Question 1

How can a warranty at the seller's expense signal that a product is high quality?

Accepted Answer

If the product is low quality, the warra

Question 2

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) the lemon problem. 
D) inefficiency. 
E) a pooling equilibrium. 
A) moral hazard. 
B) adverse selection. 
C) the lemon problem. 
D) inefficiency. 
E) a pooling equilibrium.

Question 3

Adverse selection is created by

Accepted Answer

A) incentives to change behavior after two parties have reached an agreement. 
B) risk. 
C) signaling. 
D) taxes. 
E) private information. 
A) incentives to change behavior after two parties have reached an agreement. 
B) risk. 
C) signaling. 
D) taxes. 
E) private information.

Question 4

The lemons problem is caused by

Accepted Answer

A) health-care providers' incentive to order unnecessary tests.. 
B) used car buyers' inability to determine the quantity of used cars offered for sale. 
C) auto insurance companies inability to adequately screen drivers. 
D) the missing health care market. 
E) government regulations than make some information private. 
A) health-care providers' incentive to order unnecessary tests.. 
B) used car buyers' inability to determine the quantity of used cars offered for sale. 
C) auto insurance companies inability to adequately screen drivers. 
D) the missing health care market. 
E) government regulations than make some information private.

Question 5

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 6

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

Accepted Answer

A) the government agency that regulates insurance companies 
B) the insurance company 
C) the drivers 
D) the insurance company and the drivers 
E) the government regulating agency and the insurance company 
A) the government agency that regulates insurance companies 
B) the insurance company 
C) the drivers 
D) the insurance company and the drivers 
E) the government regulating agency and the insurance company

Question 7

When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) signaling. 
D) the cost of contracting. 
E) a pooling equilibrium. 
A) moral hazard. 
B) adverse selection. 
C) signaling. 
D) the cost of contracting. 
E) a pooling equilibrium.

Question 8

Of the following, the best example of private information is when

Accepted Answer

A) Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know. 
B) you are selling a used car and you know your used car's defects but a potential buyer cannot find out about them until after buying. 
C) you are selling a used car and you do not know your used car's defects 
D) you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. 
E) you pay the owner of a used car a little extra and she lets you know all of the car's defects. 
A) Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know. 
B) you are selling a used car and you know your used car's defects but a potential buyer cannot find out about them until after buying. 
C) you are selling a used car and you do not know your used car's defects 
D) you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. 
E) you pay the owner of a used car a little extra and she lets you know all of the car's defects.

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

-The market for aggressive drivers is illustrated in ________ and the market for safe drivers is illustrated in ________.

Accepted Answer

A) Figure A; Figure A also 
B) Figure B; Figure A 
C) Figure A; Figure B 
D) Figure B; Figure B also 
E) More information is needed to answer the question. 
A) Figure A; Figure A also 
B) Figure B; Figure A 
C) Figure A; Figure B 
D) Figure B; Figure B also 
E) More information is needed to answer the question.

Question 11

In the market for automobile insurance, adverse selection implies that

Accepted Answer

A) drivers with greater risks want to buy a policy without deductibles. 
B) drivers with greater risks want to buy a policy with large deductibles. 
C) uninsured drivers will drive recklessly. 
D) insured drivers will drive recklessly. 
E) moral hazard does not exist in this market. 
A) drivers with greater risks want to buy a policy without deductibles. 
B) drivers with greater risks want to buy a policy with large deductibles. 
C) uninsured drivers will drive recklessly. 
D) insured drivers will drive recklessly. 
E) moral hazard does not exist in this market.

Question 12

________ occurs when an informed person takes an action to send information to an uninformed person and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information.

Accepted Answer

A) Moral hazard; adverse selection 
B) Adverse selection; moral hazard 
C) Signaling; screening 
D) Screening; signaling 
E) Pooling; separating 
A) Moral hazard; adverse selection 
B) Adverse selection; moral hazard 
C) Signaling; screening 
D) Screening; signaling 
E) Pooling; separating

Question 13

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 14

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 15

"Screening" means that an auto insurance company is

Accepted Answer

A) enforcing a pooling equilibrium. 
B) ignoring all private information. 
C) creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection. 
D) creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard. 
E) creating an incentive for a risky driver to reveal that he or she is risky. 
A) enforcing a pooling equilibrium. 
B) ignoring all private information. 
C) creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection. 
D) creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard. 
E) creating an incentive for a risky driver to reveal that he or she is risky.

Question 16

If buyers cannot assess the quality of used cars and there are no warranties,

Accepted Answer

A) only lemons are sold. 
B) only good used cars are sold. 
C) good cars are sold at a higher price than bad cars. 
D) there is no adverse selection problem. 
E) lemons and good cars sell for the same price. 
A) only lemons are sold. 
B) only good used cars are sold. 
C) good cars are sold at a higher price than bad cars. 
D) there is no adverse selection problem. 
E) lemons and good cars sell for the same price.

Question 17

Asymmetric information means that

Accepted Answer

A) the buyer must have information that the seller does not have. 
B) the seller must have information that the buyer does not have. 
C) the buyer and seller have the same information. 
D) either the buyer has information that the seller does not have or the seller has information that the buyer does not have. 
E) None of the above answers are correct. 
A) the buyer must have information that the seller does not have. 
B) the seller must have information that the buyer does not have. 
C) the buyer and seller have the same information. 
D) either the buyer has information that the seller does not have or the seller has information that the buyer does not have. 
E) None of the above answers are correct.

Question 18

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Accepted Answer

A) reduce; be the same 
B) reduce; differ 
C) magnify; be the same 
D) magnify; differ 
E) None of the above answers is correct because warranties have nothing to do with private information. 
A) reduce; be the same 
B) reduce; differ 
C) magnify; be the same 
D) magnify; differ 
E) None of the above answers is correct because warranties have nothing to do with private information.

Question 19

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 20

"People buy insurance do protect themselves from moral hazard." True or false? Explain.

Accepted Answer

The statement is false.In fact, insuranc

How can a warranty at the seller's expense signal that a product is high quality?

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Adverse selection is created by

The lemons problem is caused by

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

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating

Of the following, the best example of private information is when

Which of the following can create inefficiency and deadweight loss?

-The market for aggressive drivers is illustrated in and the market for safe drivers is illustrated in .

In the market for automobile insurance, adverse selection implies that

occurs when an informed person takes an action to send information to an uninformed person and occurs when an uninformed person creates an incentive for an informed person to reveal private information.

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

"Screening" means that an auto insurance company is

If buyers cannot assess the quality of used cars and there are no warranties,

Asymmetric information means that

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .

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

"People buy insurance do protect themselves from moral hazard." True or false? Explain.

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

How can a warranty at the seller's expense signal that a product is high quality?

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Adverse selection is created by

The lemons problem is caused by

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

In the auto insurance market, who is most likely to have private information that leads to adverse selection?

When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating

Of the following, the best example of private information is when

Which of the following can create inefficiency and deadweight loss?

-The market for aggressive drivers is illustrated in ________ and the market for safe drivers is illustrated in ________.

In the market for automobile insurance, adverse selection implies that

________ occurs when an informed person takes an action to send information to an uninformed person and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information.

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

"Screening" means that an auto insurance company is

If buyers cannot assess the quality of used cars and there are no warranties,

Asymmetric information means that

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

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

"People buy insurance do protect themselves from moral hazard." True or false? Explain.

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

-The market for aggressive drivers is illustrated in and the market for safe drivers is illustrated in .

occurs when an informed person takes an action to send information to an uninformed person and occurs when an uninformed person creates an incentive for an informed person to reveal private information.

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

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .