Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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Some
assumptions about firm behavior made earlier in the text were relaxed in the chapter on information
problems and transaction costs, including the assumption that firms a. | know what their
level of profit will be | b. | will earn zero economic profit in the long
run | c. | know the
marginal productivity of all resources | d. | are perfect competitors | e. | always operate
somewhere between perfect competition and monopoly | | |
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2.
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Ronald Coase's study, "The Nature of the Firm," argued that firms are formed
to take advantage of situations in which hierarchies are more efficient than
markets.
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3.
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Which
of the following is not an element of Ronald Coase's theory of the firm? a. | transaction
costs of exchanges | b. | the coordination of decisions by
managers | c. | the costs of determining inputs and negotiating
contracts | d. | the transaction costs of organizing activities within the
firm | e. | the lemons
problem | | |
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4.
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Wendy's restaurants must decide whether to grow their own potatoes for French fries or
buy them. If they buy rather than grow, then they have opted to a. | integrate
horizontally | b. | allow market prices to guide resource
allocation | c. | integrate vertically | d. | allow
hierarchical control to guide resource allocation | e. | form an
authority relation | | |
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5.
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The
McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly.
Growing potatoes is very different from running a fast-food restaurant. One could say of McDonald's
decision to grow its own potatoes for the Russian franchise that a. | the bounded
rationality criterion outweighs the need for quality control | b. | the bounded
rationality criterion is outweighed by the need for quality control | c. | both bounded
rationality and the need for quality control are factors that make it rational for McDonald's to grow
its own potatoes | d. | growing potatoes is irrational | e. | there must not
be many potato suppliers in Russia | | |
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6.
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One
reason many people make their own pickles rather than buy them is that a. | they can
maintain control over the quality during production | b. | the total cost
of ingredients is the same as the price of store-bought pickles | c. | firms do not
make high-quality pickles | d. | people place a high value on their
time | e. | firms do not
produce goods that can be made at home | | |
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7.
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Which
of the following would not limit the extent of a firm's vertical integration? a. | the managers'
bounded rationality | b. | a large minimum efficient scale of producing inputs relative to
the firm's input requirements | c. | the fact that the quality of inputs is easily determined at the
time of purchase | d. | many interchangeable suppliers of the firm's
inputs | e. | high transaction costs of contracting with resource
suppliers | | |
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8.
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Which
of the following is the best example of a vertically integrated firm? a. | General
Electric, which produces light bulbs, jet engines, washing machines, and so
on | b. | Kinko's, which
has a photocopy store near many colleges and universities | c. | USX Corporation
(formerly U.S. Steel), which owns ore and coal mines, coke ovens, blast furnaces, mills, and
foundries | d. | Intel, which makes computer chips for most of the computer
manufacturers | e. | Century 21, which has real estate offices that help people sell
a house in one city and buy another house in another city | | |
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9.
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A
horizontally integrated firm produces products in a variety of industries (e.g., General Electric,
which produces jet engines, air conditioners and microwave ovens).
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10.
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Economies of scope exist when it is less expensive to produce two or more product
lines in a single firm than it is to produce them separately.
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11.
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According to the search model, the marginal benefit of acquiring information about a
product is greater for expensive items than for cheap items.
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12.
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The
optimal searcher is likely to not even attempt to secure perfect information even if it is possible
to achieve it.
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13.
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In
Exhibit 0203, if a consumer gathers an amount of information equal to I3, a. | she has made the
optimal search | b. | she is relying solely on common
knowledge | c. | she has acquired all available information that is beneficial
to her | d. | further information will be costless to
her | e. | she should
increase her search | | |
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14.
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According to the search model, a computerized used car search service
should a. | reduce the
amount of search | b. | not affect the amount of search | c. | increase price
dispersion | d. | reduce price dispersion | e. | lower the
marginal benefit of search | | |
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15.
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Personal dating advertisements in the newspaper are popular because
they a. | increase the
marginal benefit of search | b. | reduce the marginal cost of search | c. | increase the
marginal cost of search | d. | reduce the optimal amount of search | e. | increase quality
dispersion | | |
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16.
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The
winner's curse is more likely when the value of a good at auction is common
knowledge.
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17.
