Question 1

People's abilities to bear risk increases with:

Accepted Answer

A) their abilities to understand the market. 
B) their abilities to diversify their asset holdings. 
C) their abilities to invest in risky assets over a large time period. 
D) their abilities to judge the probability of outcomes. 
A) their abilities to understand the market. 
B) their abilities to diversify their asset holdings. 
C) their abilities to invest in risky assets over a large time period. 
D) their abilities to judge the probability of outcomes.

Question 2

When does the problem of adverse selection arise in any market?

Accepted Answer

The problem of adverse selection becomes

Question 3

An escalation or automatic adjustment provision in a purchase contract for some good deters opportunistic behavior and automatically reallocates risk as its price changes.

Accepted Answer

A) True 
 B)False

Question 4

Suppose in the market for used cars, buyers would be willing to pay $9,000 for a car in good condition, while buyers would have to incur a cost of $3,500 to repair a car in poor condition.Assume a risk-averse buyer is aware that some of the cars are lemons, but is uninformed about the probability of a car being in good condition or otherwise.What price would this buyer, seeking only to minimize risk, be willing to pay for a car?

Accepted Answer

A) $3,925 
B) $5,500 
C) $7,775 
D) $5,850 
A) $3,925 
B) $5,500 
C) $7,775 
D) $5,850

Question 5

DTC contracts which prohibit buyers from inspecting diamonds in advance help to minimize:

Accepted Answer

A) the problem of moral hazard. 
B) the cost of gathering duplicative information. 
C) the problem of adverse selection. 
D) the winner's curse. 
A) the problem of moral hazard. 
B) the cost of gathering duplicative information. 
C) the problem of adverse selection. 
D) the winner's curse.

Question 6

Suppose the probability of a near-new car being good is 0.4 while its probability of being a lemon is 0.6.If risk-neutral consumers are willing to pay $14,000 if the car is in good condition and $8,000 if it is a lemon, a risk averse buyer who knows those probabilities would be willing to pay $10,400 for the car.

Accepted Answer

A) True 
 B)False

Question 7

The study conducted by Eric Bond of Vanderbilt University on the repair histories of a large sample of pickup trucks over three years old ascertained that:

Accepted Answer

A) the repair costs of trucks held by original users was similar to those held by second hand users. 
B) the repair cost of trucks held by second hand users was higher compared to those held by original users. 
C) the repair cost of trucks held by original users was higher compared to those held by second hand users. 
D) the repair costs of trucks held by original users as well as those held by second hand users increased by the same magnitude every year. 
A) the repair costs of trucks held by original users was similar to those held by second hand users. 
B) the repair cost of trucks held by second hand users was higher compared to those held by original users. 
C) the repair cost of trucks held by original users was higher compared to those held by second hand users. 
D) the repair costs of trucks held by original users as well as those held by second hand users increased by the same magnitude every year.

Question 8

What are the disadvantages of a standard form contract?

Accepted Answer

A standard-form contract like an insuran

Question 9

Explain the difference between adverse selection and moral hazard?

Accepted Answer

In the model of adverse selection, the s

Question 10

Adverse selection can occur if:

Accepted Answer

A) high-risk persons insure themselves more heavily than low-risk persons. 
B) high-risk persons claim coverage which cannot be borne by the insurers. 
C) high-risk persons do not conceal information from the insurer. 
D) high-risk persons make an effort to take less risk in the presence of an insurance cover. 
A) high-risk persons insure themselves more heavily than low-risk persons. 
B) high-risk persons claim coverage which cannot be borne by the insurers. 
C) high-risk persons do not conceal information from the insurer. 
D) high-risk persons make an effort to take less risk in the presence of an insurance cover.

Question 11

A buyer and a seller equally aware of market conditions enter into a contract to exchange a good at some date in the future.If the buyer benefits while the seller loses because the former anticipated the market price more accurately, the seller's loss can be attributed to asymmetric information.

Accepted Answer

A) True 
 B)False

Question 12

An insurer requiring a policyholder with a collision claim to submit more than one estimate of the repair costs is using a deductible to reduce morally hazardous behavior.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following can be a signal of product quality to customers?

Accepted Answer

A) Discounts offered on bulk purchases of the product. 
B) Gift of complementary products offered to purchasers. 
C) The information provided by the salesperson about the product. 
D) A warranty provided along with the product. 
A) Discounts offered on bulk purchases of the product. 
B) Gift of complementary products offered to purchasers. 
C) The information provided by the salesperson about the product. 
D) A warranty provided along with the product.

Question 14

What is an insurance premium?

Accepted Answer

An insurance premium is the pr

Question 15

Which of the following risks will always be insured in a business?

