ECON7100-M50 Spring 2015


  1. Basic liability auto insurance is mandatory to prevent
    1. Adverse selection.
    2. Better drivers from skipping auto insurance.
    3. The collapse of the insurance pool.
    4. Both B and C.
    5. All of the above.
  2. The number of yes persons is likely to be higher in business where
    1. performance criteria are objective.
    2. the boss is secure.
    3. employees have job security.
    4. performance criteria are mostly subjective.
  3. Statistical discrimination
    1. hurts those who have higher than average risk in the group being discriminated against.
    2. benefits those who have higher than average risk in the group being favored.
    3. is unfair to everybody in the same statistical group.
    4. treats everybody in the same statistical group fairly.
  4. Which of the following institutions allow sellers and buyers to build up their reputation?
    1. Credit card companies.
    2. eBay auction site.
    3. Movie theaters.
    4. Fly-by-night operations.
    5. Both A and B.
  5. Lemon owners prefer to sell their lemons to strangers because
    1. they are less concerned about their reputation to strangers.
    2. information about their lemons is less asymmetric to strangers than to their friends.
    3. Strangers can detect a lemon more easily than the lemon owners' friends.
    4. Strangers are likely to offer less.
  6. Online buyers often free-ride on offline retailers' product information because
    1. Online sellers offer much lower prices but little touch-and-feel product information.
    2. Manufacturers do not have information stores to demonstrate their products.
    3. Most products do not require much after-sale service.
    4. All of the above.
    5. Both A and B.
  7. If more choices could make people more likely to regret their choice later, that means
    1. the theory of opportunity cost is quite difficult to apply correctly when too many close choices are available.
    2. choices must have been very different in degree and substance.
    3. the theory of opportunity cost must be wrong.
    4. more choices are always better than less choices.
  8. In order to be profitable, the market maker in a two-sided market must
    1. assume that each side of the market is equally well-stocked and has equal price elasticity.
    2. price their services to cover at least the marginal cost on each side of the market.
    3. not make one side cross subsidize the other side.
    4. consider the price elasticity and how well-stocked each side of the market is in setting prices.
  9. Information cascades occur because
    1. of adequate information.
    2. it is cheaper to conduct independent verification.
    3. crowds are generally correct.
    4. there is safety in numbers.
  10. If college A has more selective admissions standards than college B,
    1. college B will serve as a magnet for adverse selection.
    2. Nobody would attend college B.
    3. less academically oriented students will be attracted to college A.
    4. a diploma from college B will be more highly valued by potential employers.
  11. Celebrity endorsers may start an up cascade of product adoption because
    1. they are not likely to endorse a product unless it is really good.
    2. buyers want to be identified with the celebrity.
    3. buyers are too lazy to gather their own information.
    4. Both B and C.
    5. Both A and B.
  12. Cheaters and trusters coexists because
    1. It is too expensive to identify all cheaters.
    2. Trusters still gain by being always honest as long as the percentage of cheaters is small.
    3. Cheaters need trusters to survive.
    4. Trusters need cheaters to survive.
    5. Both A and B.
  13. The side of a two-sided market that is _______________ to price should be charged ________ than the side which is ________________ to price. On the other hand, the side that is ____________ need not be paid a price premium than the side that is __________.
    1. more sensitive; less; less sensitive; less well-stocked; well-stocked
    2. less sensitive; more; more sensitive; less well-stocked; well-stocked
    3. more sensitive (elastic); less; less sensitive (inelastic); less well-stocked; well-stocked
    4. more sensitive (elastic); less; less sensitive (inelastic); well-stocked; less well-stocked
  14. Everybody is in the business of passing lemons around because
    1. nobody wants to write off the capital loss.
    2. nobody gets hurt in voluntary transactions.
    3. it is the golden rule to do unto others what others do unto you.
    4. buyers would not have bought the "lemon" unless they know it is not a lemon.
  15. Joint liability
    1. reduces the risk of loan default in the absence of objective credit history.
    2. allows lenders to lend to fewer people.
    3. is less time consuming than objective credit history in expanding the loan circle.
    4. is more useful as a loan collateral in mobile societies.
  16. Product warranty
    1. is costly to manufacturers who have no intention to honor its terms.
    2. gives no quality information to buyers if every manufacturer offers the same warranty terms.
    3. is still useful even after the manufacturer is out of business.
    4. is more meaningful for perishable goods.
  17. When even basic information is difficult to obtain, people tend to
    1. make better decision.
    2. optimize at narrow margin.
    3. do the opposite of what the crowds do.
    4. believe rumors.
  18. If people choose their clothing according to how well the clothing style enhances their look, they are more likely to
    1. join every up cascade.
    2. resist some fashions.
    3. join every down cascade.
    4. follow every changing fashion.
  19. Under which health insurance system would the insured voluntarily undergo genetic screening for curable diseases?
    1. National health insurance where everybody is covered regardless of risk.
    2. Private health insurance where the insurer can adjust premiums according to health risk.
    3. Nation-wide health management organization with risk-based premiums.
    4. All of the above.
    5. Both A and C.
  20. In what way does good reputation pay?
    1. Borrowers can enjoy lower-interest loans.
    2. Sellers can charge higher prices.
    3. Employees can get more challenging job assignments and faster promotion.
    4. All of the above.
    5. Both A and B.