Exam 17: Uncertainty and Asymmetric Information

Related to the Economics in Practice on page 357: Insurance companies are interested in being legally allowed to obtain the results of genetic testing before deciding on issuing insurance policies to potential buyers, which would lessen the problem of ________ in the health insurance market.

Warranties, education, extracurricular activities are all examples of

Expected value and expected utility are synonyms.

Jim used to be very careful with his car. However, once he bought full auto insurance on it, he stopped turning on his alarm or even locking it when parking it. This is an example of adverse selection.

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 Income Total Utility \ 0 0 \ 40,000 20 \ 80,000 50 \ 120,000 90 \ 160,000 150 -Refer to Table 17.6. From the table, we can see that Isabel is

Relating to the Economics in Practice on page 362: The smart phone app which allows skiers at a slope to report weather conditions to others could be considered a form of

Moral hazard is a situation in which asymmetric information results in high-quality goods or high-quality consumers being squeezed out of transactions because they are unable to demonstrate their quality.

Which of the following statements about asymmetric information is true?

Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk-neutral, which job offer will he choose?

Adverse selection and moral hazard arise because of

If a buyer or seller enters into an exchange with another party who has more information, there is

In the area of market signaling, education is a strong signal in the job market because

Refer to the data provided in Table 17.2 below to answer the following question(s). The table shows the relationship between income and utility for Sue. Table 17.2 Income Total Utility \ 0 0 \ 20,000 20 \ 40,000 40 \ 60,000 60 \ 80,000 80 -Refer to Table 17.2. Sue earns $40,000 annually. She has the opportunity to bet her entire salary on the upcoming super bowl. If Sue takes the bet, she will pick the Patriots. She believes that the Patriots have a 50-50 chance of winning the game. If the Patriots win, Sue will win $81,000 but if they lose she loses her entire salary ($0). Will Sue take the bet?

Universal health coverage, lemon laws, and dealer warranties are all examples of tools used to reduce

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2 -Refer to Figure 17.2. Suppose Sam's utility from income is given in the diagram. From this we would say that Sam is

________ is (are) used to distinguish between high and low quality and help correct the adverse selection problem.

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 Income Total Utility \ 0 0 \ 40,000 20 \ 80,000 50 \ 120,000 90 \ 160,000 150 -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 which will pay her her full salary in the event she becomes disabled. Such an insurance policy be worth ________ to Isabel.

Which of the following are examples of tools used to reduce adverse selection?

For most people, as their income increases, their utility from that income ________ at a(n) ________ rate.

Hudson has two job offers when he graduates from college. Hudson views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $45,000. The second offer is at a fixed salary of $25,000 plus a possible bonus of $40,000. Hudson believes that he has a 50-50 chance of earning the bonus. If Hudson takes the offer that maximizes his expected utility and he is risk-loving, then