Question 1

Performance compensation that is tied to outcomes out of the employees' control will provide employees with the incentive to work hard.

Accepted Answer

A) True 
 B)False

Question 2

Labor market compensation contracts can be designed to screen out poor quality workers as well as provide employees with incentives to work hard.

Accepted Answer

A) True 
 B)False

Question 3

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet.

Accepted Answer

A) True 
 B)False

Question 4

A lender faces a(n) ________ problem if borrowers with a greater chance of defaulting on their loans get loans from the lender.

Accepted Answer

A)  adverse selection 
B)  moral hazard 
C)  external cost 
D)  free‐rider 
A)  adverse selection 
B)  moral hazard 
C)  external cost 
D)  free‐rider

Question 5

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
 $$\begin{array} { | c | c | } 
\hline \text { Income } & \text { Total Utility } \
\hline \$ 0 & 0 \
\hline \$ 40,000 & 20 \
\hline \$ 80,000 & 50 \
\hline \$ 120,000 & 90 \
\hline \$ 160,000 & 150 \
\hline
\end{array}$$
-Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Would Isabel purchase such a policy?

Accepted Answer

A)  yes 
B)  no 
C)  maybe 
D)  indeterminate from the given information 
A)  yes 
B)  no 
C)  maybe 
D)  indeterminate from the given information

Question 6

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. What is the expected value of the game?

Accepted Answer

A)  -$12 
B)  $0 
C)  $8 
D)  $32 
A)  -$12 
B)  $0 
C)  $8 
D)  $32

Question 7

You cause an automobile liability insurance company to face a moral hazard problem when you take ________ driving precautions ________ you buy automobile liability insurance from the company.

Accepted Answer

A)  fewer; after 
B)  more; after 
C)  fewer; before 
D)  the same; before and after 
A)  fewer; after 
B)  more; after 
C)  fewer; before 
D)  the same; before and after

Question 8

Which of the following are examples of market signals?

Accepted Answer

A)  warranties 
B)  education 
C)  extracurricular activities 
D)  all of the above 
A)  warranties 
B)  education 
C)  extracurricular activities 
D)  all of the above

Question 9

A fair bet is a game whose expected value is positive.

Accepted Answer

A) True 
 B)False

Question 10

In general, risk-loving individuals experience increasing marginal utility from income.

Accepted Answer

A) True 
 B)False

Question 11

Refer to the data provided in Table 17.4 below to answer the following question(s). The table shows the relationship between income and utility for Celeste.
Table 17.4
 $$\begin{array} { | c | c | } 
\hline  { \text { Income } } & \text { Total Utility } \
\hline \$ 0 & 0 \
\hline \$ 40,000 & 50 \
\hline \$ 80,000 & 90 \
\hline \$ 120,000 & 120 \
\hline \$ 160,000 & 140 \
\hline
\end{array}$$
-Refer to Table 17.4. Suppose Celeste has a 1/3 chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Celeste does not become disabled, she will earn her usual salary of $120,000. Celeste has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. On average, such a contract would cost the insurance company ________ per insured person.

Accepted Answer

A)  $40,000 
B)  $60,000 
C)  $80,000 
D)  $120,000 
A)  $40,000 
B)  $60,000 
C)  $80,000 
D)  $120,000

Question 12

Refer to the data provided in Table 17.5 below to answer the following question(s). The table shows the relationship between income and utility for Lucy.
Table 17.5
 $$\begin{array} { | c | c | } 
\hline \text { Income } & \text { Total Utility } \
\hline \$ 0 & 0 \
\hline \$ 10,000 & 10 \
\hline \$ 20,000 & 20 \
\hline \$ 30,000 & 30 \
\hline \$ 40,000 & 40 \
\hline
\end{array}$$
-Refer to Table 17.5. From the table, we can see that Lucy is

Accepted Answer

A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Lucy's attitude toward risk from the table. 
A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Lucy's attitude toward risk from the table.

Question 13

You cause a fire insurance company to face a moral hazard problem when you take ________ you buy fire insurance from the company.

Accepted Answer

A)  fewer precautions to prevent fires after 
B)  more precautions to prevent fires after 
C)  fewer precautions to prevent fires before 
D)  the same precautions to prevent fires before and after 
A)  fewer precautions to prevent fires after 
B)  more precautions to prevent fires after 
C)  fewer precautions to prevent fires before 
D)  the same precautions to prevent fires before and after

Question 14

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
 $$\begin{array} { | r | c | } 
\hline \text { Income } & \text { Total Utility } \
\hline \$ 0 & 0 \
\hline \$ 20,000 & 10 \
\hline \$ 40,000 & 25 \
\hline \$ 60,000 & 45 \
\hline \$ 80,000 & 75 \
\hline
\end{array}$$
-Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Terri?

Accepted Answer

A)  $0 
B)  less than $20,000 but more than $0 
C)  $20,000 or more 
D)  indeterminate from the given information 
A)  $0 
B)  less than $20,000 but more than $0 
C)  $20,000 or more 
D)  indeterminate from the given information

Question 15

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow.   Figure 17.1
-Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is

Accepted Answer

A)  risk-neutral. 
B)  risk-averse. 
C)  risk-loving. 
D)  a risk taker. 
A)  risk-neutral. 
B)  risk-averse. 
C)  risk-loving. 
D)  a risk taker.

