Economic

Q: Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees. Currently, the employees receive an annual bonus. Trisha can sell all the output she produces for $150 per unit. Trisha's total cost function (including bonus payments to employees) is: TC(Q) = 75Q + 2.5Q2. The marginal cost function is: MC(Q) = 75 + 5Q. The profit sharing plan would pay employees 30% of profits. However, due to greater cost saving initiatives from employees, Trisha's total cost function becomes: TC(Q) = 50Q + 2Q2. The relevant marginal cost function becomes: MC(Q) = 50 + 4Q. Which plan offers Trisha the greatest profits for herself?

Q: Ty's Sporting Goods is considering rewarding employees with profit sharing for good performance. Without the sharing plan, Ty's total cost function is: TC(Q) = 250Q + and his marginal cost function is: MC(Q) = 250 + . Ty can sell all his output for $500. Calculate Ty's optimal output level. What is his level of profits? If Ty implements the profit sharing plan, his total cost function is: TC(Q) = 125Q + and his marginal cost function is: MC(Q) = 125 + . If the profit sharing plan entitles his employees to 25% of the profits, should Ty institute the plan?

Q: Glen's friend Andre is a big strong guy. Andre will not allow anyone to harm Glen. Glen enjoys teasing people. In fact, Glen's marginal benefit of teasing people is given by: MB(Q) = 75 - 10Q. Generally, people do not enjoy Glen teasing them. Thus, they retaliate to Glen's teasing. Without Andre around to protect Glen from the retaliation, Glen's marginal cost of teasing people isMC(Q) = 20Q due to the retaliation. However, with Andre around, Glen perceives his marginal costs of teasing to always be zero as no one will retaliate with Andre around. This is because Andre will step in to protect Glen from retaliation. Without Andre around, what is Glen's choice for teasing? How much does Glen increase teasing when Andre's around? Is Glen's behavior characteristic of a moral hazard or adverse selection?

Q: Jim's Hardware Supply has theft insurance. Jim also has an alarm system. The alarm system has just recently malfunctioned. If Jim has the alarm system repaired, it will cost him $100. The probability of a theft occurring is p = 0.0001. If a theft occurs and there is no alarm system, the value of stolen materials will be $125,000. However, Jim's insurance will compensate him fully for the loss. No thefts will occur if the alarm system is in place. What is the expected cost to Jim of repairing the alarm system? What is the expected cost to society of not repairing the alarm system?

Q: Matthew drives a truck for Overtheroad Haulers. Matthew's marginal benefit for driving per day is: MB(m) = 2,400 - 2m, where m is the number of miles driven. The marginal social cost per mile is MSC(m) = 2m. Calculate the efficient number of miles driven for Matthew in a day. Since Overtheroad Haulers has full insurance on Matthew's truck, Matthew's personal marginal cost is: MPC(m) = m. How many miles per day will Matthew drive? Would it be efficient for society if Overtheroad Haulers places a limit on the number of miles Matthew drives? If so, what limit should they set?

Q: Hart's Pinefall Lodge provides guided hunts and fishing trips to their customers in Ontario, Canada. The market price for high quality hunting and fishing trips is $1,250. The market price for standard quality hunting and fishing trips is $750. The marginal cost of providing high quality trips each season is: MC(Q) = 156.25Q. The marginal cost of providing standard quality trips each season is: MC(Q) = 62.5Q. In order to be able to sell their hunting and fishing trips at high quality prices, Hart's Pinefall Lodge must pay an advertising fee of $500 each season. Should the Lodge pay the fee and sell high quality trips?

Q: Ron owns an automotive repair center. Ron provides high quality automotive repair. The market price for high quality service is $225 while the market price for standard service is $150. Currently, Ron only has a reputation for providing standard service. Ron's marginal cost function of providing high quality service is: MCH(Q) = 0.25Q. Ron's marginal cost function of providing standard service is: MCS(Q) = 0.0625Q. Butch's Marketing has told Ron that if he hires Butch's firm to advertise and market Ron's high quality services, consumers will pay him the high quality service market price providing he delivers that quality. What is the most amount of money Ron is willing to pay for Butch's services?

