MCQ

1) Firm sells two types of pants, one with quality 400 and the other with 25. It is only possible for consumers to tell which quality pants they have after two weeks when low quality pants start to rip. Consumer is willing to pay sqrtQ, for a pants of quality Q. It costs 3 to produce low quality pants and 18 to produce high quality. In equilibrium what mix of pants will firm produce?

a) All high quality

b)any mixture of high and low

c)all low quality

d)at least 1/3 high quality

e)there cannot be a stable equilibrium

2)If there is a large number of used cars for sale, quality is uniformly distributed between 0 and 2000. Original owners must sell their used cars and they know their cars worth but buyers cannot determine its quality until they buy. Owner can either take car to garage and pay 200 to have it appraised or sell it unappraised. In equilibirum, car owners will have their cars appraised if and only if the cars value is at least:

a)1000

b)400

c)200

d)1200

e)800

3))Which is correct about expected utility theory?

a)It is always a good model on how people behave

b)it is no more restrictive than utility maximisation under certainty

c)assumes people are risk averse

d)it is invariant to monotonic transformations of theVNM utility function

e)It requires independence of irrelevant alternatives axioms

4)Which is the best example of adverse selection?

a) People mistakley choose low quality products.

b) an individual can influence probability that they had an accident.

c)a residual claimant will have to bear the consequences of the most adverse outcomes.

d)a car insurer being concerned that once people are insured they drive less carefully

e) people who face the highest risks are the people most likely to buy insurance against these risks