Econ Final

Prospect theory can explain why A. people tend to care more of a given change in the outcome for large gains or losses. B. people should never play the lottery. C. people should only sell their losing stocks. D. people tend to keep their losing stocks too long and sell their winning stocks too early

people tend to keep their losing stocks too long and sell their winning stocks too early.

Searching the Internet for information to help select a product that is more reliable is most likely to be done by a A. risk-neutral person. C. risk-averse person. B. risk-preferring person. D. person addicted to the internet

risk-averse person.

If all used cars in a market with symmetric information about quality are sold at the same price, then A. sellers of good quality cars are subsidizing buyers of lemons. B. sellers of good quality cars are subsidizing sellers of lemons. C. buyers of good quality cars are subsidizing buyers of lemons. D. sellers of lemons are subsidizing sellers of good quality cars

sellers of good quality cars are subsidizing sellers of lemons.

When a person has health insurance, they often have to pay nothing or very little (a "copay") to see a doctor. This might result in A. a principal-agent problem. B. some moral hazard, since people might overuse the benefit. C. their being overly healthy. D. an adverse selection problem

some moral hazard, since people might overuse the benefit.

In a Stackelberg game, a monopolist could deter entry from a potential rival by A. moving to a Bertrand model. C. telling the potential rival not to enter. B. strategically moving first. D. None of the above.

strategically moving first.

Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game. This is an example of a(n) A. objective probability. C. subjective probability. B. risk-averse statement. D. Friedman-Savage preference.

subjective probability.

If each player in a game uses a strategy that results in a Nash equilibrium outcome, the players are most likely to say A. "Given the strategies chosen by the other players in the game, I probably could have done better if I had more time." B. "I don't like my choice, because I think I could have done better." C. "There was no real strategy on my part, I basically made an educated guess." D. "Given the strategies chosen by the other players in the game, I made the best possible choice."

"Given the strategies chosen by the other players in the game, I made the best possible choice."

If an agent is risk neutral and a principal is risk averse, which of the following contracts would be efficient in risk bearing? A. A fixed fee is paid to the principal. C. An hourly rate is paid to the agent. B. The agent enjoys a share of the profit. D. A fixed fee is paid to the agent.

A fixed fee is paid to the principal.

28. When neither player has a dominant strategy A. at least one Nash equilibrium exists. B. the game cannot be analyzed. C. no Nash equilibrium exists. D. game theory will not provide information

A. at least one Nash equilibrium exists.

36. If decision makers have limited ability to calculate profits from all possible combinations of options, they are said to have A. bounded rationality. C. Pareto inefficiency. B. a maximin problem. D. dementia.

A. bounded rationality

41. A Nash bargaining solution A. is derived from a Nash equilibrium. B. gives a solution in both cooperative and non-cooperative games. C. is not the same as a Nash equilibrium. D. None of the above.

C. is not the same as a Nash equilibrium.

Augustus bought his BMW convertible brand-new in 2008 and knows that it is in excellent condition. He now wants to sell it but he does not realize that there are many other similar cars on the used car market that are lemons and potential buyers have no way to tell the differences between a lemon and a good used car. As a result: A. He will get the best price for his car by selling it to a dealer. B. He will not be able to sell his car at the price that he thinks is fair. C. He should be able to sell the car at a premium price because of its excellent condition. D. He is willing to to sell at a price that is no more than a lemon.

He will not be able to sell his car at the price that he thinks is fair.

When firms select the solution that is better for all parties, the ________ is satisfied. A. coordination game requirement C. Nash equilibrium condition B. Pareto Criterion D. pure strategy requirement

Pareto Criterion

A sub-game perfect Nash equilibrium is defined as A. a set of strategies that are a Nash equilibrium in a single subgame of a dynamic game. B. a set of strategies that are a Nash equilibrium in every subgame of a static game. C. the game within the game. D. a set of strategies that are a Nash equilibrium in every subgame of a dynamic game.

a set of strategies that are a Nash equilibrium in every subgame of a dynamic game.

If Intel moves first and makes a large investment in a chip fabrication plant in Bolivia in exchange for tax credits, Intel has made ________ and Bolivia ________. A. a tactical error; will nationalize the plant B. a specific investment; has a hostage C. a general investment; no longer has to grant the tax credits D. a specific investment; will create the tax credit

a specific investment; has a hostage

If reckless drivers are more likely to buy automobile insurance than safe drivers are A. adverse selection has occurred. B. then automobile insurance will be fairly priced. C. the market for insurance is efficient. D. a moral hazard has occurred.

adverse selection has occurred.

