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Managerial Economics · Asymmetric information

BSMS3206 · 19 questions · 26 marks · 2 papers

Answer key

Indian Institute of Technology Madras

BS Degree Programme · Examination & Study Paper

BSMS3206 · Managerial Economics

Asymmetric information

Official Paper

Examination Instructions & Guidelines

Solve on notebook/paper first before checking solutions.
MCQ: Exactly 1 option is correct. Negative marking applies.
NAT: Numerical response. No negative marking.
Scientific calculator allowed for all calculations.
Official answer key is sealed at the end of this sheet.

End Term · 31 Aug 2025 (FN)End Term

Read the passage below, then answer Q1–Q2
Imagine that you have been working after college and now face the decision of whether or not to get an MBA at a prestigious institution. The cost of getting the MBA is 10. (Again, you can decide on the denomination, but rest assured that this sum includes the income lost over the course of the two years you will be studying!) Your future value is your stream of income, which depends on the strength of the labor market for the next decade. If the labor market is strong then your income value from having an MBA is 32, while your income value from your current status is 12. If the labor market is average then your income value from having an MBA is 16, while your income value from your current status is 8. If the labor market is weak then your income value from having an MBA is 12, while your income value from your current status is 4. Further assume that the probability of a strong labor market is p, of an average labor market is 0.5 and of a weak labor market is 0.5− p.
Based on the above data, answer the given subquestions.
Q1MCQ2 Marks·Choose one option
Asked 2 times Key ↓
For which values of p will you decide to get an MBA?
1. A
2. B
3. C
4. D
Q2NAT2 Marks·Write the number
Asked 2 times Key ↓
If p = 0.4, what is the highest price the university can charge for you to be willing to go ahead and get an MBA? ___________
Your answer:
Read the passage below, then answer Q3–Q5
In a market for old cars, there are 200 used cars for sale; half of these cars are good and half of them are lemons (the bad ones). Owners of lemons are willing to sell them for $500. Owners of good used cars are willing to sell them for prices above $1,100 but will keep them if the price is lower than $1,100. There are many potential buyers who are willing to pay $600 for a lemon and $1,700 for a good car. Buyers can’t tell good cars from bad, but original owners know. Based on the above data, answer the given subquestions.
Q3NAT1 Mark·Write the number
Key ↓
The expected valuation of a car for a potential buyer will be (in $) ______________
Your answer:
Q4MCQ2 Marks·Choose one option
Key ↓
In equilibrium, what kind of cars will be sold
1. AAll the good quality cars
2. BAll the bad quality cars (Lemons)
3. CAll 200 cars
4. DCannot answer
Q5NAT2 Marks·Write the number
Key ↓
What will be the equilibrium price at which the buyers will buy the cars (in $)? _____________
Your answer:
Read the passage below, then answer Q6–Q7
There are 50 low-risk people in a town and 50 high-risk people. A low-risk person has an average of $500 in medical expenses each year and is willing to pay $800 for medical insurance (this person is risk averse). A high-risk person has an average of $1,200 in medical expenses each year and is willing to pay $1,500 for medical insurance. Insurance companies are unable to differentiate who is high-risk and who is low risk.
Based on the above data, answer the given subquestions.
Q6MCQ1.5 Marks·Choose one option
Key ↓
If the insurance provider offered medical insurance at a price of $1,000
1. AEveryone will enroll for the insurance irrespective of the type
2. BThe provider will lose money
3. CBoth Everyone will enroll for the insurance irrespective of the type & The provider will lose money
4. DNone of these
Q7MCQ1.5 Marks·Choose one option
Key ↓
If the insurance company offered medical insurance at a price of $1,300
1. Alow-risk people would not be insured
2. BTotal surplus will be $10000 if the price is $1300
3. CBoth low-risk people would not be insured & Total surplus will be $10000 if the price is $1300
4. DNone of these
Q8MCQ1 Mark·Choose one option
Asked 2 times Key ↓
Moral hazard occurs when contracts are written in such a way that
1. Athe interests of agent and principal converge
2. Bthe interests of agent and principal diverge
3. Cagents will wish to maximize the principal's utility
4. Dproduction and risk-bearing efficiency are achieved

End Term · 31 Aug 2025 (AN)End Term

Read the passage below, then answer Q9–Q15
Based on the above data, answer the given subquestions.
Q9NAT1 Mark·Write the number
Key ↓
What is Latif’s profit (per car in $) if he does not offer a one-year warranty?______________
Your answer:
Q10NAT1 Mark·Write the number
Key ↓
What is Latif’s profit (per car in $) if he offers a one-year warranty?______________
Your answer:
Q11NAT1 Mark·Write the number
Key ↓
What is Hamid’s profit (per car in $) if Latif’s does not offer a one-year warranty? ___________
Your answer:
Q12NAT1 Mark·Write the number
Key ↓
What is Hamid’s profit (per car in $) if Latif’s offers a one-year warranty? _____________
Your answer:
Q13MCQ1 Mark·Choose one option
Key ↓
Will Latif’s match Hamid’s one-year warranty?
1. AYes
2. BNo
Q14MCQ1 Mark·Choose one option
Key ↓
Is it a good idea for Hamid’s to offer a one-year warranty?
1. AYes
2. BNo
Q15MCQ1 Mark·Choose one option
Key ↓
What if Hamid offers a two-year warranty? Will this generate a credible signal of quality?
1. AYes
2. BNo
Read the passage below, then answer Q16–Q17
Imagine that you have been working after college and now face the decision of whether or not to get an MBA at a prestigious institution. The cost of getting the MBA is 10. (Again, you can decide on the denomination, but rest assured that this sum includes the income lost over the course of the two years you will be studying!) Your future value is your stream of income, which depends on the strength of the labor market for the next decade. If the labor market is strong then your income value from having an MBA is 32, while your income value from your current status is 12. If the labor market is average then your income value from having an MBA is 16, while your income value from your current status is 8. If the labor market is weak then your income value from having an MBA is 12, while your income value from your current status is 4. Further assume that the probability of a strong labor market is p, of an average labor market is 0.5 and of a weak labor market is 0.5− p.
Based on the above data, answer the given subquestions.
Q16MCQ2 Marks·Choose one option
Asked 2 times Key ↓
For which values of p will you decide not to get an MBA?
1. A
2. B
3. C
4. D
Q17NAT2 Marks·Write the number
Asked 2 times Key ↓
If P=0.4, what is the highest price the university can charge for you to be willing to go ahead and get an MBA? ____________
Your answer:
Q18MCQ1 Mark·Choose one option
Key ↓
Adverse selection occurs when
1. Aa person takes more risks that are not known to the life insurance company because he has life insurance
2. Ba person buys life insurance because he has a risky lifestyle that is not known to the life insurance company
3. Ca person is a risk lover
4. Dpregnant women with health insurance make more doctor visits than uninsured pregnant women
Q19MCQ1 Mark·Choose one option
Asked 2 times Key ↓
Moral hazard occurs when contracts are written in such a way that
1. Athe interests of agent and principal converge
2. Bthe interests of agent and principal diverge
3. Cagents will wish to maximize the principal's utility
4. Dproduction and risk-bearing efficiency are achieved

Official Key

Master Answer Key & Explanations

Official answer keys from IIT Madras BS past papers. Click any question to review.

Reveal Key

Q1B

Q22.8

Q31150

Q4C

Q51150

Q6B

Q7C

Q8B

Q92000

Q102500

Q111500

Q120

Q13A

Q14B

Q15A

Q16D

Q172.8

Q18B

Q19B

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