Exam 9: Imperfect Information, External Benefits, and External Costs

The free-rider problem is larger for private goods than it is for public goods.

If Tom purchases a comprehensive auto insurance policy because he knows he is a reckless driver, his behavior is an example of moral hazard.

Command-and-control policies lead to higher prices for consumers than pollution taxes do.

It is rational for someone who wants to sell a lemon to offer the buyer a money-back guarantee.

If you watch a football game on a cable TV, the cable TV is

You are responsible for purchasing 20 used computers for your company. Red brand computers cost $1,250 and green brand computers cost $1,800. Based on experience, you believe that 60% of red brand computers are lemons (low quality) while 20% of green brand computers are lemons (low quality). You are willing to pay $1,000 for a known lemon and $2,000 for a known plum. Which brand do you purchase?

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). -Recall the Application. Free-agent baseball pitchers who switch teams spend a relatively long time on the disabled list compared to those who do not switch teams.

If in the market for used bikes only sellers can distinguish between good quality and bad quality used bikes, then in that market there exists

Public Broadcasting, in its fund drives, often appeals to viewers by saying, "without you, there will be no Big Bird." This is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good.

Under a system of pollution taxes we expect firms to cut pollution until the marginal benefit from tax savings equals the marginal increase in production costs due to decreasing pollution.

An appeal to peoples' sense of civic or moral responsibility will ________ the free-rider problem and lead to a ________ level of contribution to the public good.

Figure 9.6 -Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. The insurance companies estimate that 40% of its customers are high-cost type. The uninformed side(s) of the market is (are)

Table 9.5 -If each firm depicted in Table 9.5 is currently generating 1,000 gallons of wastewater per day, Firm A would need to be paid at least ________ from Firm B to reduce wastewater production to 0 gallons per day.

Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s). -Recall the Application. Why were there so many "lemon" kiwifruit in the U.S. market?

In the market for pollution permits, the demand for permits comes from

Table 9.3 -In Table 9.3, Market 1 would be in equilibrium if buyers believed lemons account for

Which of the following is necessary for a system of marketable pollution permits to lead to beneficial trades between polluting companies?

As compared to a pollution tax, a command-and-control policy will increase production costs by a ________ amount and increase equilibrium price by a ________ amount.

Figure 9.1 -Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers have pessimistic expectations about the used bikes in the market, what number of used bikes sold will actually be lemons (low quality)?

Assume that an insurance company sets a single price for insurance equal to the total medical bills paid by the insurance company divided by the number of its customers. If it pays medical bills of $5,000 for half of its customers and $9,000 for the other half of its customers, the price of insurance will be