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Question
Which of the following is the best example of adverse selection?a. Smokers are more likely to obtain health insurance.
b. Safe drivers tend to get auto insurance.
c. All drivers are required to have auto insurance if they are to register their cars legally in Connecticut.
d. Both healthy and unhealthy people tend to buy life insurance.
e. Given the existence of government-funded flood insurance, people continue to build homes in floodplains.
Answer
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Related questions
Q:
The antitrust law that made certain specified practices that tend to reduce competition or create monopoly illegal was the:
a. Sherman Act.
b. Clayton Act.
c. Federal Trade Commission Act.
d. Robinson-Patman Act.
e. Celler-Kefauver Act.
Q:
If there are two equal-sized firms in an industry, the Herfindahl-Hirschman index would be:
a. 50
b. 100
c. 2,500
d. 5,000
e. 250
Q:
If there are 10 equal-sized firms in an industry, the Herfindahl-Hirschman index would be:
a. 1,000
b. 100
c. 10,000
d. 10
e. 1
Q:
When economies of scale persist to such high levels of output that it is efficient to have only one firm produce, the resulting firm is known as a(n):
a. patent holder.
b. regulated monopolist.
c. reluctant monopolist.
d. natural monopolist.
e. acceptable monopolist.
Q:
The signaling model of education would be ineffective if:
a. skills learned in school were useful in employment and could be effectively tested.
b. the costs of acquiring education were equal for individuals of different abilities.
c. individuals could not identify their own abilities.
d. b and c.
e. all of the above.
Q:
Insurance companies are able to offset the adverse selection in markets for life insurance by:
a. requiring premiums that are above the expected value of receipts.
b. only insuring people who appear to be sick.
c. insuring a wide variety of people so that gains on some policies offset losses on others.
d. requiring medical exams from people whom they insure.
e. requiring higher premiums from healthy people than from sick people.
Q:
Good drivers have a 20% chance, and bad drivers have a 50% chance, of getting into an accident. A car is worth $900, and an accident would reduce its value to $400. Both types of drivers have utility U = (car value)0.5. What is a bad driver's expected utility without insurance?
a. 20
b. 25
c. 28
d. 30
e. None of the above.
Q:
Consider this decision tree, which represents the outcomes of two alternative projects that Ink Inc., a producer of printers, might pursue. Ink Inc., needs to borrow $1,000 to pursue either project and is going to sell bonds to finance the venture. Ink, Inc., is carrying a large amount of debt because of overexpansion during the dot-com explosion. Under these circumstances, the shareholders would tend to choose:
a. project A, because it has the highest expected value.
b. project B, because it has the greatest degree of risk.
c. project A, because it has the lowest degree of risk.
d. neither project A nor B, because both are risky.
e. either project A or B; both have the same degree of risk.
Q:
The moral-hazard problem occurs when:
a. a consumer of insurance changes his or her behavior in such a way as to decrease the probability of a payoff.
b. a consumer of insurance changes his or her behavior in such a way as to increase the probability of a payoff.
c. insurance companies change their behaviors in such a way as to increase the probabilities of a payoff.
d. insurance companies change their behaviors in such a way as to decrease the probabilities of a payoff.
e. none of the above.
Q:
Suppose that Wilma's utility function is given byU(E) = 100 - 2E2,where E = Wilma's work effort in producing homemade dinners, measured in hours per day. The marginal utility of effort for Wilma is:a. 2E2.b. -2E.c. 100.d. -4E.e. none of the above.
Q:
Use the following profit function (per worker) for the Blue Delta Faucet Company to answer this question.P(e) = 40e - (2e2 + 100)Note that P = firm profits and e = worker-hours per day. Assume that effort is observed perfectly. At this profit-maximizing level of effort for the firm, profits per worker will be:a. $40.b. $100.c. $300.d. $400.e. none of the above.
Q:
Billy Joe Bob thinks he will win $3 with probability P; otherwise he will win $11. His expected payoff is:a. $3 + $8P.b. $11 - $8P.c. $7.d. $3 + $11P.e. $11 - $3P.
Q:
A frequency definition of probability is:
a. a weighted average of different peoples' degrees of certainty of an event's occurring.
b. a theoretical probability distribution.
c. a person's degree of certainty of an event's occurring.
d. an expected value of a particular outcome.
e. the number of occurrences of an event in a large number of repetitions of an experiment.
Q:
Fred has a utility function U = 10P5 and also has an investment opportunity that will pay 25 with probability 0.4 and 100 with probability 0.6. What is the certainty equivalent of this opportunity?
a. 64
b. 70
c. 80
d. 83.7
e. None of the above.
Q:
If s is the standard deviation of a project with expected returns R, the coefficient of variation is:
a. s / R.
b. s2/ R.
c. sR.
d. s2R.
e. R2s.
