Microeconomics Practice Test - 15: The Economics of Information

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  1. The cost of search may include

    1. time spent to learn the properties of the product

    2. time spent to compare the product to possible substitutes

    3. time spent to find lower-price sellers of the product

    4. money spent to purchase information on the product

    5. all of the above

  2. With each additional search, the marginal benefit from more search

    1. increases

    2. declines

    3. first increases and then decreases

    4. does not change

  3. With a greater range of product prices, the marginal benefit from search

    1. increases

    2. decreases

    3. does not change

    4. can increase or decrease

  4. Asymmetric information refers to the case where

    1. the seller of a product or service has more information than the buyer

    2. the buyer of a product has more information than the seller

    3. the seller or the buyer of a product or service has more information than the other

    4. information is irrelevant to the transaction

  5. Which of the following statements is correct?

    1. Asymmetric information leads to adverse selection

    2. adverse selection leads to asymmetric information

    3. adverse selection leads to an insurance problem

    4. moral hazard leads to asymmetric information

  6. How can the problem of adverse selection be overcome?

    1. By buyers getting more information about the quality or the good or service

    2. by sellers providing more information of the quality of the good or service

    3. by brand names and chain retailers

    4. by professional licensing

    5. all of the above

  7. Credit companies reduce the adverse selection problem that they face by

    1. sharing borrowers’ credit histories with other credit companies

    2. asking borrowers to purchase health insurance

    3. asking borrowers for a medical checkup

    4. all of the above

  8. Which of the following is not a market signaling device?

    1. Guarantees and warranties

    2. coinsurance and deductibles

    3. hedging

    4. a college education

  9. Which of the following is not related to moral hazard?

    1. The probability of an illness

    2. the probability of a flood

    3. the probability of a car accident

    4. the probability of a fire

  10. The problem of moral hazard can be reduced by

    1. requiring certain precautions from buyers of insurance

    2. co-insurance

    3. deductibles

    4. all of the above

  11. All of the following are examples of a principal-agent problem, except:

    1. managers seeking to maximize their own interests rather than the total benefits of the firm

    2. workers seeking to maximize their salaries rather than the interests of the firm

    3. the owners of the firm seeking to maximize the value of the firm

    4. the manager of a hospital resisting a merger with another hospital

  12. A principal-agent problem can be overcome by the firm

    1. offering golden parachutes to its top managers

    2. setting up generous deferred-compensation schemes for its top managers

    3. setting up profit-sharing schemes for its workers

    4. all of the above

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