Question 1

Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  both moral hazard and adverse selection. 
D)  private information. 
A)  adverse selection. 
B)  moral hazard. 
C)  both moral hazard and adverse selection. 
D)  private information.

Question 2

A risk averse person will always buy insurance against risk.

Accepted Answer

A) True 
 B)False

Question 3

If a lender checks credit reports on individuals before mailing out loan offers, it is most likely trying to avoid

Accepted Answer

A)  moral hazard. 
B)  moral dilemma. 
C)  adverse selection. 
D)  adverse reaction. 
A)  moral hazard. 
B)  moral dilemma. 
C)  adverse selection. 
D)  adverse reaction.

Question 4

-Lucy works as a college instructor for a fixed annual salary of $30,000. She is considering quitting this job and becoming a real estate broker. Lucy believes that as a realtor she has a 40 percent chance to make $60,000 per year and a 60 percent chance to make $25,000 a year. The figure above shows Lucy's total utility of wealth curve (U). Lucy's expected utility from real estate brokerage is

Accepted Answer

A)  117. 
B)  103. 
C)  110. 
D)  93. 
A)  117. 
B)  103. 
C)  110. 
D)  93.

Question 5

-Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields $200 for sure. Option B has a 0.3 probability of yielding $100, and a 0.7 probability of yielding $300. Marylou, who is

Accepted Answer

A)  picks option A. 
B)  picks option B. 
C)  is indifferent between option A and option B. 
D)  needs more information to make a choice. 
A)  picks option A. 
B)  picks option B. 
C)  is indifferent between option A and option B. 
D)  needs more information to make a choice.

Question 6

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's expected wealth?

Accepted Answer

A)  $10,000 
B)  $20,000 
C)  $30,000 
D)  $40,000 
A)  $10,000 
B)  $20,000 
C)  $30,000 
D)  $40,000

Question 7

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. Initially there is a 10 percent chance that the house will be destroyed by hurricane. As the risk of destruction due to hurricane rises from 10 percent to 20 percent, the minimum cost of insurance

Accepted Answer

A)  stays the same. 
B)  increases by $10,000. 
C)  increases by $20,000. 
D)  increases by $30,000. 
A)  stays the same. 
B)  increases by $10,000. 
C)  increases by $20,000. 
D)  increases by $30,000.

Question 8

How can we measure the cost of risk?

Accepted Answer

The cost of risk is the amount

Question 9

Ebay is an online auction site where individual buyers and sellers receive feedback on their how well they conducted their transaction. This feedback is public available. What is the purpose of this feedback?

Accepted Answer

A)  It is a signal that the buyer or seller is reliable. 
B)  To reduce credit risk of a faulty buyer 
C)  To reduce default risk of a faulty seller 
D)  It is a tool to prevent moral hazard. 
A)  It is a signal that the buyer or seller is reliable. 
B)  To reduce credit risk of a faulty buyer 
C)  To reduce default risk of a faulty seller 
D)  It is a tool to prevent moral hazard.

Question 10

If a salesperson is paid by the volume of sales he or she makes, then the

Accepted Answer

A)  moral hazard problem is diminished. 
B)  moral hazard problem is enhanced. 
C)  adverse selection problem is enhanced. 
D)  None of the above answers is correct. 
A)  moral hazard problem is diminished. 
B)  moral hazard problem is enhanced. 
C)  adverse selection problem is enhanced. 
D)  None of the above answers is correct.

Question 11

-Mike has the utility of wealth curve shown in the figure above. He owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Mike will have an accident within a year. If he does have an accident, his car is worthless.
a) What is Mike's expected utility?
b) What is the maximum amount that Mike is willing to pay for auto insurance?
c) Suppose all car owners are like Mike insofar as they have a 10 percent chance of having an accident. An insurance company agrees to pay each person who has an accident the full value of his or her car. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept?
d) Will Mike buy the company's policy? Why or why not?

Accepted Answer

a) If Mike has an accident, his utility

Question 12

Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________.

Accepted Answer

A)  6,005 
B)  3,001 
C)  6,000 
D)  5 
A)  6,005 
B)  3,001 
C)  6,000 
D)  5

Question 13

Private information is a situation in which

Accepted Answer

A)  two parties to an exchange have information that is available to outsiders if they ask. 
B)  one party to an exchange has information that is not available to the other. 
C)  the marginal cost of a person's obtaining additional information is zero. 
D)  the marginal cost of making information available to one more person is zero. 
A)  two parties to an exchange have information that is available to outsiders if they ask. 
B)  one party to an exchange has information that is not available to the other. 
C)  the marginal cost of a person's obtaining additional information is zero. 
D)  the marginal cost of making information available to one more person is zero.

Question 14

Moral hazard occurs ________ an agreement is made and when monitoring the parties to the agreement is ________.