Q: Cecil's Home Appliances sells high quality washing machines. Cecil's marginal cost function is:MCC(QC) = . Zach's Appliances sells low quality washing machines. Zach's marginal cost function is: MCC(QZ) = . The market demand for high quality washing machines is:= 8,250 - 10PH. The market demand for low quality washing machines is: = 5,000 - 10PL. If Consumer's can distinguish between the quality of Cecil's and Zach's machines (and Cecil and Zach behave as price takers), determine the equilibrium price of washing machines. Calculate Cecil's producer surplus. Now, suppose that consumers can not distinguish between the quality of Cecil's and Zach's washing machines. In this case, the demand for washing machines is: QD = 6,625 - 10P. Determine the joint market supply curve. Calculate the equilibrium price of washing machines and the quantity brought to market by Cecil and Zach. What is Cecil's producer surplus? If Cecil offers a warranty on his washing machines, his marginal cost function becomes: MCC() = . However, consumers will then perceive his machines to be high quality. Should Cecil offer the warranty?

Q: Wiz-Bang Games is a new video game maker for the latest game console. As a new game maker, they have not established a reputation of providing quality games. The marginal cost to Wiz-Bang for manufacturing games is: MC(Q) = 0.05Q. The market price for low-quality games is $20. The market price for high-quality games is $65. If Wiz-Bang sells their product in the low quality market, calculate their producer surplus. If Wiz-Bang sells their product in the high quality market, calculate their producer surplus. If Wiz-Bang spends $12,500 on marketing and packaging, they will be perceived as a high quality producer of video games. Should Wiz-Bang spend the $12,500 to provide a signal to video game consumers of producing high quality games?

Q: The professional baseball league on planet Economus allows team owners to draft players for life. Once a player is acquired in the draft, team owners may trade players to other teams. The demand for high quality players is: = 2,000 - . The supply of high quality players is:= - 500. What is the lowest price necessary to induce an owner to trade a high quality player. Determine the equilibrium price and quantity of high quality players. The demand for low quality players is: = 400 - . The supply of low quality players is: = - 125.Determine the equilibrium price and quantity of low skill players. Now, suppose that only the team that has the rights to the player knows the quality of the player. This implies the new demand for players of uncertain quality is: QD = 1,200 - . The supply of players becomes:QS = {Derive the equilibrium price and quantity for players of uncertain ability. Do you believe any high quality players are being traded at this new market price?

Q: Prestige University grants degrees only to high skill students who perform well for their eventual employers. Mediocre University grants degrees only to low skill students. The market demand for newly graduated high skilled workers is: = 5,000 - pH. The market demand for newly graduated low skilled workers is: = 15,000 - pL. Currently, Prestige University graduates 1,000 students while Mediocre University graduates 5,000. Determine the equilibrium prices for low and high skilled graduates. Suppose that in an effort to cut costs, the State has merged Prestige University and Mediocre University into State University. This merger has eliminated the signal that employers use to rely on to discern graduate quality. As a result, the demand for State University graduates is: QD = 10,000 - P. The number of graduates from State University will be 6,000. Calculate the equilibrium price for State University graduates. Before the merger, would students at both Universities be willing to pay higher tuition in an effort to prevent the Universities from merging? Why or why not?

Q: In a competitive labor market, shirking on the job can be a problem. In this market for labor services, the demand for labor is expressed as: W = where W is wage rate (dollars per hour) and L is number employed per unit of time. The no shirking constraint (NSC) is expressed as: NSC = where NSC is the minimum wage workers need not to shirk, and L is the number employed per unit of time. Assume that the labor force L* = 150,000. Determine the following: a. the level of unemployment that would result when firms pay the efficiency wage b. the market clearing wage c. the efficiency wage

Q: Some firms provide stock options to managers as an incentive to work hard and increase the value of the firm. A typical option contract gives the manager the right to buy the firm's stock at a set price (known as the exercise price). If the firm's stock value increases and moves above the exercise price, then the manager's option becomes more valuable. What is the potential problem with this incentive scheme? A) The incentive does not include a performance benchmark, so it cannot be optimal. B) There is a dynamic incentive problem --- the manager may focus too much on the firm's short-run stock value and not on actions that are in the best interest of the firm for the long run. C) The incentive value depends on the firm's stock value, which cannot be influenced by the amount of work or effort exerted by the manager. D) There are no problems with this incentive scheme.

Q: Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Qf + 0.2(Q - Qf). What potential problems can arise with this scheme? A) If Qf is unusually large, then the manager has little incentive to work hard during the following quarter because Q will likely fall back below Qf. B) If Qf is unusually small, then the manager will receive a small bonus regardless of their efforts during the current quarter. C) The manager has an incentive to underperform and generate a small Q during the current quarter in order to provide a smaller benchmark for performance in the next quarter. D) The incentive scheme only depends on current output and does not measure performance relative to feasible production.

Q: Firms that contain some divisions that produce parts and components to be used by other divisions in order to generate finished goods are said to be: A) horizontally integrated. B) vertically integrated. C) multinationals. D) corporations.

Q: If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms? A) Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient. B) This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law. C) Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions. D) Managers in some divisions may not have information about production capacities or costs in related divisions.

Q: Firms that have several plants that produce the same or related products are said to be: A) horizontally integrated. B) vertically integrated. C) conglomerates. D) cooperatives.

Q: Which incentive scheme would simultaneously elicit accurate information about feasible plant production levels and motivate managers to perform up to potential (in the following schemes, B is the bonus payment, Q is actual plant output, and Qf is the manager's estimate of feasible output)? A) B = 0.4Q B) B = 0.4(Q - Qf) C) B = 0.4Qf + 0.3(Q - Qf) if Q > Qf D) B = 0.4Qf - 0.6(Q - Qf) if Q < Qf E) B = 0.4Qf - 0.6(Q - Qf) if Q > Qf

Q: The bonus of a plant manager in a vertically integrated firm is based on the following formula: Bonus = 10,000 - 0.5(Qf - Q) where Qf is feasible production and Q is actual production. The value for Qf is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive: A) to underestimate Qf. B) to overestimate Qf. C) to reveal the true Qf and make Q as small as possible. D) to reveal the true Qf and make Q as large as possible.

Q: The problem of production in multi-plant firms with asymmetric information can be solved by paying the manager A) a piece rate, some constant amount per unit of output produced. B) a larger amount for each unit than was paid for the previous unit, to reflect increasing marginal cost. C) a smaller amount for each unit than was paid for the previous unit, to reflect decreasing marginal revenue. D) an annual bonus that increases with each unit of output up to capacity, and decreases with each unit of output past capacity. E) an annual bonus that is calculated decreases with each unit of output up to capacity, and increases with each unit of output past capacity.

Q: The problem of asymmetric information in multi-plant firms involves A) only the problem of how to get managers to produce as much as possible. B) only the problem of how to get managers to produce the amount the larger firm wants them to, whether it be a lot or a little. C) both the problem of how to get managers to produce the appropriate amount and the problem of how to get them to accurately report their capacity. D) both the problem of how to get managers to produce the appropriate amount and the problem of how to get them to not sell that output outside of the firm. E) both the problems of vertical and horizontal integration with the rest of the firm.

Q: What is the problem with paying plant managers in multi-plant firms according to how much each plant produces relative to its capacity? A) Managers in low-cost or high-capacity plants could be penalized, in percentage terms, for their overproduction. B) The production problem in multi-plant firms is usually how to lower production to increase market power, not how to increase production. C) Managers in high-cost or low-capacity plants could be penalized for production constraints over which they have no control. D) Managers would have an incentive to understate the productive capacity of their plants. E) Managers would have an incentive to overstate the productive capacity of their plants.

