Question 1

When the buyer of a house pays for a home inspection, this reduces:

Accepted Answer

A)  mutually beneficial trades. 
B)  the principal-agent problem. 
C)  moral hazard. 
D)  adverse selection. 
A)  mutually beneficial trades. 
B)  the principal-agent problem. 
C)  moral hazard. 
D)  adverse selection. C

Question 2

An expensive action that is taken to reveal information is called a(n):

Accepted Answer

A)  adverse selection. 
B)  signal. 
C)  credible promise. 
D)  principal-agent problem. 
A)  adverse selection. 
B)  signal. 
C)  credible promise. 
D)  principal-agent problem. C

Question 3

Obtaining a college degree is an example of:

Accepted Answer

A)  adverse selection. 
B)  signaling. 
C)  moral hazard. 
D)  the principal-agent problem. 
A)  adverse selection. 
B)  signaling. 
C)  moral hazard. 
D)  the principal-agent problem. B

Question 4

The market for used cars is:

Accepted Answer

A)  full of moral hazards that prevent the efficient functioning of the market. 
B)  active and well-functioning because of market institutions that developed to mitigate adverse selection. 
C)  contains many instances of adverse selection, which prevent it from functioning efficiently. 
D)  exhibit the principal-agent problem that prevent buyers from knowing the quality of the car they want to purchase. 
A)  full of moral hazards that prevent the efficient functioning of the market. 
B)  active and well-functioning because of market institutions that developed to mitigate adverse selection. 
C)  contains many instances of adverse selection, which prevent it from functioning efficiently. 
D)  exhibit the principal-agent problem that prevent buyers from knowing the quality of the car they want to purchase.

Question 5

Health insurance leads to _____ because doctors, patients, and hospitals all know that the insurance company will be paying the bills.

Accepted Answer

A)  adverse selection 
B)  information asymmetry 
C)  moral hazard 
D)  the principal-agent problem 
A)  adverse selection 
B)  information asymmetry 
C)  moral hazard 
D)  the principal-agent problem

Question 6

Allowing a patient to get a second opinion on a diagnosis would help reduce:

Accepted Answer

A)  moral hazard. 
B)  the principal-agent problem. 
C)  mutually beneficial trades. 
D)  adverse selection. 
A)  moral hazard. 
B)  the principal-agent problem. 
C)  mutually beneficial trades. 
D)  adverse selection.

Question 7

The adverse selection death spiral in health insurance can be prevented by:

Accepted Answer

A)  not selling to unhealthy people. 
B)  requiring people to only purchase health insurance in individual policy markets. 
C)  requiring health exams prior to issuing a policy and charging higher prices to unhealthy people. 
D)  making policy buyers aware of the potential for the death spiral. 
A)  not selling to unhealthy people. 
B)  requiring people to only purchase health insurance in individual policy markets. 
C)  requiring health exams prior to issuing a policy and charging higher prices to unhealthy people. 
D)  making policy buyers aware of the potential for the death spiral.

Question 8

The principal-agent problem occurs when a used car buyer cannot determine the maintenance history of a used care.

Accepted Answer

A) True 
 B)False

Question 9

Because home inspectors are not allowed to profit from any repairs they recommend, there is a reduction in:

Accepted Answer

A)  mutually beneficial trades. 
B)  the principal-agent problem. 
C)  adverse selection. 
D)  moral hazard. 
A)  mutually beneficial trades. 
B)  the principal-agent problem. 
C)  adverse selection. 
D)  moral hazard.

Question 10

Signaling can create moral hazard problems.

Accepted Answer

A) True 
 B)False

Question 11

In the market for used cars, half of the cars are of good quality and would sell for $14,000, while half of the cars are of poor quality and would sell for $10,000. If a buyer possessed no information about the quality of the car she was considering, what is the expected value of the car? What would the buyer be willing to pay for the car? If the expected value and the willingness to pay are different, explain why.

Accepted Answer

The expected value of the car is 0.5 × $

Question 12

In the market for used cars, half of the cars are of good quality and would sell for $14,000, while half of the cars are of poor quality and would sell for $10,000. If a buyer possessed no information about the quality of the car she was considering, what would she be willing to pay for it?

