Question 1

A good driver who becomes more reckless after obtaining automobile insurance is an example of moral hazard.

Accepted Answer

A) True 
 B)False

Question 2

The domination of the used car market by lemons is an example of the ________ problem.

Accepted Answer

A)  adverse selection 
B)  moral hazard 
C)  perfect information 
D)  marginal analysis 
A)  adverse selection 
B)  moral hazard 
C)  perfect information 
D)  marginal analysis

Question 3

Ward is thinking about buying fire insurance for his store.Explain how asymmetric information occurs when the policy is issued.Explain how moral hazard might occur after the policy is issued.

Accepted Answer

Asymmetric information occurs because Wa

Question 4

After Fred discovered he was seriously ill,he went and purchased health insurance without telling the insurance company about his illness.This is an example of moral hazard.

Accepted Answer

A) True 
 B)False

Question 5

Health insurance companies are often at an advantage because they must pick from a desirable selection of customers.

Accepted Answer

A) True 
 B)False

Question 6

The result of adverse selection is that

Accepted Answer

A)  higher-quality producers drive lower-quality producers out of the market. 
B)  lower-quality producers drive higher-quality producers out of the market. 
C)  consumers will be able to purchase only high-quality products. 
D)  higher-quality producers receive a higher price than they would if adverse selection was not present. 
A)  higher-quality producers drive lower-quality producers out of the market. 
B)  lower-quality producers drive higher-quality producers out of the market. 
C)  consumers will be able to purchase only high-quality products. 
D)  higher-quality producers receive a higher price than they would if adverse selection was not present.

Question 7

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s).
-Recall the Application.In the market for used baseball pitchers,

Accepted Answer

A)  free agency has eliminated the adverse selection problem. 
B)  pitchers who switch teams are generally healthier than those who do not. 
C)  asymmetric information leads to adverse selection. 
D)  both A and B 
A)  free agency has eliminated the adverse selection problem. 
B)  pitchers who switch teams are generally healthier than those who do not. 
C)  asymmetric information leads to adverse selection. 
D)  both A and B

Question 8

If insurance premiums are based on an experience rating,

Accepted Answer

A)  every firm in a given area pays the same price for medical insurance. 
B)  insurance premiums are based on the past medical bills of a firm's employees. 
C)  firms have no incentive to try to lower the health care costs of their employees. 
D)  firms will not be concerned with the health problems of job applicants. 
A)  every firm in a given area pays the same price for medical insurance. 
B)  insurance premiums are based on the past medical bills of a firm's employees. 
C)  firms have no incentive to try to lower the health care costs of their employees. 
D)  firms will not be concerned with the health problems of job applicants.

Question 9

The adverse selection problem happens when an informed buyer or seller must choose from an undesirable selection of goods.

Accepted Answer

A) True 
 B)False

Question 10

-Refer to Figure 14.1.If the insurance company assumes there will be a 50-50 split between high-cost and low-cost customers,the price of insurance will be ________ and there will be ________ consumers.

Accepted Answer

A)  5,000; 150 
B)  5,000; 200 
C)  7,500; 75 
D)  7,500; 125 
A)  5,000; 150 
B)  5,000; 200 
C)  7,500; 75 
D)  7,500; 125

Question 11

Suppose that buyers in the used electric washer market are willing to pay $100 for a high-quality electric washer and $50 for a low-quality electric washer.If buyers believe that 70% of all used electric washer are low-quality,what is the maximum price they would be willing to pay for a used electric washer?

Accepted Answer

A)  $35 
B)  $50 
C)  $65 
D)  $70 
A)  $35 
B)  $50 
C)  $65 
D)  $70

Question 12

Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s).
-Recall the Application.There is asymmetric information in the kiwifruit market because

Accepted Answer

A)  buyers have more information than sellers. 
B)  sellers have more information than buyers. 
C)  both the buyers and sellers have complete information. 
D)  sellers have the same information as the buyers. 
A)  buyers have more information than sellers. 
B)  sellers have more information than buyers. 
C)  both the buyers and sellers have complete information. 
D)  sellers have the same information as the buyers.

Question 13

The reservation price provides consumers with a convenient rule for when to continue searching for a lower price.

Accepted Answer

A) True 
 B)False

Question 14

What is moral hazard?

Accepted Answer

Moral hazard arises when one p

Question 15

Reservation prices and search efforts are the same across consumers.

Accepted Answer

A) True 
 B)False

Question 16

Suppose that buyers are willing to pay $1,000 for a plum used computer and $300 for a lemon.If buyers expect 40% of the used computers to be plums,what is the maximum amount that buyers will be willing to pay for a used computer?

Accepted Answer

The most a buyer would be will

Question 17

Table 14.2
-Refer to Table 14.2,which shows the market for used fishing boats.Which of the following is NOT true about this market?

Accepted Answer

A)  The price buyers will be willing to pay will rise. 
B)  The quantity of plums supplied will rise. 
C)  The proportion of lemons in the market will rise. 
D)  All of the above are false. 
A)  The price buyers will be willing to pay will rise. 
B)  The quantity of plums supplied will rise. 
C)  The proportion of lemons in the market will rise. 
D)  All of the above are false.

Question 18

An example of adverse selection is

Accepted Answer

A)  when high-quality loan applicants drive low-quality loan applicants out of the market for bank loans. 
B)  when a person discovers that he has a serious illness and then purchases health insurance. 
C)  when consumers are not willing to pay top dollar for a used car because of imperfect information. 
D)  All of the above are examples of adverse selection. 
A)  when high-quality loan applicants drive low-quality loan applicants out of the market for bank loans. 
B)  when a person discovers that he has a serious illness and then purchases health insurance. 
C)  when consumers are not willing to pay top dollar for a used car because of imperfect information. 
D)  All of the above are examples of adverse selection.

