ch14 - File: Ch14; CHAPTER 14: Asymmetric Information and...

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File: Ch14; CHAPTER 14: Asymmetric Information and Organizational Design Each question contains a code showing the section of the chapter text from which it was taken. The codes for this chapter are: Code Section 1 Asymmetric Information 2 Organizational Design MULTIPLE CHOICE 1. Asymmetric information is a) Imperfect information. b) One factor leading to adverse selection. c) caused by delegated decisions. d) Information possessed by one agent but not by the other. e) Answers b and d are both correct. ANSWER: e SECTION: 1 2. The “lemons” model refers to a market a) That is unsustainable in the long run. b) That is regulated to control quality. c) Where different quality goods sell at different prices. d) Where asymmetric information leads to the sale of mostly low-quality goods. e) Where only the buyer has access to complete information. ANSWER: d SECTION: 1 3. Adverse selection usually occurs due to a) Signaling. b) Externalities. c) Agents’ shared uncertainty. d) Asymmetric information. e) Moral hazard. ANSWER: d SECTION: 1 4. When a used car salesperson offers a warranty on any car sold in the lot, it's referred to as a) Signaling. b) Risk aversion. c) Self-selection. d) Asymmetric information. 14-1
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Asymmetric Information and Organizational Design e) Adverse selection. ANSWER: a SECTION: 1 5. Moral hazard occurs when a) The principal purposely misleads the agent to obtain higher profits. b) Limited information causes uncertainty for the agent. c) An agent has an incentive to pursue its own interests to the detriment of the principal. d) Self-selection is impossible. e) An agent has inferior information when taking an action on behalf of the principal. ANSWER: c SECTION: 1 6. Adverse selection occurs because a) One party has better information about the true risk than another party. b) Both parties have an incentive to cheat on a contract. c) One party has worse luck than another party. d) One party is unable to perform the contract as specified. e) Answers b and d are both correct. ANSWER: a SECTION: 1 7. One way to overcome the problem of asymmetric information is a) Word-of-mouth. b) Adverse selection. c) Self-selection. d) Signaling. e) Risk Sharing. ANSWER: d SECTION: 1 8. Employers that permit telecommuting (working at home and contacting the office by electronic methods) may face the problem of a) Asymmetric Information. b) Moral hazard. c) A lateral organizational structure. d) Annual performance review. e) Answers a and c are both correct. ANSWER: b SECTION: 1 9. One of the important features of large, modern firms is a) The dispersion of information among many decision makers. 14-2
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Chapter 14 b) The inclusion of management and information in a single entity. c)
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ch14 - File: Ch14; CHAPTER 14: Asymmetric Information and...

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