Question 1

Which of the following is NOT a government response to asymmetric information?

Accepted Answer

Manufacturer's warranties are not a government response to asymmetric information, they are a private response. Liability laws, social regulation, and government licensing are all examples of government responses to asymmetric information.

Question 2

The lemons problem occurs mainly because of

Accepted Answer

The lemons problem is essentially a problem of asymmetric information. This occurs when one party in a transaction has more or better information than the other party, leading to an imbalance of power and potentially unfavorable outcomes for the less informed party. In the case of the market for used cars (where the term "lemons" originates), sellers know more about the quality of the car than buyers do. This can lead to buyers being wary of purchasing a used car, as they don't know whether they're getting a good deal or a lemon. Asymmetric information can also arise in other markets, such as insurance or financial products.

Question 3

A possible market solution that a reputable firm can engage in when faced with the lemons problem is

Accepted Answer

Offering a warranty can help alleviate the concerns of potential buyers regarding the quality of the product, and can signal to them that the firm is confident in the product's reliability. This can mitigate the adverse selection problem and create a market for higher quality goods.

Question 4

What are the major rationales for consumer protection in nonmonopolistic industries?

Accepted Answer

The answer of What are the major rationales for consumer...

Question 5

According to the text, critics point out that the costs incurred by firms due to regulations

Accepted Answer

Critics argue that regulations increase production costs for firms as they have to comply with safety and environmental standards, which require additional expenses for equipment, training, and inspections.

Question 6

A firm that responds to a regulatory rule in a way that permits technical compliance while allowing the firm to violate the spirit of the regulation has.

Accepted Answer

The firm has engaged in a creative response to regulation by finding a way to technically comply with the rule while still circumventing the intended purpose of the regulation.

Question 7

All of the following are possible criticisms of social regulation EXCEPT

Accepted Answer

The question asks for the criticism that is NOT possible of social regulation. Choices A, B, and D are all commonly cited criticisms of social regulation, but choice C suggests that social regulation has not resulted in safer working conditions, which is a potential criticism. Therefore, choice C is the correct answer as it is not a possible criticism of social regulation.

Question 8

The two most important rationales for government intervention in non-monopolistic markets are

Accepted Answer

Market failure refers to situations where the market fails to allocate resources efficiently, resulting in outcomes that are not optimal for society as a whole. Asymmetric information refers to situations where one party in a transaction has more information than the other which can lead to market inefficiencies. These are the two most common rationales for government intervention in non-monopolistic markets.

Question 9

What is the lemons problem? How do firms try to address this problem?

Accepted Answer

The answer of What is the lemons problem? How do...

Question 10

Regulation focused on the impact of production on the environment and society, the working conditions under which production occurs, or the physical attributes of goods, is known as

Accepted Answer

Social regulation is regulatory measures aimed at protecting the environment, promoting public health and safety, or ensuring fair and ethical treatment of workers. This type of regulation can include policies on pollution control, occupational health and safety standards, product labeling, and working conditions.

Question 11

Which of the following is most subject to the lemons problem?

Accepted Answer

Credence goods are the most subject to the lemons problem because it is difficult for consumers to assess their quality even after purchase. This creates a situation where dishonest sellers can take advantage of consumers by selling them low-quality goods but charging high prices.

Question 12

The problem of asymmetric information that brings about a general decline in product quality in an industry is

Accepted Answer

The answer of The problem of asymmetric information that brings...

Question 13

Which of the following is an example of an agency concerned with social regulation?

Accepted Answer

The Consumer Product Safety Commission is concerned with social regulation, as its mission is to protect consumers from hazardous products and promote product safety. The other agencies listed are primarily focused on economic regulation (FCC, SEC, FERC).

Question 14

The potential for a decline in product quality due to asymmetric information is commonly referred to as

Accepted Answer

The term commonly used to describe the potential decline in product quality due to asymmetric information is the lemons problem. This problem arises because the seller has more information about the quality of the product than the buyer, and may try to take advantage of this information asymmetry by selling low-quality products at a higher price. This can lead to a decline in average quality in the market, as buyers become more wary of purchasing products due to the risk of getting a "lemon".

Question 15

The benefits of social regulation are

Accepted Answer

The benefits of social regulation are often difficult to measure, as they may be indirect or long-term. For example, reducing air pollution may not show immediate benefits but can lead to improved public health in the long run. Similarly, regulations to protect endangered species may not have direct economic benefits but contribute to the preservation of biodiversity and ecosystem health. Therefore, measuring the benefits of social regulation can be challenging.

Question 16

The problem of excess pollution mainly occurs because of

Accepted Answer

Excess pollution is a classic example of a negative externality, where the costs associated with pollution are not faced by polluters but by society as a whole. This can result in market failure and overconsumption of pollution-causing goods or services.

Question 17

The benefits of social regulation usually are

Accepted Answer

The benefits of social regulation are difficult to measure as they are often long-term and indirect, whereas the costs are often more immediate and visible.

Question 18

According to the text, the federal government spends the most taxpayer-provided funds regulating which area of the economy?

Accepted Answer

The answer of According to the text, the federal government...

Question 19

Which of the following is a government response to asymmetric information?

Accepted Answer

The answer of Which of the following is a government...

Question 20

A potential benefit that comes from social regulations would be

Accepted Answer

Social regulations, such as environmental regulations, can lead to a cleaner and healthier environment. However, they may also result in higher costs for businesses and consumers. Higher tax collections and layoffs are not necessarily benefits of social regulations.

Quiz 27: Regulation and Antitrust Policy in a Globalized Economy