Q: What is the problem with paying plant managers in multi-plant firms according to the level of output they produce? A) Managers in low-cost or high-capacity plants could be penalized, in percentage terms, for their overproduction. B) The production problem in multi-plant firms is usually how to lower production to increase market power, not how to increase production. C) Managers in high-cost or low-capacity plants could be penalized for production constraints over which they have no control. D) Managers would have an incentive to understate the productive capacity of their plants. E) Managers would have an incentive to overstate the productive capacity of their plants.

Q: Asymmetric information problems arise A) in horizontally integrated firms, but not vertically integrated firms. B) in vertically integrated firms, but not horizontally integrated firms. C) in both vertically and horizontally integrated firms. D) only in firms that do not have the advantage of either horizontal or vertical integration. E) only when a single firm is both horizontally and vertically integrated.

Q: Explain what the principal-agent problem is, and explain evidence of its existence in hospitals in the United States.

Q: Explain what the principal-agent problem is, and discuss evidence of its existence in the banking industry in the United States.

Q: Assume that the owners of a firm know that the firm's profits will depend upon two parameters: (1) how hard the managers work, and (2) the state of the economy. For simplicity, assume that the managers can exert either maximum or minimum effort and that the economy can be either favorable or unfavorable. The profits under various situations are represented by the matrix below. Favorable Unfavorable Economy Economy Maximum Effort 700,000 400,000 Minimum Effort 400,000 200,000 The firm considers there to be an equal probability of either state of the economy. The manager considers the cost of effort to be C = 55,000x, where x = 1 for maximum effort, 0 for minimum effort. The firm is considering the pay scheme described below. Evaluate each alternative in terms of their incentive effects for the manager and their effect on the firm's profitability. a. a flat salary of $30,000 that is not tied to the firm's performance b. a bonus of 0 if profit equals 200,000 or 400,000 and a bonus of 120,000 if profit equals 700,000 c. a bonus determined by the formula: B = 0.20(PROFIT - 300,000) d. a bonus determined by the formula: B = 0.24(PROFIT - 300,000)

Q: What do we mean when we state that a particular principal-agent payment scheme is inefficient? A) The principal and agent could find another agreement that would increase the sum of the owner's revenue and the worker's payment. B) The agreement involves the highest level of effort for the worker. C) The agreement leads to the lowest level of revenue for the owner. D) The sum of the income taxes paid by the owner and the worker is too high.

Q: Why do workers tend to choose low effort levels when they are compensated with fixed wage payments? A) Workers ignore the cost of effort B) The net compensation after deducting the cost of effort is always higher when the worker provides low effort. C) Workers care more about the stability of income than the level of income. D) Workers tend to be risk averse and tend to choose low-intensity alternatives.

Q: Use the following statements to answer this question: I. Based on the principal-agent framework in economics, we know that the lack of incentive compatibility may arise in private firms but not in public agencies or government bureaus. II. The key problem in principal-agent situations is the principal's fundamental inability to oversee or supervise the agent. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

Q: Suppose Bob owns two factories that are located several hundred miles apart. Bob decides to manage one of the plants himself, and he hires another person to manage the second plant. For purposes of operating the second plant, who is the agent and who is principal? A) Bob is the agent and the manager is the principal. B) Bob is the principal and the manager is Bob's agent. C) Both Bob and the manager are principals. D) We need more information to determine the identities of the principal and the agent in this case.

Q: In the economic literature on principal-agent problems, the ________ is the person who takes some action, and the ________ is the person whom the action affects. A) agent, principal B) principal, agent C) Both statements describe the agent. D) Both statements describe the principal.

