Question

50.If market price is greater than the minimum of AVC but below the minimum of AC, then

A.

revenue covers variable costs and some of the fixed costs and profit is positive.

B.

economic profit is zero.

C.

revenue covers variable costs and some of the fixed costs, although profit is negative.

D.

the firm will shut down.

1.In the presence of asymmetric information, a

fixedminus−fee

contract

A.

can lead to opportunistic behavior on the part of the agent.

B.

is impossible to write.

C.

will result in the principal earning all of the profit.

D.

achieves production efficiency.

2.If a specific tax is implemented

A.

the firm's average cost curve shifts up, resulting in lower profits.

B.

the

afterminus−tax

marginal cost curve shifts, resulting in lower quantity produced.

C.

there is less profit per unit sold.

D.

All of the above.

3.The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

A.

change jobs

B.

telecommute

C.

use the Internet

D.

complain to management

Which of the following would be considered a contingent contract?

A.

a

profitminus−sharing

contract

B.

a contact with a bonus

C.

a piece rate contract

D.

All of the above.

4.Producer surplus

A.

determines whether or not a firm will produce in the long run.

B.

represents the opportunity cost of the firm.

C.

is a measure of what a firm gains from trade.

D.

is the minimum amount a firm must receive to engage in trade.

5.If some consumers think that two detergents have differing qualities, such as

brandminus−name

vs. private label detergents, wheres other consumers know that the detergents are identical, then the detergent producer can

A.

avoid moral hazard.

B.

engage in a special type of price discrimination.

C.

reduce its costs.

D.

None of the above.

6.If the government provides universal health insurance, what screening process will the government need?

A.

It won't use screening tests but it will use statistical discrimination.

B.

It will only give health insurance to

nonminus−smokers.

C.

It won't use screening tests but it will use signals.

D.

It won't need a screening test.

7.Which firm provides the better signal when trying to decide which of the firms' stock to buy?

A.

Firm B, which uses an internal group for auditing.

B.

Firm C, which has seen its stock go up by $20 per share in the last week.

C.

Firm A, which uses an independent accounting firm for auditing.

D.

Firm D, which hasn't been under SEC investigation for over 5 years.

8.A firm will exit a competitive market when

A.

costs force the marginal cost curve to shift to the left.

B.

the

longminus−run

profit would be negative.

C.

it can earn only earn a zero

longminus−run

profit.

D.

Both B and C.

9.A consumer's marginal willingness to pay

A.

is the first derivative of the demand curve.

B.

is equal to the marginal value to the consumer of the last unit of output.

C.

changes with price.

D.

is the minimum price a consumer will pay for the last unit of output.

10.Monitoring of employees

A.

can be effective

afterminus−theminus−fact

if the shirking behavior can be detected later and the employee punished.

B.

is only effective while the employees are working, so that payment may be withheld for shirking.

C.

is only effective

afterminus−theminus−fact

when it is possible to fire them for shirking.

D.

None of the above.

11.When a person has health insurance, they often have to pay nothing or very little (called a "copay") to see a doctor. This might result in

A.

a

principalminus−agent

problem.

B.

some moral hazard, since people might overuse the benefit.

C.

their being overly healthy.

D.

an adverse selection problem.

Answer 1

(50) (C)

When AVC < Price < AC, the firm is recovering variable costs and some of fixed costs, and incurring a loss.

(1) (A)

Asymmetric information requires variable-fee contract, since fixed-fee contract leads to principal-agent problem.

(2) (D)

A specific tax being unit tax, increases ATC and MC, shifting both curves up and decreasing output.

(3) (i) (B)

Telecommuting makes monitoring difficult and inefficient.

(3) (ii) (D)

In contingent contract, profit depends on variable factors.

(4) (C)

Producer surplus = Actual price received - Minimum acceptable price (Marginal cost of production)

(5) (B)

(6) (D)

A universal health insurance does not involve adverse selection problem, so screening isn't needed.

(7) (C)

Firm A has its performance evaluated by independent agents.

(8) (B)

Firms incurring long run loss will exit.

(9) (B)

(10) (B)

(11) (B)

The co-pay may cause people to ignore health and take riskier lifestyle and decisions, requiring more medical visits since they do not need to make full payment for medical services such availed.