A person who does not own a motorcycle but often ride on her friends' and does not reveal this to her life insurance company before purchasing insurance. This is an example of A. screening. C. moral hazard. B. adverse selection. D. signaling.

adverse selection.

Life insurance companies often give applicants a physical examination to prevent A. the person from dying before obtaining the policy. B. signaling. C. profit maximization. D. adverse selection.

adverse selection.

When a prisoners' dilemma game is repeated a finite number of times (T) A. cooperation continues until the T-2 round, where the players will switch to a non-cooperative Nash equilibrium. B. cooperation unravels during the first round of the game, resulting in the static game Nash equilibrium. C. firms cooperate and achieve the collusive Nash equilibrium for all rounds. D. If each firm adopt a tit-for-tat strategy, they will cooperate until the T round.

cooperation unravels during the first round of the game, resulting in the static game Nash equilibrium.

A disadvantage of moving too quickly is that A. consumers aren't loyal. B. costs of entry are higher. C. firms are subject to holdup problems. D. the commitment to high output level is credible.

costs of entry are higher.

An incumbent's threat to use limit pricing if a firm enters the market A. is not credible if the firms have different costs and market demand won't support both firms. B. is credible if the firms have different costs and market demand won't support both firms. C. is cheap talk, because the other firm will enter and the incumbent will still be able to charge monopoly pricing. D. is credible if the firms have identical costs and market demand supports both firms.

is credible if the firms have different costs and market demand won't support both firms.

In a repeated game, deterring entry A. is not possible. B. cannot form a subgame perfect Nash equilibrium. C. may require losing money fighting the first potential entrant. D. is not a rational strategy if money is lost fighting the first potential entrant.

may require losing money fighting the first potential entrant.

A person develops a hobby of motorcycle racing after signing a contract with a life insurance company. This is an example of A. adverse selection. C. signaling. B. screening. D. moral hazard.

moral hazard.

One interesting feature of a prisoner's dilemma game is that A. non-cooperative behavior leads to lower payoffs than cooperative behavior. B. individuals behave irrationally when they behave non-cooperatively. C. there is never a dominated strategy. D. cooperative behavior leads to lower payoffs than non-cooperative behavior

non-cooperative behavior leads to lower payoffs than cooperative behavior.

Catherine is risk-averse with a utility function of U = mc009-1.jpg, where W is her wealth level. Her current wealth level is W0 = $100. A gamble cost her $19 will pay her $40 if she wins with a probability of 60% or else she loses, the gamble pays her nothing. When faced with a choice between this gamble and the certain level of wealth of $100 she will A. prefer the certain level of wealth since the expected utility of taking the gamble is higher than the utility of $100. B. prefer the gamble since the expected utility of taking the gamble is higher than the utility of $100. C. prefer the gamble since the expected utility of taking the gamble is less than the utility of $100. D. prefer the certain level of wealth since the expected utility of taking the gamble is less than the utility of $100.

prefer the gamble since the expected utility of taking the gamble is higher than the utility of $100. Hint: The wealth level for Catherine is 100 - 19 + 40 = 81 + 40 = 121 if she wins but, 100 - 19 + 0 = 81 if she loses.

In a bargaining solution, a player's net surplus is A. the amount of consumer surplus she receives minus any deadweight loss. B. always maximized. C. the amount of total surplus minus any deadweight loss. D. the difference between what the player receives in the final bargain minus what she would have gotten from the disagreement point.

the difference between what the player receives in the final bargain minus what she would have gotten from the disagreement point.

If your risk of losing your house to catastrophe is 25%, how much would fair insurance cost if your home were worth $1,000,000? A. $500,000 C. $250,000 B. $750,000 D. $100,000.

$250,000

Which of the following is most likely to be a feature of a contingent contract? A. A VP of Sales is given options as part of her salary. B. An engineer who has been working for a firm for 5 years start to receive the firm's pension benefits. C. A CFO is paid $250,000 per year. D. A newly hired computer programmer receives low wages during a 3-month probation period.

A VP of Sales is given options as part of her salary.

