ECO 316 Week 2 Chapter 11 Reducing Transactions Costs and Information Costs
ECO 316 Week 2 Chapter 11 Reducing Transactions Costs and Information Costs
In this paperwork of ECO 316 Week 2 Chapter 11 Reducing Transactions Costs and Information Costs you will find the answers on the next questions:
11.1 Multiple Choice Questions
1) Why did one prominent economist state that in the late 1990s “hundreds of billions of dollars were being left on the table” in Eastern Europe?
2) Which of the following was a consequence of the poorly developed financial markets in Eastern Europe in the 1990s?
3) What solution did most financial experts suggest be undertaken in response to the poorly developed financial markets in the 1990s?
4) Transactions costs are
5) Information costs
6) The presence of transactions costs and information costs
7) resence of transactions costs and information costs
8) Which of the following is NOT an example of transactions costs?
9) Small savers face
10) Small savers face
11) Financial intermediaries emerged
12) Transaction and information costs
13) Banks earn a profit by
14) It is generally agreed that
15) Financial intermediaries reduce transactions costs by
16) Economies of scale are
17) Individual investors can reduce transactions costs by
18) Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?
19) Financial intermediaries are able to exploit economies of scale since
20) The reduction in transactions costs brought about by financial intermediaries benefits
21) The assumption of symmetric information means that
22) Symmetric information
23) When there’s asymmetric information, who tends to have the better information?
24) Generally, when there is asymmetric information
25) The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of an unexpectedly harsh report from the Surgeon General condemning excessive chocolate eating by children. This incident is best thought of as an example of
26) The assumption of asymmetric information means that
27) The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public. This incident is best thought of as an example of
28) Which of the following is NOT true of adverse selection?
29) Which of the following is NOT true of moral hazard?
30) Which of the following is an example of adverse selection?
31) Which of the following is NOT an example of adverse selection?
32) The “lemons problem” in the used car market arises from
33) The “lemons problem” exists in the market for goods because
34) Which economist is credited with having been the first to discuss the “lemons problem”?
35) The “lemons problem” is overcome in the used car market by
36) You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of
37) If there were no adverse selection problems in the stock market,
38) When interest rates in the bond market rise,
39) Why is adverse selection more likely in financial markets when interest rates rise?
40) To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham’s loan applicants is likely to
41) Why do higher interest rates increase adverse selection problems in the loan market?
42) One method that lenders use to mitigate the adverse selection problem is to
43) Credit rationing refers to
44) One reaction of firms to the adverse selection problem is to
45) All of the following are consequences of adverse selection on good firms EXCEPT
46) The adverse selection problem in financial markets creates a profit opportunity because
47) The adverse selection problem in financial markets creates a profit opportunity because
48) Government regulations requiring firms that desire to sell securities in financial markets to disclose all available information
49) Requirements for information disclosure for firms that desire to sell securities in financial markets
50) Moody’s Investors Service is able to make a profit because
51) Which of the following is NOT a company that collects information on individual borrowers and sells it to savers?
52) Private information-collection firms fail to eliminate the adverse selection problem because
53) The free-rider problem faced by private information-collection firms results in their
54) SEC Regulation Fair Disclosure (FD)
55) Proponents of the Sarbanes-Oxley Act cite all of the following benefits EXCEPT
56) Critics of the Sarbanes-Oxley Act cite all of the following EXCEPT
57) Banks require collateral for loans in order to
58) The use of collateral
59) A firm’s net worth is equal to the value of its
60) Lenders prefer to lend to firms with high net worth because
61) Moral hazard arises from
62) Moral hazard problems arise when
63) Moral hazard problems arise when
64) Acme Widget tells investors it wants to build a widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a scheme they have devised to win at blackjack. This is an example of
65) Suppose one person buys a copy of Consumer Reports and gives away free copies to all who request one. This is an example of
66) Suppose some members of Enron’s board of directors are aware of the company’s true financial condition, information that is not available to most investors. This is an example of
67) Which of the following agencies has established standardized accounting principles for reporting corporate earnings?
68) A firm’s principals are its
69) A firm’s agents are its
70) When managers do not own very much of the net worth of the firm, then
71) Which of the following firms is most likely to suffer from principal-agent problems?
72) In the United States the stake of top management in firms’ ownership usually is
73) One reason that the principal-agent problem is a general one in equity contracts is that
74) The decline in the use of equity finance and the increase in corporate borrowings during the 1980s might be explained as an attempt by firms to
75) In 2006, some economists were particularly concerned that what event may increase the chance for debt deflation?
76) With debt financing
77) Moral hazard is not eliminated in debt financing because
78) Restrictive covenants
79) Which of the following is NOT true of restrictive covenants?
80) Which of the following is NOT true of debt deflation?
81) The best known example of debt deflation came during
82) Since World War II what percentage of the funds needed by U.S. nonfinancial corporations have been raised internally?
83) Banks deal with problems of adverse selection by
84) In effect, banks are able to charge
85) Banks overcome the free-rider problem faced by private information-collection firms in financial markets by
86) The main reason why banks are the leading source of external finance for businesses is
87) Venture capital firms attempt to overcome the principal-agent problem by
88) Recent research has shown that
89) Financial intermediaries are able to act as delegated monitors for individual savers because
11.2 Essay Questions
1) Why do you believe that the SEC would have mandated under Regulation Fair Disclosure that companies release material information to the general public at the same time it is issued to Wall Street professionals?
2) A number of companies exist that specialize in “payday loans.” Payday loans are small loansoften for a few hundred dollars or lessthat are made to low-income borrowers. Often these borrowers have poor credit histories and few assets and would have difficulty in qualifying for loans from other sources. The interest rates on these loans are often very high and some commentators have suggested that ceilings should be enforced on these loans. If such interest rate ceilings were imposed, what would be the likely effect?
3) If the market values of commercial buildings in a city begin to decline rapidly, what is likely to happen to the number of claims for fire insurance filed by the owners of these buildings?
4) Use the analysis presented in this chapter to provide a possible explanation for the large increase in issuances of bonds relative to issuances of stock by corporations during the 1980s.