Question 1

The _____ clause in an insurance policy relieves the insurer of responsibility to pay for policyholder's losses below a pre-specified amount.

Accepted Answer

A) propitious selection 
B) coinsurance 
C) vigilance 
D) deductible 
A) propitious selection 
B) coinsurance 
C) vigilance 
D) deductible D

Question 2

What is the difference between the utility function of a risk averse person and a risk neutral person.

Accepted Answer

The utility function of a risk averse person is an upward rising curve concave to the wealth axis.The utility function of a risk neutral person is an upward sloping straight line.

Question 3

When does an insurance contract benefit both the parties?

Accepted Answer

Insurance is a contract that reallocates risk between the insurer and the insured.This exchange of risks benefits both sides of the contract if they have different degrees of aversion or different abilities to bear risk.

Question 4

The lemons model suggests that owners will have superior information about the quality of their cars and incentives to conceal it, to which buyers will respond by lowering their bids.

Accepted Answer

A) True 
 B)False

Question 5

An insurance policy is a contract that:

Accepted Answer

A) benefits the parties if they have the same degrees of risk aversion. 
B) benefits the parties if both of them are risk neutral. 
C) benefits the parties if they have different degrees of risk aversion. 
D) benefits the parties if either of them is risk neutral. 
A) benefits the parties if they have the same degrees of risk aversion. 
B) benefits the parties if both of them are risk neutral. 
C) benefits the parties if they have different degrees of risk aversion. 
D) benefits the parties if either of them is risk neutral.

Question 6

The problem of adverse selection is usually more acute in case of automobile insurance compared to health insurance.

Accepted Answer

A) True 
 B)False

Question 7

Asymmetric information increases the economic value that an agreement between two parties creates.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following were discovered in a Federal Trade Commission Study of 8,000 new and used Corvettes sold on eBay between 2001 and 2003?

Accepted Answer

A) The last-minute bids on new Corvettes were higher than that on used ones. 
B) The median winning bid on new Corvettes exceeded that on used ones. 
C) The median winning bid on used Corvettes exceeded that on new ones. 
D) The last-minute bids on used Corvettes were higher than that on new ones. 
A) The last-minute bids on new Corvettes were higher than that on used ones. 
B) The median winning bid on new Corvettes exceeded that on used ones. 
C) The median winning bid on used Corvettes exceeded that on new ones. 
D) The last-minute bids on used Corvettes were higher than that on new ones.

Question 9

Mention some of the ways in which the problem of asymmetric information can be reduced.

Accepted Answer

The problem of asymmetric information ca

Question 10

Which of following provisions in an insurance policy may be economically efficient if policy holders can control small claims but not large ones?

Accepted Answer

A) Vigilance provision 
B) Non-price exceptions 
C) Co-payment provisions 
D) Liquidated damages 
A) Vigilance provision 
B) Non-price exceptions 
C) Co-payment provisions 
D) Liquidated damages

Question 11

Suppose the seller of a used car provides unverifiable information about its quality to a prospective buyer.Unverifiability will reduce the cost of formulating a contract.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is a possible result of adverse selection?

Accepted Answer

A) Only lemons remain in the market for used cars. 
B) A store manager shirks his responsibility because his supervisor is not present at all times. 
C) A car mechanic does not bother to properly fix the customers' cars when his work cannot be monitored. 
D) Many people selling their houses at very low prices expecting prices to decline further. 
A) Only lemons remain in the market for used cars. 
B) A store manager shirks his responsibility because his supervisor is not present at all times. 
C) A car mechanic does not bother to properly fix the customers' cars when his work cannot be monitored. 
D) Many people selling their houses at very low prices expecting prices to decline further.

Question 13

Insurers reduce the problem of moral hazard by limiting coverage of open-ended treatments like psychotherapy or fully elective treatments like some cosmetic surgeries.

Accepted Answer

A) True 
 B)False

Question 14

Assume that 50 percent of the population consisting of 2,000 low-risk people and 1,000 high-risk people choose a comprehensive health insurance plan having a break even premium of $800.The remaining 50 percent, also consisting of 2,000 low-risk people and 1,000 high-risk people, choose a Health Maintenance Organization plan having a break even premium of $400.If high-risk people submit claims worth $2,000 under the comprehensive plan and $1,000 under the HMO plan, which of the following situations will occur?

Accepted Answer

A) High-risk people will shift to the comprehensive plan resulting in an increase in its premium rate. 
B) High-risk people will shift to the HMO plan resulting into a fall in its premium rate. 
C) Low-risk people will shift to the comprehensive plan resulting in a substantial decrease in its premium rate. 
D) Low-risk people in both groups will stick to their respective plans and minimize their losses. 
A) High-risk people will shift to the comprehensive plan resulting in an increase in its premium rate. 
B) High-risk people will shift to the HMO plan resulting into a fall in its premium rate. 
C) Low-risk people will shift to the comprehensive plan resulting in a substantial decrease in its premium rate. 
D) Low-risk people in both groups will stick to their respective plans and minimize their losses.

Question 15

Which of the following situations can lead to a winner's curse?

Accepted Answer

A) A bid which is won by multiple bidders but fails to cover the expectations of the seller. 
B) A win which makes a player over-enthusiastic about further gambles. 
C) An overoptimistic bid which helps the bidder to win but fails to cover his costs. 
D) A win which makes the player risk-averse toward future gambles. 
A) A bid which is won by multiple bidders but fails to cover the expectations of the seller. 
B) A win which makes a player over-enthusiastic about further gambles. 
C) An overoptimistic bid which helps the bidder to win but fails to cover his costs. 
D) A win which makes the player risk-averse toward future gambles.

Question 16

How is the utility of a gamble to a risk averse person different from that to a risk neutral person?