Accepted Answer

A)  before; easy 
B)  before; costly 
C)  after; easy 
D)  after; costly 
A)  before; easy 
B)  before; costly 
C)  after; easy 
D)  after; costly

Question 15

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The value of insurance to Van is

Accepted Answer

A)  $10,000. 
B)  $15,000. 
C)  $20,000. 
D)  $30,000. 
A)  $10,000. 
B)  $15,000. 
C)  $20,000. 
D)  $30,000.

Question 16

Dan has a car valued at $10,000 that gives him a utility of 50 units. There is a 10 percent chance that he will have an accident that will make his car worthless, in which case his utility will be zero. His utility from a wealth of $7,000 is 45 units. The maximum amount Dan will be willing to pay for car insurance is

Accepted Answer

A)  $1,000. 
B)  $3,000. 
C)  $7,000. 
D)  zero. 
A)  $1,000. 
B)  $3,000. 
C)  $7,000. 
D)  zero.

Question 17

Moral hazard results from ________ information and adverse selection results from ________ information.

Accepted Answer

A)  private; private 
B)  private; public 
C)  public; private 
D)  public; public 
A)  private; private 
B)  private; public 
C)  public; private 
D)  public; public

Question 18

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. Suppose that one of James' professors offers him the opportunity to be a research assistant for a fixed and guaranteed amount each month. Comparing the two opportunities, working at Games Galore versus being a research assistant, what is James' cost of risk?

Accepted Answer

A)  $125 per month 
B)  $175 per month 
C)  $375 per month 
D)  $500 per month 
A)  $125 per month 
B)  $175 per month 
C)  $375 per month 
D)  $500 per month

Question 19

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 know some of your used car's defects but a potential buyer cannot find out about them until after buying. 
C)  you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. 
D)  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 know some of your used car's defects but a potential buyer cannot find out about them until after buying. 
C)  you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. 
D)  you pay the owner of a used car a little extra and she lets you know all of the car's defects.

Question 20

You took a summer job as a salesperson in a shoe store with the knowledge that you will either make $2,000 or $3,500 with probabilities 0.4 and 0.6 respectively. What is your expected income for the summer job?

Accepted Answer

A)  $2,000 
B)  $3,000 
C)  $5,000 
D)  $2,900 
A)  $2,000 
B)  $3,000 
C)  $5,000 
D)  $2,900

Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of

A risk averse person will always buy insurance against risk.

If a lender checks credit reports on individuals before mailing out loan offers, it is most likely trying to avoid

-Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields $200 for sure. Option B has a 0.3 probability of yielding $100, and a 0.7 probability of yielding $300. Marylou, who is

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's expected wealth?

How can we measure the cost of risk?

Ebay is an online auction site where individual buyers and sellers receive feedback on their how well they conducted their transaction. This feedback is public available. What is the purpose of this feedback?

If a salesperson is paid by the volume of sales he or she makes, then the

Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________.

Private information is a situation in which

Moral hazard occurs an agreement is made and when monitoring the parties to the agreement is .

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The value of insurance to Van is

Moral hazard results from information and adverse selection results from information.

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

You took a summer job as a salesperson in a shoe store with the knowledge that you will either make $2,000 or $3,500 with probabilities 0.4 and 0.6 respectively. What is your expected income for the summer job?

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters

Exam 20: Uncertainty and Information

Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of

A risk averse person will always buy insurance against risk.

If a lender checks credit reports on individuals before mailing out loan offers, it is most likely trying to avoid

-Marylou, whose utility of wealth curve is shown in the figure above, faces two options. Option A yields $200 for sure. Option B has a 0.3 probability of yielding $100, and a 0.7 probability of yielding $300. Marylou, who is

-The above figure shows the utility of wealth curve for a homeowner whose only possession is a $50,000 house. If there is a 20 percent chance that the home could be entirely destroyed, what is the person's expected wealth?

How can we measure the cost of risk?

Ebay is an online auction site where individual buyers and sellers receive feedback on their how well they conducted their transaction. This feedback is public available. What is the purpose of this feedback?

If a salesperson is paid by the volume of sales he or she makes, then the

Erika's utility with $3,000 of wealth is 6,000 and her utility with $3,001 of wealth is 6,005. Her marginal utility from gaining the additional $1 of wealth is ________.

Private information is a situation in which

Moral hazard occurs ________ an agreement is made and when monitoring the parties to the agreement is ________.

-Van, whose utility of wealth curve is shown in the above figure, owns a home that is valued at $100,000. There is a 10 percent chance that the house will be destroyed by hurricane. The value of insurance to Van is

Moral hazard results from ________ information and adverse selection results from ________ information.

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

You took a summer job as a salesperson in a shoe store with the knowledge that you will either make $2,000 or $3,500 with probabilities 0.4 and 0.6 respectively. What is your expected income for the summer job?

What Is Economics

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Public Choices, Public Goods, and Healthcare

Externalities

Markets for Factors of Production

Economic Inequality

Filters

Moral hazard occurs an agreement is made and when monitoring the parties to the agreement is .

Moral hazard results from information and adverse selection results from information.