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If a
seller knows more about the good than the buyer does, there exists a. | perfect
information | b. | an externality | c. | a low marginal
benefit of information for the buyer | d. | asymmetric information | e. | optimal
search | | |
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18.
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Suppose the new doctor you found in the yellow pages turns out to be a charlatan. This
is an example of a. | natural
selection | b. | moral hazard | c. | hidden
actions | d. | external costs | e. | hidden
characteristics | | |
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19.
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The
principal-agent problem arises because of a. | natural selection | b. | diminishing
marginal returns | c. | hidden actions | d. | the winner's
curse | e. | hidden characteristics | | |
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20.
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The
academic dean at Esoteric University hires a philosopher to teach one of the 12 sections of a course
called "Why Nerf Balls Ingest Hair." Which of the following is true? a. | The academic
dean is the agent; the philosopher is the principal. | b. | The academic
dean is the agent; the students are the principals. | c. | The academic
dean is the principal; the students are the agents. | d. | The philosopher
is the principal to both the academic dean and the students. | e. | The philosopher
is an agent to both the academic dean and the students. | | |
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21.
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An
employer-employee relationship is a. | a nonmarket relation | b. | a
principal-agent relation | c. | a comparable worth relation | d. | a substitution
relation | e. | a winner's curse | | |
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22.
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Principal-agent problems are less likely to arise a. | if it is easy
for principals to know agents' actions and if there is less conflict between their
goals | b. | if it is difficult for principals to know agents' actions and
if there is less conflict between their goals | c. | if it is easy
for principals to know agents' actions and if there is some difference in their
goals | d. | if it is difficult for principals to know agents' actions and
if there is some difference in their goals | e. | if agents have higher incomes | | |
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23.
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The
tendency for the poorest risks to buy health insurance and the tendency of the insured to take more
risks with their health are known as a. | moral hazard and adverse selection,
respectively | b. | the winner's curse and adverse selection,
respectively | c. | adverse selection and natural selection,
respectively | d. | adverse selection and moral hazard,
respectively | e. | the winner's curse and moral hazard,
respectively | | |
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24.
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Lemon
laws are an attempt to reduce __________ in used car markets. a. | symmetrical
information | b. | adverse selection | c. | natural
selection | d. | moral hazard | e. | the winner's
curse | | |
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25.
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At
Tony's Car Wash Emporium, a team of four workers washes and rinses each car by hand, and one worker
dries the car by hand. Which of the following is true? a. | Tony will have
no principal-agent problems. | b. | Tony will have more principal-agent problems in washing and
rinsing than in drying the cars. | c. | Tony will have more principal-agent problems in drying than in
washing and rinsing the cars. | d. | Tony will be awash in severe principal-agent
problems. | e. | Tony will have no incentive to monitor the car
wash. | | |
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26.
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The
adverse selection problem is least likely in which of the following occupations? a. | lawyer | b. | barber | c. | college
professor | d. | marketing analyst | e. | manager | | |
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27.
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Adverse selection refers to a situation in which a. | employers have
more information about a job's salary than the job candidate does | b. | a job candidate
has more information about the job's salary than the employer does | c. | employers have
more information about a job candidate's abilities than the candidate does | d. | a job candidate
has more information about her abilities than the employer does | e. | only
below-average job candidates apply for a job | | |
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28.
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Darryl graduated with honors from college. However, he obtained his outstanding grades
by cheating on every final exam with help from his best friend; Darryl actually has the talent of a C
student. Nevertheless, he gets a job with a top accounting firm in Boston. The fact that he is hired
illustrates a failure of a. | comparable worth | b. | signaling and
screening | c. | marginal productivity | d. | supply and
demand | e. | specialization | | |
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29.
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Universities sometimes hire professors who are poor teachers but have good research
skills because a. | research ability
is more important in education than teaching ability | b. | students don't
listen to professors anyway | c. | teaching can be learned; research ability
cannot | d. | research skills are easier to measure than teaching
skills | e. | research skills are difficult to
measure | | |
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30.
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By
not advertising for new franchisees, McDonald's is trying to avoid a. | signaling | b. | adverse selection | c. | screening | d. | moral hazard | e. | bounded
rationality | | |
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