Accepted Answer

A)  $14,000 
B)  $10,000 
C)  $12,000 
D)  The buyer would choose not to buy because of the lack of information. 
A)  $14,000 
B)  $10,000 
C)  $12,000 
D)  The buyer would choose not to buy because of the lack of information.

Question 13

Describe the moral hazard problem that facilitated the financial crash of 2007-2009.

Accepted Answer

The sellers of mortgage-backed securitie

Question 14

List and describe features the health insurance market has developed to reduce adverse selection.

Accepted Answer

Insurance companies may require physical

Question 15

Moral hazard is not a significant problem in markets.

Accepted Answer

A) True 
 B)False

Question 16

Obtaining a college education signals that a potential employee:

Accepted Answer

A)  is wealthy enough to afford college. 
B)  is not a very good worker 
C)  has determination and a relatively high IQ. 
D)  knows much of the information needed to do the job without training. 
A)  is wealthy enough to afford college. 
B)  is not a very good worker 
C)  has determination and a relatively high IQ. 
D)  knows much of the information needed to do the job without training.

Question 17

A used car will sell for the price of a poor-quality used car even if it is high quality because:

Accepted Answer

A)  only poor-quality used cars will be for sale. 
B)  there is no reason to believe that good-quality used cars will be for sale. 
C)  owners of good-quality used cars won't want to sell their cars. 
D)  only poor quality cars will sell. 
A)  only poor-quality used cars will be for sale. 
B)  there is no reason to believe that good-quality used cars will be for sale. 
C)  owners of good-quality used cars won't want to sell their cars. 
D)  only poor quality cars will sell.

Question 18

The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was (were):

Accepted Answer

A)  moral hazard. 
B)  the principal-agent problem. 
C)  mutually beneficial trades. 
D)  adverse selection. 
A)  moral hazard. 
B)  the principal-agent problem. 
C)  mutually beneficial trades. 
D)  adverse selection.

Question 19

If education merely signals an ability to learn, there is reduced pressure on colleges and universities to:

Accepted Answer

A)  ensure students graduate. 
B)  ensure students receive financial assistance. 
C)  teach something useful. 
D)  reduce the workload. 
A)  ensure students graduate. 
B)  ensure students receive financial assistance. 
C)  teach something useful. 
D)  reduce the workload.

Question 20

Possible results of asymmetric information include all of the following EXCEPT:

Accepted Answer

A)  new sellers will enter the market sensing profit opportunities. 
B)  less informed buyers will leave the market. 
C)  mutually beneficial trades may not occur. 
D)  trades may occur that are not mutually beneficial. 
A)  new sellers will enter the market sensing profit opportunities. 
B)  less informed buyers will leave the market. 
C)  mutually beneficial trades may not occur. 
D)  trades may occur that are not mutually beneficial.

Exam 24: Price Discrimination

When the buyer of a house pays for a home inspection, this reduces:

An expensive action that is taken to reveal information is called a(n):

Obtaining a college degree is an example of:

The market for used cars is:

Health insurance leads to _____ because doctors, patients, and hospitals all know that the insurance company will be paying the bills.

Allowing a patient to get a second opinion on a diagnosis would help reduce:

The adverse selection death spiral in health insurance can be prevented by:

The principal-agent problem occurs when a used car buyer cannot determine the maintenance history of a used care.

Because home inspectors are not allowed to profit from any repairs they recommend, there is a reduction in:

Signaling can create moral hazard problems.

In the market for used cars, half of the cars are of good quality and would sell for $14,000, while half of the cars are of poor quality and would sell for $10,000. If a buyer possessed no information about the quality of the car she was considering, what would she be willing to pay for it?

Describe the moral hazard problem that facilitated the financial crash of 2007-2009.

List and describe features the health insurance market has developed to reduce adverse selection.

Moral hazard is not a significant problem in markets.

Obtaining a college education signals that a potential employee:

A used car will sell for the price of a poor-quality used car even if it is high quality because:

The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was (were):

If education merely signals an ability to learn, there is reduced pressure on colleges and universities to:

Possible results of asymmetric information include all of the following EXCEPT:

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Consumer Choice

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