Exam 17: Uncertainty and Asymmetric Information

A lender faces a(n) ________ problem when the lender lends funds to a borrower for a specific purpose and the borrower then opportunistically uses the funds for another purpose.

A person who is willing to take a bet with an expected value of one in called risk-neutral.

Universal health coverage, lemon laws, and dealer warranties are all examples of tools used to reduce

Mark has two job offers when he graduates from college. Mark views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $40,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $40,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes the offer that maximizes his expected utility and is risk-loving, which job offer will he choose?

Refer to the Economics in Practice on page 358. Sometimes the lack of information in an advertisement serves as a signal.

Related to the Economics in Practice on page 358: Suppose you see the following advertisement for a vacation rental. "Beautiful condo on the Island of Maui (Hawaii). Sleeps 5. Great landscaped grounds, pool, and BBQ area. Lanai overlooks pool. $1,500 per week." It is likely true that the condo

Labor market compensation contracts can be designed to screen out poor quality workers as well as provide employees with incentives to work hard.

Moral hazard can do harm to one party to a contract, but always results in efficient behavior.

For a risk-averse individual, marginal utility of income does not diminish.

Refer to the information provided in Figure 17.1 below to answer the question(s) that follow. Figure 17.1 -Refer to Figure 17.1. John has two job offers when he graduates from college. John views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that he has a 50-50 chance of earning the bonus. What is the expected value of John's income for each job offer?

In the market for used motorcycles there are high-quality motorcycles and low-quality motorcycles. Potential buyers cannot determine prior to purchase whether the motorcycle is high quality or low quality. Which of the following statements best describes what is likely to happen in this market?

In general, risk-averse individuals experience diminishing marginal utility from income.

A fair bet is a game whose expected value is positive.

Which of the following are examples of market signals?

Life insurance companies require that prospective policy holders have a medical check‐up before the companies will sell the policy because of a(n) ________ problem in which the insured could be ________ than expected.

________ is (are) used to distinguish between high and low quality and help correct the adverse selection problem.

Hudson has two job offers when he graduates from college. Hudson views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $45,000. The second offer is at a fixed salary of $25,000 plus a possible bonus of $40,000. Hudson believes that he has a 50-50 chance of earning the bonus. If Hudson takes the offer that maximizes his expected utility and he is risk-neutral, then

Relating to the Economics in Practice on page 356: A long-term study of Huntington's disease patients found that individuals who carry the Huntington's disease genetic mutation are up to five times as likely as the general population to buy long-term care insurance. This is an example of ________ in the health insurance market.

Hudson has two job offers when he graduates from college. Hudson views the offers as identical, except for the salary terms. The first offer is at a fixed annual salary of $45,000. The second offer is at a fixed salary of $25,000 plus a possible bonus of $40,000. Hudson believes that he has a 50-50 chance of earning the bonus. If Hudson takes the offer that maximizes his expected utility and he is risk-loving, then

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel. Table 17.6 -Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Isabel's utility with the policy is