Question 1

A landlord requiring potential tenants to provide a rental history is an example of:

Accepted Answer

A) screening. 
B) signaling. 
C) statistical discrimination. 
D) building a reputation. 
A) screening. 
B) signaling. 
C) statistical discrimination. 
D) building a reputation.

Question 2

In the early 2000s, laws requiring banks and mortgage brokers to disclose the terms of home loans:

Accepted Answer

A) prevented Americans from entering into mortgage contracts that they did not understand. 
B) were an example of how the government can act to solve the moral hazard problem. 
C) were so numerous and detailed that borrowers didn't read or understand the information the companies had disclosed. 
D) reduced statistical discrimination in the home mortgage market. 
A) prevented Americans from entering into mortgage contracts that they did not understand. 
B) were an example of how the government can act to solve the moral hazard problem. 
C) were so numerous and detailed that borrowers didn't read or understand the information the companies had disclosed. 
D) reduced statistical discrimination in the home mortgage market.

Question 3

Consider a market for health insurance with 1,000 potential buyers. The insurance company knows that half of the potential buyers are of poor health and will cost the insurance company $50,000 annually, while the other half are of good health and will cost the insurance company $10,000 annually. However, the insurance company does not know which individual people are of poor health or good health. The potential buyers know whether they are of poor health or good health. If the insurance company sets the price of the insurance policy at $30,000, _____ people will purchase insurance, and the average per-person cost incurred by the insurance company will be _____.

Accepted Answer

A) 500; $40,000 
B) 1,000; $10,000 
C) 1,000; $30,000 
D) 500; $50,000 
A) 500; $40,000 
B) 1,000; $10,000 
C) 1,000; $30,000 
D) 500; $50,000

Question 4

Which of the following is an effect of adverse selection?

Accepted Answer

A) Buyers may gain surplus they would have lost with complete information. 
B) Sellers may gain surplus they would have lost with complete information. 
C) Buyers and sellers may lose surplus they would have gained with more complete information. 
D) Buyers may lose surplus, and sellers may gain surplus, because of the information imbalance. 
A) Buyers may gain surplus they would have lost with complete information. 
B) Sellers may gain surplus they would have lost with complete information. 
C) Buyers and sellers may lose surplus they would have gained with more complete information. 
D) Buyers may lose surplus, and sellers may gain surplus, because of the information imbalance.

Question 5

When people are fully informed about the choices that they and other relevant economic actors face, we say they:

Accepted Answer

A) have complete information. 
B) will always try to hide that information to gain advantage. 
C) will always be willing to go through with the transaction. 
D) have relevant information. 
A) have complete information. 
B) will always try to hide that information to gain advantage. 
C) will always be willing to go through with the transaction. 
D) have relevant information.

Question 6

What result can we expect to see from effective screening and signalling?

Accepted Answer

A) Decreased market complexity 
B) Increased surplus for buyers and/or sellers 
C) Decreased surplus for the party with less information 
D) All of these are true. 
A) Decreased market complexity 
B) Increased surplus for buyers and/or sellers 
C) Decreased surplus for the party with less information 
D) All of these are true.

Question 7

One way to solve the problems caused by information asymmetry is:

Accepted Answer

A) surfing. 
B) signaling. 
C) proofing. 
D) All of these are solutions to problems caused by information asymmetry. 
A) surfing. 
B) signaling. 
C) proofing. 
D) All of these are solutions to problems caused by information asymmetry.

Question 8

Wearing a suit to a job interview is an example of a:

Accepted Answer

A) positive signal. 
B) negative signal. 
C) positive screen. 
D) negative screen. 
A) positive signal. 
B) negative signal. 
C) positive screen. 
D) negative screen.

Question 9

Both signaling and screening:

Accepted Answer

A) reduce efficiency in the market. 
B) are effective ways to increase information available to both parties. 
C) benefit sellers but harm buyers. 
D) benefit buyers but harm sellers. 
A) reduce efficiency in the market. 
B) are effective ways to increase information available to both parties. 
C) benefit sellers but harm buyers. 
D) benefit buyers but harm sellers.

Question 10

An employer asking potential employees to sit down for an interview is an example of:

Accepted Answer

A) signaling. 
B) screening. 
C) statistical discrimination. 
D) building a reputation. 
A) signaling. 
B) screening. 
C) statistical discrimination. 
D) building a reputation.

Question 11

An example of a market subject to adverse selection would be:

Accepted Answer

A) the video game market. 
B) the new appliance market. 
C) the used car market. 
D) uniform commodity markets, like crude oil. 
A) the video game market. 
B) the new appliance market. 
C) the used car market. 
D) uniform commodity markets, like crude oil.

