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Exam 17: Markets With Asymmetric Information

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Question 71

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

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The principal-agent problem is an exampl...

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Question 72

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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.

E) A) and B)
F) All of the above

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Question 73

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Scenario 17.4 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. -Refer to Scenario 17.4. Moral hazard arises in this situation because once the firm

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 is MC(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?

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:

Scenario 17.5 Consider the following information: Income to the firm from workers who sell door-to-door Bad Luck Good Luck Low Effort (e = 0) $5,000 $7,000 High Effort (e = 1) $7,000 $13,000 Cost of effort: c = $2500e Probabilities: Bad luck = .75; Good luck = .25 -Refer to Scenario 17.5. If low effort is exerted, expected income is

Scenario 17.1 Consider the information below: For Group A the cost of attaining an educational level y is C_A(y) = $6,000y and for Group B the cost of attaining that level is C_B (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^*. -Refer to Scenario 17.1. If the threshold educational level y^* is set at 10,

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?

Because the presence of a warranty for a good is a signal that the good is of high quality,

In the arena of asymmetric information, standardization (for example, menus at McDonald's restaurants) is a substitute for