Question 1

​The following is not an example of adverse selection

Accepted Answer

A) ​you lock your garage when you have expensive workshop tools 
B) you are less 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 lock your garage when you have expensive workshop tools 
B) you are less 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 2

​Someone who values a lottery at its expected value is

Accepted Answer

A) ​A risk lover 
B) Risk neutral 
C) Risk averse 
D) ​most likely to play a lottery 
A) ​A risk lover 
B) Risk neutral 
C) Risk averse 
D) ​most likely to play a lottery

Question 3

​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.If Samantha is offered full coverage for her house at $1,500,what is her expected wealth with the insurance policy?

Accepted Answer

A) ​$80,000 
B) $87,000 
C) $97,000 
D) ​$98,500 
A) ​$80,000 
B) $87,000 
C) $97,000 
D) ​$98,500

Question 4

​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.If Samantha is offered an insurance policy for her house to protect her from loss at $3,000,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 5

​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.
-​One of the solutions to the adverse selection problem in insurance is

Accepted Answer

A) ​Is to require that only the high risk individuals to buy insurance 
B) Is to require that only the low risk individuals buy insurance 
C) Is to require everyone to buy insurance 
D) ​Is to completely ban insurance companies 
A) ​Is to require that only the high risk individuals to buy insurance 
B) Is to require that only the low risk individuals buy insurance 
C) Is to require everyone to buy insurance 
D) ​Is to completely ban insurance companies

Question 6

​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 the minimum price an insurance company could offer (if it had no other costs)?

Accepted Answer

A) ​$10,000 
B) $3,000 
C) $100,000 
D) ​$5,000 
A) ​$10,000 
B) $3,000 
C) $100,000 
D) ​$5,000

Question 7

​The following is not an example of risk aversion

Accepted Answer

A) ​you 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 uncertain 
D) ​you only go swimming when the lifeguard is on duty 
A) ​you 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 uncertain 
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.If Samantha is offered an insurance policy for her house to protect her from loss at $3,000,would she buy the insurance?

Accepted Answer

A) ​Yes because she gets to now enjoy her wealth risk-free 
B) No,because she can take the risk and be better off 
C) Yes,because she is a risk lover 
D) ​None of the above 
A) ​Yes because she gets to now enjoy her wealth risk-free 
B) No,because she can take the risk and be better off 
C) Yes,because she is a risk lover 
D) ​None of the above

Question 9

​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.
-​How much would Nadia be willing to pay for the insurance?

Accepted Answer

A) ​$900 
B) $1000 
C) $1100 
D) ​$1200 
A) ​$900 
B) $1000 
C) $1100 
D) ​$1200

Question 10

​Individuals who are more risk averse

Accepted Answer

A) ​buy less insurance 
B) buy more insurance 
C) are not more or less inclined to buy insurance 
D) ​are philosophically opposed to insurance 
A) ​buy less insurance 
B) buy more insurance 
C) are not more or less inclined to buy insurance 
D) ​are philosophically opposed to insurance

Question 11

​Adverse selection in insurance requires that

Accepted Answer

A) ​all people face the same risk 
B) potential customers facing more risk are more interested in purchasing insurance 
C) people are not 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 more interested in purchasing insurance 
C) people are not risk averse 
D) ​insurers can tell higher risk people from lower risk people

Question 12

​Leaving a handsome tip for the waiter in full view of your dinner date 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 13

​Contracting for Lawn Mowing Services
An apartment owner advertises for lawn mowing services for a number of apartments he owns.He has some idea of the going price and so he advertises that he will pay $100 per month per apartment complex.So why is he disappointed that the winning contractor only provides minimal services?

Accepted Answer

He has fallen victim to adverse selectio

Question 14

​Someone who values a lottery at more 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 15

​Offering an expensive engagement ring to your (future)bride 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

​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 fewer safety devices 
C) Individuals living in less secure neighborhoods want to buy more 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 fewer safety devices 
C) Individuals living in less secure neighborhoods want to buy more insurance 
D) ​Individuals with a strong family history of heart diseases opt to buy less insurance

Question 17

​Adverse selection is

Accepted Answer

A) ​when people act differently because they are insured 
B) when more risk averse people want to be insured more 
C) when people at a greater risk want to be insured more 
D) ​when your guess at a test question is wrong 
A) ​when people act differently because they are insured 
B) when more risk averse people want to be insured more 
C) when people at a greater risk want to be insured more 
D) ​when your guess at a test question is wrong

Question 18

​Which firm is not dealing with adverse selection

Accepted Answer

A) ​a manufacturer forgoes a usual 90 day probationary period for new employees 
B) a temporary clerical agency requires a typing test 
C) a manufacturer requires suppliers to be ISO 9000 certified 
D) ​Smokers get the worse life insurance rates as non-smokers 
A) ​a manufacturer forgoes a usual 90 day probationary period for new employees 
B) a temporary clerical agency requires a typing test 
C) a manufacturer requires suppliers to be ISO 9000 certified 
D) ​Smokers get the worse life insurance rates as non-smokers

Question 19

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

Accepted Answer

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

Question 20

​Signaling is

Accepted Answer

A) ​actions by the informed party to reveal her true risks 
B) actions by the informed party to conceal her true risks 
C) actions by the uninformed party to uncover the true risks 
D) ​actions by the uninformed party to conceal the true risks 
A) ​actions by the informed party to reveal her true risks 
B) actions by the informed party to conceal her true risks 
C) actions by the uninformed party to uncover the true risks 
D) ​actions by the uninformed party to conceal the true risks

The following is not an example of adverse selection

Someone who values a lottery at its expected value is

The following is not an example of risk aversion

Individuals who are more risk averse

Adverse selection in insurance requires that

Leaving a handsome tip for the waiter in full view of your dinner date is a

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

Offering an expensive engagement ring to your (future)bride is a

The following is an example of adverse selection

Adverse selection is

Which firm is not dealing with adverse selection

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

Signaling is

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