Question 1

What is private information and what problems does it create?

Accepted Answer

Private information is informa

Question 2

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

Accepted Answer

A)  owners of peaches cannot convince buyers that their cars are worth $10,000. 
B)  buyers cannot convince owners of peaches to sell their cars for $10,000. 
C)  owners of lemons cannot convince buyers that their cars are worth more than $4,000. 
D)  buyers cannot convince owners of lemons to sell their cars for more than $4,000. 
E)  buyers cannot convince owners of lemons to sell their cars for $4,000. 
A)  owners of peaches cannot convince buyers that their cars are worth $10,000. 
B)  buyers cannot convince owners of peaches to sell their cars for $10,000. 
C)  owners of lemons cannot convince buyers that their cars are worth more than $4,000. 
D)  buyers cannot convince owners of lemons to sell their cars for more than $4,000. 
E)  buyers cannot convince owners of lemons to sell their cars for $4,000.

Question 3

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a ________ deductible and a ________ premium.

Accepted Answer

A)  high; high 
B)  high; low 
C)  low; high 
D)  low; low 
E)  None of the above answers are correct because private information has no effect in the market for auto insurance. 
A)  high; high 
B)  high; low 
C)  low; high 
D)  low; low 
E)  None of the above answers are correct because private information has no effect in the market for auto insurance.

Question 4

In the health insurance market,adverse selection occurs when

Accepted Answer

A)  chronically ill people buy health insurance. 
B)  insured people go to the doctor unnecessarily. 
C)  patients sue their doctor. 
D)  people with health insurance tend to behave more recklessly. 
E)  chronically ill people are unable to buy health insurance. 
A)  chronically ill people buy health insurance. 
B)  insured people go to the doctor unnecessarily. 
C)  patients sue their doctor. 
D)  people with health insurance tend to behave more recklessly. 
E)  chronically ill people are unable to buy health insurance.

Question 5

In the used car market without warranties,adverse selection results in

Accepted Answer

A)  sellers of "lemons" claiming that their car is a lemon. 
B)  only lemons being available for sale. 
C)  the market price of used cars equal to that of good used cars. 
D)  an efficient pooling equilibrium. 
E)  all of the above 
A)  sellers of "lemons" claiming that their car is a lemon. 
B)  only lemons being available for sale. 
C)  the market price of used cars equal to that of good used cars. 
D)  an efficient pooling equilibrium. 
E)  all of the above

Question 6

In the used car market,with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

Accepted Answer

A)  less than; equal to 
B)  equal to; less than 
C)  equal to; more than 
D)  more than; more than 
E)  equal to; equal to 
A)  less than; equal to 
B)  equal to; less than 
C)  equal to; more than 
D)  more than; more than 
E)  equal to; equal to

Question 7

In the market for auto insurance,in a separating equilibrium,

Accepted Answer

A)  risky and safe drivers pay the same premium for insurance. 
B)  risky drivers pay a larger premium than do safe drivers for insurance. 
C)  risky drivers pay a smaller premium than do safe drivers for insurance. 
D)  risky drivers cannot obtain insurance. 
E)  safe drivers cannot obtain insurance. 
A)  risky and safe drivers pay the same premium for insurance. 
B)  risky drivers pay a larger premium than do safe drivers for insurance. 
C)  risky drivers pay a smaller premium than do safe drivers for insurance. 
D)  risky drivers cannot obtain insurance. 
E)  safe drivers cannot obtain insurance.

Question 8

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000,and lemons are worth $6,000.Three fourths of all used cars are peaches,and one fourth are lemons.In a market with no signals,for instance,a market without warranties,the average value of cars actually sold will be

Accepted Answer

A)  $6,000. 
B)  $7,000. 
C)  $7,500. 
D)  $9,000. 
E)  $10,000. 
A)  $6,000. 
B)  $7,000. 
C)  $7,500. 
D)  $9,000. 
E)  $10,000.

Question 9

Which of the following can create inefficiency and deadweight loss?