Q: Scenario 17.5Consider the following information:Income to the firm from workers who sell door-to-door Bad Luck Good LuckLow Effort (e = 0) $5,000 $7,000High Effort (e = 1) $7,000 $13,000Cost of effort: c = $2500eProbabilities: Bad luck = .75; Good luck = .25Under which of the following payment schemes would workers have an incentive to exert high effort?A) A guaranteed wage equal to $0B) A guaranteed wage equal to $5000C) A guaranteed wage equal to $10,000D) A wage equal to the income earned, minus $4000E) A wage equal to $0 if revenue is $5000, $2000 if revenue is $7000, and $8000 if revenue is $13,000

Q: Scenario 17.5Consider the following information:Income to the firm from workers who sell door-to-door Bad Luck Good LuckLow Effort (e = 0) $5,000 $7,000High Effort (e = 1) $7,000 $13,000Cost of effort: c = $2500eProbabilities: Bad luck = .75; Good luck = .25If a fixed wage of $3000 is given the individual worker, the result will beA) low effort 75% of the time.B) low effort 25% of the time.C) low effort.D) high effort.E) high or low effort depending on whether the worker thinks the $3000 is an acceptable wage.

Q: Scenario 17.5Consider the following information:Income to the firm from workers who sell door-to-door Bad Luck Good LuckLow Effort (e = 0) $5,000 $7,000High Effort (e = 1) $7,000 $13,000Cost of effort: c = $2500eProbabilities: Bad luck = .75; Good luck = .25A principal-agent problem arises in the situation in Scenario 17.5 becauseA) the principal can measure effort and output; the agent can measure only output.B) the principal can measure only effort, and the agent can measure only output.C) the principal can measure only output, and the agent can measure effort and output.D) neither the principal nor the agent can measure effort.E) neither the principal nor the agent can measure output.

Q: The principal-agent problem of ownership vs. control of the corporation tends to get worse when A) stock in a corporation is held exclusively by a small number of people who control the company's day-to-day operations. B) stock in the company is tightly held, but there are some "outsider" stockholders. C) stock in the company is very diffusely held, with no individual or group having control over a large block of stock. D) managers have profit-sharing schemes as part of their incentive package. E) managers focus on maximizing the firm's profits, rather than the firm's market share.

Q: The principal-agent problem of ownership vs. control of the corporation arises when owners and managers A) are the same people. B) pursue objectives that differ from those their customers wish them to pursue. C) pursue objectives that differ from those their workers wish them to pursue. D) pursue objectives that differ from those the government wishes them to pursue. E) pursue different objectives.

Q: Managers' pursuit of which of the following objectives would NOT lead to a principal-agent problem in a corporation? A) The corporation's growth B) Increased market share for the corporation C) The maximum possible profit for the corporation D) A great "golden parachute" or retirement package E) Increased current salary and fringe benefits

Q: The principal-agent problem in corporations exists because the managers of a firm A) may pursue their own goals even when the result is lower profit for owners. B) may know how to operate the business better than absentee owners do, and yet not be allowed to. C) are generally unable to do the monitoring that would result in the firm's avoiding moral hazard problems. D) are generally unable to do the monitoring that would result in the firm's avoiding adverse selection. E) are generally unable to monitor workers, who do not care about the profits due the managers.

Q: Which of the following is NOT an example of moral hazard in business? A) A bank buys risky mortgage securities because they believe the government will provide a bail-out if the investment performs badly. B) A firm uses venture capital to speculate in the commodity futures market. C) A firm does not hire adequate security protection for its warehouse after it pays for insurance on the property. D) Firms with the large debt problems are more likely to apply for bank loans than financially stable firms.

Q: Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet). What is the source of the asymmetric information problem in this case? A) The bank has more information about the true cost of the corporate jet than the firm. B) The bank has more information about the opportunity cost of the loaned funds. C) The firm has more information about the actual use of the funds than the bank. D) The firm has more information about the interest rate on the loan than the bank.

Q: In insurance markets, moral hazard creates economic inefficiency because: A) insurance companies are price setters rather than price takers. B) insurance products are not homogenous goods. C) there are many buyers but only a few sellers. D) insured individuals do not correctly perceive the costs or benefits of their actions.