1. Common knowledge in game theory A. is information known by all players. B. is required for static games. C. does not impact the outcome of the game, since everyone has the information. D. is information known by most people in a country

A. is information known by all players.

29. A strategy in which a player uses probabilities to decide which strategy to use is called a A. mixed strategy. C. pure strategy. B. Pareto strategy. D. coin flip strategy.

A. mixed strategy

2. Which of the following is a simultaneous decision game? A. rock-paper-scissors (Roshambo) C. chess B. tic-tac-toe D. poker

A. rock-paper-scissors (Roshambo)

30. If a game has a pure strategy Nash equilibrium then A. it does not have a mixed strategy equilibrium. B. it might also have a mixed strategy equilibrium. C. no player has a dominant strategy. D. at least one player has a dominant strategy.

B. it might also have a mixed strategy equilibrium.

33. In a Nash equilibrium A. each player has a dominant strategy. B. players may or may not have dominant strategies. C. no players have a dominant strategy. D. the player with the dominant strategy will win. E. at least one player has a dominant strategy.

B. players may or may not have dominant strategies

43. One possible source of inefficiency in bargaining is A. that there are multiple Nash equilibria. B. that the bargaining process takes time. C. bounded irrationality. D. that the Nash product may be indeterminant.

B. that the bargaining process takes time.

6. When both firms have dominant strategies A. there is a prisoners' dilemma. B. the outcome is called a dominant strategy solution. C. there are multiple Nash equilibria. D. joint profits are maximized.

B. the outcome is called a dominant strategy solution.

31. A maximin strategy A. involves a random choice between two strategies, one which maximizes potential gain and one which minimizes potential loss. B. maximizes the gain of one player, but minimizes the gain of the opponent. C. maximizes the minimum gain that can be earned. D. minimizes the maximum gain that can be earned.

C. maximizes the minimum gain that can be earned.

What is the primary difference between a mixed strategy and a pure strategy? A. Pure strategies are always dominated strategies. B. Mixed strategies are not optimal whereas pure strategies are. C. Pure strategies are much more common than mixed strategies. D. Mixed strategies call for randomizing over possible actions, pure strategies do not.

Mixed strategies call for randomizing over possible actions, pure strategies do not.

Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda. In this case, politicians are using A. prospect theory. C. the Khaneman effect. B. framing. D. the Allais effect.

framing

In the beauty contest where players predict the outcome of players choosing a number between 0 and 100, The submission closest to 1/2 of the average of all numbers submitted would win. The number submitted by level-2 reasoning participants should be A. 25. C. 50. B. 33. D. 13.

13 The expected value from random integers between 0 and 100 is 50, so the level-1 thinkers will pick 0.5x50 = 25 and level-2 thinkers will pick 0.5x25 = 12.5 » 13

On any given day, a salesman can earn $0 with a 30% probability, $100 with a 20% probability, or $300 with a 50% probability. His expected earnings equal A. $100. C. $170. B. $150. D. $0

170

Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Alternatively, she could get utility of 146 from a certainty equivalent of $43. What is Natasha's risk premium? A. $19 C. $105 B. $103 D. $43

19

A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is A. 249.50. C. 249.75. B. 15.8. D. 499.

249.75

People in a certain group have a 0.3% chance of dying this year. If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise, what is the expected value of a policy to the insurance company? A. $3,300 C. $0 B. $300 D. $3,000

300

12. Which of the following statements is TRUE about a non-cooperative game? A. When two players each have a dominant strategy, joint profits may not be maximized. B. When players use their best responses, joint profits are maximized. C. When two players each have a dominant strategy, joint profits are maximized. D. When two players each have a dominant strategy, joint profits may is never maximized.

A. When two players each have a dominant strategy, joint profits may not be maximized

32. Andre Agassi, a star tennis player, is playing the number one player in the world, Roger Federer. Before the match, Agassi decided that he would serve 20 percent of his serves to Federer's backhand, 30 percent of his serves to Federer's forehand, and 50 percent of his serves straight at Federer. In the language of game theory, this is known as: A. a mixed strategy. C. a maximin strategy. B. a dominant strategy. D. a pure strategy.

A. a mixed strategy.

26. When firms select the solution that is better for all parties, the ________ is satisfied. A. cheap talk may be illegal under anti-trust laws. B. if there's an incentive for one or more players to lie, then cheap talk lacks credibility. C. pareto criterion might not be defined. D. Both A and B

A. cheap talk may be illegal under anti-trust laws.

5. A payoff matrix A. shows the payoffs to each firm for each possible outcome. B. is optional in game theory. C. details the actions each firm takes. D. shows the payoffs (i.e. bribes) required to government officials for firms undertaking specific actions.

