Exam 23: Moral Hazard and Adverse Selection: Informational Market Failures

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If insurance companies cannot distinguish between the safe people and the risky people in a population because of a lack of information, the companies must charge everyone the same average premium.

(True/False)

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Question 21

Explain why we cannot trust that all car repair experts are both competent and honest.

(Essay)

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Question 22

If an insurance company must charge all customers a uniform rate that reflects the average cost of insuring any individual in the population, this average cost will be too ___ to attract _ risks but too _ to fully cover the losses produced by the ___ risks.

(Multiple Choice)

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Question 23

An equilibrium to a game of incomplete information where players of different types take identical actions so that others are not able to learn their types from observing the actions they take is called a pooling equilibrium.

(True/False)

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Question 24

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (wg) is greater than the opportunity wage of bad waiters (wb). If the restaurant sets its salary equal to or greater than wg, it will attract

(Multiple Choice)

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Question 25

When an insurance company cannot observe the characteristics of potential clients and offers a contract that is accepted by bad risks, the company suffers from

(Multiple Choice)

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Question 26

A lack of information about the riskiness of potential customers forces insurance companies to sell insurance on the assumption that they will face the average number of accidents for the population.

(True/False)

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Question 27

Asymmetric information causes _______________ for car repair experts.

(Multiple Choice)

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Question 28

Assume that an insurance company lacks information about which potential customers fall into the safe group and which fall into the risky group. When an individual wants to purchase insurance, the company will assume that the potential customer is the

(Multiple Choice)

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Question 29

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (wg) is greater than the opportunity wage of bad waiters (wb). If the restaurant sets its salary between wb and wg , then it will attract only bad waiters.

(True/False)

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Question 30

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (w_g) is greater than the opportunity wage of bad waiters (w_b). If the restaurant sets its salary below w_b, it will attract

(Multiple Choice)

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Question 31

Adverse selection occurs in situations where one economic agent can observe the characteristics of another.

(True/False)

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Question 32

There could be a car repair equilibrium in which all experts are both competent and honest.

(True/False)

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Question 33

A market solution to adverse selection is

(Multiple Choice)

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Question 34

In a pooling equilibrium in which all potential customers attend safety school, the insurance company will charge

(Multiple Choice)

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Question 35

Compared to safe people, risky people are __________ willing to buy insurance.

(Multiple Choice)

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Question 36

The car repair market can always have an equilibrium in which all experts are

(Multiple Choice)

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Question 37

Car owners will continue to seek information about possible repairs until the marginal cost of obtaining one more opinion _________________ the expected marginal benefit from the information contained in that opinion.

(Multiple Choice)

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Question 38

An insurance company ______________________ whether its potential clients are safe or risky.

(Multiple Choice)

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Question 39

By allowing tipping, a restaurant can solve adverse selection in employing waiters by creating a

(Multiple Choice)

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Question 40

Showing 21 - 40 of 40

Exam 23: Moral Hazard and Adverse Selection: Informational Market Failures

If insurance companies cannot distinguish between the safe people and the risky people in a population because of a lack of information, the companies must charge everyone the same average premium.

Explain why we cannot trust that all car repair experts are both competent and honest.

If an insurance company must charge all customers a uniform rate that reflects the average cost of insuring any individual in the population, this average cost will be too _______ to attract _______ risks but too _______ to fully cover the losses produced by the _______ risks.

An equilibrium to a game of incomplete information where players of different types take identical actions so that others are not able to learn their types from observing the actions they take is called a pooling equilibrium.

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (wg) is greater than the opportunity wage of bad waiters (wb). If the restaurant sets its salary equal to or greater than wg, it will attract

When an insurance company cannot observe the characteristics of potential clients and offers a contract that is accepted by bad risks, the company suffers from

A lack of information about the riskiness of potential customers forces insurance companies to sell insurance on the assumption that they will face the average number of accidents for the population.

Asymmetric information causes _______________ for car repair experts.

Assume that an insurance company lacks information about which potential customers fall into the safe group and which fall into the risky group. When an individual wants to purchase insurance, the company will assume that the potential customer is the

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (wg) is greater than the opportunity wage of bad waiters (wb). If the restaurant sets its salary between wb and wg , then it will attract only bad waiters.

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (wg) is greater than the opportunity wage of bad waiters (wb). If the restaurant sets its salary below wb, it will attract

Adverse selection occurs in situations where one economic agent can observe the characteristics of another.

There could be a car repair equilibrium in which all experts are both competent and honest.

A market solution to adverse selection is

In a pooling equilibrium in which all potential customers attend safety school, the insurance company will charge

Compared to safe people, risky people are __________ willing to buy insurance.

The car repair market can always have an equilibrium in which all experts are

Car owners will continue to seek information about possible repairs until the marginal cost of obtaining one more opinion _________________ the expected marginal benefit from the information contained in that opinion.

An insurance company ______________________ whether its potential clients are safe or risky.

By allowing tipping, a restaurant can solve adverse selection in employing waiters by creating a

Economics and Institutions: a Shift of Emphasis

Consumers and Their Preferences

Utilities Indifference Curves

Demand and Behavior in Markets

Some Applications of Consumer Demand, and Welfare Analysis

Uncertainty and the Emergence of Insurance

Uncertainty Applications and Criticisms

The Discovery of Production and Its Technology

Cost and Choice

Cost Curves

Game Theory and the Tools of Strategic Business Analysis

Decision Making Over Time

The Internal Organization of the Firm

Perfectly Competitive Markets: Short-Run Analysis

Competitive Markets in the Long Run

Market Institutions and Auctions

The Age of Entrepreneurship: Monopoly

Natural Monopoly and the Economics of Regulation

The World of Oligopoly: Preliminaries to Successful Entry

Market Entry and the Emergence of Perfect Competition

The Problem of Exchange

General Equilibrium and the Origins of the Free Market and Interventionist Ideologies

Externalities: the Free Market Interventionist Battle Continues

Public Goods, the Consequences of Strategic Voting Behavior, and the Role of Government

Input Markets and the Origins of Class Conflict

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If an insurance company must charge all customers a uniform rate that reflects the average cost of insuring any individual in the population, this average cost will be too ___ to attract _ risks but too _ to fully cover the losses produced by the ___ risks.

A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (w_g) is greater than the opportunity wage of bad waiters (w_b). If the restaurant sets its salary below w_b, it will attract