Question 66

Alex, who is risk-neutral, is looking for a one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. If the cost to Alex of searching for an apartment is $30, then searching for another apartment is a gamble with an expected value of:

A)$0.
B)$10.
C)$20.
D)$40.

Question 67

When the expected value of search increases:

A)fewer searches occur.
B)the number of searches does not change.
C)more searches occur.
D)the cost of searching falls.

Question 68

Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. Who will accept an offer of $30,000?

A)Graduates who have been searching the longest
B)Graduates who enjoy taking risks
C)Graduates who are either risk-neutral or risk-averse
D)Graduates who are risk-averse

Question 69

Alex, who is risk-neutral, is looking for a one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. Suppose Alex is risk-averse. If the cost to Alex of searching for another apartment is $40, then will he search for another apartment?

A)No, because searching for another apartment is a less-than-fair gamble.
B)Yes, because searching for another apartment is a better-than-fair gamble.
C)No, because searching for another apartment is a fair gamble.
D)Yes, because searching for another apartment is a fair gamble.

Question 70

Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. Moe has just received a job offer that pays $40,000 per year. Moe should:

A)reject the offer regardless of his preference for risk.
B)accept the offer if he is risk averse.
C)reject the offer if he is risk averse.
D)only accept the offer if he is risk-neutral.

Question 71

Several web sites, like Pricewatch.com, allow consumers to input the name of a product, and the site then returns a list of suppliers with their respective prices for the product. This:

A)increases the benefit of search.
B)increases the free-rider problem.
C)reduces the benefit of search.
D)reduces the cost of search.

Question 72

Imagine a world in which landlords always fix problems quickly, tenants never damage property and always pay their rent in a timely fashion. In such a world, lease agreements would ________.

A)still exist to solve the commitment problem
B)be unnecessary
C)apply only to people with low monthly income
D)only serve the interests of tenants

Question 73

Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. If this scenario describes job searches in general, the segment of the population that is most risk-averse will tend to earn:

A)average salaries.
B)below-average salaries.
C)above-average salaries.
D)stable salaries.

Question 74

There are two employers in Bucolic that hire people who do not have a high school degree: a grocery store and a hardware store. The grocery store pays $10 per hour and the hardware store pays $12 per hour. People who work at either store can work as many hours as they want at those wages. Assume that it takes two hours to interview for a job. Lee works at the grocery store, but would like to work at the hardware store. If Lee interviews at the hardware store, there is a 10% probability of being hired. Assume that Lee is risk-neutral. In terms of foregone earnings, what does it cost Lee to spending two hours interviewing for a job at the hardware store?

A)0
B)$2
C)$10
D)$20

Question 75

Alex, who is risk-neutral, is looking for a one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. Suppose Alex is risk-neutral. If the cost to Alex of searching for another apartment is $30, then will he search for another apartment?

A)No, because searching for another apartment is a less-than-fair gamble.
B)Yes, because searching for another apartment is a better-than-fair gamble.
C)No, because searching for another apartment is a fair gamble.
D)Yes, because searching for another apartment is a fair gamble.

Question 76

Suppose that there is not enough parking at an urban university. Sometimes students come to campus, spend a few minutes searching for a parking spot, and then decide that going to class isn't worth the effort of continuing to search for a parking spot, so they go home. Assume that all professors give midterm exams on the same day. You would expect the optimal amount of time spent searching for a parking spot on that day to ________ because ________.

A)decrease; the marginal cost of search is higher
B)increase; the marginal cost of search is lower
C)increase; the marginal benefit of search is higher
D)decrease; the marginal benefit of search is lower

Question 77

A gamble that offers a 1 percent chance of winning $699.93 and a 99 percent chance of losing $7.07 would be classified as a(n):

A)better-than-fair gamble.
B)less-than-fair gamble.
C)fair gamble.
D)unfair gamble.

Question 78

There are two employers in Bucolic that hire people who do not have a high school degree: a grocery store and a hardware store. The grocery store pays $10 per hour and the hardware store pays $12 per hour. People who work at either store can work as many hours as they want at those wages. Assume that it takes two hours to interview for a job. Lee works at the grocery store, but would like to work at the hardware store. If Lee interviews at the hardware store, there is a 10 percent probability of being hired. Assume that Lee is risk-neutral. What is Lee's expected hourly benefit from interviewing at the hardware store?

A)$12
B)$0.12
C)$0.20
D)$2

Question 79

If a gamble has an expected value of $10, then one can predict that:

A)only risk-averse people will take the gamble.
B)no risk-averse person will take the gamble.
C)all risk-neutral people will take the gamble.
D)the gamble never pays out more than $10.

Question 80

There are two employers in Bucolic that hire people who do not have a high school degree: a grocery store and a hardware store. The grocery store pays $10 per hour and the hardware store pays $12 per hour. People who work at either store can work as many hours as they want at those wages. Assume that it takes two hours to interview for a job. Lee works at the grocery store, but would like to work at the hardware store. If Lee interviews at the hardware store, there is a 10 percent probability of being hired. Assume that Lee is risk-neutral. How many hours must Lee anticipate working at the hardware store to justify interviewing for the job?

A)1 hour
B)10 hours
C)100 hours
D)60 hours