A. shows the payoffs to each firm for each possible outcome.

42. A disagreement point is A. the outcome that occurs if there is no agreement in a bargain. B. the point in a negotiation where the players cannot reach an agreement. C. a way of keeping score in a negotiation. D. an item of contention between the two bargaining players.

A. the outcome that occurs if there is no agreement in a bargain.

24. "Cheap talk" is considered cheap because A. firms avoid the costs of hiring lawyers. B. a firm can say anything, but may actually do something different. C. communications via phone or email these days has a cost that is close to zero. D. the cost of talking is far outweighed by the gains to be made in coordinating efforts.

B. a firm can say anything, but may actually do something different.

8. A Nash equilibrium occurs when A. the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost. B. players choose their best strategy given the strategies chosen by others. C. a monopolist is forced to produce the efficient level of output. D. oligopolists cooperate with each other.

B. players choose their best strategy given the strategies chosen by others.

45. In an English auction A. the winning bidder pays the amount bid by the person with the second highest bid. B. the price increases until nobody else will raise the bid. C. bidders put their bids in a sealed envelope. D. the price decreases until someone bids.

B. the price increases until nobody else will raise the bid.

40. In a bargaining game, players A. are forced to negotiate, as in a mediation. B. voluntarily negotiate. C. are engaging in illegal activity. D. have to share the surplus equally.

B. voluntarily negotiate.

Which of the following games involving the roll of a single die is a fair bet? A. Bet $1 and receive $1 if 3, 4, or 5 come up. B. Bet $1 and receive $4 if 6 comes up. C. Bet $1 and receive $1 if 3 or 4 come up. D. Bet $1 and receive $3 if 2 or 6 comes up.

Bet $1 and receive $1 if 3, 4, or 5 come up. Hint: A die has 6 sides, each marked with a number from 1, 2, 3, 4, 5, and 6. To make a bet in this game, a player pays $1 and receive the payoff if the prespecified number comes up in one rolling. So if the bet specified as payoff of $1 if the sides marked with 1 or 2 comes up, the player has 2/6 = 1/3 probability to receive the $1.

13. Your economics professor has decided that your class will not be graded on a curve but on an absolute scale. Therefore, it is possible for every student in the class to get an "A." Your grade will not depend in any way on your classmates' performance. Based on this information, you decide that you should study economics three hours each day, regardless of what your classmates do. In the language of game theory, your decision to study three hours each day is: A. a minimax strategy. C. a dominant strategy. B. a maximin strategy. D. a Prisoner's dilemma.

C. a dominant strategy.

4. A dominant strategy can best be described as A. a strategy that leaves every player in a game better off. B. a strategy taken by a dominant firm. C. a strategy that is optimal for a player no matter what an opponent does. D. the strategy taken by a firm in order to dominate its rivals.

C. a strategy that is optimal for a player no matter what an opponent does.

38. If you take a maximin strategy A. then both players are doing the best they can given the payoffs in the game. B. you are irrational according to economic definition. C. you are getting the best possible outcome given that the other player does the thing that's worst for you. D. you are ensuring that the other player gets the worst possible outcome.

C. you are getting the best possible outcome given that the other player does the thing that's worst for you.

27. A mixed strategy may A. lead identical firms to choose different actions. B. be part of a Nash equilibrium. C. be a set of probabilities of selecting each possible action. D. All of the above

D. All of the above

34. In the example of coordination problems between Google and Motorola Mobility, one method to solve the problems was A. to undertake a merger or acquisition. B. form a joint venture. C. for one firm to subcontract with the other. D. All of the above.

D. All of the above

25. Not all games with two or more Nash equilibria can be solved with pre-play communication because A. cheap talk may be illegal under anti-trust laws. B. if there's an incentive for one or more players to lie, then cheap talk lacks credibility. C. pareto criterion might not be defined. D. Both A and B

D. Both A and B

23. Communication between players prior to the start of a game that does NOT affect the payoffs is called A. a binding verbal contract. C. pareto efficient. B. ineffective bargaining. D. cheap talk.

D. cheap talk.

3. A dominated strategy A. exists when one firm is weaker than another. B. is a characteristic of games with multiple Nash equilibria. C. only occurs in a mixed strategy scenario. D. is one that is never used by a rational actor.

