Question 1

In the market for auto insurance,in a separating 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 2

In the market for automobile insurance,adverse selection implies that

Accepted Answer

A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  private information cannot be successfully screened. 
D)  insured and uninsured alike will take greater risks. 
E)  drivers with greater risks are more likely to buy insurance. 
A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  private information cannot be successfully screened. 
D)  insured and uninsured alike will take greater risks. 
E)  drivers with greater risks are more likely to buy insurance.

Question 3

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 is correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers. 
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 is correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers.

Question 4

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  a separating equilibrium. 
D)  signaling. 
E)  the lemons problem. 
A)  adverse selection. 
B)  moral hazard. 
C)  a separating equilibrium. 
D)  signaling. 
E)  the lemons problem.

Question 5

Which of the following is an example of moral hazard?

Accepted Answer

A)  I hire you to work in my garden for a fixed fee, and you work hard all day. 
B)  I hire you to work at an hourly rate and you work as slowly as possible. 
C)  You apply for the job only because I pay a fixed wage per day, no matter how much or little you do. 
D)  You agree to be paid by the weed to work in my garden, and then you work hard. 
E)  You agree to be paid by the weed to work in my garden, and then you don't work hard. 
A)  I hire you to work in my garden for a fixed fee, and you work hard all day. 
B)  I hire you to work at an hourly rate and you work as slowly as possible. 
C)  You apply for the job only because I pay a fixed wage per day, no matter how much or little you do. 
D)  You agree to be paid by the weed to work in my garden, and then you work hard. 
E)  You agree to be paid by the weed to work in my garden, and then you don't work hard.

Question 6

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)  car sellers would never lie. 
B)  car buyers are gullible. 
C)  signals lead to efficient pooling equilibriums. 
D)  the signal cannot be false. 
E)  a false signal can be costly to the seller. 
A)  car sellers would never lie. 
B)  car buyers are gullible. 
C)  signals lead to efficient pooling equilibriums. 
D)  the signal cannot be false. 
E)  a false signal can be costly to the seller.

Question 7

In the market for automobile insurance,drivers can reveal that they are low risk by buying policies with ________ deductibles and ________ premiums.

Accepted Answer

A)  high; low 
B)  low; high 
C)  high; high 
D)  low; low 
E)  zero; high 
A)  high; low 
B)  low; high 
C)  high; high 
D)  low; low 
E)  zero; high

Question 8

Compared to other major nations,the United States spends ________ on health care and achieves ________ efficiency.

Accepted Answer

A)  less; greater 
B)  more; about the same 
C)  less; less 
D)  more; less 
E)  about the same; less 
A)  less; greater 
B)  more; about the same 
C)  less; less 
D)  more; less 
E)  about the same; less

Question 9

Auto insurance companies charge a lower premium to drivers who carry a higher deductible because

Accepted Answer

A)  insurance companies are not profit maximizers. 
B)  a driver's riskiness increases as the driver's deductible increases. 
C)  a high deductible signals a high risk. 
D)  insurance companies prefer that drivers carry no deductible. 
E)  a high deductible reveals that driver is a careful driver. 
A)  insurance companies are not profit maximizers. 
B)  a driver's riskiness increases as the driver's deductible increases. 
C)  a high deductible signals a high risk. 
D)  insurance companies prefer that drivers carry no deductible. 
E)  a high deductible reveals that driver is a careful driver.

Question 10

Health-care vouchers have been proposed.These vouchers would

Accepted Answer

A)  cap total expenditure on health care but do nothing to solve the problem of uninsurance. 
B)  limit choice and would create long waiting times for health care service. 
C)  solve the problem of the doctor shortage but would not affect the problem of over spending on health care. 
D)  ensure universal coverage for health care and would cap total expenditure on health care. 
E)  None of the above answers is correct. 
A)  cap total expenditure on health care but do nothing to solve the problem of uninsurance. 
B)  limit choice and would create long waiting times for health care service. 
C)  solve the problem of the doctor shortage but would not affect the problem of over spending on health care. 
D)  ensure universal coverage for health care and would cap total expenditure on health care. 
E)  None of the above answers is correct.

Question 11

If Sally drives less carefully after buying auto insurance,she illustrates

Accepted Answer

A)  adverse selection. 
B)  negative selection. 
C)  screening risk. 
D)  moral hazard. 
E)  lemon hazard. 
A)  adverse selection. 
B)  negative selection. 
C)  screening risk. 
D)  moral hazard. 
E)  lemon hazard.

Question 12

Adverse selection can occur when

Accepted Answer

A)  all parties have full information. 
B)  one party has information not available to the other party. 
C)  information is not full but both parties have the same information. 
D)  incentives result in one party not reaching an agreement with the other party. 
E)  nobody has any information. 
A)  all parties have full information. 
B)  one party has information not available to the other party. 
C)  information is not full but both parties have the same information. 
D)  incentives result in one party not reaching an agreement with the other party. 
E)  nobody has any information.

Question 13

In the used car market with no warranties,the equilibrium is a ________ and there is ________.

Accepted Answer

A)  pooling equilibrium; inefficiency, partly because of oversupply of good cars 
B)  pooling equilibrium; inefficiency, partly because of oversupply of lemons 
C)  separating equilibrium; no inefficiency 
D)  separating equilibrium; inefficiency, partly because of oversupply of lemons 
E)  pooling equilibrium; no inefficiency 
A)  pooling equilibrium; inefficiency, partly because of oversupply of good cars 
B)  pooling equilibrium; inefficiency, partly because of oversupply of lemons 
C)  separating equilibrium; no inefficiency 
D)  separating equilibrium; inefficiency, partly because of oversupply of lemons 
E)  pooling equilibrium; no inefficiency

Question 14

Life insurance companies often give applicants a physical examination to prevent

Accepted Answer

A)  moral hazard. 
B)  screening. 
C)  adverse selection. 
D)  signaling. 
E)  warranties. 
A)  moral hazard. 
B)  screening. 
C)  adverse selection. 
D)  signaling. 
E)  warranties.

