Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

340 THE ECONOMICS OF INFORMATION [CHAP. 15
9. Which of the following is not related to moral hazard? (a) The probability of an illness, (b) the probability of a flood,
(c) the probability of a car accident, (d) the probability of a fire.
Ans. (b) See Section 15.5.
10. The problem of moral hazard can be reduced by (a) requiring certain precautions from buyers of insurance,
(b) co-insurance, (c) deductibles, (d) all of the above.
Ans. (d) See Section 15.5.
11. All of the following are examples of a principal-agent problem, except: (a) managers seeking to maximize their own
interests rather than the total benefits of the firm, (b) workers seeking to maximize their salaries rather than the interests
of the firm, (c) the owners of the firm seeking to maximize the value of the firm, (d) the manager of a hospital
resisting a merger with another hospital.
Ans. (c) See Section 15.6.
12. A principal-agent problem can be overcome by the firm (a) offering golden parachutes to its top managers, (b)
setting up generous deferred-compensation schemes for its top managers, (c) setting up profit-sharing schemes
for its workers, (d) all of the above.
Ans. (d) See Section 15.6.
Solved Problems
THE ECONOMICS OF SEARCH
15.1 (a) In which market structure was perfect information assumed on the part of all economic agents? (b)If
all consumers have perfect information, can a price dispersion for a given homogeneous product exist in
the market if all conditions of the sale are identical? Why?
(a)
(b)
Of the four types of market structure discussed (perfect competition, monopoly, monopolistic competition,
and oligopoly), only the perfectly competitive model assumed perfect information on the part of all economic
agents.
If a product is homogeneous, the conditions of the sale are identical, and consumers have identical information,
then each consumer will know the lowest-price seller and will not purchase the product at any
higher price. Then no firm can sell the product at any higher price. A price dispersion for the product can
only arise if one or more of the above assumptions do not hold.
15.2 (a) On which do you think consumers spend more time shopping for lower prices, sugar or coffee?
Why? (b) Can you explain why the price dispersion for salt is much greater than the price dispersion
for sugar?
(a)
(b)
Since the price of coffee is so much higher than the price of sugar and consumers spend much more on coffee than
on sugar, the marginal benefit from comparative shopping is likely to be much greater for coffee than for sugar. As
a result, we would expect consumers to spend much more time shopping for lower prices for coffee than for sugar.
Since consumers spend much more on sugar than on salt, it does not pay for them to spend as much time shopping
for lower prices for salt than for sugar. With less search and information, a greater dispersion of prices is
possible in the market for salt than in the market for sugar.
15.3 Frozen vegetables are search goods because they are purchased frequently by consumers. True or false?
Explain.
False. It is true that frozen vegetables may be purchased frequently and would not be purchased again if consumers
found their quality to be too low in relation to their price, but their quality can only be determined after
eating them. Because of this, frozen vegetables are experience, not search goods.