D. is one that is never used by a rational actor.

Sports announcers often refer to a baseball batter in a hitting slump as "being due." If they are correct, then it must be the case that A. baseball players are acting irrationally. B. a batter's hits are randomly distributed. C. a batter's at-bats are related to each other. D. a batter's at-bats are independent of each other.

a batter's at-bats are related to each other.

Which of the following workers is most likely to be asked to post a performance bond? A. car salesman C. fireman B. basketball coach D. armored car guard

armored car guard

In the Stackelberg model, the leader has a first-mover advantage because it A. differentiates its output. B. has lower costs than the follower. C. reacts to the follower's decision. D. chooses its output to manipulate the follower to produce the output that most benefits the leader.

chooses its output to manipulate the follower to produce the output that most benefits the leader.

In game theory, a strategy A. is useful in static games, but not in dynamic games. B. is useless, because firms are subject to bounded rationality. C. determines the payoff matrix of the game. D. defines the specific actions a firm will make.

defines the specific actions a firm will make.

If two events are positively correlated but NOT perfectly correlated, then A. diversification is not necessary since there is no risk. B. diversification can reduce risk. C. diversification does not reduce risk at all. D. diversification eliminates all risk.

diversification can reduce risk.

One drawback of deferred payments is that A. it is difficult to determine who are the good and who are the bad workers. B. employees may shirk anyway. C. employers might fire high achievers to avoid paying higher wages or bonuses. D. employees have to work for the firm for a long time.

employers might fire high achievers to avoid paying higher wages or bonuses.

The revenues to the firm from one sales representative who sells door-to-door, before paying this employee are listed in the table below: Low Demand High Demand Low Effort (e = 0) $2,000 $4,000 High Effort (e = 1) $4,000 $6,000 Cost of effort: c = $600e. The cost of high effort is $400 and low effort, 0. Probabilities: Low Demand = 0.7; High Demand = 0.3 If the firm collects a license fee of $1500 if low demand occurs and a license fee of $3000 if high demand occors, this sales representative will choose: A. low effort level for an expected residual income of $1500. B. low effort level for an expected residual income of $2600. C. high effort level for an expected residual income of $2050. D. high effort level for an expected residual income of $2500.

high effort level for an expected residual income of $2050.

Designing your products with proprietary technology so that they won't work with a rival's equipments , is a way to A. protect intellectual property. B. increase switching costs for your customers. C. grandfather in your products. D. decrease your marginal cost.

increase switching costs for your customers.

Shawn is risk-averse with a utility function of U = mc017-1.jpg, where W is his wealth level. His current wealth level is W0 = $10,000. An investment project costing $3,600 will generate a payoff of $8,000 if it succeeds with a probability of 50% or else, the project fails, it is only worth $1700. Based on this information, Shawn should A. invest in the project since the expected utility from investing is higher than from his current wealth level. B. invest in the project since the expected utility from investing is less than from his current wealth level. C. not invest in the project since the expected utility from investing is less than from his current wealth level. D. not invest in the project since he is risk-averse.

invest in the project since the expected utility from investing is higher than from his current wealth level.

A coordination game A. is a game with multiple Nash equilibria where players can credibly coordinate to select one of the equilibria. B. always has one Nash equilibrium and no dominated strategies. C. is a game where players coordinate to maximize joint profits. D. cannot be solved with cheap talk.

is a game with multiple Nash equilibria where players can credibly coordinate to select one of the equilibria.

If a game has a pure strategy Nash equilibrium then A. at least one player has a dominant strategy. B. it does not have a mixed strategy equilibrium. C. it might also have a mixed strategy equilibrium. D. no player has a dominant strategy.

it might also have a mixed strategy equilibrium.

The revenues to the firm from one sales representative who sells door-to-door, before paying this employee are listed in the table below: Poor Luck Good Luck Low Effort (e = 0) $5,000 $7,000 High Effort (e = 1) $7,000 $9,000 Cost of effort: c = $1000e: The cost of high effort is $1000 and low effort, 0. Probabilities: Poor luck = 0.5; Good luck = 0.5 If a fixed wage of $3000 is given the individual sales representative, the result will be A. high effort. C. low effort. B. low effort 50% of the time. D. low effort 50% of the time.

low effort

The revenues to the firm from one sales representative who sells door-to-door, before paying this employee are listed in the table below: Poor Luck Good Luck Low Effort (e = 0) $5,000 $7,000 High Effort (e = 1) $7,000 $13,000 Cost of effort: c = $1000e. The cost of high effort is $1000 and low effort, 0. Probabilities: Poor luck = 0.5; Good luck = 0.5 If the firm compensate the sales representative with 20% of the revenues, this sales representative will choose: A. low effort level for an expected payoff of $1500. B. high effort level for an expected payoff of $1500. C. high effort level for an expected payoff of $2000. D. low effort level for an expected payoff of $2000.

low effort level for an expected payoff of $1500.

