ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 01
EXERCISE SET 8: 5 POINTS TOTAL DUE: Tuesday, April 10, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
1-1 Of the four sources of external funds listed below, the most important
source for U.S. businesses over the period 1970-1985 was
A. foreign investment
B. marketable debt securities
C C. loans from financial intermediaries
D. common stock issue
2-1 "Free riding" is said to occur in financial markets when
A A. people who do not pay for information take advantage of the information
that other people have paid for by observing their behavior.
B. high-risk borrowers are successfully able to pass themselves off
as low-risk borrowers when applying for loans.
C. the cost per dollar loaned declines as the size of the loan increases.
D. ownership of assets is separated from the control of these assets.
3-1 The separation of ownership and control in corporations can lead to
problems of poor management because it can lead to ________ for _______.
A. Low salaries; Corporate managers
B B. Principle-agent problems; Corporate shareholders
C. Adverse selection problems; Corporate shareholders
D. Adverse selection problems; Corporate managers
4-1 The more collateral backing a loan, the ______ a lender has to worry
about _________.
A. more; transaction costs
B. more; information costs
C. less; adverse selection
D. less; moral hazard
E E. both C and D
5-1 Corporate shareholders are generally more subject to moral hazard
problems than corporate bondholders because
A. bonds have pre-set payment obligations that are not conditioned
on corporate profit performance
B. bondholders have priority over stockholders in case of bankruptcy
C. free-rider problems tend to reduce shareholder oversight efforts
D D. all of the above
E. only A and B above
