Question 1

​Which of the following is NOT a way to signal high quality

Accepted Answer

A) ​wearing a business suit on a job interview 
B) leaving a big tip for the waiter after a dinner date 
C) offering a cheap engagement ring to your bride 
D) ​Visiting the beauty salon before a big date 
A) ​wearing a business suit on a job interview 
B) leaving a big tip for the waiter after a dinner date 
C) offering a cheap engagement ring to your bride 
D) ​Visiting the beauty salon before a big date

Question 2

​Which firm is not dealing with adverse selection

Accepted Answer

A) ​a manufacturer requires a 90 day probationary period for new employees 
B) a temporary clerical agency hires without verifying typing skills 
C) a manufacturer requires suppliers to be ISO 9000 certified 
D) ​Smokers get the worse life insurance rates as non-smokers 
A) ​a manufacturer requires a 90 day probationary period for new employees 
B) a temporary clerical agency hires without verifying typing skills 
C) a manufacturer requires suppliers to be ISO 9000 certified 
D) ​Smokers get the worse life insurance rates as non-smokers

Question 3

​Which is a screen against adverse selection

Accepted Answer

A) ​Insurance companies require homeowners to have smoke detectors 
B) Rearview cameras in cars 
C) Installing engine monitors to track driving habits of the insured 
D) ​Prospective secretaries must take a typing test before being hired 
A) ​Insurance companies require homeowners to have smoke detectors 
B) Rearview cameras in cars 
C) Installing engine monitors to track driving habits of the insured 
D) ​Prospective secretaries must take a typing test before being hired

Question 4

​In the market for insurance,low risk customers are not served because

Accepted Answer

A) ​They do not like buying insurance 
B) They are more costly to serve 
C) Products designed to be attractive to them are also attractive to high risk types. 
D) ​All of the above 
A) ​They do not like buying insurance 
B) They are more costly to serve 
C) Products designed to be attractive to them are also attractive to high risk types. 
D) ​All of the above

Question 5

If you buy an insurance policy with a low deductible and no co-payments,you would end up paying​

Accepted Answer

A) ​A higher premium 
B) A lower premium 
C) The premium of a low risk individual 
D) ​Both B&C 
A) ​A higher premium 
B) A lower premium 
C) The premium of a low risk individual 
D) ​Both B&C

Question 6

​Cici's Pizza
Most pizza restaurants charge by the pie or by the slice.Cici's has found a niche by charging a flat rate for the meal and allowing as many visits to the pizza buffet as the customer desires.How does this affect the make-up of its clientele?

Accepted Answer

Cici's pricing scheme is particularly at

Question 7

​The following is not an example of risk aversion

Accepted Answer

A) ​you don't lock your garage when you have expensive workshop tools 
B) you are more careful when you buy a more expensive car 
C) Individuals tend to gamble more with their money when the future is certain 
D) ​you only go swimming when the lifeguard is on duty 
A) ​you don't lock your garage when you have expensive workshop tools 
B) you are more careful when you buy a more expensive car 
C) Individuals tend to gamble more with their money when the future is certain 
D) ​you only go swimming when the lifeguard is on duty

Question 8

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.What is her expected wealth?

Accepted Answer

A) ​80,000 
B) $87,000 
C) $97,000 
D) ​$99,000 
A) ​80,000 
B) $87,000 
C) $97,000 
D) ​$99,000

Question 9

Individuals who face greater risks​

Accepted Answer

A) ​are more likely to purchase insurance 
B) are less likely to purchase insurance 
C) are neither more nor less likely to purchase insurance 
D) ​are risk neutral 
A) ​are more likely to purchase insurance 
B) are less likely to purchase insurance 
C) are neither more nor less likely to purchase insurance 
D) ​are risk neutral

Question 10

​Potential buyers of older homes form their bids from imperfect estimates of a house's value As a consequence,

Accepted Answer

A) ​Lower quality houses are more likely to be up for sale 
B) Higher quality houses are more likely to be up for sale 
C) Both the higher and lower value houses would be offered for sale 
D) No houses would be offered for sale​ 
A) ​Lower quality houses are more likely to be up for sale 
B) Higher quality houses are more likely to be up for sale 
C) Both the higher and lower value houses would be offered for sale 
D) No houses would be offered for sale​

Question 11

The following is an example of adverse selection​

Accepted Answer

A) ​A majority of those applying for well paid jobs are well qualified 
B) More reckless drivers opt for cars with more safety devices 
C) Individuals living in less secure neighborhoods want to buy less insurance 
D) ​Individuals with a strong family history of heart diseases opt to buy less insurance 
A) ​A majority of those applying for well paid jobs are well qualified 
B) More reckless drivers opt for cars with more safety devices 
C) Individuals living in less secure neighborhoods want to buy less insurance 
D) ​Individuals with a strong family history of heart diseases opt to buy less insurance

Question 12

​Someone who values a lottery at less than the expected value is

Accepted Answer

A) ​a risk lover 
B) risk neutral 
C) risk averse 
D) ​one who tends to play lots of lotteries 
A) ​a risk lover 
B) risk neutral 
C) risk averse 
D) ​one who tends to play lots of lotteries