Signals solve the adverse selection problem A. if the signaling firm is known to be a profit-maximizer. B. when the signal is expensive to produce. C. if the signal is an advertisement placed in the New York Times or other top-tier publication. D. only if the signal is viewed as credible.

only if the signal is viewed as credible.

A person who is risk-neutral will A. pick the option with the highest expected value. B. pick a slightly less risky option with a slightly lower expected value. C. pay a small risk premium when making a choice. D. consider the risk levels of alternative options when making decisions

pick the option with the highest expected value.

An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents A. the expected value of the amount the employee loses if he shirks. B. the cost of monitoring the employee. C. the amount the employee loses if caught shirking. D. the gain to the employee if he shirks.

the amount the employee loses if caught shirking.

If a Cournot duopolist announced that it will double its output, the other firm does not view the announcement as credible because A. the announcing firm's profits will fall if it carries out the threat. B. the other firm's profits will fall if the announcing firm carries out the threat. C. the other firm will double output also. D. the other firm's profits will rise if the announcing firm carries out the threat.

the announcing firm's profits will fall if it carries out the threat.

In an indefinitely repeated Cournot Duopoly/prisoners' dilemma game, if firms adopt a strategy that triggers a permanent punishment, the outcome can be A. the collusive Nash equilibrium. B. alternating between the collusive Nash equilibrium and the noncooperative ones. C. undefined. D. the noncooperative Nash equilibrium

the collusive Nash equilibrium.

An incumbent's threat to retaliate after a potential competitor enters the market will be taken seriously by potential competitors if A. the incumbent earns greater profit carrying out the threat than by accommodating entry. B. the incumbent can still earn a profit after carrying out the threat. C. the potential entrant cannot earn a profit if the threat is carried out. D. the potential entrant's profit exceeds the incumbent's if the threat is carried out.

the incumbent earns greater profit carrying out the threat than by accommodating entry.

A player's best response is A. a dominant strategy. B. a way to avoid the prisoners' dilemma. C. impossible to find when there isn't a Nash equilibrium. D. the strategy that maximizes his payoff given what he thinks the other player will do.

the strategy that maximizes his payoff given what he thinks the other player will do.

The winner's curse occurs when A. the winning bid is higher than the private value of the good. B. bidders "shade" their bids. C. the winner buys something he didn't need. D. the winning bid is higher than the good's common value

the winning bid is higher than the good's common value.

In the ultimatum game, one reason players don't choose the rational offer is A. that there are too many possible outcomes to reasonably consider. B. they are worse off by taking the offer. C. that it is not a Nash equilibrium. D. they prefer to sacrifice to punish "unfair" behavior.

they prefer to sacrifice to punish "unfair" behavior.

Which firm provides the better signal when trying to decide which of the firms' stock to buy? A firm that A. uses an internal group for auditing. B. uses an independent accounting firm for auditing. C. has seen its stock go up by $20 per share in the last week. D. hasn't been under SEC investigation for over 5 years.

uses an independent accounting firm for auditing.

A holdup problem occurs A. when a financial institution undertakes too little investment in security. B. if the firm that moves second in a Stackelberg game chooses the incorrect output level. C. if you are entering into a contract with a government entity. D. when one firm must make a specific investment and a second firm takes advantage of it.

when one firm must make a specific investment and a second firm takes advantage of it.

Risk-averse individuals make risky investments A. never. B. when the investment's expected return exceeds the return on a non-risky investment. C. only when they are feeling irrational. D. when the investment's expected return adequately compensates for the risk

when the investment's expected return adequately compensates for the risk.

In a sealed-bid, second-price auction, you should bid A. one dollar more than your estimate of what the second-highest bid will be. B. your estimate of what others value the good at. C. the common value of the good. D. your highest value

your highest value.

