Question 1

________ occurs when an informed person takes an action to send information to an uninformed person and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information.

Accepted Answer

A)  Moral hazard; adverse selection
B)  Adverse selection; moral hazard
C)  Signaling; screening
D)  Screening; signaling
E)  Pooling; separatingF) B) and E)
G) C) and D)

Question 2

The lemons problem is caused by

Accepted Answer

A)  health-care providers' incentive to order unnecessary tests..
B)  used car buyers' inability to determine the quantity of used cars offered for sale.
C)  auto insurance companies inability to adequately screen drivers.
D)  the missing health care market.
E)  government regulations than make some information private.F) C) and D)
G) D) and E)

Question 3

A safe drive is likely to prefer an auto insurance policy that has a ________ deductible and a ________ premium.

Accepted Answer

A)  high; high
B)  high; low
C)  low; high
D)  low; low
E)  None of the above answers are correct because private information has no effect in the market for auto insurance.F) A) and B)
G) A) and E)

Question 4

"People buy insurance do protect themselves from moral hazard." True or false? Explain.

Accepted Answer

The statement is false.In fact, insuranc...

Question 5

Consider a market for used cars.Suppose there are only two kind of cars: lemons and good cars.A lemon is worth $1,500 both to its current owner and to anyone who buys it.A good car is worth $6,000 to its current and potential owners.Buyers can't tell whether a car is a lemon until after they have bought the car.What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer.

Accepted Answer

Because buyers can't tell the difference...

Question 6

Adverse selection is created by

Accepted Answer

A)  incentives to change behavior after two parties have reached an agreement.
B)  risk.
C)  signaling.
D)  taxes.
E)  private information.F) A) and B)
G) None of the above

Question 7

-The market for aggressive drivers is illustrated in ________ and the market for safe drivers is illustrated in ________.

Accepted Answer

A)  Figure A; Figure A also
B)  Figure B; Figure A
C)  Figure A; Figure B
D)  Figure B; Figure B also
E)  More information is needed to answer the question.F) B) and E)
G) All of the above

Question 8

In the market for automobile insurance, adverse selection implies that

Accepted Answer

A)  drivers with greater risks want to buy a policy without deductibles.
B)  drivers with greater risks want to buy a policy with large deductibles.
C)  uninsured drivers will drive recklessly.
D)  insured drivers will drive recklessly.
E)  moral hazard does not exist in this market.F) D) and E)
G) B) and D)

Question 9

How can a warranty at the seller's expense signal that a product is high quality?

Accepted Answer

If the product is low quality, the warra...

Question 10

If a health insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

Accepted Answer

A)  moral hazard problems.
B)  adverse selection problems.
C)  lower costs.
D)  low demand for its product.
E)  a screening equilibrium.F) B) and C)
G) A) and B)

Question 11

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Accepted Answer

A)  moral hazard.
B)  adverse selection.
C)  the lemon problem.
D)  inefficiency.
E)  a pooling equilibrium.F) A) and B)
G) A) and E)

Question 12

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Accepted Answer

A)  reduce; be the same
B)  reduce; differ
C)  magnify; be the same
D)  magnify; differ
E)  None of the above answers is correct because warranties have nothing to do with private information.F) A) and B)
G) A) and E)

Question 13

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Accepted Answer

A)  a warranty on a lemon is costly to the seller.
B)  warranties are only offered on lemons.
C)  the signal cannot be false.
D)  adverse selection means that warranties will not be used as a signal.
E)  a false signal has no effect on the seller.F) B) and E)
G) D) and E)

Question 14

Asymmetric information means that

Accepted Answer

A)  the buyer must have information that the seller does not have.
B)  the seller must have information that the buyer does not have.
C)  the buyer and seller have the same information.
D)  either the buyer has information that the seller does not have or the seller has information that the buyer does not have.
E)  None of the above answers are correct.F) D) and E)
G) A) and D)

Question 15

Of the following, the best example of private information is when

Accepted Answer

A)  Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know.
B)  you are selling a used car and you know your used car's defects but a potential buyer cannot find out about them until after buying.
C)  you are selling a used car and you do not know your used car's defects
D)  you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects.
E)  you pay the owner of a used car a little extra and she lets you know all of the car's defects.F) A) and B)
G) B) and D)

Question 16

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

Accepted Answer

A)  the government agency that regulates insurance companies
B)  the insurance company
C)  the drivers
D)  the insurance company and the drivers
E)  the government regulating agency and the insurance companyF) B) and C)
G) A) and E)

Question 17

If buyers cannot assess the quality of used cars and there are no warranties,

Accepted Answer

A)  only lemons are sold.
B)  only good used cars are sold.
C)  good cars are sold at a higher price than bad cars.
D)  there is no adverse selection problem.
E)  lemons and good cars sell for the same price.F) A) and B)
G) D) and E)

Question 18

When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating

Accepted Answer

A)  moral hazard.
B)  adverse selection.
C)  signaling.
D)  the cost of contracting.
E)  a pooling equilibrium.F) A) and B)
G) A) and C)

Question 19

"Screening" means that an auto insurance company is

Accepted Answer

A)  enforcing a pooling equilibrium.
B)  ignoring all private information.
C)  creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection.
D)  creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard.
E)  creating an incentive for a risky driver to reveal that he or she is risky.F) A) and B)
G) A) and C)

Question 20

Which of the following can create inefficiency and deadweight loss?