Question 16

Consider the following game. You roll a 6-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The $50 when you "win" and the -$10 when you "lose" are known as

Accepted Answer

A)  payoffs. 
B)  winnings and losings, respectively. 
C)  incentives. 
D)  expected values. 
A)  payoffs. 
B)  winnings and losings, respectively. 
C)  incentives. 
D)  expected values.

Question 17

Related to the Economics in Practice on page 359: The individual mandate feature of the Affordable Care Act potentially broadens the pool of people who are in the health insurance market. Including young, healthy people in this pool via the mandate should potentially reduce ________ and ________ overall health care costs.

Accepted Answer

A)  adverse selection ; raise 
B)  asymmetric information; raise 
C)  adverse selection; lower 
D)  asymmetric information; have no impact on 
A)  adverse selection ; raise 
B)  asymmetric information; raise 
C)  adverse selection; lower 
D)  asymmetric information; have no impact on

Question 18

Relating to the Economics in Practice on page 357: A long-term study of Huntington's disease patients found that individuals who carry the Huntington's disease genetic mutation are up to five times as likely as the general population to buy long-term care insurance. This is an example of ________ in the health insurance market.

Accepted Answer

A)  moral hazard 
B)  risk-loving 
C)  adverse selection 
D)  market signaling 
A)  moral hazard 
B)  risk-loving 
C)  adverse selection 
D)  market signaling

Question 19

All of the following statements about asymmetric information are true except

Accepted Answer

A)  asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have. 
B)  asymmetric information creates market failures because it makes it harder for individuals to engage in transactions that would take place in the presence of perfect information. 
C)  asymmetric information can only be solved through government intervention. 
D)  asymmetric information occurs in the market for used cars and in the insurance market. 
A)  asymmetric information occurs when one party to a transaction has relevant information to the transaction that the other party does not have. 
B)  asymmetric information creates market failures because it makes it harder for individuals to engage in transactions that would take place in the presence of perfect information. 
C)  asymmetric information can only be solved through government intervention. 
D)  asymmetric information occurs in the market for used cars and in the insurance market.

Question 20

Consider the following game. You roll a six-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The expected value of the game is

Accepted Answer

A)  -$10. 
B)  $0. 
C)  $10. 
D)  $50. 
A)  -$10. 
B)  $0. 
C)  $10. 
D)  $50.

Performance compensation that is tied to outcomes out of the employees' control will provide employees with the incentive to work hard.

Labor market compensation contracts can be designed to screen out poor quality workers as well as provide employees with incentives to work hard.

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet.

A lender faces a(n) ________ problem if borrowers with a greater chance of defaulting on their loans get loans from the lender.

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. What is the expected value of the game?

You cause an automobile liability insurance company to face a moral hazard problem when you take driving precautions you buy automobile liability insurance from the company.

Which of the following are examples of market signals?

A fair bet is a game whose expected value is positive.

In general, risk-loving individuals experience increasing marginal utility from income.

You cause a fire insurance company to face a moral hazard problem when you take ________ you buy fire insurance from the company.

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is

Consider the following game. You roll a 6-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The $50 when you "win" and the -$10 when you "lose" are known as

All of the following statements about asymmetric information are true except

Consider the following game. You roll a six-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The expected value of the game is

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Monopolistic Competition

Externalities, Public Goods, and Common Resources

Income Distribution and Poverty

Public Finance: the Economics of Taxation

International Trade, Comparative Advantage, and Protectionism

Economic Growth in Developing Economies

Critical Thinking About Research

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Exam 17: Uncertainty and Asymmetric Information

Performance compensation that is tied to outcomes out of the employees' control will provide employees with the incentive to work hard.

Labor market compensation contracts can be designed to screen out poor quality workers as well as provide employees with incentives to work hard.

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet.

A lender faces a(n) ________ problem if borrowers with a greater chance of defaulting on their loans get loans from the lender.

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. What is the expected value of the game?

You cause an automobile liability insurance company to face a moral hazard problem when you take ________ driving precautions ________ you buy automobile liability insurance from the company.

Which of the following are examples of market signals?

A fair bet is a game whose expected value is positive.

In general, risk-loving individuals experience increasing marginal utility from income.

You cause a fire insurance company to face a moral hazard problem when you take ________ you buy fire insurance from the company.

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. Suppose John's utility from income is given in the figure. From this we would say that John is

Consider the following game. You roll a 6-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The $50 when you "win" and the -$10 when you "lose" are known as

All of the following statements about asymmetric information are true except

Consider the following game. You roll a six-sided die and each time you roll a 1, you get $50. For all other outcomes you pay $10. The expected value of the game is

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Monopolistic Competition

Externalities, Public Goods, and Common Resources

Income Distribution and Poverty

Public Finance: the Economics of Taxation

International Trade, Comparative Advantage, and Protectionism

Economic Growth in Developing Economies

Critical Thinking About Research

Filters

You cause an automobile liability insurance company to face a moral hazard problem when you take driving precautions you buy automobile liability insurance from the company.