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.