Accepted Answer

A)  Moral hazard can create inefficiency and deadweight loss but adverse selection cannot.
B)  Adverse selection can create inefficiency and deadweight loss but moral hazard cannot.
C)  Both moral hazard and adverse selection can create inefficiency and deadweight loss .
D)  Neither moral hazard nor adverse selection can create inefficiency and deadweight loss .
E)  None of the above answers are correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers.F) All of the above
G) B) and D)

Exam 12: Markets With Private Information

Adverse selection is created by

Correct Answer
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If a health insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

Correct Answer
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Which of the following can create inefficiency and deadweight loss?

Correct Answer
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When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating

Correct Answer
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Correct Answer
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Because buyers can't tell the difference...
View Answer

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .

Correct Answer
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Asymmetric information means that

Correct Answer
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occurs when an informed person takes an action to send information to an uninformed person and occurs when an uninformed person creates an incentive for an informed person to reveal private information.

Correct Answer
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Of the following, the best example of private information is when

Correct Answer
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"People buy insurance do protect themselves from moral hazard." True or false? Explain.

Correct Answer
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The statement is false.In fact, insuranc...
View Answer

How can a warranty at the seller's expense signal that a product is high quality?

Correct Answer
verified
If the product is low quality, the warra...
View Answer

"Screening" means that an auto insurance company is

Correct Answer
verified

In the market for automobile insurance, adverse selection implies that

Correct Answer
verified

If buyers cannot assess the quality of used cars and there are no warranties,

Correct Answer
verified

A safe drive is likely to prefer an auto insurance policy that has a deductible and a premium.

Correct Answer
verified

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Correct Answer
verified

The lemons problem is caused by

Correct Answer
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Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Correct Answer
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-The market for aggressive drivers is illustrated in and the market for safe drivers is illustrated in .

Correct Answer
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In the auto insurance market, who is most likely to have private information that leads to adverse selection?

Correct Answer
verified

Exam 12: Markets With Private Information

Adverse selection is created by

Correct AnswerverifiedShow Answer

If a health insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer

Correct AnswerverifiedShow Answer

Which of the following can create inefficiency and deadweight loss?

Correct AnswerverifiedShow Answer

When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating

Correct AnswerverifiedShow Answer

Correct AnswerverifiedBecause buyers can't tell the difference...View AnswerShow Answer

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Correct AnswerverifiedShow Answer

Asymmetric information means that

Correct AnswerverifiedShow Answer

________ occurs when an informed person takes an action to send information to an uninformed person and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information.

Correct AnswerverifiedShow Answer

Of the following, the best example of private information is when

Correct AnswerverifiedShow Answer

"People buy insurance do protect themselves from moral hazard." True or false? Explain.

Correct AnswerverifiedThe statement is false.In fact, insuranc...View AnswerShow Answer

How can a warranty at the seller's expense signal that a product is high quality?

Correct AnswerverifiedIf the product is low quality, the warra...View AnswerShow Answer

"Screening" means that an auto insurance company is

Correct AnswerverifiedShow Answer

In the market for automobile insurance, adverse selection implies that

Correct AnswerverifiedShow Answer

If buyers cannot assess the quality of used cars and there are no warranties,

Correct AnswerverifiedShow Answer

A safe drive is likely to prefer an auto insurance policy that has a ________ deductible and a ________ premium.

Correct AnswerverifiedShow Answer

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Correct AnswerverifiedShow Answer

The lemons problem is caused by

Correct AnswerverifiedShow Answer

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Correct AnswerverifiedShow Answer

-The market for aggressive drivers is illustrated in ________ and the market for safe drivers is illustrated in ________.

Correct AnswerverifiedShow Answer

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Because buyers can't tell the difference...
View Answer

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .

Correct Answer
verified

Correct Answer
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occurs when an informed person takes an action to send information to an uninformed person and occurs when an uninformed person creates an incentive for an informed person to reveal private information.

Correct Answer
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Correct Answer
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Correct Answer
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The statement is false.In fact, insuranc...
View Answer

Correct Answer
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If the product is low quality, the warra...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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A safe drive is likely to prefer an auto insurance policy that has a deductible and a premium.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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-The market for aggressive drivers is illustrated in and the market for safe drivers is illustrated in .

Correct Answer
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Correct Answer
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