Question 1

-Refer to Figure 14.1.If the price of insurance is $5000,then:

Accepted Answer

A) 50% of the consumers will be high-cost. 
B) 25% of the consumers will be low-cost. 
C) 75% of the consumers will be low-cost. 
D) 50% of the consumers will be low-cost.

Question 2

Lemon laws:

Accepted Answer

A) protect producers from unsatisfied buyers. 
B) require automakers to repurchase automobiles that experience frequent problems during their first year of use. 
C) increase the quantity of lemons for sale on the used car market. 
D) none of the above

Question 3

Adverse selection describes the situation that occurs when:

Accepted Answer

A) people have perfect information. 
B) high-quality products are driven from the market by low-quality products due to imperfect information. 
C) actions that were expected to happen do not occur. 
D) low-quality products are driven from the market by high-quality products because of imperfect information.

Question 4

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

Question 5

Consider a market in which some high-quality goods are sold,but not as many as if there was perfect information about the quality of the good.This type of market is known as a:

Accepted Answer

A) beneficial selection. 
B) thin market. 
C) symmetric market. 
D) efficient market.

Question 6

The marginal benefit of someone's search depends on her/his discovered price.

Accepted Answer

A) True 
 B)False

Question 7

What is moral hazard?

Accepted Answer

The answer of What is moral hazard?...

Question 8

Joe is in the market for a mattress.He is deciding between two different mattresses: one that is fairly expensive but offers a free 20-year manufacturer's warranty and another that is lower-priced but only offers a on-year manufacturer's warranty.Joe's decision to purchase the more expensive mattress would indicate that:

Accepted Answer

A) Joe has a high level of income. 
B) Joe is not price sensitive. 
C) Joe interpreted the manufacturer's warranty as a quality indicator. 
D) Joe is not a utility maximizer.

Question 9

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.

Question 10

Recall the application about the California kiwifruit market and the "lemons" problem.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.

Question 11

There is asymmetric information in the auto insurance market because companies know more about customers' driving habits and can predict very well the chances of customers getting into an accident than the customers.

Accepted Answer

A) True 
 B)False

Question 12

After Johan purchased a full coverage insurance policy for his car,he is not careful and leaves his car unlocked at all times.This is an example of:

Accepted Answer

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

Question 13

In the market for insurance,sellers have:

Accepted Answer

A) perfect information. 
B) less information than buyers. 
C) more information than buyers. 
D) none of the above.

Question 14

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 15

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.

Question 16

On an automobile insurance policy,a deductible is the dollar amount that the driver will pay toward damages before the insurance company will pay anything.Asymmetric information suggests that:

Accepted Answer

A) high-risk drivers will buy a policy without any deductible. 
B) high-risk drivers will buy a policy with a very high deductible. 
C) insured drivers drive more safely than uninsured drivers. 
D) insured drivers drive more recklessly than uninsured drivers.

Question 17

Suppose air bags are installed on all cars sold.Which of the following is likely to occur?

Accepted Answer

A) There are fewer accidents because cars are safer. 
B) People drive more carefully. 
C) People drive more recklessly and there are more accidents. 
D) People drive more recklessly and there are fewer accidents.

Question 18

The marginal benefit of search ________ with the discovered price,while the marginal cost of search is ________.

Accepted Answer

A) increases;decreased 
B) increases;constant 
C) decreases;negative 
D) increases;negative

Question 19

Consumers can interpret the fact that a product offers a life-time warranty as a sign that the product is of high quality.

Accepted Answer

A) True 
 B)False

Question 20

Table 14.1
-Refer to Table 14.1,which shows the market for used motorcycles in a small Midwestern town.Which of the following is true?

Accepted Answer

A) The market is in equilibrium. 
B) We can expect the price of used motorcycles to fall. 
C) We can expect the price of used motorcycles to rise. 
D) Buyers' willingness to pay for a used motorcycle will remain unchanged.

Exam 14: Imperfect Information: Adverse Selection and Moral Hazard

-Refer to Figure 14.1.If the price of insurance is $5000,then:

Lemon laws:

Adverse selection describes the situation that occurs when:

Consider a market in which some high-quality goods are sold,but not as many as if there was perfect information about the quality of the good.This type of market is known as a:

The marginal benefit of someone's search depends on her/his discovered price.

What is moral hazard?

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?

Recall the application about the California kiwifruit market and the "lemons" problem.There is asymmetric information in the kiwifruit market because:

There is asymmetric information in the auto insurance market because companies know more about customers' driving habits and can predict very well the chances of customers getting into an accident than the customers.

After Johan purchased a full coverage insurance policy for his car,he is not careful and leaves his car unlocked at all times.This is an example of:

In the market for insurance,sellers have:

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

If insurance premiums are based on an experience rating:

On an automobile insurance policy,a deductible is the dollar amount that the driver will pay toward damages before the insurance company will pay anything.Asymmetric information suggests that:

Suppose air bags are installed on all cars sold.Which of the following is likely to occur?

The marginal benefit of search with the discovered price,while the marginal cost of search is .

Consumers can interpret the fact that a product offers a life-time warranty as a sign that the product is of high quality.

Table 14.1 -Refer to Table 14.1,which shows the market for used motorcycles in a small Midwestern town.Which of the following is true?