Q: Traditionally, the federal government provides disaster relief funds to flood victims so that they can rebuild their homes after a major flood. However, the government has recently denied requests to rebuild some homes that were situated in flood-prone areas. This action represents an attempt to ________ the moral hazard problem associated with building private homes in risky areas. A) enhance B) mitigate C) legalize D) support

Q: Over the past several years, the federal government has rescued a few financially distressed banks and other large private companies, and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem. However, critics of these interventions argue that these actions generate a moral hazard problem. Why? A) Government oversight of rescued firms is typically based on limited information, so the outcome is economically inefficient. B) Rescued firms will have a difficult time buying insurance in private markets, so the government will also have to insure the firm against losses from fire, theft, etc. C) Managers have more information about the financial strength of their firm than government officials, so the rescue attempts may be unnecessary. D) Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure.

Q: The presence of deposit insurance in the savings and loan industry A) created an adverse selection problem because good S&Ls were forced out of the market. B) solved its own adverse selection problem because it pushed badly managed S&Ls out of the market. C) contributed to "depositor moral hazard" but did not involve a moral hazard problem with owners. D) contributed to "moral hazard by owners" but did not involve a moral hazard problem with depositors. E) contributed to both "depositor moral hazard" and "moral hazard by owners."

Q: Consider the following information: StowUrStuff Storage is located slightly below sea level in a coastal town. It could build and maintain a flood control system around its property at an annual cost of $1000, and if it did so, the probability of a flood's doing $1,000,000 in damage during the year would be .005. With no flood control system, the probability of such a flood would be .01. Moral hazard arises in this situation because once the firm A) pays the premium that is based on the .005 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .005. B) pays the premium that is based on the .01 probability, it has no incentive to spend the additional $1000 for the flood control system, so the true probability of loss is no longer .01. C) provides for flood control, it has less incentive to spend $5000 on premiums, leaving itself underinsured. D) provides for flood control, it has less incentive to spend $10,000 on premiums, leaving itself underinsured. E) provides for flood control, it will consider that a substitute for insurance and not be able to deal with the loss from a flood should it occur.

Q: Consider the following information: The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run. . Moral hazard arises in this situation because once the firm A) pays the premium that is based on the 0.001 probability, it has no incentive to spend the additional $80 for the fire protection program, so the true probability of loss is no longer 0.001. B) pays the premium that is based on the 0.01 probability, it has no incentive to spend the additional $80 for the fire protection program, so the true probability of loss is no longer 0.01. C) puts the fire protection program in place, it has less incentive to spend $300 for a premium, leaving the firm underinsured. D) puts the fire protection program in place, it has less incentive to spend $6,000 for a premium, leaving the firm underinsured. E) puts the fire protection program in place, it will consider that a substitute for insurance and not be able to deal with the loss from a fire should it occur.

Q: If the moral hazard problem in automobile driving were to be eliminated, the marginal cost of driving would be A) lowered enough to pull the amount of driving back down to the efficient level. B) lowered enough to raise the amount of driving back up to the efficient level. C) raised enough to pull the amount of driving back down to the efficient level. D) raised enough to raise the amount of driving back up to the efficient level. E) lowered back down to the efficient level, relieving the stress on market forces.

Q: When a moral hazard problem exists for automobile driving, the marginal cost of driving A) is lowered, and the amount of driving done is raised above the efficient level. B) is lowered, and the amount of driving done is lowered below the efficient level. C) is raised, and the amount of driving done is raised above the efficient level. D) is raised, and the amount of driving done is lowered below the efficient level. E) is raised above the efficient level, but market forces keep the total amount of driving is kept at the efficient level.

Q: Which of the following would be LEAST likely to contribute to a moral hazard problem among drivers? A) Provide medical coverage to all drivers, their passengers, and any and all individuals involved in the accident, no matter who was at fault. B) Provide medical coverage and car repair/replacement coverage to drivers, their passengers, and any and all individuals involved in the accident, no matter who was at fault. C) Modify all cars to remove the driver's seatbelt and the steering wheel air bag. D) Pass a law limiting the amount of damages that juries may award in accident cases. E) Make automobile insurance mandatory for all drivers.

