Practice Final 2 (with answers)

Practice Final 2 (with answers) - Name:_ Student ID...

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Name:_____________________________________ Student ID Number:__________________________ University of Michigan School of Business Administration Practice Final Exam 3 WITH ANSWERS Instructions: You will have two hours to complete the exam.
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Section I Multiple Choice: Choose the best answer (5 points each) 1. Adverse selection problems in the insurance industry a) are likely to be greater, the more elastic the demand b) are likely to be greater, the less elastic the demand c) are likely to be greater, the more elastic the supply d) are likely to be greater, the less elastic the supply e) none of the above. 2. Certain auto insurers require information on your driving record dating back to when you started driving. They will only insure drivers with perfect records and they offer them extremely low rates. This method of carefully screening potential customers will a) increase problems with adverse selection b) decrease problems with adverse selection c) raise the average insurance premiums for many individual who do not qualify for this low rate insurance d) both a and c e) both b and c 3. You are considering buying a small firm. Before you decide, you have a look at the books to try to determine the economic costs of the firm. You are particularly concerned about getting the equipment valued correctly. The total cost of the equipment was $500,000 purchased over a number of years. The annual cost of updating the equipment is about $80,000 and has been consistently over the past 10 years. On the books, the equipment shows a value of $350,000. A reasonable rate of return on an investment is 10%. Based on this information, the economic cost of capital a) is $80,000 b) is $35,000 c) is $8000 d) is $50,000 e) cannot be determined based on the information given. 4. Which of the following can be used to overcome agency problems: i) exclusive territories ii) resale price maintenance iii) exclusive dealing a) i and ii b) ii and iii c) i and iii d) i, ii and iii e) none of these
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5. Armco and Cyclops were two stainless steel manufacturers in the 1980s. They were two of the principle competitors as the stainless steel suppliers to the auto industry. For the purposes of this test, suppose they are the only two suppliers. As the only two competitors, each has to decide how to price taking the behavior of the other into account. Suppose the payoffs for pricing are as follows (where high means high price and low means low price): Armco high low Cyclops high 20, 20 12, 25 low 25, 12 15, 15 Based on this information, a) high, high is a non-cooperative (Nash) equilibrium b) low, low is a non-cooperative (Nash) equilibrium c) high, high is the cooperative solution d) both a and b are correct e) both b and c are correct 6. Continuing on the information from above, now suppose the auto companies force Armco and Cyclops to use most favored nation contracts. That is, the auto companies are contractually guaranteed that the steel companies will not sell to another buyer at a lower price than they are selling to the auto company. a)
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This test prep was uploaded on 04/02/2008 for the course BE 300 taught by Professor Masten during the Fall '07 term at University of Michigan.

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Practice Final 2 (with answers) - Name:_ Student ID...

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