Q1. If the seller knows more about the good than the buyer knows thereexists:

A.

a public goods problem.

B.

an externality.

C.

asymmetric information.

D.

moral hazard.

Q2. In markets with imperfect information

A.

buyers and sellers will use resources to acquire information before making decisions.

B.

buyers will use resources to acquire information before making adecision, but sellers do not need to acquire additional information before making a decision.

C.

sellers will use resources to acquire information before making adecision, but buyers do not need to acquire additional information before making a decision.

D.

neither buyers nor sellers will be able to acquire information in order to make decisions.

Q3. In some markets for usedgoods:

A.

the buyer has more information than the seller about the quality of the good.

B.

the seller has more information than the buyer about the quality of the good.

C.

the quality of used goods sold in the market will typically rise over time.

D.

lowquality used goods will be underpriced.

Q4. A mixed market is one inwhich:

A.

a seller of a good requires that the purchase of one good be tied to the purchase of another.

B.

consumers can be buyers and sellers and producers can be sellers and buyers.

C.

there are different qualities of a good being sold in the market and there is imperfect information about the quality of each good.

D.

demand is positively sloped and supply is negatively sloped.

Q5. Suppose buyers in the used car market are willing to pay$4,000 for a plum (highquality) used car and$2,000 for a lemon (lowquality) used car. If buyers believe that50% of the used cars on the market are lemons(low quality), what would they be willing to pay for a usedcar?

A.

$4000

B.

$3500

C.

$3000

D.

$2000

Q6. When sellers have more information about the quality of a good than buyersdo, a relatively large share of the goods in the market will be lowquality goods. This is the________ problem.

A.

law of diminishing returns

B.

moral hazard

C.

adverse selection

D.

freerider

Q7. In a market with an adverse selectionproblem:

A.

the uninformed side of the market must choose from an undesirable selection of goods.

B.

one side of the market has better information about the goods than the other.

C.

some highquality goods are sold but fewer than would be sold in a market with perfect information.

D.

all of the above

Q8. In a market with an adverse selectionproblem:

A.

the uninformed side of the market must choose from an undesirable selection of goods.

B.

one side of the market has better information about the goods than the other.

C.

some highquality goods are sold but fewer than would be sold in a market with perfect information.

D.

all of the above

Q9. The lemons model predicts that

A.

the more lowquality goods there are in themarket, the more highquality goods there will be in the market.

B.

if there are highquality goods in themarket, there will be fewer or no lowquality items.

C.

if buyers are pessimistic about the percentage of lowquality goods on the market sellers of lowquality goods will be able to charge higher prices than if buyers had neutral beliefs.

D.

if there are lowquality goods in themarket, there will be fewer or no highquality items.

Q10. Recall the Application about the freeagent market for professional baseball pitchers to answer the followingquestion(s).

Recall the Application. Baseball players who switch teams are more likely to suffer from injuries because theplayer's ________ team has superior information concerning the health of the playerand, if they believe the player will be prone to injury in thefuture, they________ be willing to outbid another team.

A.

new; will not

B.

old; will not

C.

old; will

D.

new; will

Q11. If a seller of a highquality good cannot prove the quality of that good

A.

buyers will not be willing to pay the amount for which they value a highquality good.

B.

buyers will only be willing to pay the amount for which they value a lowquality good.

C.

the good will trade at its equilibrium price.

D.

the good will never be offered for sale.

Q12. Reading Consumer Reports before buying a used car

A.

helps buyers increase their chances of avoiding alemon, or lowquality car.

B.

does not help buyers because magazines only cover new carsales, not used car sales.

C.

is irrational because the cost of the magazine is greater than the benefit of the information.

D.

makes warranties on used cars unnecessary.

Q13. AdditionalApplication: CARFAX is a company that compiles and sells histories of used cars. Used car dealers offer to give their customers a copy of the CARFAX history of the cars in their inventoryto:

A.

cause adverse selection.

B.

give buyers additional information about used cars for sale.

C.

avoid having to offer warranties.

D.

give sellers additional information about used cars for sale.

Q14. By which of the following methods could a supplier identify its good as a plum to a skepticalbuyer?

A.

warranties and repair guarantees

B.

moneyback guarantee

C.

a verbal assurance

D.

both A and B

Q15. Aseller's verbal assurances that a used car is a plum (highquality car)

A.

is an effective way for sellers to prove that the good they are selling is of high quality.

B.

provides the same protection against adverse selection than does a repair guarantee.

C.

is not effective at reducing the problems associated with asymmetric information.

D.

is a more efficient way to prove high quality than a moneyback guarantee because it does not cost the seller any money to make the assurance.

Q16. Recall the Application about federal quality standards in the market for kiwifruit to answer the following question.

Recall the Application. The sweetness of the kiwifruit is basedon:

A.

the variety of the tree.

B.

the amount of water on the ground where it is grown.

C.

its maturity at the time of harvest.

D.

the amount of sunshine at the location of the plantation.

Q17. Recall the Application about federal quality standards in the market for kiwifruit to answer the following question.

Recall the Application. Prior to the federal marketing order in1987, why were the California kiwifruit more likely to besour?

A.

The California kiwifruit that were sweet were sold to Canada.

B.

It was less expensive to harvest the fruit when it was still immature.

C.

The trees were still young and did not bear good fruit.

D.

It was more expensive to harvest the fruit when it was still immature.

Q18. What is the largest category in federal governmentspending?

A.

national defense

B.

Social Security

C.

income security

D.

health

Q19. What is the largest category in local governmentspending?

A.

health and hospitals

B.

fire protection

C.

education

D.

public welfare

Q20. The federal government receives more money from________ than from any other source.

A.

sales taxes

B.

individual income taxes

C.

corporate income taxes

D.

excise taxes