Question 15

Moral hazard is

Accepted Answer

A)  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. 
B)  when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. 
C)  a situation in which only bad quality items are bought and sold. 
D)  absent after a person who dislikes risk buys insurance against the risk. 
E)  an action taken outside a market that conveys information that can be used by that market. 
A)  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. 
B)  when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. 
C)  a situation in which only bad quality items are bought and sold. 
D)  absent after a person who dislikes risk buys insurance against the risk. 
E)  an action taken outside a market that conveys information that can be used by that market.

Question 16

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000,and lemons are worth $6,000.Three fourths of all used cars are peaches,and one fourth are lemons.In a market with no signals,for instance,a market without warranties,the average value of cars actually sold will be

Accepted Answer

A)  $6,000. 
B)  $7,000. 
C)  $7,500. 
D)  $9,000. 
E)  $10,000. 
A)  $6,000. 
B)  $7,000. 
C)  $7,500. 
D)  $9,000. 
E)  $10,000.

Question 17

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

Accepted Answer

A)  pooling equilibrium; inefficiency, partly because of oversupply of good cars 
B)  pooling equilibrium; inefficiency, partly because of oversupply of lemons (poor quality used cars) 
C)  separating equilibrium; no inefficiency 
D)  separating equilibrium; inefficiency, partly because of oversupply of lemons (poor quality used cars) 
E)  pooling equilibrium; no inefficiency 
A)  pooling equilibrium; inefficiency, partly because of oversupply of good cars 
B)  pooling equilibrium; inefficiency, partly because of oversupply of lemons (poor quality used cars) 
C)  separating equilibrium; no inefficiency 
D)  separating equilibrium; inefficiency, partly because of oversupply of lemons (poor quality used cars) 
E)  pooling equilibrium; no inefficiency

Question 18

Private information

Accepted Answer

A)  can create adverse selection but plays no role in creating moral hazard. 
B)  explains why drivers screen auto insurance companies. 
C)  means that unless it is overcome, the equilibrium in the market will be a separating equilibrium. 
D)  plays a role in the markets for health-care insurance and auto insurance. 
E)  cannot explain why the U.S. expenditures on health care per person exceed those in other major nations. 
A)  can create adverse selection but plays no role in creating moral hazard. 
B)  explains why drivers screen auto insurance companies. 
C)  means that unless it is overcome, the equilibrium in the market will be a separating equilibrium. 
D)  plays a role in the markets for health-care insurance and auto insurance. 
E)  cannot explain why the U.S. expenditures on health care per person exceed those in other major nations.

Question 19

Which of the following is not a problem in health-care markets?

Accepted Answer

A)  Hospitals are not trying to maximize their profit. 
B)  asymmetric information 
C)  public-health externalities 
D)  a missing insurance market 
E)  None of the above answers is correct; that is, all the answers are problems in health-care markets. 
A)  Hospitals are not trying to maximize their profit. 
B)  asymmetric information 
C)  public-health externalities 
D)  a missing insurance market 
E)  None of the above answers is correct; that is, all the answers are problems in health-care markets.

Question 20

Explain the concept of moral hazard.Give an example.

Accepted Answer

Moral hazard exists when one of the part

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

In the market for automobile insurance,adverse selection implies that

Which of the following can create inefficiency and deadweight loss?

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

Which of the following is an example of moral hazard?

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

In the market for automobile insurance,drivers can reveal that they are low risk by buying policies with deductibles and premiums.

Compared to other major nations,the United States spends on health care and achieves efficiency.

Auto insurance companies charge a lower premium to drivers who carry a higher deductible because

Health-care vouchers have been proposed.These vouchers would

If Sally drives less carefully after buying auto insurance,she illustrates

Adverse selection can occur when

In the used car market with no warranties,the equilibrium is a and there is .

Life insurance companies often give applicants a physical examination to prevent

Moral hazard is

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

Private information

Which of the following is not a problem in health-care markets?

Explain the concept of moral hazard.Give an example.

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 market for auto insurance,in a separating equilibrium,

In the market for automobile insurance,adverse selection implies that

Which of the following can create inefficiency and deadweight loss?

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

Which of the following is an example of moral hazard?

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

In the market for automobile insurance,drivers can reveal that they are low risk by buying policies with ________ deductibles and ________ premiums.

Compared to other major nations,the United States spends ________ on health care and achieves ________ efficiency.

Auto insurance companies charge a lower premium to drivers who carry a higher deductible because

Health-care vouchers have been proposed.These vouchers would

If Sally drives less carefully after buying auto insurance,she illustrates

Adverse selection can occur when

In the used car market with no warranties,the equilibrium is a ________ and there is ________.

Life insurance companies often give applicants a physical examination to prevent

Moral hazard is

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

Private information

Which of the following is not a problem in health-care markets?

Explain the concept of moral hazard.Give an example.

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

In the market for automobile insurance,drivers can reveal that they are low risk by buying policies with deductibles and premiums.

Compared to other major nations,the United States spends on health care and achieves efficiency.

In the used car market with no warranties,the equilibrium is a and there is .

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