Q: In the insurance market, "moral hazard" refers to the problem that A) insurers can't tell high-risk customers from low-risk customers. B) high-risk customers have an incentive to give false signals to make themselves look like low-risk customers. C) companies may unfairly lump individuals together by race, sex, age or other characteristics in an attempt to use demographic data to pinpoint high-risk populations. D) individuals are willing and able to pay different amounts for insurance, but must all be charged the same amount. E) individuals may change their behavior after the insurance is bought, so that they behave in a more high-risk manner than they did before.

Q: A certain firm can hire two types of workers: Group A workers who have high productivity and Group B workers with low productivity. Group A workers will add $27,500 to the firm's revenues per year, while Group B workers will increase the firm's revenues by $15,000 per year. The firm's managers expect workers to be employed for eight years. The differences in the workers' productivity levels are reflected in their costs per year of education. Each year of education (which includes the psychic costs of study effort) costs an A worker $12,500, while each year costs a B worker $25,000. a. Under competitive conditions, how much would A and B workers earn? b. Assuming that the firm is unable to distinguish A from B workers and that it is equally likely that a worker is of either type, what pay scale will the firm offer? c. Suppose that the firm decides to use education as a market signaling device to distinguish A workers from B workers. What education requirement could the firm set?

Q: In this problem, a labor market exists where employers hire and pay workers according to how much formal education workers possess. Education is a proxy for the level of productivity that employers can expect from workers. Therefore, employers follow a strategy in which they hire workers and pay salaries according to the following conditions: Degrees Above the Values of Post High School High School Level Education During Working Life, B(y) None 0 (y = 0 years) Associate's Degree $30,000 (y = 2 years) Bachelor's Degree $51,000 (y = 4 years) Master's Degree $58,000 (y = 6 years)Assume that there are only two types of worker abilities, those who are less productive (type L) and those who are highly productive (type H). The less productive workers have to study harder than highly productive workers in order to earn any degree. Consequently, the costs (including the psychic costs of study effort) of attaining various levels of education for these two types of employees are different.For less productive workers: CL(y) = $13,000yFor highly productive workers: CH(y) = $10,000ya. Draw a diagram with years of education on the horizontal axis. Graph the benefits to education B(y) and the costs of education for each of the two types of workers. Discuss what level of education each type of worker should obtain.b. Now use the equations above to verify your answer from part (a) mathematically.c. Explain the value of formal education above the high school level in the market place to employers.

Q: Over the past several decades, low-productivity and high-productivity workers in the US and other countries have tended to invest in their own human capital by completing more years of college than earlier generations. Which of the following reasons does NOT help to explain this trend? A) The cost of education for low-productivity workers has declined due to the emergence of online and other nontraditional programs. B) The earnings gap between workers with and without education has grown larger over time. C) The cost of education for high-productivity workers has increased over time. D) The benefit associated with increased education has increased over time.

Q: Many business professionals constantly monitor their incoming email and text messages so they can appear to be alert and responsive, even at night and on weekends. Alternatively, some time management consultants recommend that business professionals should not constantly check for new messages because this practice distracts the worker from scheduled tasks that may have higher priority. The decision to check email or text messages less frequently may not harm the worker's salary if it is a: A) weak signal of worker ability. B) weak signal of cell phone strength. C) strong signal of worker ability. D) strong signal of ease of distraction.

Q: Job market signals like dressing well for interviews are not especially effective because: A) the cost of dressing well is about the same for high-quality and low-quality workers. B) many businesses have adopted casual office attire, so dressing well is not important to the firm. C) federal labor laws prohibit firms from using dress or appearance as an employment criterion. D) none of the above

Q: The process by which sellers send signals to buyers conveying information about product quality is known as: A) asymmetric information. B) market signaling. C) a lemons problem. D) moral hazard.

