Exam 14: Imperfect Information: Adverse Selection and Moral Hazard

Table 14.1 -Refer to Table 14.1,which shows the market for used motorcycles in a small Midwestern town.Which of the following is true?

If John in searching for a particular product,the lowest price observed so far in his search process is called the

Adverse selection problem in the kiwifruit market leads to the presence of low-quality kiwifruit that will increase the number of high-quality kiwifruit.

Which of the following is an example of moral hazard?

An example of moral hazard is

Recall the Application about how having car insurance affects driving behavior to answer the following question(s). -Recall the Application.What does the theory of moral hazard suggest when it comes to car insurance among insured and uninsured drivers?

Suppose air bags are installed on all cars sold.Which of the following is likely to occur?

When the buyer is more knowledgeable than the seller,there is a(n)

Explain why the insurance market suffers from the adverse-selection problem.

After Johan purchased a full coverage insurance policy for his car,he is not careful and leaves his car unlocked at all times.This is an example of

Most of the working-age people in the United States have private health insurance.

-Refer to Figure 14.1.If the price of insurance is $7,500,then

The marginal benefit of search ________ with the discovered price,while the marginal cost of search is ________.

A product that offers a guarantee is not any more appealing to consumers than a similar product that does not offer a guarantee as long as the two products are priced the same.

Table 14.2 -Refer to table 14.2.The buyers assumed chance of getting a lemon will ________ and hence the willingness to pay for the used boat will ________.

What is asymmetric information?

Asymmetric information occurs if John,who is buying Kim's used Toyota Corolla,has the same amount of information as Kim.

As the cost of automobile insurance rises,good drivers might reduce their coverage while poor drivers will likely maintain their coverage.This situation is known as moral hazard.

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). -Recall the Application.Assume professional pitchers who are free agents and are more likely to get injured switch teams more often than those who are less likely to get injured.How is this situation explained by asymmetric information?

The reservation price is the price at which a consumer is indifferent about additional search for a lower price.