ECON202 EXAM 3 Study set

Jack is considering selling his elliptical machine, which he never really used, is high quality, and has been taking up space in his spare bedroom. He lists it on Facebook Marketplace for "$1,200 or best offer" but in reality won't sell it for less than $1,000 . Lina is looking to purchase a used elliptical machine. For a high‑quality elliptical, she is willing to pay up to $1,300, and for a low‑quality elliptical, she is willing to pay $600. Lina is risk neutral but she cannot tell if the elliptical machine is high quality or low quality. If she believes that 60% of used elliptical machines are high quality and 40% are low quality, what is the maximum price that Lina would be willing to pay?

$1020

Slider owns a hamburger restaurant. Slider's minimum average variable cost is $10 at a quantity of 100 hamburgers, and his minimum average total cost is $15 at a quantity of 200 hamburgers. His total fixed cost is $300. Use this information to answer the questions. What is Slider's AVC when he sells 200 hamburgers?

$13.50

Mark sells tires and is incredibly well branded, whereas Meg sells automobiles. In order to produce automobiles, Meg must incorporate tires sold by Mark or some other supplier. Suppose that Mark will sell more tires if he sells his tires packaged into Meg's automobiles, rather than independently, but he must sell them to Meg at an agreeable price. Mark may choose to bargain for a high price (knowing that Meg will be more successful if she uses his well‑branded tires) or sell it at a low price. What is Meg's profit?

$15,000

A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year. What were your accounting profits of your firm over the past year?

$170,000

The population is evenly divided between 2 types of people: healthy people and unhealthy people. Healthy people have expected health care costs of $1000 per year. Unhealthy people have expected health care costs of $5000 per year. Unhealthy people can become healthy by working out, eating healthier, and taking preventive care. Assume that the cost of becoming healthy in terms of time and effort is $2000 per year. These people live in a city with one employer who will hire anyone who is willing to work. This employer provides complete health care to all its employees; all health care costs are covered by the insurance. What is the expected cost of insurance for all the workers?

$3000

The population is evenly divided between 2 types of people: healthy people and unhealthy people. Healthy people have expected health care costs of $1000 per year. Unhealthy people have expected health care costs of $5000 per year. Unhealthy people can become healthy by working out, eating healthier, and taking preventive care. Assume that the cost of becoming healthy in terms of time and effort is $2000 per year. These people live in a city with one employer who will hire anyone who is willing to work. This employer provides complete health care to all its employees; all health care costs are covered by the insurance. What would the new expected cost of insurance be at the original firm?

$5000

Mark sells tires and is incredibly well branded, whereas Meg sells automobiles. In order to produce automobiles, Meg must incorporate tires sold by Mark or some other supplier. Suppose that Mark will sell more tires if he sells his tires packaged into Meg's automobiles, rather than independently, but he must sell them to Meg at an agreeable price. Mark may choose to bargain for a high price (knowing that Meg will be more successful if she uses his well‑branded tires) or sell it at a low price. What is Mark's profit?

$6,000

Suppose that you work for Gecko Car Insurance and are tasked with pricing decisions. Suppose that there are 10 bad drivers in the market who all have a 47% chance of filing a claim, 20 good drivers who all have a 12% chance of filing a claim, and 20 excellent drivers who all have a 1% chance of filing a claim. To simplify, assume that any time an accident occurs, Gecko must pay $1000 to insured drivers. Drivers without insurance face the same cost if they do not have insurance. Assume all drivers are risk neutral and that insurance costs $200. If the above description includes all revenue and costs, what is Gecko's expected profit?

-$2700

A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year. What were the economic profits of your firm over the past year?

-$36,000

Perfect price discrimination is mostly hypothetical. However, as data mining becomes more ubiquitous, we can expect markets to (... blank ...) perfect price discrimination, as (... blank ...) Blank 1 : a.) increasingly resemble, b.) move further away from Blank 2 : a.) consumers' tastes become more varied, making them increasingly difficult to track, b.) companies amass more information about individual consumers' preferences

Blank 1 : a.) increasingly resemble Blank 2 : b.) companies amass more information about individual consumers' preferences

Under perfect price discrimination, sellers benefit, because they can thereby sell their products at maximum prices. Buyers with smaller marginal benefits (... blank ...) benefit, because (... blank ...). Blank 1: a.) do not, b.) also Blank 2: a.) higher prices reduce consumer surplus, b.) perfect price discrimination enables some consumers to purchase items that they otherwise could not purchase

Blank 1: b.) also Blank 2: b.) perfect price discrimination enables some consumers to purchase items that they otherwise could not purchase

Jim and Dwight are in the industrial office supply industry. Jim has developed a new copier and is trying to decide whether to sell it at a high price or a low price. Selling the good at a higher price will provide higher profits but might entice Dwight to develop and sell a competing copier. A lower price could deter entry from Dwight. After Jim sets his price, Dwight must decide to enter the market for the new copier or not. Assume that both Jim and Dwight must make at least $5,000 to make the investment worthwhile. what is both jim's and dwight's final profit?

Both Jim and Dwight earn $9000

Sophia operates her own accounting practice and is looking to hire two entry‑level accountants. A high‑productivity worker will generate $90,000 in revenue per year and a low‑productivity worker will generate $60,000. Tasia is a high‑productivity worker and wants a salary of at least $80,000. Rick is a low‑productivity worker and wants at least a $55,000 salary. If Sophia can easily identify the type of worker, who should she hire and how much profit will she gain?

Both Tasia and Rick with a total combined profit of $15,000

Overconfidence

David is the risk manager at a mortgage company. In 2007, he was asked by his boss to estimate the probability that 2020% of the company's borrowers would default on their loans at the same time. David stated that this was extraordinarily unlikely, so the firm should not worry about loaning to too many risky borrowers. A year later, mortgage default rates were at an all-time high.

Availability Bias

Dorothy watched news reports about a devastating tornado in a neighboring state and in response she decides to quadruple the amount of home insurance that she currently has.

The expense of buying textbooks or purchases of office supplies

Explicit Costs

Buyers are the only group that suffers from information asymmetries

False

Insurance markets are rarely subject to adverse selection

False

Sellers are the only ones who suffer from information asymmetries

False

the principal-agent problem

If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of

The forgone yearly salary of $40,000 or when using office space to run your business that was previously rented out for income

Implicit Costs

Loss aversion

Mandy was working at a Fortune 500 company earning $200,000 per year before she lost her job during a recession. The economy has largely recovered and she has received several job offers, but Mandy is still unemployed because she refuses to accept any job that pays her less than $200,000 per year.

In 2018 the United States and China engaged in a trade war where each country was imposing trade tariffs on goods imported from the other country. The Trump administration announced in June of that year that the United States would "soon" begin imposing tariffs on $50 billion worth of goods imported from China. China quickly responded by announcing tariffs on agricultural products, automobiles, and other products imported from the United States. President Trump then countered by threatening additional tariffs on another $200 billion worth of Chinese goods. China responded with a statement that said it would respond to any such measures in kind. The trade war between the United States and China is an example of

Prisoner's Dilemma

When the price the consumers pay is equal to the marginal cost of producing goods and when production represents consumer preferences

Results in Allocative Efficiency

When the maximum output is obtained with given resources and when goods & services are produced at their lowest opportunity cost

Results in Productive Efficiency

The number of firms remains stable

When no firms earn economic profit

Firms enter the market

When the price is greater than the average cost and firms earn both economic profit and accounting profit

Firms exit the market

When the price is less than the average cost and firms earn economic loss

Moral Hazard

You hire your neighbor to check on your cat every day while your are traveling for the week. The neighbor checks on your cat every other day instead.

Adverse Selection of Sellers

Your local seafood shop advertises fresh seafood, but you are not certain if the seafood is actually fresh or if it has been frozen.

since tenants do not own the property in which they live, they may not feel obligated to maintain the property as well as someone who incurs the full cost of ownership. Thus, The need for landlords to charge a security deposits reflects?

a moral hazard

Suppose that you work for Gecko Car Insurance and are tasked with pricing decisions. Suppose that there are 10 bad drivers in the market who all have a 47% chance of filing a claim, 20 good drivers who all have a 12% chance of filing a claim, and 20 excellent drivers who all have a 1% chance of filing a claim. To simplify, assume that any time an accident occurs, Gecko must pay $1000 to insured drivers. Drivers without insurance face the same cost if they do not have insurance. Assume all drivers are risk neutral and that insurance costs $200. To earn positive expected profit, what is the minimum amount Gecko must charge for insurance?

There is no price at which Gecko will earn a positive profit

Google decides to offer multiple health care plans to its employees. One plan offers a high deductible, but a low monthly premium. The other plan offers a low deductible but a high monthly premium

This will decrease the problems associated with adverse selection of buyers by compelling employees to reveal whether they are high‑risk or low risk‑cases

The government mandates that all drivers purchase auto insurance

This will decrease the problems associated with adverse selection of buyers by ensuring that insurance companies aren't stuck with only expensive, high‑risk drivers

Advances in technology make it less expensive for people to take a DNA test that provides them—but not their health insurer—with information about their risk of developing various diseases

This will increase the problems associated with adverse selection by providing individuals with increased private information about their health conditions

Adverse selection is a potential source of market failure

True

Adverse selection occurs because of asymmetric information

True

Adverse selection problems can be addressed when the uninformed side of the market acquires more information

True

Jim and Dwight are in the industrial office supply industry. Jim has developed a new copier and is trying to decide whether to sell it at a high price or a low price. Selling the good at a higher price will provide higher profits but might entice Dwight to develop and sell a competing copier. A lower price could deter entry from Dwight. After Jim sets his price, Dwight must decide to enter the market for the new copier or not. Assume that both Jim and Dwight must make at least $5,000 to make the investment worthwhile. What will Dwight do as a result of Jim's choice? a.) Dwight will enter the market. b.) Dwight will not enter the market.

a.) Dwight will enter the market.

a single firm that produces a unique product with no close substitutes

Monopoly

the single firm has considerable control over the price it charges for the product it produces, and the entry of new firms into the industry is blocked

Monopoly

There are multiple equilibria in the table. The desired outcome is cell A, but there is an equal chance of an equilibrium outcome in cell D. Which of the following is an appropriate approach to resolving the problem through communication, so that the outcome in cell A is likely? a.) Firms announce that they will not cut production or jobs as long as consumer spending does not fall. b.) Workers expect that their jobs are just as secure as their parents' jobs were. c.) The government decrees that firms cannot reduce employment. d.) The government conducts an advertising campaign that urges households to increase their saving.

a.) Firms announce that they will not cut production or jobs as long as consumer spending does not fall.

The population is evenly divided between 2 types of people: healthy people and unhealthy people. Healthy people have expected health care costs of $1000 per year. Unhealthy people have expected health care costs of $5000 per year. Unhealthy people can become healthy by working out, eating healthier, and taking preventive care. Assume that the cost of becoming healthy in terms of time and effort is $2000 per year. These people live in a city with one employer who will hire anyone who is willing to work. This employer provides complete health care to all its employees; all health care costs are covered by the insurance. Do the unhealthy employees have an incentive to become healthy? a.) No b.) Yes c.) There is not enough information to tell.

a.) No

Which of the following is an example of a principal-agent problem? a.) Shareholders hire a CEO to increase profits, and the CEO remodels the office with expensive artwork and furnishings. b.) Buyers opt to buy the low-cost, low-quality version of a product even though they say their primary goal is high quality. c.) Workers are motivated to do their best on the job regardless of compensation. d.) A firm fails to earn profits because a manager mismanages the employees.

a.) Shareholders hire a CEO to increase profits, and the CEO remodels the office with expensive artwork and furnishings.

Use the check mark method to determine which cell, if any, has a Nash equilibrium, and then choose the correct description. a.) The Nash equilibrium is Gizelle earning profit of $3,000 and Devin earning profit of $2,500. b.) The Nash equilibrium is Gizelle earning profit of $1,000 and Devin earning profit of $5,000. c.) The Nash equilibrium is Gizelle earning profit of $5,000 and Devin earning profit of $4,000. d.) The Nash equilibrium is Gizelle earning profit of $6,000 and Devin earning profit of $1,000.

a.) The Nash equilibrium is Gizelle earning profit of $3,000 and Devin earning profit of $2,500.

Most stores offer rotating promotions that provide discounts on various products. However, at many of them, you must become a rewards member to take advantage of the deals. The price of the membership is free. You are probably familiar with this process at grocery stores, pharmacies, and even pet supply chains. Rewards membership offerings benefit stores by enabling them to a.) make sales they would not otherwise make. b.) gain a unique competitive advantage, so that they can dominate the market. c.) track data, such as buying habits, on their customers.

a.) make sales they would not otherwise make. c.) track data, such as buying habits, on their customers.

Sears, an American retail store, was the largest retailer (measured by revenue) in the United States until the 1990s. In 2018, Sears filed for bankruptcy. Some commentators have argued that the rise of Amazon drove Sears to bankruptcy. However, others argue that Sears was in decline long before Amazon became a dominant force in the market. Consider each of the arguments given for Sears' downfall. Sears' management failed to consider the effect of services not offered by Sears, such as second-day shipping, which was offered by some online retailers. This is an example of Sears failing to prepare for a.) substitute services that would be appealing to Sears' customer base. b.) buyers using their bargaining power to demand new services. c.) the intensity of competition among existing competitors. d.) sellers using their bargaining power to offer services not available at Sears.

a.) substitute services that would be appealing to Sears' customer base.

Perfect price discrimination leads to (... blank ...) market output. a.) the socially efficient b.) inefficient

a.) the socially efficient

In 2018, Spotify was available in many countries around the world. The same year, Spotify offered an attractive deal available only to students—Spotify Premium, Hulu Limited, and Showtime, all for one monthly payment of $4.99. The fee is half the amount charged for a standard Spotify Premium account. To qualify for the deal, students must provide their information, such as name and birthdate, to Spotify and its third-party partner, SheerID. SheerID is a verification service utilized by companies to confirm various personal attributes and qualifications. In this case, your current student status at a Title IX school is in a database, which is accessed by SheerID. By requiring third-party verification for the discount, rather than simply requiring an ".edu" e-mail address—as many other retailers do—Spotify effectively a.)narrows the consumer base to students with the lowest reservation prices. b.) narrows the consumer base to students with the highest reservation prices. c.) ensures that its discount only applies to students, as opposed to professors or others employed at universities.

a.)narrows the consumer base to students with the lowest reservation prices. c.) ensures that its discount only applies to students, as opposed to professors or others employed at universities.

What is the difference between asymmetric information, adverse selection, and moral hazard? Check all that apply a.) Asymmetric information is a synonym for adverse selection, but moral hazard is a type of principal-agent problem b.) Adverse selection and moral hazard are both types of asymmetric information problems c.) Adverse selection is about hidden characteristics, usually before a transaction has taken place d.) Moral hazard is about hidden actions when people don't bear the full cost of their actions.

b.) Adverse selection and moral hazard are both types of asymmetric information problems c.) Adverse selection is about hidden characteristics, usually before a transaction has taken place d.) Moral hazard is about hidden actions when people don't bear the full cost of their actions.

Facebook's position in social media: a.) Economies of scale b.) Network externalities c.) Control of a resource d.) Legal barrier

b.) Network externalities

Which situation gives the best example of a price‑taker as it pertains to perfect competition? a.) The city government has set a maximum price Alice can charge for her garage apartment, so she must take that price or not rent it out at all. b.) Bob is having trouble selling his old car. When Cindy offers him $1000 he takes it, even though it is less than he was hoping to get. c.) Mary Beth grows cotton. She finds that she can always sell her entire crop at the market price. However, if she asks a price that is even slightly higher she cannot sell any of her cotton. d.) Carol sells used furniture. Sometimes customers want to haggle with her over her prices, but she typically responds, "That's the price, hon. Take it or leave it."

c.) Mary Beth grows cotton. She finds that she can always sell her entire crop at the market price. However, if she asks a price that is even slightly higher she cannot sell any of her cotton.

Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants? a.) The cost differential can easily be offset by creating a demand differential, so it will have little impact. b.) New florists will not be affected because input prices are minor factors in markets. c.) New florists will be discouraged from entering the market because of the difficulty of competing on cost. d.) New florists will be encouraged to enter because they will be energized by the challenge to succeed.

c.) New florists will be discouraged from entering the market because of the difficulty of competing on cost.

Suppose a large firm allows its employees to choose whether to participate in its health insurance plan. The firm is trying to decide between two​ plans: Plan I has a low monthly premium but a high​ deductible, and Plan II has a high monthly premium but a low deductible. Under which plan is adverse selection likely to be a bigger​ problem? a.) Plan II because it is likely to draw employees who tend to overconsume health care services because of the low deductible. Insurance companies are likely to end up paying out more claims than the premiums they collect. b.) Plan I because it is likely to draw the relatively healthy employees who do not expect to spend much on health care. Because the monthly premiums are​ low, the insurance company has to bear a bigger financial burden in the event of serious illnesses. c.) Plan II because it is likely to draw participants who expect high medical costs. Healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums. d.) Plan I because it is likely to draw participants who expect high medical costs. This group expect to consume much health care services and therefore prefer low deductibles.

c.) Plan II because it is likely to draw participants who expect high medical costs. Healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums.

Suppose that the price of corn, a crop produced in a perfectly (or purely) competitive industry, increased 208% last year as demand for corn‑based ethanol fuel increased. What do you expect to happen in the long run for the corn industry given this recent success? a.) The price per bushel of corn will continue to increase, yielding higher profits. Thus, more firms will enter the market indefinitely. b.) Profits will become negative due to overfarming, which will result in the corn farming industry going under. c.) Profits will be equal to zero. d.) None of the above.

c.) Profits will be equal to zero.

Suppose the firms in the market for bacon, also a perfectly (or purely) competitive industry, experienced losses last quarter due to people becoming increasingly concerned about how high-fat diets negatively impact health. What do you expect to happen in the long run for the bacon industry? a.) Seeing this as an opportunity to monopolize a fledging industry, firms will enter the industry, shifting supply to the right. b.) Profits will remain negative, which will result in the closing down of the industry as a whole. c.) Profits will be equal to zero. d.) None of the above.

c.) Profits will be equal to zero.

Entex and HAL are both releasing new gaming consoles at the same time. Assume that consumers value both equally. Each company is deciding what to charge. If they both charge $600, then they will split the market and each earn $500 million. If one firm charges less, then it will capture the market and earn a significantly higher profit, while the other firm will be driven out of the market and earn nothing. If they both charge a low price, each company will earn a small profit. What are the dominant strategies for the two firms? a.) HAL should charge $600 and Entex should charge less. b.) Entex should charge $600 and HAL should charge less. c.) Both firms should charge the higher price. d.) Neither firm has a dominant strategy. e.) Both firms should charge the lower price.

e.) Both firms should charge the lower price.

China's control of the market for rare earths (a group of minerals used to produce electronics): a.) Brand loyalty b.) Network externalities c.) Economies of scale d.) Legal barrier e.) Control of a resource

e.) Control of a resource

Pfizer's control of the production of Viagra: a.) Network externalities b.) Control of a resource c.) Economies of scale d.) Brand loyalty e.) Legal barrier

e.) Legal barrier

The local utility company that can provide electricity to the entire market at a lower average cost than other producers: a.) Control of a resource b.) Brand loyalty c.) Legal barrier d.) Network externalities e.) Natural monopoly

e.) Natural monopoly

Suppose that the market for pizzas in your town is perfectly (or purely) competitive, with a market price of $14 per pizza in long run equilibrium. A local pizza restaurant, Pizzazzy, signs a one‑year lease in a new building in town and continues selling pizzas at this price. People in your town view Pizzazzy pizzas as the same as other pizzas. Suppose that a couple of months after the new pizza restaurant opens, the local government institutes a $8 per pizza price ceiling. If you buy a $8 pizza from Pizzazzy a week later (and assuming Pizzazzy is behaving rationally), what do you know about the marginal cost, average total cost, and average variable cost at the profit maximizing point of production after the price ceiling is imposed? What's average total cost?

higher than $14

The cost of a previous stadium

is a sunk cost

The cost of last year's renovation of the old stadium

is a sunk cost

The cost of destroying the old stadium to make room for the new one

is not a sunk cost

The cost of labor for building the new stadium

is not a sunk cost

many firms that produce a differentiated product

monopolistic competition

Suppose that the market for pizzas in your town is perfectly (or purely) competitive, with a market price of $14 per pizza in long run equilibrium. A local pizza restaurant, Pizzazzy, signs a one‑year lease in a new building in town and continues selling pizzas at this price. People in your town view Pizzazzy pizzas as the same as other pizzas. Suppose that a couple of months after the new pizza restaurant opens, the local government institutes a $8 per pizza price ceiling. If you buy a $8 pizza from Pizzazzy a week later (and assuming Pizzazzy is behaving rationally), what do you know about the marginal cost, average total cost, and average variable cost at the profit maximizing point of production after the price ceiling is imposed? What's marginal cost?

no higher than $8

Suppose that the market for pizzas in your town is perfectly (or purely) competitive, with a market price of $14 per pizza in long run equilibrium. A local pizza restaurant, Pizzazzy, signs a one‑year lease in a new building in town and continues selling pizzas at this price. People in your town view Pizzazzy pizzas as the same as other pizzas. Suppose that a couple of months after the new pizza restaurant opens, the local government institutes a $8 per pizza price ceiling. If you buy a $8 pizza from Pizzazzy a week later (and assuming Pizzazzy is behaving rationally), what do you know about the marginal cost, average total cost, and average variable cost at the profit maximizing point of production after the price ceiling is imposed? what's average variable cost?

no higher than $8

there are a few firms and the ease of entry of new firms is low

oligopoly

A very large number of firms that produce an identical product

perfect competition

individual firms are price takers, and firms can easily enter or exit the industry

perfect competition

the demand curve for an individual firm's output is a horizontal line

perfect competition

A name-brand bleach is priced 45% higher per gallon than the generic alternative

signaling

Fred's Used Cars offers a warranty on every car sold

signaling

Haley uses her 4.0 grade point average to land a new job

signaling

Jo decides to go to graduate school so her future employer will know that she is smart and a hard worker

signaling

Tommy's Tea Shop advertises by recording the testimonials of satisfied customers

signaling

moral hazard

when people who are not responsible for the entire costs of their actions take riskier actions than they would otherwise take

Adverse Selection of Buyers

People with asthma are more likely to buy health insurance

Jack is considering selling his elliptical machine, which he never really used, is high quality, and has been taking up space in his spare bedroom. He lists it on Facebook Marketplace for "$1,200 or best offer" but in reality won't sell it for less than $1,000 . Lina is looking to purchase a used elliptical machine. For a high‑quality elliptical, she is willing to pay up to $1,300, and for a low‑quality elliptical, she is willing to pay $600. Lina is risk neutral but she cannot tell if the elliptical machine is high quality or low quality. Would Jack agree to this price?

Since it is higher than his lowest acceptable price, he would

Sophia operates her own accounting practice and is looking to hire two entry‑level accountants. A high‑productivity worker will generate $90,000 in revenue per year and a low‑productivity worker will generate $60,000. Tasia is a high‑productivity worker and wants a salary of at least $80,000. Rick is a low‑productivity worker and wants at least a $55,000 salary. It's more likely that Sophia can't tell who will be a high‑ or low-productivity worker from an interview. But based on her experience, she believes that 65% of workers are low productivity and 35% of workers are high productivity. Find the maximum salary that she would be willing to pay and determine who will accept her job offer. Does this change the maximum she is willing to pay for an accountant of unknown quality? What's sophia's maximum salary rate and who will accept her offer?

Sophia's maximum salary rate is $70,500 In this case, only Rick will accept her offer at that salary. Sophia will offer more only if she finds a way to distinguish low‑ and high‑productivity workers

The population is evenly divided between 2 types of people: healthy people and unhealthy people. Healthy people have expected health care costs of $1000 per year. Unhealthy people have expected health care costs of $5000 per year. Unhealthy people can become healthy by working out, eating healthier, and taking preventive care. Assume that the cost of becoming healthy in terms of time and effort is $2000 per year. These people live in a city with one employer who will hire anyone who is willing to work. This employer provides complete health care to all its employees; all health care costs are covered by the insurance. Suppose a new employer that pays $1500 more in wages per worker but does not offer any insurance (and there is no market for health insurance) enters the market. Which people will go and work for the new employer? a.) The healthy b.) None c.) The unhealthy d.) Both groups

a.) The healthy

Carfax is a web‑based service that supplies vehicle history reports to individuals on used cars: ownership history, vehicle mileage, accident reports, and other information. The existence of Carfax as a third‑party verifier in the used car industry can result in which of the following? Carfax could lead to a.) an efficient outcome in the used car market b.) an increase in the number of cars available in the used car market c.) a reduction in the variance in the quality of cars in the used car market

a.) an efficient outcome in the used car market & b.) an increase in the number of cars available in the used car market

Suppose that you work for Gecko Car Insurance and are tasked with pricing decisions. Suppose that there are 10 bad drivers in the market who all have a 47% chance of filing a claim, 20 good drivers who all have a 12% chance of filing a claim, and 20 excellent drivers who all have a 1% chance of filing a claim. To simplify, assume that any time an accident occurs, Gecko must pay $1000 to insured drivers. Drivers without insurance face the same cost if they do not have insurance. Assume all drivers are risk neutral and that insurance costs $200. At this price, which drivers choose to buy car insurance? a.) bad drivers b.) good drivers c.) excellent drivers

a.) bad drivers

Under Armour sells much of its product to large retailers such as Dick's Sporting Goods or Macy's, which then sell to end consumers. These large retailers also purchase from Nike and other sports apparel companies. This creates the threat of a.) bargaining power of customers b.) bargaining power of suppliers

a.) bargaining power of customers

Mark sells tires and is incredibly well branded, whereas Meg sells automobiles. In order to produce automobiles, Meg must incorporate tires sold by Mark or some other supplier. Suppose that Mark will sell more tires if he sells his tires packaged into Meg's automobiles, rather than independently, but he must sell them to Meg at an agreeable price. Mark may choose to bargain for a high price (knowing that Meg will be more successful if she uses his well‑branded tires) or sell it at a low price. If Mark sets a high price, then Meg will a.) buy the tires. b.) not buy the tires.

a.) buy the tires.

The sports apparel market requires a significant investment in capital costs for branding, advertising, and creating product demand. This serves to reduce the threat of a.) competition from potential entrants b.) competition from existing competitors

a.) competition from potential entrants

Most stores offer rotating promotions that provide discounts on various products. However, at many of them, you must become a rewards member to take advantage of the deals. The price of the membership is free. You are probably familiar with this process at grocery stores, pharmacies, and even pet supply chains. Identify each hurdle that shoppers must typically clear to obtain these promotional deals. a.) divulging personal information, such as one's age and e-mail address b.) remembering to bring the discount card to the store or providing the clerk with your phone number c.) taking time to fill out a form

a.) divulging personal information, such as one's age and e-mail address b.) remembering to bring the discount card to the store or providing the clerk with your phone number c.) taking time to fill out a form

In 2018, Spotify was available in many countries around the world. The same year, Spotify offered an attractive deal available only to students—Spotify Premium, Hulu Limited, and Showtime, all for one monthly payment of $4.99. The fee is half the amount charged for a standard Spotify Premium account. To qualify for the deal, students must provide their information, such as name and birthdate, to Spotify and its third-party partner, SheerID. SheerID is a verification service utilized by companies to confirm various personal attributes and qualifications. In this case, your current student status at a Title IX school is in a database, which is accessed by SheerID. In making this offer to students, Spotify is a.) engaging in group pricing, where the market segments are students and nonstudents. b.) engaging in perfect price discrimination, charging each individual based on her or his willingness to pay. c.) using the hurdle method, getting people to self-identify their willingness to pay by requiring them to overcome one or more obstacles.

a.) engaging in group pricing, where the market segments are students and nonstudents. c.) using the hurdle method, getting people to self-identify their willingness to pay by requiring them to overcome one or more obstacles.

Jim and Dwight are in the industrial office supply industry. Jim has developed a new copier and is trying to decide whether to sell it at a high price or a low price. Selling the good at a higher price will provide higher profits but might entice Dwight to develop and sell a competing copier. A lower price could deter entry from Dwight. After Jim sets his price, Dwight must decide to enter the market for the new copier or not. Assume that both Jim and Dwight must make at least $5,000 to make the investment worthwhile. Which price will Jim charge? a.) high price b.) low price

a.) high price

Mark sells tires and is incredibly well branded, whereas Meg sells automobiles. In order to produce automobiles, Meg must incorporate tires sold by Mark or some other supplier. Suppose that Mark will sell more tires if he sells his tires packaged into Meg's automobiles, rather than independently, but he must sell them to Meg at an agreeable price. Mark may choose to bargain for a high price (knowing that Meg will be more successful if she uses his well‑branded tires) or sell it at a low price. Mark will set a a.) high price b.) low price

a.) high price

You buy a brand-new car and take good care of it. But after two months and just a thousand miles of driving, you decide you need something bigger and decide to sell your car. Compared to what you paid for it, what price should you expect to receive and why? a.) Significantly less than what you paid for it. Moral hazard suggests to buyers that you treated the car very badly for the two months you owned it. b.) Significantly less than what you paid for it. Selling a brand-new car is unusual and adverse selection suggests there is something wrong with it, so buyers will expect a major discount. c.) About what you paid for it, since it is barely used and buyers can verify its condition easily. d.) About what you paid for it, since adverse selection in the used car market means that almost-new cars are expected to be good quality.

b.) Significantly less than what you paid for it. Selling a brand-new car is unusual and adverse selection suggests there is something wrong with it, so buyers will expect a major discount

Michelle owns an independent bookstore and has observed that college graduates read more than people without degrees. She is considering offering a 10% discount on book purchases to customers who have a postsecondary degree. Why might Michelle's plan hurt rather than help her business? a.) High educational achievement is not a difficult-to-change characteristic. b.) Whether an individual has a postsecondary degree is not easily verifiable. c.) People with higher education typically earn more than others and so may have a higher willingness to pay. d.) People who read more books are likely to have a higher willingness to pay than others.

b.) Whether an individual has a postsecondary degree is not easily verifiable. c.) People with higher education typically earn more than others and so may have a higher willingness to pay. d.) People who read more books are likely to have a higher willingness to pay than others.

Under Armour products are produced by many different manufacturers located in multiple countries. This serves to reduce the threat of a.) bargaining power of customers b.) bargaining power of suppliers

b.) bargaining power of suppliers

Mark sells tires and is incredibly well branded, whereas Meg sells automobiles. In order to produce automobiles, Meg must incorporate tires sold by Mark or some other supplier. Suppose that Mark will sell more tires if he sells his tires packaged into Meg's automobiles, rather than independently, but he must sell them to Meg at an agreeable price. Mark may choose to bargain for a high price (knowing that Meg will be more successful if she uses his well‑branded tires) or sell it at a low price. If Mark sets a low price, then Meg will a.) not buy the tires. b.) buy the tires.

b.) buy the tires.

