Question 1

In the used car market without warranties,adverse selection results in

Accepted Answer

A)  sellers of "lemons" claiming that their car is a lemon. 
B)  only lemons being available for sale. 
C)  the market price of used cars equal to that of good used cars. 
D)  an efficient pooling equilibrium. 
E)  all of the above 
A)  sellers of "lemons" claiming that their car is a lemon. 
B)  only lemons being available for sale. 
C)  the market price of used cars equal to that of good used cars. 
D)  an efficient pooling equilibrium. 
E)  all of the above

Question 2

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Accepted Answer

A)  owners of peaches cannot convince buyers that their cars are worth $10,000. 
B)  buyers cannot convince owners of peaches to sell their cars for $10,000. 
C)  owners of lemons cannot convince buyers that their cars are worth more than $4,000. 
D)  buyers cannot convince owners of lemons to sell their cars for more than $4,000. 
E)  buyers cannot convince owners of lemons to sell their cars for $4,000. 
A)  owners of peaches cannot convince buyers that their cars are worth $10,000. 
B)  buyers cannot convince owners of peaches to sell their cars for $10,000. 
C)  owners of lemons cannot convince buyers that their cars are worth more than $4,000. 
D)  buyers cannot convince owners of lemons to sell their cars for more than $4,000. 
E)  buyers cannot convince owners of lemons to sell their cars for $4,000.

Question 3

Which of the following has a positive externality and hence can be underprovided?

Accepted Answer

A)  Chronically ill people are not allowed to buy insurance. 
B)  health insurance purchased through an employer 
C)  vaccination 
D)  Health Maintenance Organizations 
E)  None of the above has a positive externality. 
A)  Chronically ill people are not allowed to buy insurance. 
B)  health insurance purchased through an employer 
C)  vaccination 
D)  Health Maintenance Organizations 
E)  None of the above has a positive externality.

Question 4

Bill purchases property insurance for his office building,which includes coverage for fire damage.The policy offers premium discounts for smoke detectors,fire alarms,fire extinguishers and sprinkler systems.This is an incentive system to help avoid

Accepted Answer

A)  adverse selection. 
B)  adverse signals. 
C)  moral hazard. 
D)  screening. 
E)  None of the above answers is correct. 
A)  adverse selection. 
B)  adverse signals. 
C)  moral hazard. 
D)  screening. 
E)  None of the above answers is correct.

Question 5

One way of screening in the automobile insurance market is for companies to

Accepted Answer

A)  offer policies with different deductibles and different premiums. 
B)  insure only careful drivers. 
C)  insure only risky drivers. 
D)  eliminate policies with no-claim bonuses because these policies are usually not profitable. 
E)  offer warranties. 
A)  offer policies with different deductibles and different premiums. 
B)  insure only careful drivers. 
C)  insure only risky drivers. 
D)  eliminate policies with no-claim bonuses because these policies are usually not profitable. 
E)  offer warranties.

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. 
A)  incentives to change behavior after two parties have reached an agreement. 
B)  risk. 
C)  signaling. 
D)  taxes. 
E)  private information.

Question 7

Vaccination against infectious diseases ________ so private markets will provide ________ efficient quantity of vaccination.

Accepted Answer

A)  is a public good; less than 
B)  is a public good; the 
C)  leads to adverse selection; less than 
D)  has a positive externality; less than 
E)  has a positive externality; the 
A)  is a public good; less than 
B)  is a public good; the 
C)  leads to adverse selection; less than 
D)  has a positive externality; less than 
E)  has a positive externality; the

Question 8

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

Question 9

Most observers suggest that health care in the United States faces two major problems:

Accepted Answer

A)  too many people have health insurance, and health care costs too much. 
B)  a significant shortage of doctors, and health care costs too much. 
C)  a vast oversupply of hospital rooms and a significant shortage of doctors. 
D)  Health Maintenance Organizations are too common, and too many people do not have health insurance. 
E)  too many people do not have health insurance, and health care costs too much. 
A)  too many people have health insurance, and health care costs too much. 
B)  a significant shortage of doctors, and health care costs too much. 
C)  a vast oversupply of hospital rooms and a significant shortage of doctors. 
D)  Health Maintenance Organizations are too common, and too many people do not have health insurance. 
E)  too many people do not have health insurance, and health care costs too much.

Question 10

Private information is a situation in which

Accepted Answer

A)  two parties to an exchange have information that is available to outsiders if they ask. 
B)  one party to an exchange has information that is not available to the other. 
C)  the marginal cost of a person's obtaining additional information is zero. 
D)  the marginal cost of making information available to one more person is zero. 
E)  outsiders have relevant information that is not available to the people in the market. 
A)  two parties to an exchange have information that is available to outsiders if they ask. 
B)  one party to an exchange has information that is not available to the other. 
C)  the marginal cost of a person's obtaining additional information is zero. 
D)  the marginal cost of making information available to one more person is zero. 
E)  outsiders have relevant information that is not available to the people in the market.

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

Question 12

The lemons problem in the used car market is that

Accepted Answer

A)  the price of a lemon is too high. 
B)  the price of a lemon is too low. 
C)  no lemons are bought and sold. 
D)  only lemons are bought and sold. 
E)  Both answers A and D are correct. 
A)  the price of a lemon is too high. 
B)  the price of a lemon is too low. 
C)  no lemons are bought and sold. 
D)  only lemons are bought and sold. 
E)  Both answers A and D are correct.

Question 13

What is the missing insurance market in health care? Why don't private markets provide this insurance?