Question 19

The price where the marginal benefit of search equals the marginal cost is called the

Accepted Answer

A)  search price. 
B)  discovered price. 
C)  marginal price. 
D)  reservation price. 
A)  search price. 
B)  discovered price. 
C)  marginal price. 
D)  reservation price.

Question 20

Suppose air bags make people feel safer and hence they drive more recklessly.This is an example of

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  asymmetric information. 
D)  a lemon market. 
A)  moral hazard. 
B)  adverse selection. 
C)  asymmetric information. 
D)  a lemon market.

A good driver who becomes more reckless after obtaining automobile insurance is an example of moral hazard.

The domination of the used car market by lemons is an example of the ________ problem.

Ward is thinking about buying fire insurance for his store.Explain how asymmetric information occurs when the policy is issued.Explain how moral hazard might occur after the policy is issued.

After Fred discovered he was seriously ill,he went and purchased health insurance without telling the insurance company about his illness.This is an example of moral hazard.

Health insurance companies are often at an advantage because they must pick from a desirable selection of customers.

The result of adverse selection is that

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). -Recall the Application.In the market for used baseball pitchers,

If insurance premiums are based on an experience rating,

The adverse selection problem happens when an informed buyer or seller must choose from an undesirable selection of goods.

-Refer to Figure 14.1.If the insurance company assumes there will be a 50-50 split between high-cost and low-cost customers,the price of insurance will be and there will be consumers.

Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s). -Recall the Application.There is asymmetric information in the kiwifruit market because

The reservation price provides consumers with a convenient rule for when to continue searching for a lower price.

What is moral hazard?

Reservation prices and search efforts are the same across consumers.

Suppose that buyers are willing to pay $1,000 for a plum used computer and $300 for a lemon.If buyers expect 40% of the used computers to be plums,what is the maximum amount that buyers will be willing to pay for a used computer?

Table 14.2 -Refer to Table 14.2,which shows the market for used fishing boats.Which of the following is NOT true about this market?

An example of adverse selection is

The price where the marginal benefit of search equals the marginal cost is called the

Suppose air bags make people feel safer and hence they drive more recklessly.This is an example of

Introduction: What Is Economics

The Key Principles of Economics

Exchange and Markets

Demand,supply,and Market Equilibrium

Elasticity: a Measure of Responsiveness

Market Efficiency and Government Intervention

Consumer Choice: Utility Theory and Insights From Neuroscience

Production Technology and Cost

Perfect Competition

Monopoly and Price Discrimination

Market Entry and Monopolistic Competition

Oligopoly and Strategic Behavior

Controlling Market Power: Antitrust and Regulation

Public Goods and Public Choice

External Costs and Environmental Policy

The Labor Market and the Distribution of Income

International Trade and Public Policy

Filters

Exam 14: Imperfect Information: Adverse Selection and Moral Hazard

A good driver who becomes more reckless after obtaining automobile insurance is an example of moral hazard.

The domination of the used car market by lemons is an example of the ________ problem.

Ward is thinking about buying fire insurance for his store.Explain how asymmetric information occurs when the policy is issued.Explain how moral hazard might occur after the policy is issued.

After Fred discovered he was seriously ill,he went and purchased health insurance without telling the insurance company about his illness.This is an example of moral hazard.

Health insurance companies are often at an advantage because they must pick from a desirable selection of customers.

The result of adverse selection is that

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). -Recall the Application.In the market for used baseball pitchers,

If insurance premiums are based on an experience rating,

The adverse selection problem happens when an informed buyer or seller must choose from an undesirable selection of goods.

-Refer to Figure 14.1.If the insurance company assumes there will be a 50-50 split between high-cost and low-cost customers,the price of insurance will be ________ and there will be ________ consumers.

Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s). -Recall the Application.There is asymmetric information in the kiwifruit market because

The reservation price provides consumers with a convenient rule for when to continue searching for a lower price.

What is moral hazard?

Reservation prices and search efforts are the same across consumers.

Suppose that buyers are willing to pay $1,000 for a plum used computer and $300 for a lemon.If buyers expect 40% of the used computers to be plums,what is the maximum amount that buyers will be willing to pay for a used computer?

Table 14.2 -Refer to Table 14.2,which shows the market for used fishing boats.Which of the following is NOT true about this market?

An example of adverse selection is

The price where the marginal benefit of search equals the marginal cost is called the

Suppose air bags make people feel safer and hence they drive more recklessly.This is an example of

Introduction: What Is Economics

The Key Principles of Economics

Exchange and Markets

Demand,supply,and Market Equilibrium

Elasticity: a Measure of Responsiveness

Market Efficiency and Government Intervention

Consumer Choice: Utility Theory and Insights From Neuroscience

Production Technology and Cost

Perfect Competition

Monopoly and Price Discrimination

Market Entry and Monopolistic Competition

Oligopoly and Strategic Behavior

Controlling Market Power: Antitrust and Regulation

Public Goods and Public Choice

External Costs and Environmental Policy

The Labor Market and the Distribution of Income

International Trade and Public Policy

Filters

-Refer to Figure 14.1.If the insurance company assumes there will be a 50-50 split between high-cost and low-cost customers,the price of insurance will be and there will be consumers.