Question 1

Signals are believable when the cost of sending a ________ is known to be ________.

Accepted Answer

A)  false signal; low 
B)  false signal; high 
C)  true signal; low 
D)  true or false signal; low 
E)  true signal; high 
A)  false signal; low 
B)  false signal; high 
C)  true signal; low 
D)  true or false signal; low 
E)  true signal; high B

Question 2

Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?

Accepted Answer

Receiving a lifetime appointment creates a moral hazard.Knowing that one cannot be fired creates an incentive to shirk work.Colleges minimize the problem by looking for signals such as publications and an ongoing commitment to one's discipline during the six year probation period with the belief that those who work hard for these six years are also likely to work hard throughout the future.

Question 3

In the used car market,with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

Accepted Answer

A)  less than; equal to 
B)  equal to; less than 
C)  equal to; more than 
D)  more than; more than 
E)  equal to; equal to 
A)  less than; equal to 
B)  equal to; less than 
C)  equal to; more than 
D)  more than; more than 
E)  equal to; equal to B

Question 4

If a salesperson is paid by the volume of sales he or she makes,then the

Accepted Answer

A)  moral hazard problem is diminished. 
B)  lemons problem can be screened. 
C)  moral hazard problem is enhanced. 
D)  adverse selection problem is enhanced. 
E)  None of the above answers is correct. 
A)  moral hazard problem is diminished. 
B)  lemons problem can be screened. 
C)  moral hazard problem is enhanced. 
D)  adverse selection problem is enhanced. 
E)  None of the above answers is correct.

Question 5

When an auto insurance company is screening,it is

Accepted Answer

A)  ignoring the possibility of moral hazard in order to minimize adverse selection. 
B)  attempting to keep its private information private. 
C)  trying to determine if a driver is an aggressive driver or a safe driver. 
D)  making its private information public. 
E)  marketing its policies to customers. 
A)  ignoring the possibility of moral hazard in order to minimize adverse selection. 
B)  attempting to keep its private information private. 
C)  trying to determine if a driver is an aggressive driver or a safe driver. 
D)  making its private information public. 
E)  marketing its policies to customers.

Question 6

Because Don has health insurance,he is more likely to see the doctor when he has a cold.This is an example of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  the lemons problem. 
D)  both moral hazard and adverse selection. 
E)  private information. 
A)  adverse selection. 
B)  moral hazard. 
C)  the lemons problem. 
D)  both moral hazard and adverse selection. 
E)  private information.

Question 7

-The figures show the expenditures per person on health care and the efficiency of the health care system in 8 different nations.The United States is bar ________ in expenditures per person and is bar ________ in efficiency index.

Accepted Answer

A)  A; A 
B)  B; A 
C)  A; D 
D)  E; E 
E)  D; B 
A)  A; A 
B)  B; A 
C)  A; D 
D)  E; E 
E)  D; B

Question 8

In the used car market with warranties,the equilibrium is a ________ and the lemons problem is ________.

Accepted Answer

A)  pooling equilibrium; solved 
B)  pooling equilibrium; unresolved 
C)  separating equilibrium; unresolved 
D)  separating equilibrium; solved 
E)  pooling equilibrium; possibly solved and possibly unresolved, depending on whether good used cars sell for a higher price than do lemons 
A)  pooling equilibrium; solved 
B)  pooling equilibrium; unresolved 
C)  separating equilibrium; unresolved 
D)  separating equilibrium; solved 
E)  pooling equilibrium; possibly solved and possibly unresolved, depending on whether good used cars sell for a higher price than do lemons

Question 9

In the used car market with no warranties,the market for lemons (poor quality used cars)is ________ and the market for good cars is ________.