Accepted Answer

A) Bad debts recorded in the company accounts 
B) Vital inputs required for daily production 
C) High-end technology based products 
D) Inventory stocked up in the storehouses. 
A) Bad debts recorded in the company accounts 
B) Vital inputs required for daily production 
C) High-end technology based products 
D) Inventory stocked up in the storehouses.

Question 16

An individual can avoid risks associated with a transaction by purchasing insurance.

Accepted Answer

A) True 
 B)False

Question 17

Suppose a comprehensive plan applies to 2,000 low-risk people and 1,000 high-risk people opting for insurance coverage.If the average claim submitted by low-risk people is $200 while that submitted by high-risk people is $2,000, what would be the net benefit accrued by a high-risk person paying the break even premium charged by the insurance company?

Accepted Answer

A) -$300 
B) $1,800 
C) $1,200 
D) -$400 
A) -$300 
B) $1,800 
C) $1,200 
D) -$400

Question 18

______ provisions in an insurance policy stipulate that it will pay only a certain percentage of losses claimed by the insured.

Accepted Answer

A) Vigilance 
B) Co-payment 
C) Non-price exception 
D) Deductible 
A) Vigilance 
B) Co-payment 
C) Non-price exception 
D) Deductible

Question 19

Which of the following is an example of asymmetric information?

Accepted Answer

A) A student adopting unfair means to complete his/her assignment. 
B) A commodity trader buying goods at a low price and selling them off at a high price. 
C) A builder selling houses built on property that is zoned for industrial use. 
D) A buyer paying a pre-contracted price which is lower than the current market price. 
A) A student adopting unfair means to complete his/her assignment. 
B) A commodity trader buying goods at a low price and selling them off at a high price. 
C) A builder selling houses built on property that is zoned for industrial use. 
D) A buyer paying a pre-contracted price which is lower than the current market price.

Question 20

An insured person's incentive to behave in ways that raise the probability of a claim is known as:

Accepted Answer

A) a moral hazard. 
B) the lemons problem. 
C) the problem of adverse selection. 
D) the problem of advantageous selection. 
A) a moral hazard. 
B) the lemons problem. 
C) the problem of adverse selection. 
D) the problem of advantageous selection.

People's abilities to bear risk increases with:

When does the problem of adverse selection arise in any market?

An escalation or automatic adjustment provision in a purchase contract for some good deters opportunistic behavior and automatically reallocates risk as its price changes.

DTC contracts which prohibit buyers from inspecting diamonds in advance help to minimize:

The study conducted by Eric Bond of Vanderbilt University on the repair histories of a large sample of pickup trucks over three years old ascertained that:

What are the disadvantages of a standard form contract?

Explain the difference between adverse selection and moral hazard?

Adverse selection can occur if:

A buyer and a seller equally aware of market conditions enter into a contract to exchange a good at some date in the future.If the buyer benefits while the seller loses because the former anticipated the market price more accurately, the seller's loss can be attributed to asymmetric information.

An insurer requiring a policyholder with a collision claim to submit more than one estimate of the repair costs is using a deductible to reduce morally hazardous behavior.

Which of the following can be a signal of product quality to customers?

What is an insurance premium?

Which of the following risks will always be insured in a business?

An individual can avoid risks associated with a transaction by purchasing insurance.

______ provisions in an insurance policy stipulate that it will pay only a certain percentage of losses claimed by the insured.

Which of the following is an example of asymmetric information?

An insured person's incentive to behave in ways that raise the probability of a claim is known as:

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Time, Risk and Options

Conflict, Negotiation and Group Choice

Filters

Exam 11: Risk and Information in Contracts

People's abilities to bear risk increases with:

When does the problem of adverse selection arise in any market?

An escalation or automatic adjustment provision in a purchase contract for some good deters opportunistic behavior and automatically reallocates risk as its price changes.

DTC contracts which prohibit buyers from inspecting diamonds in advance help to minimize:

The study conducted by Eric Bond of Vanderbilt University on the repair histories of a large sample of pickup trucks over three years old ascertained that:

What are the disadvantages of a standard form contract?

Explain the difference between adverse selection and moral hazard?

Adverse selection can occur if:

A buyer and a seller equally aware of market conditions enter into a contract to exchange a good at some date in the future.If the buyer benefits while the seller loses because the former anticipated the market price more accurately, the seller's loss can be attributed to asymmetric information.

An insurer requiring a policyholder with a collision claim to submit more than one estimate of the repair costs is using a deductible to reduce morally hazardous behavior.

Which of the following can be a signal of product quality to customers?

What is an insurance premium?

Which of the following risks will always be insured in a business?

An individual can avoid risks associated with a transaction by purchasing insurance.

______ provisions in an insurance policy stipulate that it will pay only a certain percentage of losses claimed by the insured.

Which of the following is an example of asymmetric information?

An insured person's incentive to behave in ways that raise the probability of a claim is known as:

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Time, Risk and Options

Conflict, Negotiation and Group Choice

Filters