Question 1

In which of the following situations is adverse selection most likely to be a problem?

Accepted Answer

A)  buying tomatoes at the local farmers' market 
B)  hiring a new manager to work the night shift 
C)  buying a new lawnmower 
D)  buying a house directly from the previous owner 
A)  buying tomatoes at the local farmers' market 
B)  hiring a new manager to work the night shift 
C)  buying a new lawnmower 
D)  buying a house directly from the previous owner

Question 2

Use the following to answer questions :  
-(Table: Choice with Uncertainty) Look at the table Choice with Uncertainty. Suppose the probability that the sitcom does not make it to television is 30%, that it makes it to television but is not the most viewed show in its time slot is 50%, and that it makes it to television and is the most viewed show in its time slot is 20%. Given this information, Norman's expected total utility is _____ utils.

Accepted Answer

A)  2,000 
B)  2,150 
C)  2,350 
D)  2,650 
A)  2,000 
B)  2,150 
C)  2,350 
D)  2,650

Question 3

Use the following to answer questions 
Scenario: Choosing Insurance
The Ramirez family owns three cars and is considering buying insurance to cover the cost of repairs. They face two possible states: in state 1 their cars need no repairs and their income available for purchasing other goods and services is $50,000; in state 2 their cars need $10,000 worth of repairs and their income available for purchasing other goods and services is reduced to $40,000. The probability of repairs is 10%, while the probability of no repairs is 90%.
-(Scenario: Choosing Insurance) Look at the scenario Choosing Insurance. The premium on a fair insurance policy for the Ramirez family will be:

Accepted Answer

A)  $0. 
B)  $900. 
C)  $1,000. 
D)  $2,000. 
A)  $0. 
B)  $900. 
C)  $1,000. 
D)  $2,000.

Question 4

Which of the following is a principle of the insurance industry?

Accepted Answer

A)  Trade in risk can produce mutual gains. 
B)  Diversification can increase risk. 
C)  Deductibles add to the problem of moral hazard. 
D)  Adverse selection should be used to reduce insurance costs. 
A)  Trade in risk can produce mutual gains. 
B)  Diversification can increase risk. 
C)  Deductibles add to the problem of moral hazard. 
D)  Adverse selection should be used to reduce insurance costs.

Question 5

Use the following to answer questions 
Figure: Risk Aversion  
-(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a ____ insurance premium than Bob because she is _____ risk-averse.

Accepted Answer

A)  higher; more 
B)  lower; more 
C)  lower; less 
D)  higher; less 
A)  higher; more 
B)  lower; more 
C)  lower; less 
D)  higher; less

Question 6

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills. The $7,300 is Darnell's:

Accepted Answer

A)  risk. 
B)  marginal utility. 
C)  expected utility. 
D)  premium. 
A)  risk. 
B)  marginal utility. 
C)  expected utility. 
D)  premium.

Question 7

As a result of frequent flooding, the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods. Holding demand for insurance constant, if flooding is expected to continue to be a problem:

Accepted Answer

A)  flood insurance providers will reap greater profits. 
B)  more insurance companies will provide such insurance. 
C)  flood insurance markets may eventually collapse, since the risks of damage cannot be offset by diversification. 
D)  flood insurance premiums will decrease. 
A)  flood insurance providers will reap greater profits. 
B)  more insurance companies will provide such insurance. 
C)  flood insurance markets may eventually collapse, since the risks of damage cannot be offset by diversification. 
D)  flood insurance premiums will decrease.

Question 8

Use the following to answer questions 
Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company. If it is a rainy year and he invests only in the sunglass company, he will lose $5,000. However, if it is a rainy year and he invests only in the rain poncho company, he will earn $10,000. If it is a sunny year and he invests only in the sunglass company, he will earn $10,000; if he invests only in the rain poncho company, he will lose $5,000 in a sunny year. There is a 50% chance of a sunny year and a 50% chance of a rainy year.
-(Scenario: Diversification) Look at the scenario Diversification. If Morris invests all of his money in the rain poncho company, what is his expected gain or loss?

Accepted Answer

A)  a loss of $2,500 
B)  to break even 
C)  a gain of $2,500 
D)  a gain of $10,000 
A)  a loss of $2,500 
B)  to break even 
C)  a gain of $2,500 
D)  a gain of $10,000

Question 9

If the probability that one person will develop a health problem is greater than that of another person and if they buy insurance from the same provider, most likely the person with a higher probability will pay:

Accepted Answer

A)  the same as the other person. 
B)  more than the person with the lower probability. 
C)  less than the person with the lower probability. 
D)  All people, regardless of probabilities, pay the same amount for insurance. 
A)  the same as the other person. 
B)  more than the person with the lower probability. 
C)  less than the person with the lower probability. 
D)  All people, regardless of probabilities, pay the same amount for insurance.

