Question 2 The graph below shows the effect of a sales tax imposed on consumers.
ID: 1192887 • Letter: Q
Question
Question 2
The graph below shows the effect of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive price Ps, and consumers pay the price Pd.
The portion of tax revenue ultimately paid by consumers is
1) area A + B + C + D.
2) area C + D.
3) area C + D + E.
4) area A + B + C + D + E.
7.
The adverse selection process is prevalent in the used car market because
only poorer people are likely to purchase used cars.
sellers know more about the vehicles being sold than do potential buyers.
the price of the car sends a signal about its quality.
so many consumers are adverse to buying used cars.
8.
When do insurance companies encounter the problem of moral hazard?
When simply having insurance causes people to take more risks than they would otherwise.
When they do not have enough information to distinguish between people who are “good risks” and those who are “bad risks.”
When the price of insurance premium fully reflects all available information.
When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously.
9. Why are corporate executives often guaranteed “golden parachutes” if they should be fired?
To given them the incentive to take the higher levels of risk desired by stockholders.
To ensure that they exercise great caution in spending stockholders’ money.
To encourage the most experienced people to apply for the executive positions.
To provide a signal to the public that the firm is on solid financial ground.
10.
The fact that employees often take longer lunch breaks than they are supposed to is an example of
the principle agent problem.
moral hazard.
adverse selection.
a golden parachute.
1) area A + B + C + D.
2) area C + D.
Price D E price Pd price PaP D-Tax 9-8,Quantity 01 Q0Explanation / Answer
2. The consumers ultimately pay tax revenue of the portion is C + D because they are paying price Pd and receiving quantity Q1.
7. The adverse selection process is prevalent in the used car market because sellers know more about the vehicles being sold than do potential buyers. We analyze adverse selection in the used-car market using a new approach that considers a car as an assemblage of parts, some with symmetric information and others with asymmetric information. We find evidence of adverse selection due to the conditions of the transmission, engine, and, during colder months, air-conditioning; and sorting due to the conditions of the vehicle body and, during warmer months, air-conditioning.
8. Insurance companies encounter the problem of moral hazard when simply having insurance causes people to take more risks than they would otherwise. In economics, moral hazard occurs when one person takes more risks because someone else bears the burden of those risks. Insurance companies worried that protecting their clients from risks (like fire, or car accidents) might encourage those clients to behave in riskier ways (like smoking in bed or not wearing seat belts). This inefficiency results from information asymmetry. If insurance companies could perfectly observe the actions of their clients, they could deny coverage to clients choosing risky actions (like smoking in bed or not wearing seat belts), allowing them to provide thorough protection against risk (fire, accidents) without encouraging risky behavior. However, since insurance companies cannot perfectly observe their clients' actions, they are discouraged from providing the amount of protection that would be provided in a world with perfect information.
9. A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated. Corporate executives are often gurateed golden parachutes if they are fired to provide a signal to the public that the firm is on solid financial grounds because proponents of golden parachutes argue that golden parachutes make it easier to hire and retain executives, especially in industries more prone to mergers and help an executive to remain objective about the company during the takeover process.
10. The fact that employees often take longer lunch breaks than they are supposed to is an example of principal agent problem.
The principal–agent problem occurs when one person (the "agent") is able to make decisions on behalf of, or that impact, another person ( the "principal"). The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal. Here the employees are motivated to take longer lunch breaks as it is their own interest and they ignore the interest of the employer which will make them work longer and take short lunch breaks.
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