Adam Smith’s invisible hand leads to an efficient outcome when

buyers are fully informed about all relevant aspects of the product and the market in which it is traded.

B buyers have collected information only up to the point at which the marginal cost of acquiring more

. information equals the marginal benefit of having more information.

buyers have more information about the product being traded than do sellers.
buyers have less information about the product being traded than do sellers.

AACSB: Analytic

Blooms: Understand

Difficulty: 2 Medium

Frank – Chapter 11 #1

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

Information about the quality of a product is
1. intangible, and therefore not subject to economic principles.

impossible to objectively assess, and therefore not subject to economic principles.
both beneficial to have and costly to obtain, and therefore subject to economic principles.

D subject to economic principles only when it is paid for, for example by subscribing to Consumer

. Reports or by hiring a financial advisor.

AACSB: Analytic

Blooms: Understand

Difficulty: 2 Medium

Frank – Chapter 11 #2

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

According to the textbook, middlemen
1. add no value to economic activity.

only add value if the consumer gets a good deal.
only add value to themselves.

provide value through information and coordination.

AACSB: Analytic

Blooms: Remember

Difficulty: 1 Easy

Frank – Chapter 11 #3

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney’s customers have reservation prices of $5. When Sydney’s cart is located on a sidewalk in

an upscale mall, wealthier customers with reservation prices of $10 buy snow globes. Assume that Sydney can sell the same volume at either location and that marginal and average costs are $3 per globe at both locations.

Maximization of total economic surplus indicates that Sydney should

alternate between the two locations and price discriminate.

sell only near the discount store and charge $5.

sell only in the upscale mall and charge $10.

alternate between the two locations and charge $5 at both locations.

AACSB: Analytic

Blooms: Apply

Difficulty: 3 Hard

Frank – Chapter 11 #4

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

Sydney sells snow globes from a cart. When the cart is located on the sidewalk near a discount store, Sydney’s customers have reservation prices of $5. When Sydney’s cart is located on a sidewalk in

Information about the reservation prices of Sydney’s customers increases total surplus by

allowing consumers with different incomes to acquire things they value.

distributing snow globes to consumers who like them most.

encouraging sellers to locate in underserved areas.
distributing snow globes to consumers with the greatest willingness to pay.

AACSB: Analytic

Blooms: Apply

Difficulty: 3 Hard

Frank – Chapter 11 #5

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

Better information about consumers’ reservation prices generally leads to
1. a reduction in consumer surplus.

acquisition of goods by consumers who are willing to pay the highest price.

equitable distribution of goods among low income consumers.
acquisition of goods by consumers with the greatest need.

AACSB: Analytic

Blooms: Apply

Difficulty: 3 Hard

Frank – Chapter 11 #6

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

When auctions, such as those used on eBay, are used to sell a product
1. information about consumers’ true reservation prices is minimized.

information about consumers’ true reservation prices is revealed.

consumers have an incentive to bid higher than their true reservation prices.
consumers do not have an incentive to bid their true reservation prices.

AACSB: Analytic

Blooms: Understand

Difficulty: 2 Medium

Frank – Chapter 11 #7

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

Jean places a high value on a loaf of bread with which to feed his family, but can only afford to pay $1. Val regularly pays $2 for a loaf of bread, but often the bread molds before Val can finish the loaf. Total economic surplus is maximized when

Jean receives a loaf of bread.

Val gives Jean leftover bread.

Val purchases the bread.

Val and Jean purchase equal quantities of bread.

AACSB: Analytic

Blooms: Apply

Difficulty: 3 Hard

Frank – Chapter 11 #8

Learning Objective: 11-01 Explain how middlemen add value to market transactions.

Topic: How the Middleman Adds Value

The optimal amount of information to acquire before making a purchase is

as much as technically possible.

an amount such that the total cost of acquiring information equals the total benefit.

an amount such that the marginal cost of acquiring information equals the marginal benefit.

AACSB: Analytic

Blooms: Remember

Difficulty: 1 Easy Frank – Chapter 11 #9 Learning Objective: 11-02 Use the concept of rational search to find the optimal amount of information market participants should obtain.

Topic: The Optimal Amount of Information