Accepted Answer

The missing market is the insurance mark

Question 14

In the market for health care services,Health Maintenance Organizations

Accepted Answer

A)  exist to insure people with pre-existing medical conditions. 
B)  overprovide medical care and thereby result in increased costs. 
C)  help overcome adverse selection by enrolling only healthy clients. 
D)  help overcome moral hazard by monitoring the quality of the service. 
E)  None of the above answers is correct. 
A)  exist to insure people with pre-existing medical conditions. 
B)  overprovide medical care and thereby result in increased costs. 
C)  help overcome adverse selection by enrolling only healthy clients. 
D)  help overcome moral hazard by monitoring the quality of the service. 
E)  None of the above answers is correct.

Question 15

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. 
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.

Question 16

In a pooling equilibrium,there is ________ of insurance in the market for safe drivers,and there is ________ of insurance in the market for aggressive drivers.

Accepted Answer

A)  overprovision; underprovision 
B)  overprovision; overprovision 
C)  underprovision; underprovision 
D)  underprovision; overprovision 
E)  underprovision; an efficient quantity 
A)  overprovision; underprovision 
B)  overprovision; overprovision 
C)  underprovision; underprovision 
D)  underprovision; overprovision 
E)  underprovision; an efficient quantity

Question 17

In the health insurance market,moral hazard occurs when

Accepted Answer

A)  chronically ill people buy insurance. 
B)  chronically ill people cannot buy insurance. 
C)  insured people adopt an unhealthy lifestyle. 
D)  patients sue their doctor. 
E)  chronically ill people refuse appropriate medical treatment. 
A)  chronically ill people buy insurance. 
B)  chronically ill people cannot buy insurance. 
C)  insured people adopt an unhealthy lifestyle. 
D)  patients sue their doctor. 
E)  chronically ill people refuse appropriate medical treatment.

Question 18

The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

Accepted Answer

A)  adverse selection. 
B)  a pooling selection. 
C)  moral hazard. 
D)  the market for oranges. 
E)  a signal. 
A)  adverse selection. 
B)  a pooling selection. 
C)  moral hazard. 
D)  the market for oranges. 
E)  a signal.

Question 19

In a pooling equilibrium,there ________ a deadweight loss in the market for safe drivers,and there ________ a deadweight loss in the market for aggressive drivers.

Accepted Answer

A)  is; is 
B)  is; is not 
C)  is not; is 
D)  is not; is not 
E)  might be; might be 
A)  is; is 
B)  is; is not 
C)  is not; is 
D)  is not; is not 
E)  might be; might be

Question 20

In the insurance market,private information

Accepted Answer

A)  creates moral hazard but eliminates adverse selection. 
B)  creates adverse selection but eliminates moral hazard. 
C)  creates both moral hazard and adverse selection. 
D)  eliminates both moral hazard and adverse selection. 
E)  means that screening is unnecessary. 
A)  creates moral hazard but eliminates adverse selection. 
B)  creates adverse selection but eliminates moral hazard. 
C)  creates both moral hazard and adverse selection. 
D)  eliminates both moral hazard and adverse selection. 
E)  means that screening is unnecessary.

In the used car market without warranties,adverse selection results in

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Which of the following has a positive externality and hence can be underprovided?

Bill purchases property insurance for his office building,which includes coverage for fire damage.The policy offers premium discounts for smoke detectors,fire alarms,fire extinguishers and sprinkler systems.This is an incentive system to help avoid

One way of screening in the automobile insurance market is for companies to

Adverse selection is created by

Vaccination against infectious diseases so private markets will provide efficient quantity of vaccination.

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

Most observers suggest that health care in the United States faces two major problems:

Private information is a situation in which

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

The lemons problem in the used car market is that

What is the missing insurance market in health care? Why don't private markets provide this insurance?

In the market for health care services,Health Maintenance Organizations

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

In a pooling equilibrium,there is of insurance in the market for safe drivers,and there is of insurance in the market for aggressive drivers.

In the health insurance market,moral hazard occurs when

The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

In a pooling equilibrium,there a deadweight loss in the market for safe drivers,and there a deadweight loss in the market for aggressive drivers.

In the insurance market,private information

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

In the used car market without warranties,adverse selection results in

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Which of the following has a positive externality and hence can be underprovided?

Bill purchases property insurance for his office building,which includes coverage for fire damage.The policy offers premium discounts for smoke detectors,fire alarms,fire extinguishers and sprinkler systems.This is an incentive system to help avoid

One way of screening in the automobile insurance market is for companies to

Adverse selection is created by

Vaccination against infectious diseases ________ so private markets will provide ________ efficient quantity of vaccination.

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

Most observers suggest that health care in the United States faces two major problems:

Private information is a situation in which

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

The lemons problem in the used car market is that

What is the missing insurance market in health care? Why don't private markets provide this insurance?

In the market for health care services,Health Maintenance Organizations

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

In a pooling equilibrium,there is ________ of insurance in the market for safe drivers,and there is ________ of insurance in the market for aggressive drivers.

In the health insurance market,moral hazard occurs when

The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as

In a pooling equilibrium,there ________ a deadweight loss in the market for safe drivers,and there ________ a deadweight loss in the market for aggressive drivers.

In the insurance market,private information

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

Vaccination against infectious diseases so private markets will provide efficient quantity of vaccination.

In a pooling equilibrium,there is of insurance in the market for safe drivers,and there is of insurance in the market for aggressive drivers.

In a pooling equilibrium,there a deadweight loss in the market for safe drivers,and there a deadweight loss in the market for aggressive drivers.