Question 1

In the used car market with warranties,the equilibrium is a ________ and the lemons problem is ________.

Accepted Answer

A)  pooling equilibrium; solved 
B)  pooling equilibrium; unresolved 
C)  separating equilibrium; unresolved 
D)  separating equilibrium; solved 
E)  pooling equilibrium; possibly solved and possibly unresolved, depending on whether good used cars sell for a higher price than do lemons 
A)  pooling equilibrium; solved 
B)  pooling equilibrium; unresolved 
C)  separating equilibrium; unresolved 
D)  separating equilibrium; solved 
E)  pooling equilibrium; possibly solved and possibly unresolved, depending on whether good used cars sell for a higher price than do lemons

Question 2

Consider a market for used cars.Suppose there are only two kind of cars: lemons and good cars.A lemon is worth $1,500 both to its current owner and to anyone who buys it.A good car is worth $6,000 to its current and potential owners.Buyers can't tell whether a car is a lemon until after they have bought the car.What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer.

Accepted Answer

Because buyers can't tell the difference

Question 3

In the market for automobile insurance,adverse selection implies that

Accepted Answer

A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  private information cannot be successfully screened. 
D)  insured and uninsured alike will take greater risks. 
E)  drivers with greater risks are more likely to buy insurance. 
A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  private information cannot be successfully screened. 
D)  insured and uninsured alike will take greater risks. 
E)  drivers with greater risks are more likely to buy insurance.

Question 4

If a health insurance company offers coverage regardless of age,health status,or smoking history,it is likely to suffer

Accepted Answer

A)  moral hazard problems. 
B)  adverse selection problems. 
C)  lower costs. 
D)  low demand for its product. 
E)  a screening equilibrium. 
A)  moral hazard problems. 
B)  adverse selection problems. 
C)  lower costs. 
D)  low demand for its product. 
E)  a screening equilibrium.

Question 5

One way of screening in the automobile insurance market is for companies to

Accepted Answer

A)  offer policies with different deductibles and different premiums. 
B)  insure only careful drivers. 
C)  insure only risky drivers. 
D)  eliminate policies with no-claim bonuses because these policies are usually not profitable. 
E)  offer warranties. 
A)  offer policies with different deductibles and different premiums. 
B)  insure only careful drivers. 
C)  insure only risky drivers. 
D)  eliminate policies with no-claim bonuses because these policies are usually not profitable. 
E)  offer warranties.

Question 6

The idea of an insurance company "pooling" the risk means that

Accepted Answer

A)  the risk is completely eliminated from society. 
B)  the insurance company requires buyers to pay a large deductible. 
C)  the risk is spread over a large population. 
D)  the insurance company insists on a pooling equilibrium. 
E)  moral hazard and adverse selection are eliminated. 
A)  the risk is completely eliminated from society. 
B)  the insurance company requires buyers to pay a large deductible. 
C)  the risk is spread over a large population. 
D)  the insurance company insists on a pooling equilibrium. 
E)  moral hazard and adverse selection are eliminated.

Question 7

Explain the concept of adverse selection.Give an example.

Accepted Answer

Adverse selection is a tendency for peop

Question 8

A safe drive is likely to prefer an auto 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 9

What is the private information in the market for health-care insurance? What is the private information in the market for health care?

Accepted Answer

The private information in the market fo

Question 10

Auto insurance companies charge a lower premium to drivers who carry a higher deductible because

Accepted Answer

A)  insurance companies are not profit maximizers. 
B)  a driver's riskiness increases as the driver's deductible increases. 
C)  a high deductible signals a high risk. 
D)  insurance companies prefer that drivers carry no deductible. 
E)  a high deductible reveals that driver is a careful driver. 
A)  insurance companies are not profit maximizers. 
B)  a driver's riskiness increases as the driver's deductible increases. 
C)  a high deductible signals a high risk. 
D)  insurance companies prefer that drivers carry no deductible. 
E)  a high deductible reveals that driver is a careful driver.

Question 11

Moral hazard typically occurs because

Accepted Answer

A)  people are dishonest. 
B)  agreements sometimes create incentives that are costly to monitor so people can act in their self interest. 
C)  workers possess diminishing marginal productivity. 
D)  screening leads to informed people revealing their relevant private information. 
E)  workers possess adverse selection. 
A)  people are dishonest. 
B)  agreements sometimes create incentives that are costly to monitor so people can act in their self interest. 
C)  workers possess diminishing marginal productivity. 
D)  screening leads to informed people revealing their relevant private information. 
E)  workers possess adverse selection.

Question 12

Suppose there are only two kind of cars in the market for used cars: lemons and good cars.A lemon is worth $1,000 both to its current owner and to anyone who buys it.A good car is worth $8,000 to its current and potential owners.Buyers can't tell whether a car is a lemon until after they have bought the car,and there is no warranty.What is the equilibrium price of a used car?

Accepted Answer

A)  $8,000 
B)  $1,000 
C)  $4,500 
D)  $9,000 
E)  The equilibrium price depends on how many lemons and how many good cars are traded. 
A)  $8,000 
B)  $1,000 
C)  $4,500 
D)  $9,000 
E)  The equilibrium price depends on how many lemons and how many good cars are traded.

Question 13

In the market for auto insurance,with a pooling equilibrium ________ and with a separating equilibrium ________.