Question 13

​A risk neutral individual

Accepted Answer

A) ​Values a lottery at more than its expected value 
B) Values a lottery at less than its expected value 
C) Values a lottery at its expected level 
D) ​Tends to play a lot of lotteries 
A) ​Values a lottery at more than its expected value 
B) Values a lottery at less than its expected value 
C) Values a lottery at its expected level 
D) ​Tends to play a lot of lotteries

Question 14

​Adverse selection happens because

Accepted Answer

A) ​One of the parties has more information about itself then the other party 
B) Individuals that the principle want to least select are the ones more likely to apply 
C) Parties most likely to accept an offer would be least qualified 
D) ​All of the above 
A) ​One of the parties has more information about itself then the other party 
B) Individuals that the principle want to least select are the ones more likely to apply 
C) Parties most likely to accept an offer would be least qualified 
D) ​All of the above

Question 15

A bride accepting a proposal only if the ring is expensive enough is a​

Accepted Answer

A) ​Screening mechanism 
B) Signaling mechanism 
C) Way to waste money 
D) ​None of the above 
A) ​Screening mechanism 
B) Signaling mechanism 
C) Way to waste money 
D) ​None of the above

Question 16

​Adverse selection represents

Accepted Answer

A) ​Profitable transaction 
B) Unconsummated transaction 
C) Wealth creating transaction 
D) ​All of the above 
A) ​Profitable transaction 
B) Unconsummated transaction 
C) Wealth creating transaction 
D) ​All of the above

Question 17

​Adverse selection in insurance requires that

Accepted Answer

A) ​all people face the same risk 
B) potential customers facing more risk are no more interested in purchasing insurance 
C) people are risk averse 
D) ​insurers can tell higher risk people from lower risk people 
A) ​all people face the same risk 
B) potential customers facing more risk are no more interested in purchasing insurance 
C) people are risk averse 
D) ​insurers can tell higher risk people from lower risk people

Question 18

​Use the following setup for question
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
-​Suppose the insurance company cannot tell them apart but expects them to be different values and charges them an average premium of $1850.Who is more likely to buy this insurance?

Accepted Answer

A) ​Samantha 
B) Nadia 
C) Both of them 
D) ​None of them 
A) ​Samantha 
B) Nadia 
C) Both of them 
D) ​None of them

Question 19

​The "lemons" problem is that

Accepted Answer

A) ​cars of verifiable high quality are withheld from the used car market 
B) cars of verifiable low quality are withheld from the used car market 
C) cars of unverifiable high quality are withheld from the used car market 
D) ​cars of unverifiable low quality are withheld from the used car market 
A) ​cars of verifiable high quality are withheld from the used car market 
B) cars of verifiable low quality are withheld from the used car market 
C) cars of unverifiable high quality are withheld from the used car market 
D) ​cars of unverifiable low quality are withheld from the used car market

Question 20

​As a way to still be able to transact with the low-risk individuals,insurance companies can

Accepted Answer

A) ​Offer them partial insurance 
B) Offer them insurance with deductibles 
C) Offer them insurance with co-payments 
D) ​All of the above 
A) ​Offer them partial insurance 
B) Offer them insurance with deductibles 
C) Offer them insurance with co-payments 
D) ​All of the above

Which of the following is NOT a way to signal high quality

Which firm is not dealing with adverse selection

Which is a screen against adverse selection

In the market for insurance,low risk customers are not served because

If you buy an insurance policy with a low deductible and no co-payments,you would end up paying

Cici's Pizza Most pizza restaurants charge by the pie or by the slice.Cici's has found a niche by charging a flat rate for the meal and allowing as many visits to the pizza buffet as the customer desires.How does this affect the make-up of its clientele?

The following is not an example of risk aversion

Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.What is her expected wealth?

Individuals who face greater risks

Potential buyers of older homes form their bids from imperfect estimates of a house's value As a consequence,

The following is an example of adverse selection

Someone who values a lottery at less than the expected value is

A risk neutral individual

Adverse selection happens because

A bride accepting a proposal only if the ring is expensive enough is a

Adverse selection represents

Adverse selection in insurance requires that

The "lemons" problem is that

As a way to still be able to transact with the low-risk individuals,insurance companies can

The One Lessor of Business

Benefits, Costs, and Decisions

Extent How Much Decisions

Investment Decisions: Look Ahead and Reason Back

Simple Pricing

Economies of Scale and Scope

Understanding Markets and Industry Changes

Market Structure and Long Run Equilibrium

Strategy: the Quest to Keep Profit From Eroding

Foreign Exchange, Trade, and Bubbles

More Realistic and Complex Pricing

Direct Price Discrimination

Strategic Games

Bargaining

Making Decisions With Uncertainty

Auctions

The Problem of Moral Hazard

Getting Employees to Work in the Firms Best Interest

Getting Divisions to Work in the Firms Best Interest

Managing Vertical Relationships

Filters

Exam 17: The Problem of Adverse Selection