Brands such as Nike and Adidas also sell athletic footwear and apparel. This creates the threat of a.) competition from potential entrants b.) competition from existing competitors

b.) competition from existing competitors

Clark grows corn and is a price‑taker. For each scenario, decide what Clark should do to his price. A bumper crop results in a much higher supply of corn this year. a.) not change b.) decrease c.) increase

b.) decrease

Suppose the government wants to mitigate the market failure problem that results from adverse selection in the health‑care market. The government could a.) require insurance companies to cover all applicants b.) itself act as the primary insurer c.) mandate that all individuals purchase health insurance

b.) itself act as the primary insurer & c.) mandate that all individuals purchase health insurance

Private insurance companies also have an interest in finding ways to reduce the problems resulting from adverse selection. Insurance companies could a.) require applicants to undergo physical examinations with a physician of the applicant's choice b.) offer different types of plans, e.g., one with a high deductible and a low premium and one with a low deductible and a high premium c.) avoid covering people with preexisting conditions

b.) offer different types of plans, e.g., one with a high deductible and a low premium and one with a low deductible and a high premium & c.) avoid covering people with preexisting conditions

A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year. Given this information, you (... blank ...) have launched your own business. a.) should b.) should not

b.) should not

Duolingo is a widely used foreign language app, with over 500 million users. While there is a free version of the app, a premium Duolingo subscription eliminates advertisements during language practice and offers new quizzes with the ability to save lessons for offline use. Identify each hurdle for users of the free version of the app. a.) the subscription fee paid for the premium version of the app b.) the absence of enhanced features—new quizzes and the ability to save lessons for offline use—enjoyed by users of the premium version c.) the advertisements that users of the free version must endure

b.) the absence of enhanced features—new quizzes and the ability to save lessons for offline use—enjoyed by users of the premium version & c.) the advertisements that users of the free version must endure

Sears, an American retail store, was the largest retailer (measured by revenue) in the United States until the 1990s. In 2018, Sears filed for bankruptcy. Some commentators have argued that the rise of Amazon drove Sears to bankruptcy. However, others argue that Sears was in decline long before Amazon became a dominant force in the market. Consider each of the arguments given for Sears' downfall. Sears could not compete against the low prices and wide variety offered by Walmart stores. This is an example of Sears failing to prepare for a.) buyers using their bargaining power to demand lower prices. b.) the intensity of competition among existing competitors. c.) the threat of new entry into the retail space. d.) new innovations leading to substitute products and services.

b.) the intensity of competition among existing competitors.

Suppose that you are in charge of an insurance company. Two kinds of people want insurance, healthy people who probably will not get sick this year and unhealthy people who probably will get sick this year. Healthy people expect to pay, on average, $1,000 on medical bills this year. Unhealthy people expect to pay, on average, $3,000 on medical bills this year. Consider these assumptions and then answer the problem. (i) People will not pay more for insurance than they expect to pay in medical bills; people are risk neutral. As such, healthy people will not pay more than $1,000 for insurance, and sick people will not pay more than $3,000. (ii) You want to insure as many people as possible, but you cannot charge less for insurance than you expect to pay out. If you do, you will go bankrupt, and you will not be able to pay the medical bills of some people who get sick. (iii) People know whether they are healthy or unhealthy, but it is either impossible or illegal for you to know whether a person is healthy or unhealthy. This means that you cannot charge less to healthy people and more to sick people since you do not know which individuals fall into each group. (iv) There are an equal number of healthy and unhealthy people. How much will you charge for insurance in equilibrium, and who will buy insurance? a.) You charge $1,000, and only healthy people buy insurance. b.) You charge $2,000, and everyone buys insurance. c.) You charge $3,000, and only unhealthy people buy insurance. d.) You charge $3,000, and everyone buys insurance. e.) You charge $1,000, and everyone buys insurance.

c.) You charge $3,000, and only unhealthy people buy insurance

Entex and HAL are both releasing new gaming consoles at the same time. Assume that consumers value both equally. Each company is deciding what to charge. If they both charge $600, then they will split the market and each earn $500 million. If one firm charges less, then it will capture the market and earn a significantly higher profit, while the other firm will be driven out of the market and earn nothing. If they both charge a low price, each company will earn a small profit. Entex discovers that both firms buy components for the consoles from the same supplier. This supplier sells many parts to Entex. To HAL, it sells just one critical component, but it is the only supplier because it owns the patent on it. Entex approaches HAL and offers to charge the high price if HAL will as well. But if HAL breaks the agreement, Entex will tell its supplier that it will pay more for its parts if the supplier completely stops selling to HAL. HAL knows from its market research that there is a price Entex could pay that would make it worthwhile to the supplier and that this would drive HAL out of the market. Entex would capture the market but make a significantly smaller profit. Assume there is no government regulation preventing this behaviour. Entex's offer is an example of a.) an empty, or non‑credible, threat b.) odd pricing c.) a credible threat, or promise d.) price discrimination

c.) a credible threat, or promise

Golden Care provides lawn services in residential areas. They advertise by paying workers to put flyers on front doorknobs where residents are most likely to see them. Initially, these workers were paid based on how many flyers they distribute. After a few days of noticing flyers attached to mailboxes, side mirrors of cars, and dropped in gutters, Golden Care decides to change the incentives to improve the quality of the work performed. Which form of compensation is the best way to improve worker incentives? a.) compensation in the form of an hourly wage b.) compensation based on how quickly workers distribute the flyers c.) compensation based on the number of new customers who respond to flyers d.) compensation based on how long they have worked at the company

c.) compensation based on the number of new customers who respond to flyers

Clark grows corn and is a price‑taker. For each scenario, decide what Clark should do to his price. Higher taxes, fuel prices, and wages are driving costs up for all corn farmers. a.) decrease b.) not change c.) increase

c.) increase

Slider owns a hamburger restaurant. Slider's minimum average variable cost is $10 at a quantity of 100 hamburgers, and his minimum average total cost is $15 at a quantity of 200 hamburgers. His total fixed cost is $300. Use this information to answer the questions. At a quantity of 250 hamburgers, the average total cost curve is a.) not able to be calculated from the information given. Or, none of the other answers are correct. b.) below average variable cost. c.) increasing. d.) decreasing.

c.) increasing.