44. In the reality TV show Storage Wars, people bid on the contents of repossessed storage units without being able to evaluate the contents. This is an example of a ________ auction. A. private value C. second-price B. common value D. Dutch

B. common value

7. The term prisoners' dilemma refers to a game in which A. the payoff from both players playing their dominant strategies is the same for each player. B. the payoff from both players playing their dominant strategies is not the highest payoff possible. C. there are no Nash equilibria. D. there are no dominant strategies.

B. the payoff from both players playing their dominant strategies is not the highest

37. A maximin strategy A. maximizes the minimum joint profits of the players. B. minimizes the maximum payoff. C. maximizes the payoff of one player, but minimizes the payoff of the other. D. maximizes the minimum payoff.

D. maximizes the minimum payoff.

35. If a game contains private information, then A. players will decide not to play the game. B. firms will engage in cheap talk to coordinate their actions. C. third-party negotiations are necessary to resolve the information gap. D. the game's outcome is affected.

D. the game's outcome is affected

An auction in which the price announced by the auctioneer DESCENDS is called a(n) A. Sealed Bid Auction. C. Dutch Auction. B. Descending Option Auction. D. English Auction

Dutch Auction.

If the payoff to the United States to pursuing nuclear weapons is 100 if the USSR does not pursue nuclear weapons and 50 if the USSR does, and the payoff to the USSR to pursuing nuclear weapons is 80 if the USA doesn't pursue nuclear weapons and 30 if the USA does. The party not pursuing nuclear weapon will have a loss that equals to half of the payoff to the party that pursues nuclear weapon. When neither party pursues nuclear weapon, both receive 0 payoffs. What is the non-cooperative equilibrium? A. The USA does not pursue nuclear weapons, the USSR does pursue nuclear weapons. B. The USA pursues nuclear weapons, the USSR does not. C. The USA does not pursue nuclear weapons, the USSR does not pursue nuclear weapons. D. The USA pursues nuclear weapons, the USSR pursues nuclear weapons

The USA pursues nuclear weapons, the USSR pursues nuclear weapons.

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree? A. The lawyer pays the client a fee for the right to the entire settlement. B. The lawyer receives a share of the settlement. C. The lawyer receives a fixed fee. D. The lawyer is paid by the hour.

The lawyer pays the client a fee for the right to the entire settlement.

After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance? A. The risk of wind damage is potentially diversifiable but the risk of flooding is not. B. predatory insurance policies C. The risk of flood damage is potentially diversifiable but the risk of wind damage is not. D. Neither the risk of wind damage or the risk of flooding is diversifiable

The risk of wind damage is potentially diversifiable but the risk of flooding is not.

Buying a diversified mutual stock fund allows you to A. completely avoid all types of risk. B. avoid only idiosyncratic, unsystematic risk. C. avoid risk only when all the stock prices are perfectly correlated. D. avoid only systematic risk.

avoid only idiosyncratic, unsystematic risk.

Cheap talk A. is never credible. B. can be credible when both firms have an incentive to be truthful. C. generally affects the game's payoffs. D. is illegal.

can be credible when both firms have an incentive to be truthful.

In a repeated prisoners' dilemma game A. firms' choices are not influenced by their opponents' actions. B. cooperation may result if the game is played indefinitely. C. the outcomes are the same as in a static prisoners' dilemma game. D. the players act sequentially.

cooperation may result if the game is played indefinitely.

The revenues to the firm from one sales representative who sells door-to-door, before paying this employee are listed in the table below: Poor Luck Good Luck Low Effort (e = 0) $4,000 $5,000 High Effort (e = 1) $5,000 $8,000 Cost of effort: c = $400e. The cost of high effort is $400 and low effort, 0. Probabilities: Poor luck = 0.6; Good luck = 0.4 If the firm compensate the sales representative with $2000 fixed salary plus a bonus of $2000 if the gross revenue to the firm (before paying the sales representative) exceeds $5,000. A risk neutral sales representative will choose: A. high effort level for an expected earning of $2400. B. high effort level and bears no risk. C. low effort level for the base salary of $2000. D. low effort level and bears some risk.

high effort level for an expected earning of $2400.

If bad drivers can usually avoid being ticketed by the police, then insurance companies will A. use drivers' driving record as a signal. B. request driving records directly from the police and not from the individual applicant. C. not be able to use drivers' driving record as a screening device. D. use drivers' driving record as a screening device.

not be able to use drivers' driving record as a screening device.