Accepted Answer

A)  Moral hazard can create inefficiency and deadweight loss but adverse selection cannot. 
B)  Adverse selection can create inefficiency and deadweight loss but moral hazard cannot. 
C)  Both moral hazard and adverse selection can create inefficiency and deadweight loss . 
D)  Neither moral hazard nor adverse selection can create inefficiency and deadweight loss . 
E)  None of the above answers are correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers. 
A)  Moral hazard can create inefficiency and deadweight loss but adverse selection cannot. 
B)  Adverse selection can create inefficiency and deadweight loss but moral hazard cannot. 
C)  Both moral hazard and adverse selection can create inefficiency and deadweight loss . 
D)  Neither moral hazard nor adverse selection can create inefficiency and deadweight loss . 
E)  None of the above answers are correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers.

Question 10

Life insurance companies often give applicants a physical examination to prevent

Accepted Answer

A)  moral hazard. 
B)  screening. 
C)  adverse selection. 
D)  signaling. 
E)  warranties. 
A)  moral hazard. 
B)  screening. 
C)  adverse selection. 
D)  signaling. 
E)  warranties.

Question 11

Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because

Accepted Answer

A)  the firm is not a profit maximizer. 
B)  your GPA screens some of your private information. 
C)  your GPA sends a signal about your quality as a worker. 
D)  the firm will most likely make an adverse selection. 
E)  the high GPA eliminates the possibility of moral hazard. 
A)  the firm is not a profit maximizer. 
B)  your GPA screens some of your private information. 
C)  your GPA sends a signal about your quality as a worker. 
D)  the firm will most likely make an adverse selection. 
E)  the high GPA eliminates the possibility of moral hazard.

Question 12

If Sally drives less carefully after buying auto insurance,she illustrates

Accepted Answer

A)  adverse selection. 
B)  negative selection. 
C)  screening risk. 
D)  moral hazard. 
E)  lemon hazard. 
A)  adverse selection. 
B)  negative selection. 
C)  screening risk. 
D)  moral hazard. 
E)  lemon hazard.

Question 13

Which of the following has a positive externality and hence can be under provided?

Accepted Answer

A)  chronically ill people are not allowed to buy insurance. 
B)  health insurance purchased through an employer 
C)  vaccination 
D)  Health Maintenance Organizations 
E)  None of the above have a positive externality. 
A)  chronically ill people are not allowed to buy insurance. 
B)  health insurance purchased through an employer 
C)  vaccination 
D)  Health Maintenance Organizations 
E)  None of the above have a positive externality.

Question 14

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

Accepted Answer

A)  a warranty on a lemon is costly to the seller. 
B)  warranties are only offered on lemons. 
C)  the signal cannot be false. 
D)  adverse selection means that warranties will not be used as a signal. 
E)  a false signal has no effect on the seller. 
A)  a warranty on a lemon is costly to the seller. 
B)  warranties are only offered on lemons. 
C)  the signal cannot be false. 
D)  adverse selection means that warranties will not be used as a signal. 
E)  a false signal has no effect on the seller.

Question 15

JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing.This guarantee is an example of

Accepted Answer

A)  the adverse selection. problem. 
B)  the moral hazard problem. 
C)  the cost of risk. 
D)  signaling. 
E)  a lemon problem. 
A)  the adverse selection. problem. 
B)  the moral hazard problem. 
C)  the cost of risk. 
D)  signaling. 
E)  a lemon problem.

Question 16

Most observers suggest that health care in the United States faces two major problems:

Accepted Answer

A)  too many people have health insurance, and health care costs too much. 
B)  a significant shortage of doctors and health care costs too much. 
C)  a vast oversupply of hospital rooms and a significant shortage of doctors. 
D)  Health Maintenance Organizations are too common, and too many people do not have health insurance. 
E)  too many people do not have health insurance, and health care costs too much. 
A)  too many people have health insurance, and health care costs too much. 
B)  a significant shortage of doctors and health care costs too much. 
C)  a vast oversupply of hospital rooms and a significant shortage of doctors. 
D)  Health Maintenance Organizations are too common, and too many people do not have health insurance. 
E)  too many people do not have health insurance, and health care costs too much.

Question 17

In the market for health care services,Health Maintenance Organizations

Accepted Answer

A)  exist to insure people with pre-existing medical conditions. 
B)  overprovide medical care and thereby result in increased costs. 
C)  help overcome adverse selection by enrolling only healthy clients. 
D)  help overcome moral hazard by monitoring the quality of the service. 
E)  None of the above answers are correct. 
A)  exist to insure people with pre-existing medical conditions. 
B)  overprovide medical care and thereby result in increased costs. 
C)  help overcome adverse selection by enrolling only healthy clients. 
D)  help overcome moral hazard by monitoring the quality of the service. 
E)  None of the above answers are correct.