Accepted Answer

A)  efficient; efficient 
B)  inefficient because of oversupply; inefficient because of undersupply 
C)  inefficient because of oversupply; inefficient because of oversupply 
D)  efficient; inefficient because of undersupply 
E)  inefficient because of oversupply; efficient 
A)  efficient; efficient 
B)  inefficient because of oversupply; inefficient because of undersupply 
C)  inefficient because of oversupply; inefficient because of oversupply 
D)  efficient; inefficient because of undersupply 
E)  inefficient because of oversupply; efficient

Question 10

The idea of an insurance company "pooling" the risk means that

Accepted Answer

A)  the risk is completely eliminated from society. 
B)  the insurance company requires buyers to pay a large deductible. 
C)  the risk is spread over a large population. 
D)  the insurance company insists on a pooling equilibrium. 
E)  moral hazard and adverse selection are eliminated. 
A)  the risk is completely eliminated from society. 
B)  the insurance company requires buyers to pay a large deductible. 
C)  the risk is spread over a large population. 
D)  the insurance company insists on a pooling equilibrium. 
E)  moral hazard and adverse selection are eliminated.

Question 11

Suppose there are only two kinds of cars in the market for used cars: lemons and good cars.A lemon is worth $1,000 both to its current owner and to anyone who buys it.A good car is worth $8,000 to its current and potential owners.Buyers can't tell whether a car is a lemon until after they have bought the car,and there is no warranty.What is the equilibrium price of a used car?

Accepted Answer

A)  $8,000 
B)  $1,000 
C)  $4,500 
D)  $9,000 
E)  The equilibrium price depends on how many lemons and how many good cars are traded. 
A)  $8,000 
B)  $1,000 
C)  $4,500 
D)  $9,000 
E)  The equilibrium price depends on how many lemons and how many good cars are traded.

Question 12

Explain the concept of adverse selection.Give an example.

Accepted Answer

Adverse selection is a tendency for peop

Question 13

In the market for auto insurance,in a pooling equilibrium,

Accepted Answer

A)  risky and safe drivers pay the same premium for insurance. 
B)  risky drivers pay a larger premium than do safe drivers for insurance. 
C)  risky drivers pay a smaller premium than do safe drivers for insurance. 
D)  risky drivers cannot obtain insurance. 
E)  safe drivers cannot obtain insurance. 
A)  risky and safe drivers pay the same premium for insurance. 
B)  risky drivers pay a larger premium than do safe drivers for insurance. 
C)  risky drivers pay a smaller premium than do safe drivers for insurance. 
D)  risky drivers cannot obtain insurance. 
E)  safe drivers cannot obtain insurance.

Question 14

What is private information and what problems does it create?

Accepted Answer

Private information is informa

Question 15

The private market ________ health care because it sometimes ________ those with pre-existing conditions and because health care has ________ benefits.

Accepted Answer

A)  underprovides; includes; external 
B)  underprovides; excludes; external 
C)  overprovides; includes; external 
D)  overprovides; excludes; internal 
E)  underprovides; includes; internal 
A)  underprovides; includes; external 
B)  underprovides; excludes; external 
C)  overprovides; includes; external 
D)  overprovides; excludes; internal 
E)  underprovides; includes; internal

Question 16

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

Question 17

The missing insurance market in health care is the insurance market for

Accepted Answer

A)  young healthy people. 
B)  infectious diseases. 
C)  people who have pre-existing health problems. 
D)  people in Health Maintenance Organizations. 
E)  vaccinations. 
A)  young healthy people. 
B)  infectious diseases. 
C)  people who have pre-existing health problems. 
D)  people in Health Maintenance Organizations. 
E)  vaccinations.

Question 18

Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because

Accepted Answer

A)  the firm is not a profit maximizer. 
B)  your GPA screens some of your private information. 
C)  your GPA sends a signal about your quality as a worker. 
D)  the firm will most likely make an adverse selection. 
E)  the high GPA eliminates the possibility of moral hazard. 
A)  the firm is not a profit maximizer. 
B)  your GPA screens some of your private information. 
C)  your GPA sends a signal about your quality as a worker. 
D)  the firm will most likely make an adverse selection. 
E)  the high GPA eliminates the possibility of moral hazard.

Question 19

In the market for used cars,the lemons problem means that owners of ________ cars have no incentive to offer them for sale because the market price is ________ than their marginal benefit.

Accepted Answer

A)  good; more 
B)  bad; more 
C)  bad; less 
D)  fair; more 
E)  good; less 
A)  good; more 
B)  bad; more 
C)  bad; less 
D)  fair; more 
E)  good; less

Question 20

Insurance companies

Accepted Answer

A)  pool risk and enable everyone to share the costs of bad outcomes. 
B)  never can earn a profit because they accept risk. 
C)  eliminate the risk of a bad outcome. 
D)  know who will have a bad outcome. 
E)  are risk averse. 
A)  pool risk and enable everyone to share the costs of bad outcomes. 
B)  never can earn a profit because they accept risk. 
C)  eliminate the risk of a bad outcome. 
D)  know who will have a bad outcome. 
E)  are risk averse.

Signals are believable when the cost of sending a is known to be .

Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?

In the used car market,with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

If a salesperson is paid by the volume of sales he or she makes,then the

When an auto insurance company is screening,it is

Because Don has health insurance,he is more likely to see the doctor when he has a cold.This is an example of

-The figures show the expenditures per person on health care and the efficiency of the health care system in 8 different nations.The United States is bar in expenditures per person and is bar in efficiency index.

In the used car market with warranties,the equilibrium is a and the lemons problem is .

In the used car market with no warranties,the market for lemons (poor quality used cars)is and the market for good cars is .

The idea of an insurance company "pooling" the risk means that

Explain the concept of adverse selection.Give an example.

In the market for auto insurance,in a pooling equilibrium,

What is private information and what problems does it create?

The private market health care because it sometimes those with pre-existing conditions and because health care has benefits.

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

The missing insurance market in health care is the insurance market for

Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because

In the market for used cars,the lemons problem means that owners of cars have no incentive to offer them for sale because the market price is than their marginal benefit.

Insurance companies

Getting Started

The U.S.and Global Economies

The Economic Problem

Demand and Supply

Elasticities of Demand and Supply

Efficiency and Fairness of Markets

Government Actions in Markets

Taxes

Global Markets in Action

Externalities

Public Goods and Common Resources

Consumer Choice and Demand

Production and Cost

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Markets for Factors of Production

Economic Inequality

Filters

Exam 12: Markets with Private Information

Signals are believable when the cost of sending a ________ is known to be ________.

Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?

In the used car market,with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

If a salesperson is paid by the volume of sales he or she makes,then the

When an auto insurance company is screening,it is

Because Don has health insurance,he is more likely to see the doctor when he has a cold.This is an example of

-The figures show the expenditures per person on health care and the efficiency of the health care system in 8 different nations.The United States is bar ________ in expenditures per person and is bar ________ in efficiency index.

In the used car market with warranties,the equilibrium is a ________ and the lemons problem is ________.

In the used car market with no warranties,the market for lemons (poor quality used cars)is ________ and the market for good cars is ________.

The idea of an insurance company "pooling" the risk means that

Explain the concept of adverse selection.Give an example.

In the market for auto insurance,in a pooling equilibrium,

What is private information and what problems does it create?

The private market ________ health care because it sometimes ________ those with pre-existing conditions and because health care has ________ benefits.

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

The missing insurance market in health care is the insurance market for

Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because

In the market for used cars,the lemons problem means that owners of ________ cars have no incentive to offer them for sale because the market price is ________ than their marginal benefit.

Insurance companies

Getting Started

The U.S.and Global Economies

The Economic Problem

Demand and Supply

Elasticities of Demand and Supply

Efficiency and Fairness of Markets

Government Actions in Markets

Taxes

Global Markets in Action

Externalities

Public Goods and Common Resources

Consumer Choice and Demand

Production and Cost

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Markets for Factors of Production

Economic Inequality

Filters

Signals are believable when the cost of sending a is known to be .

In the used car market,with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

-The figures show the expenditures per person on health care and the efficiency of the health care system in 8 different nations.The United States is bar in expenditures per person and is bar in efficiency index.

In the used car market with warranties,the equilibrium is a and the lemons problem is .

In the used car market with no warranties,the market for lemons (poor quality used cars)is and the market for good cars is .

The private market health care because it sometimes those with pre-existing conditions and because health care has benefits.

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

In the market for used cars,the lemons problem means that owners of cars have no incentive to offer them for sale because the market price is than their marginal benefit.