Accepted Answer

For a risk averse person the expected ut

Question 17

Which of the following problems associated with asymmetric information can be avoided by using a product warranty?

Accepted Answer

A) Lemons problem 
B) Problem of adverse selection 
C) Moral Hazard 
D) Problem of blind sight 
A) Lemons problem 
B) Problem of adverse selection 
C) Moral Hazard 
D) Problem of blind sight

Question 18

Which of the following practices of insurers deter moral hazard?

Accepted Answer

A) Setting a uniform premium structure. 
B) Requiring people to purchase the same coverage. 
C) Arranging for reinsurance to cut the risk of unexpectedly large claims. 
D) Conducting security checks without notice and terminating the policy whenever required. 
A) Setting a uniform premium structure. 
B) Requiring people to purchase the same coverage. 
C) Arranging for reinsurance to cut the risk of unexpectedly large claims. 
D) Conducting security checks without notice and terminating the policy whenever required.

Question 19

The problem of _____ can arise when a seller cannot obtain reliable information from buyers.

Accepted Answer

A) moral hazard 
B) adverse selection 
C) lemons problem 
D) incomplete information 
A) moral hazard 
B) adverse selection 
C) lemons problem 
D) incomplete information

Question 20

Assume that a single insurance plan applies to 2,000 low-risk people and 1,000 high-risk people opting for insurance coverage.If the average claim submitted by low-risk people is $100 while that submitted by high-risk people was $1,000, the insurer would break even by setting a premium of:

Accepted Answer

A) $250. 
B) $400. 
C) $200. 
D) $500. 
A) $250. 
B) $400. 
C) $200. 
D) $500.

The _____ clause in an insurance policy relieves the insurer of responsibility to pay for policyholder's losses below a pre-specified amount.

What is the difference between the utility function of a risk averse person and a risk neutral person.

When does an insurance contract benefit both the parties?

The lemons model suggests that owners will have superior information about the quality of their cars and incentives to conceal it, to which buyers will respond by lowering their bids.

An insurance policy is a contract that:

The problem of adverse selection is usually more acute in case of automobile insurance compared to health insurance.

Asymmetric information increases the economic value that an agreement between two parties creates.

Which of the following were discovered in a Federal Trade Commission Study of 8,000 new and used Corvettes sold on eBay between 2001 and 2003?

Mention some of the ways in which the problem of asymmetric information can be reduced.

Which of following provisions in an insurance policy may be economically efficient if policy holders can control small claims but not large ones?

Suppose the seller of a used car provides unverifiable information about its quality to a prospective buyer.Unverifiability will reduce the cost of formulating a contract.

Which of the following is a possible result of adverse selection?

Insurers reduce the problem of moral hazard by limiting coverage of open-ended treatments like psychotherapy or fully elective treatments like some cosmetic surgeries.

Which of the following situations can lead to a winner's curse?

How is the utility of a gamble to a risk averse person different from that to a risk neutral person?

Which of the following problems associated with asymmetric information can be avoided by using a product warranty?

Which of the following practices of insurers deter moral hazard?

The problem of _____ can arise when a seller cannot obtain reliable information from buyers.

Assume that a single insurance plan applies to 2,000 low-risk people and 1,000 high-risk people opting for insurance coverage.If the average claim submitted by low-risk people is $100 while that submitted by high-risk people was $1,000, the insurer would break even by setting a premium of:

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Time, Risk and Options

Conflict, Negotiation and Group Choice

Filters

Exam 11: Risk and Information in Contracts

The _____ clause in an insurance policy relieves the insurer of responsibility to pay for policyholder's losses below a pre-specified amount.

What is the difference between the utility function of a risk averse person and a risk neutral person.

When does an insurance contract benefit both the parties?

The lemons model suggests that owners will have superior information about the quality of their cars and incentives to conceal it, to which buyers will respond by lowering their bids.

An insurance policy is a contract that:

The problem of adverse selection is usually more acute in case of automobile insurance compared to health insurance.

Asymmetric information increases the economic value that an agreement between two parties creates.

Which of the following were discovered in a Federal Trade Commission Study of 8,000 new and used Corvettes sold on eBay between 2001 and 2003?

Mention some of the ways in which the problem of asymmetric information can be reduced.

Which of following provisions in an insurance policy may be economically efficient if policy holders can control small claims but not large ones?

Suppose the seller of a used car provides unverifiable information about its quality to a prospective buyer.Unverifiability will reduce the cost of formulating a contract.

Which of the following is a possible result of adverse selection?

Insurers reduce the problem of moral hazard by limiting coverage of open-ended treatments like psychotherapy or fully elective treatments like some cosmetic surgeries.

Which of the following situations can lead to a winner's curse?

How is the utility of a gamble to a risk averse person different from that to a risk neutral person?

Which of the following problems associated with asymmetric information can be avoided by using a product warranty?

Which of the following practices of insurers deter moral hazard?

The problem of _____ can arise when a seller cannot obtain reliable information from buyers.

Assume that a single insurance plan applies to 2,000 low-risk people and 1,000 high-risk people opting for insurance coverage.If the average claim submitted by low-risk people is $100 while that submitted by high-risk people was $1,000, the insurer would break even by setting a premium of:

Reasoning With Economics: Models and Information

Transactions and Institutions: the Building Blocks

Markets

Cost and Production

Extreme Markets I: Perfect Competition

Extreme Markets II: Monopoly

Between the Extremes: Interaction and Strategy

Competition and Strategy

Beyond Markets; Property and Contracts

The Economics of Contracts

Organizations in Concept and Practice

Organizational Design

Vertical Relationships

Employment Relationships

Time, Risk and Options

Conflict, Negotiation and Group Choice

Filters