Question 18

The lemons problem in the used car market is that

Accepted Answer

A)  the price of a lemon is too high. 
B)  the price of a lemon is too low. 
C)  no lemons are bought and sold. 
D)  only lemons are bought and sold. 
E)  Both answers A and D are correct. 
A)  the price of a lemon is too high. 
B)  the price of a lemon is too low. 
C)  no lemons are bought and sold. 
D)  only lemons are bought and sold. 
E)  Both answers A and D are correct.

Question 19

The missing insurance market in health care is the insurance market for

Accepted Answer

A)  young healthy people. 
B)  infectious diseases. 
C)  people who have pre-existing health problems. 
D)  people in Health Maintenance Organizations. 
E)  vaccinations. 
A)  young healthy people. 
B)  infectious diseases. 
C)  people who have pre-existing health problems. 
D)  people in Health Maintenance Organizations. 
E)  vaccinations.

Question 20

Vaccination against infectious diseases ________ so private markets will provide ________ efficient quantity of vaccination.

Accepted Answer

A)  is a public good; less than 
B)  is a public good; the 
C)  leads to adverse selection; less than 
D)  has a positive externality; less than 
E)  has a positive externality; the 
A)  is a public good; less than 
B)  is a public good; the 
C)  leads to adverse selection; less than 
D)  has a positive externality; less than 
E)  has a positive externality; the

What is private information and what problems does it create?

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a deductible and a premium.

In the health insurance market,adverse selection occurs when

In the used car market without warranties,adverse selection results in

In the used car market,with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

In the market for auto insurance,in a separating equilibrium,

Which of the following can create inefficiency and deadweight loss?

Life insurance companies often give applicants a physical examination to prevent

Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because

If Sally drives less carefully after buying auto insurance,she illustrates

Which of the following has a positive externality and hence can be under provided?

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing.This guarantee is an example of

Most observers suggest that health care in the United States faces two major problems:

In the market for health care services,Health Maintenance Organizations

The lemons problem in the used car market is that

The missing insurance market in health care is the insurance market for

Vaccination against infectious diseases so private markets will provide efficient quantity of vaccination.

Getting Started

The Usand Global Economies

The Economic Problem

Demand and Supply

Elasticities of Demand and Supply

Efficiency and Fairness of Markets

Government Actions in Markets

Taxes

Global Markets in Action

Externalities

Public Goods and Common Resources

Consumer Choice and Demand

Production and Cost

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Markets for Factors of Production

Economic Inequality

Filters

Exam 12: Markets With Private Information

What is private information and what problems does it create?

Suppose that there are only two types of used cars,peaches and lemons.Peaches are worth $10,000 and lemons are worth $4,000.Without effective signals such as warranties,the owners of peaches cannot sell their cars for $10,000 because the

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a ________ deductible and a ________ premium.

In the health insurance market,adverse selection occurs when

In the used car market without warranties,adverse selection results in

In the used car market,with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

In the market for auto insurance,in a separating equilibrium,

Which of the following can create inefficiency and deadweight loss?

Life insurance companies often give applicants a physical examination to prevent

Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because

If Sally drives less carefully after buying auto insurance,she illustrates

Which of the following has a positive externality and hence can be under provided?

Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because

JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing.This guarantee is an example of

Most observers suggest that health care in the United States faces two major problems:

In the market for health care services,Health Maintenance Organizations

The lemons problem in the used car market is that

The missing insurance market in health care is the insurance market for

Vaccination against infectious diseases ________ so private markets will provide ________ efficient quantity of vaccination.

Getting Started

The Usand Global Economies

The Economic Problem

Demand and Supply

Elasticities of Demand and Supply

Efficiency and Fairness of Markets

Government Actions in Markets

Taxes

Global Markets in Action

Externalities

Public Goods and Common Resources

Consumer Choice and Demand

Production and Cost

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Markets for Factors of Production

Economic Inequality

Filters

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a deductible and a premium.

In the used car market,with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

Vaccination against infectious diseases so private markets will provide efficient quantity of vaccination.