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.

Accepted Answer

The bidding process will encourage buyers to bid up to their true reservation price.

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.

Accepted Answer

Acquiring information is both beneficial and costly, so it is rational to obtain more only to the extent that the expected marginal benefit is greater than or equal to than the expected marginal cost.

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.

Accepted Answer

If Sydney knows that the reservation prices of consumers at the upscale mall are higher, then she will sell there, thereby maximizing total economic surplus.

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.

Accepted Answer

People who buy gas near a freeway exit are likely to be willing to pay for the convenient location so as to avoid having to drive more in an effort to find lower-priced gasoline.

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.

Accepted Answer

If you do not use a realtor, total economic surplus from the sale of your house will be $30,000 ( = $180,000 - $150,000). If you use a realtor, total economic surplus will be $40,000 ( = $200,000 - $150,000 - $10,000). Thus, 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.

Accepted Answer

It is optimal to engage in more of any activity so long as the added benefit is expected to be greater than or equal to the added cost,

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.

Accepted Answer

It is rational to begin by acquiring information from the least expensive sources before turning to more expensive sources.

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.

Accepted Answer

Having information about buyers' reservation prices enables sellers to sell items to those who are willing to pay the highest price.

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.

Accepted Answer

The more information a person has, the less beneficial is having still more information

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.

Accepted Answer

Being able to now acquire information at a lower cost online will shift MC curve to the right (for example, from MC₀ to MC₁), so that the optimal amount of 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.

Accepted Answer

If you do not use a realtor, total economic surplus from the sale of your house will be $20,000 (= $220,000 - $200,000). If you use a realtor, total economic surplus will be $45,000 (= $250,000 - $200,000 - $5,000). Thus, using a realtor increases total economic surplus by $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.

Accepted Answer

If Dan sells the CD at his garage sale, then total economic surplus will be $75 (= $175 - $100). If Dan sells the CD on eBay, then total economic surplus will be $350 (= $500 - $100 - $50). Thus, if Dan sells the CD on eBay, total economic surplus will increase by $275 (= $350 - $75).

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.

Accepted Answer

If Judy sells the clock on Craigslist, total economic surplus will be $250 (= $450 - $200). If Judy sells the clock through an antique dealer, total economic surplus will be $550 (= $850 - $200 - $100). Thus, relative to selling the clock on Craigslist, selling the clock through an antique dealer increases economic surplus by $300. (=$550 - $250).

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.

Accepted Answer

In a world of incomplete information, sales agents add economic value by increasing the extent to which goods and services find their way to the consumers who value them the most.

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.

Accepted Answer

Given that Sydney's costs are the same at either location, Sydney's net benefit is maximized by selling the snow globes at the upscale mall because Sydney receives $10 instead of $5.

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.

Accepted Answer

Markets only lead to an efficient outcome if buyers possess all relevant information about a product and the market, so that all associated benefits and costs are known.

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

Accepted Answer

Total economic surplus is increased by middlemen being able to match 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.

Accepted Answer

Consumers should acquire information up to the point where the marginal benefit of additional information equals the marginal cost of additional information.

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.

Accepted Answer

The cost of acquiring information will be higher for tourists who are not familiar with their surroundings. The higher cost of searching means that tourists will spend less time searching for a better deal and will end up spending more because of it.

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.

Accepted Answer

Inasmuch as having information about a product and coordinating sales between buyers and sellers is valuable, middlemen provide a valuable service.

Quiz 12: The Economics of Information

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

Information about the quality of a product is

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:

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

The marginal cost curve for information is upward sloping because:

Better information about consumers' reservation prices generally leads to:

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

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:

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

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

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

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:

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:

According to the textbook, middlemen: