Q: Which formula represents the expected revenue for a repairperson exerting low effort, given equal probability of earning $$10,000 or 20$$,000?

$$E[R] = 0.5 \times 10,000 + 0.5 \times 20,000$$

Question 1

Which of the following is NOT a reason for market failure discussed in the lecture?

Accepted Answer

Perfect Information

Question 2

In the context of asymmetric information, what is a 'hidden characteristic'?

Accepted Answer

An attribute known to one party but unknown to others

Question 3

Which scenario best illustrates the problem of adverse selection?

Accepted Answer

A used car market where sellers know more about car quality than buyers

Question 4

According to Akerlof's 'lemons problem,' what happens in a used car market with asymmetric information?

Accepted Answer

Low-quality cars drive high-quality cars out of the market

Question 5

Which of the following is a method to reduce adverse selection in markets?

Accepted Answer

Restricting the ability of the informed party to exploit hidden information

Question 6

What is the main difference between adverse selection and moral hazard?

Accepted Answer

Adverse selection occurs before a transaction, moral hazard occurs after

Question 7

Which of the following is an example of signaling in labor markets?

Accepted Answer

A worker obtains a degree from a reputable university

Question 8

In the principal-agent problem, who is the 'principal'?

Accepted Answer

The individual who employs one or more agents to achieve an objective

Question 9

Suppose a repairperson can exert low or high effort. If the owners cannot monitor effort, which payment scheme best incentivizes high effort?

Accepted Answer

Revenue-sharing arrangement

Question 10

Which formula represents the expected revenue for a repairperson exerting low effort, given equal probability of earning $$10,000 or 20$$,000?

Accepted Answer

$$E[R] = 0.5 	imes 10,000 + 0.5 	imes 20,000$$

Question 11

Which of the following is NOT a real-world example of adverse selection?

Accepted Answer

A firm polluting a river

Question 12

What is the main purpose of certification in markets with asymmetric information?

Accepted Answer

To provide a report that a product meets or exceeds a given standard

Question 13

Which of the following best describes moral hazard?

Accepted Answer

A party whose actions are unobserved can affect the probability or magnitude of a payment

Question 14

In the principal-agent framework, what is a common solution to align the agent's goals with the principal's?

Accepted Answer

Design reward systems based on outcomes

Question 15

If a repairperson's wage is given by $$w = R - 18,000$$ when revenue $$R \u003e 18,000$$, and $$w = 0$$ otherwise, what is the expected wage for high effort if revenue is equally likely to be $$20,000 or$$ $$40,000$$?

Accepted Answer

$$E[w] = 0.5 	imes (20,000 - 18,000) + 0.5 	imes (40,000 - 18,000)$$

Question 16

Which of the following is a screening method used by uninformed parties to reduce adverse selection?

Accepted Answer

Credit score checks

Question 17

What is the effect of asymmetric information on the market for used cars, according to the lemons problem?

Accepted Answer

Low-quality cars are sold in greater quantities, driving high-quality cars out

Question 18

Which of the following is a plausible consequence of moral hazard in the insurance market?

Accepted Answer

Insured individuals take greater risks because their actions are unobserved

Question 19

Which formula best represents the expected profit for owners when the repairperson chooses high effort and the bonus payment is $$12,000$$?

Accepted Answer

$$E[Profit] = E[R] - 12,000$$

Question 20

Which of the following is NOT a strategy to mitigate the principal-agent problem?

Accepted Answer

Ignoring information asymmetry

Lecture 12: Information Asymmetry and Market Failure

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