Q:
A person who has a utility function (with income on the horizontal axis and utility on the vertical axis) that is linear is:
a. risk-averse.
b. risk loving.
c. risk-neutral.
d. irrational.
e. always sad.
Q:
Expected utility is:
a. the profit from a given decision.
b. a probability weighted average of possible profits.
c. an evenly weighted average of possibility profits.
d. a probability weighted average of possible utility levels.
e. the expected profits plus a number that depends on risk.
Q:
A game has two players. Player 1 chooses between two options, and then player 2, with the knowledge of what player 1 chose, chooses between two options. If this were depicted in a decision tree, how many forks would there be?
a. 2
b. 3
c. 7
d. 12
e. 24
Q:
The optimal reservation price for a seller is:
a. the value of the object being auctioned off if it does not sell.
b. managerial estimates of the highest reservation price among buyers.
c. managerial estimates of the lowest reservation price among buyers.
d. the average of a and b.
e. equal to marginal cost.
Q:
What is the optimal strategy in a second-price, sealed-bid auction?
a. Bid an amount that is equal to your reservation price.
b. Bid an amount that is greater than your reservation price because you will be paying the second-highest bid if you win.
c. Bid an amount that is less than your reservation price.
d. Bid an amount that is less than your reservation price, depending on the number of bidders.
e. If there are fewer than five bidders, bid below your reservation price. Otherwise, bid your reservation price.
Q:
What is the optimal bid for a descending-price auction if the bidder's reservation price is 8, the lowest possible bid is 3, and there are five bidders?
a. 3.
b. 6.
c. 7.
d. 8.
e. None of the above.
Q:
Regardless of the rules of an auction, the winner will pay:
a. his or her reservation price for the good at auction.
b. the true value of the good at auction.
c. the expected value of the good at auction.
d. the maximum amount that he or she is willing to pay for the good at auction.
e. the reservation price of the second highest bidder for the good at auction.
Q:
In a second-price, sealed-bid auction:
a. buyers bid against each other with a succession of increasingly higher prices until only one remains.
b. a bid is announced, and if no buyer accepts the bid in a given period of time, a new, slightly lower, bid is announced; this procedure continues until a bidder accepts the announced price.
c. each bidder submits a price that is known only to that bidder; bids are opened and the highest (lowest) bid is accepted.
d. each bidder submits a price that is known only to that bidder; bids are opened and the highest (lowest) bidder wins, but the transaction occurs at the second highest (lowest) price.
e. none of the above.
Q:
Which of the following is an example of an ascending-bid auction?
a. Sealed-bid auction.
b. Japanese auction.
c. Dutch auction.
d. Vickrey auction.
e. Rabbit auction.
Q:
Refer to the accompanying payoff matrix. Which of the following is a Nash equilibrium? a. Company A chooses Strategy 1 and Company B chooses Strategy 1.
b. Company A chooses Strategy 1 and Company B chooses Strategy 2.
c. Company A chooses Strategy 2 and Company B chooses Strategy 2.
d. Company A chooses Strategy 2 and Company B chooses Strategy 1.
e. None of the above.
Q:
If a firm has a dominant strategy:
a. its optimal strategy depends on the play of rivals.
b. its optimal strategy is always the same, even if payoffs change.
c. it is determined by the behavior of only one key rival.
d. it receives the same profits regardless of the strategy of rivals.
e. its optimal strategy is independent of the play of rivals.
Q:
A dominant strategy is one that:
a. beats all others, regardless of the opponent's choice.
b. beats all others, given the opponent's choice.
c. is beaten by all others, regardless of the opponent's choice.
d. is beaten by all others, given the opponent's choice.
e. beats at least one other, given the opponent's choice.
Q:
Consider the following decision tree. This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war. If GM cuts prices and Quaker Oats follows this behavior: a. GM loses $10 million.
b. Quaker Oats loses $10 million.
c. GM loses $2 million.
d. Quaker Oats loses $2 million.
e. both firms gain $3 million.
Q:
Duopolists A and B face the following demand curves: QA = 100 - 2PA + 2PB and QB = 100 - 2PB + 2PA. If both firms have zero marginal cost, what are the profit-maximizing prices and quantities?a. PA = 100, QA = 60, PB = 80, QB = 140.b. PA = 25, QA = 100, PB = 25, QB = 100.c. PA = 50, QA = 80, PB = 40, QB = 120.d. PA = 50, QA = 100, PB = 50, QB = 100.e. PA = 60, QA = 60, PB = 40, QB = 140.
Q:
Suppose duopolists in the market for spring water share a market demand curve given by P = 50 - 0.02Q, where P is the price per gallon and Q is thousands of gallons of water per day. The marginal cost of producing water is near zero for both firms. If one firm acts as a first mover, the second firm will produce:a. 0 gallons of water per day per firm.b. 625 gallons of water per day.c. 833 gallons of water per day.d. 1,250 gallons of water per day.e. 2,500 gallons of water per day.