Clark grows corn and is a price‑taker. For each scenario, decide what Clark should do to his price. Clark's wife wants to buy a new house. She argues that raising the price of his corn by a few cents per bushel would pay for it in no time. a.) decrease b.) increase c.) not change

c.) not change

Each time Carlos visits the doctor, he pays $20 and his insurance company pays the remainder of the cost.

co-payment

Kevin pays $5 for his prescription and his insurance company pays the remainder of the cost.

co-payment

After his deductible has been paid, Corin pays 20% of the cost of his doctor visit.

coinsurance payment

Using new technology, some insurers are offering customized rates for buyers who install equipment in their car that monitors speed, acceleration, distance traveled, and other factors. What problems are the insurance companies trying to solve? a.) Moral hazard, since people who drive badly will not purchase this type of insurance b.) Neither adverse selection nor moral hazard. Insurance companies are simply trying to price discriminate c.) Adverse selection, since good drivers know they do not need this type of insurance and will shop elsewhere d.) Both adverse selection and moral hazard, since only those who know they drive safely will purchase this insurance, and they are less likely to drive dangerously since they know they are being monitored

d.) Both adverse selection and moral hazard, since only those who know they drive safely will purchase this insurance, and they are less likely to drive dangerously since they know they are being monitored

Coca‑Cola's vast market share in the soft drink market a.) Control of a resource b.) Network externalities c.) Legal barrier d.) Brand loyalty

d.) Brand loyalty

In the United States, the bulk of health care spending is paid by health insurance companies or the government through Medicare and Medicaid. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome? a.) Physicians concerned that insurance companies may not approve payments tend not to order expensive tests for their patients. b.) Health insurance companies do not have an incentive to control cost and therefore increase demand for cutting edge medical treatments. c.) Consumers fearing that excessive use of health care services may lead to a rise in insurance premiums tend to under-consume health care services. d.) Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.

d.) Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.

Some vending machines on college campuses sell identical items, such as the same bags of potato chips, for two different prices. The low-priced chips generally sell out by the end of the day, leaving the more expensive chips for late-night visitors to the vending machines. What must the vending machine operators think about the demand of people who visit the machine at night relative to those who visit the machine during the day? Why might they think this? a.) People who buy snacks at night have more elastic demand than people who buy snacks during the day. People who are in the building late at night are likely to have an office in which they can store food. b.) People who buy snacks at night have less elastic demand than people who buy snacks during the day. People who buy from the vending machines at night are more likely to bring food from home and thus not need food from a vending machine. c.) People who buy snacks at night have more elastic demand than people who buy snacks during the day. People buying snacks at night have probably already eaten three full meals. d.) People who buy snacks at night have less elastic demand than people who buy snacks during the day. People buying snacks at night have fewer substitutes from which to choose, since a lot of restaurants and other stores are likely to be closed.

d.) People who buy snacks at night have less elastic demand than people who buy snacks during the day. People buying snacks at night have fewer substitutes from which to choose, since a lot of restaurants and other stores are likely to be closed.

The decision to start a business and the decision to attend college a.) are different in that in starting a business, you should mainly consider the cost-benefit principle, whereas in attending college, you should mainly consider the opportunity cost principle b.) are different in that in starting a business, you should mainly consider the opportunity cost principle, whereas in attending college, you should mainly consider the cost-benefit principle c.) are the same in that each decision involves the same costs and benefits and the same opportunity costs d.) are similar in that in both cases, you will want to consider the cost-benefit principle and the opportunity cost principle

d.) are similar in that in both cases, you will want to consider the cost-benefit principle and the opportunity cost principle

Duolingo is a widely used foreign language app, with over 500 million users. While there is a free version of the app, a premium Duolingo subscription eliminates advertisements during language practice and offers new quizzes with the ability to save lessons for offline use. By offering both a free and a premium version of the app, Duolingo a.) profits only from the free version, not the premium version. b.) profits only from the premium version, not the free version. c.) profits less than it would if it offered just one version of the app. d.) profits more than it would if it offered just one version of the app.

d.) profits more than it would if it offered just one version of the app.

Sears, an American retail store, was the largest retailer (measured by revenue) in the United States until the 1990s. In 2018, Sears filed for bankruptcy. Some commentators have argued that the rise of Amazon drove Sears to bankruptcy. However, others argue that Sears was in decline long before Amazon became a dominant force in the market. Consider each of the arguments given for Sears' downfall. Sears' management disregarded the impact of online retailers entering Sears' market space. This is an example of Sears failing to prepare for a.) price wars with existing competitors. b.) the tremendous bargaining power of online retailers. c.) non-price competition with existing competitors. d.) the threat of new entry into the retail space.

d.) the threat of new entry into the retail space.

Each year, the Clarke family pays the first $500 of their medical expenses before their insurance company starts paying.

deductible

Sarah is required to pay the full amount of her doctor visits until she has spent $1,200 on health care. After that, her insurance company will pay 100% of the cost of her doctor visits.

deductible