Question 12

When a party to a transaction lacks relevant information:no transactions will take place.other parties will voluntarily share the missing information truthfully.the party lacking information will postpone the transaction until full information is obtained.the market outcome will not be efficient.

Accepted Answer

A) I and IV only 
B) II and III only 
C) IV only 
D) III only 
A) I and IV only 
B) II and III only 
C) IV only 
D) III only

Question 13

The presence of adverse selection in a market causes:

Accepted Answer

A) some transactions to fail to take place. 
B) a deadweight loss. 
C) market failure. 
D) All of these are true. 
A) some transactions to fail to take place. 
B) a deadweight loss. 
C) market failure. 
D) All of these are true.

Question 14

Dressing well for a job interview is an attempt to reduce asymmetric information by:

Accepted Answer

A) looking more intelligent. 
B) signaling professionalism. 
C) showing moral character. 
D) mandating that information be shared. 
A) looking more intelligent. 
B) signaling professionalism. 
C) showing moral character. 
D) mandating that information be shared.

Question 15

A job candidate refusing to take a drug test for a potential employer is an example of:

Accepted Answer

A) screening. 
B) building a reputation. 
C) signaling. 
D) principles-based behavior. 
A) screening. 
B) building a reputation. 
C) signaling. 
D) principles-based behavior.

Question 16

Adverse selection:

Accepted Answer

A) results from unobserved characteristics of people or commodities. 
B) relates to the actions of people. 
C) occurs after parties have entered into an agreement. 
D) All of these statements are true. 
A) results from unobserved characteristics of people or commodities. 
B) relates to the actions of people. 
C) occurs after parties have entered into an agreement. 
D) All of these statements are true.

Question 17

The tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions is called:

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) counter information. 
D) collective bargaining. 
A) moral hazard. 
B) adverse selection. 
C) counter information. 
D) collective bargaining.

Question 18

Markets are more likely to be subject to adverse selection problems when:

Accepted Answer

A) information is easily available to consumers and sellers. 
B) there is an imbalance of information between buyers and sellers. 
C) the goods sold in the market are highly uniform in quality. 
D) the market relies on independent certifiers of quality. 
A) information is easily available to consumers and sellers. 
B) there is an imbalance of information between buyers and sellers. 
C) the goods sold in the market are highly uniform in quality. 
D) the market relies on independent certifiers of quality.

Question 19

An informative signal:

Accepted Answer

A) is costly to fake. 
B) contains hidden information. 
C) builds trust between the principal and the agent. 
D) All of these are true. 
A) is costly to fake. 
B) contains hidden information. 
C) builds trust between the principal and the agent. 
D) All of these are true.

Question 20

Which of the following is an example of statistical discrimination?

Accepted Answer

A) Charging young drivers a higher premium than older drivers. 
B) Charging people with homes near a lake higher premiums for flood insurance than those with homes built on a hill. 
C) Assuming that an Italian restaurant will have better food than a Chinese restaurant in the Little Italy neighborhood of New York City. 
D) All of these are examples of statistical discrimination. 
A) Charging young drivers a higher premium than older drivers. 
B) Charging people with homes near a lake higher premiums for flood insurance than those with homes built on a hill. 
C) Assuming that an Italian restaurant will have better food than a Chinese restaurant in the Little Italy neighborhood of New York City. 
D) All of these are examples of statistical discrimination.

Exam 10: Information

A landlord requiring potential tenants to provide a rental history is an example of:

In the early 2000s, laws requiring banks and mortgage brokers to disclose the terms of home loans:

Which of the following is an effect of adverse selection?

When people are fully informed about the choices that they and other relevant economic actors face, we say they:

What result can we expect to see from effective screening and signalling?

One way to solve the problems caused by information asymmetry is:

Wearing a suit to a job interview is an example of a:

Both signaling and screening:

An employer asking potential employees to sit down for an interview is an example of:

An example of a market subject to adverse selection would be:

When a party to a transaction lacks relevant information:no transactions will take place.other parties will voluntarily share the missing information truthfully.the party lacking information will postpone the transaction until full information is obtained.the market outcome will not be efficient.

The presence of adverse selection in a market causes:

Dressing well for a job interview is an attempt to reduce asymmetric information by:

A job candidate refusing to take a drug test for a potential employer is an example of:

Adverse selection:

The tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions is called:

Markets are more likely to be subject to adverse selection problems when:

An informative signal:

Which of the following is an example of statistical discrimination?

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