Deck 16: Asymmetric Information

Question 1

Which statement is true if the monopolist can observe the consumer's type in the nonlinear-pricing application?

A)The monopolist supplies the consumer with as much of the good as if it were competitively priced.
B)The monopolist's profit approaches the upper bound from the simple linear pricing problem.
C)The monopolist extracts all of the surplus from the low type but not the high type.
D)The monopolist extracts all of the surplus from the high type but not the low type.

Answer 1

The monopolist supplies the consumer with as much of the good as if it were competitively priced.

Question 2

What tradeoffs are present in the moral-hazard-in-insurance problem?

A)Full insurance benefits the risk-averse customer but gives him excessive incentives to take care to avoid harm.
B)Full insurance benefits the risk-averse customer but provides him with no incentive to take care to avoid harm.
C)Full insurance benefits the risk-averse consumers but does not allow the insurer to extract as much surplus from all types.
D)Full insurance is beneficial for all consumers,but if sold at an actuarially fair price for the population will draw only the riskiest types.

Answer 2

Full insurance benefits the risk-averse customer but provides him with no incentive to take care to avoid harm.

Question 3

Let Be the manager's salary in an owner-manager version of the principal-agent problem.Which of the following is characteristic of a "powerful" incentive scheme?

A)a close to 0
B)a close to 1
C)b close to 0
D)b close to 1

Answer 3

b close to 1

Question 4

Fill in the blanks: _____ is an important constraint in the moral-hazard problem because _____.

A)The budget constraint ----it ensures the principal has enough money to pay the agent
B)The participation constraint ---it ensures the agent chooses the action in the principal's best interest
C)The participation constraint ----it ensures the principal is willing to offer the contract
D)The incentive-compatibility constraint -----it ensures the agent chooses the action intended in the contract

Question 5

Adverse selection can arise in employment situations if information about worker quality is:

A)better for employees than employers.
B)better for employers than employees.
C)perfect.
D)available at a low enough cost.

Question 6

Compared to the case in which a monopoly insurer offers the consumer a contract,if insurance is competitively provided:

A)any moral hazard or adverse-selection problem is alleviated.
B)any moral hazard or adverse-selection problem is worsened.
C)the essence of any moral hazard or adverse-selection problem would not change much.
D)insurers would no longer offer menus of contracts.

Question 7

Which statement best characterizes the second-best policy offered by a monopoly insurer when it can't observe the consumer's risk?

A)It is a single contract offering partial insurance at an intermediate price such that all types are served.
B)It is a menu of contracts providing full insurance for the least risky types and partial insurance for higher risks.
C)It is a menu of contracts providing full insurance for the riskiest type and partial insurance at lower prices for lower risks.
D)The market breaks down since the monopolist cannot design contracts without observing each consumer's risk.

Question 8

When the monopoly insurer cannot observe the care taken by the insured party to avoid an accident,the most profitable contract for it:

A)offers full insurance at a higher price than the full-information policy.
B)offers full insurance at a lower price than the full-information policy.
C)offers partial insurance at a higher price than the full-information policy.
D)offers partial insurance at a lower price than the full-information policy.

Question 9

Which of the following is not a straightforward example of a (principal Agent) relationship?

A)Homeowner →real estate agent
B)Shareholder →manager
C)Manager →line employee
D)Doctor →patient

Question 10

In the 1980s,it became increasingly common for consumers to sign two-year leases rather than buying the cars outright.As these leases expired,the supply of used cars expanded considerably.How would the addition of this large volume of off-lease cars influence the possibility of a lemons problem on the used-car market?

A)The lemons problem would be alleviated because off-lease cars tend to be put up for sale automatically,rather than being offered only when the seller obtains private information about the car's poor quality.
B)The lemons problem would be worsened because used-car prices would fall in response to the glut of off-lease cars.
C)The lemons problem would be worsened because,with more used cars,searching for the appropriate car would become much more difficult for buyers.
D)Very little;the existence of off-lease cars has little to do with the lemons problem.

Question 11

Which of the following illustrates adverse selection?

A)Individuals sometimes mistakenly buy defective cameras.
B)Individuals will not search for bargains for low cost items.
C)Individuals know a lot about their family health history when they buy insurance.
D)Individuals can choose whether to drive safely or not.

Question 12

Consider a firm composed of 5 workers,each with a utility function of the form ,where l is hours worked and w is the wage.Suppose the firm can monitor the number of hours worked by each worker and pays them Per hour.How many hours will each worker choose to work?

A)2 hours
B)4 hours
C)8 hours
D)10 hours

Question 13

Unlike an owner,a manager may be more concerned with _____ than with _____.Which pair of words best completes this sentence?

A)profits,personal benefits
B)personal benefits,profits
C)profits,working conditions
D)cost,revenue

Question 14

What is the term for the contract that maximizes the principal's payoff subject to the constraint that the principal lacks the agent's private information?

A)First best
B)Second best
C)Third best
D)Pareto optimum

Question 15

Continue to suppose as in the previous question that the utility function for each of the firm's 5 workers is ,where l is hours worked and w is the wage.Suppose now that the firm can only monitor the total hours worked by the group and pay each worker an equal share of the wage Times the total number of hours.How many hours will each worker choose to work?

A)2 hours
B)4 hours
C)8 hours
D)10 hours

Question 16

Suppose you were competing in a sealed-bid,second-price auction for a Vermeer painting,which you happen to value at $100,000.What bid should you submit?

A)Exactly $100,000
B)Somewhat lower than $100,000 depending on the number of other bidders
C)Somewhat higher than $100,000 depending on the number of other bidders
D)Cannot say which of a,b,or c is right without further information

Question 17

Which contracting party gains from the use of a more sophisticated contract?

A)The principal,who offers the contract.
B)The agent,who accepts the contract.
C)Both parties may lose.
D)Both parties gain equally.

Question 18

Suppose that you were again competing in a sealed-bid auction for the Vermeer painting which you value at $100,000,but now it is a first-price auction.What bid should you submit?

A)Exactly $100,000
B)Somewhat lower than $100,000 depending on the number of other bidders
C)Somewhat higher than $100,000 depending on the number of other bidders
D)Cannot say which of a,b,or c is right without further information