Accepted Answer

A)  aggressive drivers pay a higher premium than do safer drivers; aggressive drivers pay a higher premium than do safer drivers 
B)  no one can buy auto insurance; aggressive drivers pay a higher premium than do safer drivers 
C)  aggressive and safe drivers pay the same premium; aggressive and safe drivers pay the same premium 
D)  aggressive and safe drivers pay the same premium; aggressive drivers pay a higher premium than do safer drivers 
E)  aggressive drivers pay a higher premium than do safer drivers; aggressive and safe drivers pay the same premium 
A)  aggressive drivers pay a higher premium than do safer drivers; aggressive drivers pay a higher premium than do safer drivers 
B)  no one can buy auto insurance; aggressive drivers pay a higher premium than do safer drivers 
C)  aggressive and safe drivers pay the same premium; aggressive and safe drivers pay the same premium 
D)  aggressive and safe drivers pay the same premium; aggressive drivers pay a higher premium than do safer drivers 
E)  aggressive drivers pay a higher premium than do safer drivers; aggressive and safe drivers pay the same premium

Question 14

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a pooling equilibrium,aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________.

Accepted Answer

A)  $1,000; $1,000 
B)  $800; $1,200 
C)  $1,200; $800 
D)  $1,000; $800 
E)  $1,200; $1,000 
A)  $1,000; $1,000 
B)  $800; $1,200 
C)  $1,200; $800 
D)  $1,000; $800 
E)  $1,200; $1,000

Question 15

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)  car sellers would never lie. 
B)  car buyers are gullible. 
C)  signals lead to efficient pooling equilibriums. 
D)  the signal cannot be false. 
E)  a false signal can be costly to the seller. 
A)  car sellers would never lie. 
B)  car buyers are gullible. 
C)  signals lead to efficient pooling equilibriums. 
D)  the signal cannot be false. 
E)  a false signal can be costly to the seller.

Question 16

In the insurance market,private information

Accepted Answer

A)  creates moral hazard but eliminates adverse selection. 
B)  creates adverse selection but eliminates moral hazard. 
C)  creates both moral hazard and adverse selection. 
D)  eliminates both moral hazard and adverse selection. 
E)  means that screening is unnecessary. 
A)  creates moral hazard but eliminates adverse selection. 
B)  creates adverse selection but eliminates moral hazard. 
C)  creates both moral hazard and adverse selection. 
D)  eliminates both moral hazard and adverse selection. 
E)  means that screening is unnecessary.

Question 17

What role does moral hazard play in the market for health care?

Accepted Answer

Providers of health care have private in

Question 18

In the used car market,adverse selection is a problem primarily when

Accepted Answer

A)  sellers cannot judge buyers' creditworthiness. 
B)  buyers cannot signal their willingness to buy. 
C)  buyers cannot determine the quality of a used car. 
D)  sellers offer warranties on all used cars. 
E)  sellers and buyers both agree that a particular used car is a lemon. 
A)  sellers cannot judge buyers' creditworthiness. 
B)  buyers cannot signal their willingness to buy. 
C)  buyers cannot determine the quality of a used car. 
D)  sellers offer warranties on all used cars. 
E)  sellers and buyers both agree that a particular used car is a lemon.

Question 19

Consider a market for used cars.Suppose there are only two kind of cars: lemons and good cars.A lemon is worth $1,500 both to its current owner and to anyone who buys it.A good car is worth $6,000 to its current and potential owners.Buyers can't tell whether a car is a lemon until after they have bought the car.What do economists call the problem that buyers of used cars face? What kind of cars (lemons,good cars,or both)are traded? Explain and substantiate your answer.

Accepted Answer

Because buyers can't tell the difference

Question 20

Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?

Accepted Answer

Receiving a lifetime appointment creates

In the used car market with warranties,the equilibrium is a and the lemons problem is .

In the market for automobile insurance,adverse selection implies that

If a health insurance company offers coverage regardless of age,health status,or smoking history,it is likely to suffer

One way of screening in the automobile insurance market is for companies to

The idea of an insurance company "pooling" the risk means that

Explain the concept of adverse selection.Give an example.

A safe drive is likely to prefer an auto insurance policy that has a deductible and a premium.

What is the private information in the market for health-care insurance? What is the private information in the market for health care?

Auto insurance companies charge a lower premium to drivers who carry a higher deductible because

Moral hazard typically occurs because

In the market for auto insurance,with a pooling equilibrium and with a separating equilibrium .

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -In a pooling equilibrium,aggressive drivers pay a premium of and safe drivers pay a premium of .

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

In the insurance market,private information

What role does moral hazard play in the market for health care?

In the used car market,adverse selection is a problem primarily when

Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?

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

In the used car market with warranties,the equilibrium is a ________ and the lemons problem is ________.

In the market for automobile insurance,adverse selection implies that

If a health insurance company offers coverage regardless of age,health status,or smoking history,it is likely to suffer

One way of screening in the automobile insurance market is for companies to

The idea of an insurance company "pooling" the risk means that

Explain the concept of adverse selection.Give an example.

A safe drive is likely to prefer an auto insurance policy that has a ________ deductible and a ________ premium.

What is the private information in the market for health-care insurance? What is the private information in the market for health care?

Auto insurance companies charge a lower premium to drivers who carry a higher deductible because

Moral hazard typically occurs because

In the market for auto insurance,with a pooling equilibrium ________ and with a separating equilibrium ________.

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -In a pooling equilibrium,aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________.

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

In the insurance market,private information

What role does moral hazard play in the market for health care?

In the used car market,adverse selection is a problem primarily when

Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?

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

In the used car market with warranties,the equilibrium is a and the lemons problem is .

A safe drive is likely to prefer an auto insurance policy that has a deductible and a premium.

In the market for auto insurance,with a pooling equilibrium and with a separating equilibrium .

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -In a pooling equilibrium,aggressive drivers pay a premium of and safe drivers pay a premium of .