Q: Which of the following job market signals are less costly for high-quality workers to send than low-quality workers? A) Spending long hours at the office B) Sending emails to coworkers and supervisors at night and on weekends C) Leaving voice-mail message for colleagues before or after regular business hours D) all of the above

Q: Which of the following is TRUE about a college education as a signaling device? A) It is a useful signal only if individuals choose majors related to their ultimate field of employment. B) It is a useful signal only if a college education is open to all individuals, no matter what their previous level of educational accomplishment was. C) It is a useful signal whether or not people actually learn anything in college. D) It is a useful signal only if the job in question cannot be done without the preparatory coursework the college degree required. E) It is less and less a useful signal in the post-industrial economy, where the skill sets employers need change so rapidly.

Q: A warranty is most valuable as a signaling device when A) the buyer has much more information about the product than the seller does. B) the seller has much more information about the product than the buyer does. C) the buyer has much more information about his or her own preferences than the seller does. D) neither the buyer nor the seller has good information about the product. E) neither the buyer nor the seller has good information about consumer preferences.

Q: A bumper-to-bumper warranty on a used car is a signaling device that A) identifies a high-quality car as a high-quality car, because putting such a warranty on a low-quality car would be prohibitively costly. B) disguises a low-quality car as a high-quality car, and thus makes it easier to sell. C) is necessary in order to sell a low-quality car at all. Without it no one would risk buying the car. D) isn't necessary if there is a mix of high-quality and low-quality cars in the market. E) helps sellers determine whether the buyer is truly looking for a high-quality car.

Q: Which of the following is TRUE about producers' willingness to offer warranties on products? A) Producers are equally likely to offer warranties on high-quality and low-quality goods. B) Producers are more likely to offer warranties on low-quality goods, because without the signal that the warranty provides, the low-quality good wouldn't sell. C) Producers are more likely to offer warranties on high-quality goods, because the expected cost of repairs is lower for those goods. D) Producers have an incentive to deal with third-party companies to provide the warranties, so that an "impartial" view of the product is given to the consumer. E) Producers will not offer warranties in any market that suffers from asymmetric information.

Q: Because the presence of a warranty for a good is a signal that the good is of high quality, A) consumers are willing and able to pay more for a good that carries a warranty. B) consumers are willing to buy goods if and only if the goods come with warranties. C) producers do not need to charge extra for warranties. D) producers can use warranties to sort out high-risk customers. E) producers must make warranties available on all goods.

Q: Consider the information below: For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. An employer who only wants to hire those people who find learning less costly can do so by choosing y* to be anywhere between A) 15 and 45. B) 15 and 30. C) 13 1/3 and 30. D) 8 and 20. E) none of the above

Q: Consider the information below: For Group A the cost of attaining an educational level y is CA(y) = $6,000y and for Group B the cost of attaining that level is CB (y) = $10,000y. Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*. If the threshold educational level y* is set at 20, A) only individuals in Group K will attain it. B) only individuals in Group M will attain it. C) individuals in both groups will attain it. D) no individuals will attain it. E) some fraction of individuals in each group will attain it.

Q: Consider the information below:For Group A the cost of attaining an educational level y isCA(y) = $6,000yand for Group B the cost of attaining that level isCB (y) = $10,000y.Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*.If the threshold educational level y* is set at 13 1/3,A) only individuals in Group K will attain it.B) only individuals in Group M will attain it.C) individuals in both groups will attain it.D) no individuals will attain it.E) some fraction of individuals in each group will attain it.

Q: Consider the information below:For Group A the cost of attaining an educational level y isCA(y) = $6,000yand for Group B the cost of attaining that level isCB (y) = $10,000y.Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*.If the threshold educational level y* is set at 45,A) only individuals in Group K will attain it.B) only individuals in Group M will attain it.C) individuals in both groups will attain it.D) no individuals will attain it.E) some fraction of individuals in each group will attain it.

Q: Consider the information below:For Group A the cost of attaining an educational level y isCA(y) = $6,000yand for Group B the cost of attaining that level isCB (y) = $10,000y.Employees will be offered $50,000 if they have y < y*, where y* is an education threshold determined by the employer. They will be offered $130,000 if they have y > y*.The lowest level of y* that can be set and still have only the high-productivity people meet it isA) 90.B) 60.C) 30.D) 22.5.E) 15.

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