Question 10

The funds that an insurance company may have to pay out are known as the:

Accepted Answer

A)  fair premium. 
B)  capital at risk. 
C)  total premium. 
D)  deductible. 
A)  fair premium. 
B)  capital at risk. 
C)  total premium. 
D)  deductible.

Question 11

Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.

Accepted Answer

A) True 
 B)False

Question 12

By offering a menu of policies with different premiums and deductibles, insurance companies can _____ their customers; for example, a low-risk customer will often buy insurance with a lower _____ but a higher _____ than a high-risk customer.

Accepted Answer

A)  signal; deductible; premium 
B)  signal; premium; deductible 
C)  screen; deductible; premium 
D)  screen; premium; deductible 
A)  signal; deductible; premium 
B)  signal; premium; deductible 
C)  screen; deductible; premium 
D)  screen; premium; deductible

Question 13

Micah is considering turning pro before his senior year basketball season. If he turns pro, Micah expects a pro contract worth $2 million in present value. If he does not turn pro, there is a 50% chance an injury will prevent him from playing professionally and a 50% chance he will get a pro contract worth $4 million in present value. What is the expected present value of Micah's pro contract if he stays in college for his senior year?

Accepted Answer

A)  $3.5 million 
B)  $5 million 
C)  $2 million 
D)  $0 
A)  $3.5 million 
B)  $5 million 
C)  $2 million 
D)  $0

Question 14

Asymmetric, or private, information:

Accepted Answer

A)  is an important explanation of the variation (or asymmetric performance) of individuals on standardized tests. 
B)  refers to personal information (e.g., regarding gender or ethnicity) that a person is not obligated to reveal on a job application. 
C)  is relevant for an economic transaction and is known only by some of the people involved in the transaction. 
D)  is protected by patents or copyrights. 
A)  is an important explanation of the variation (or asymmetric performance) of individuals on standardized tests. 
B)  refers to personal information (e.g., regarding gender or ethnicity) that a person is not obligated to reveal on a job application. 
C)  is relevant for an economic transaction and is known only by some of the people involved in the transaction. 
D)  is protected by patents or copyrights.

Question 15

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to _____ as the _____ curve shifts _____.

Accepted Answer

A)  rise; supply; left 
B)  fall; supply; right 
C)  fall; demand; left 
D)  rise; demand; right 
A)  rise; supply; left 
B)  fall; supply; right 
C)  fall; demand; left 
D)  rise; demand; right

Question 16

A fair insurance policy is one whose premium:

Accepted Answer

A)  is zero. 
B)  allows the insurance company to profit. 
C)  equals the expected value of the claims. 
D)  is higher as the probability of a claim decreases. 
A)  is zero. 
B)  allows the insurance company to profit. 
C)  equals the expected value of the claims. 
D)  is higher as the probability of a claim decreases.

Question 17

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

Accepted Answer

A)  a moral hazard. 
B)  risk-loving. 
C)  risk-averse. 
D)  risk-neutral. 
A)  a moral hazard. 
B)  risk-loving. 
C)  risk-averse. 
D)  risk-neutral.

Question 18

The insurance industry operates on the principles of:

Accepted Answer

A)  risk trading and diversification. 
B)  exploitation and capital accumulation. 
C)  moral hazard and irrationality. 
D)  adverse selection and diminishing marginal utility. 
A)  risk trading and diversification. 
B)  exploitation and capital accumulation. 
C)  moral hazard and irrationality. 
D)  adverse selection and diminishing marginal utility.

Question 19

Use the following to answer questions  
-(Table: Natasha's Total Utility) Look at the table Natasha's Total Utility. Natasha earns $50,000 per year but faces losing $20,000 of it if she is late with her work. If there is a 25% probability that Natasha will be late with her work and her income will equal $30,000, To guarantee an income of $50,000, Natasha would be willing to pay _____ for insurance.

Accepted Answer

A)  $4,000 
B)  $5,000 
C)  $7,500 
D)  $9,500 
A)  $4,000 
B)  $5,000 
C)  $7,500 
D)  $9,500

Question 20

Warranties that cover the cost of a repair or replacement will:

Accepted Answer

A)  decrease the consumer's expected utility from consuming the good. 
B)  increase the consumer's expected utility from consuming the good. 
C)  have no impact on the consumer's expected utility from consuming the good. 
D)  reverse the consumer's diminishing marginal utility. 
A)  decrease the consumer's expected utility from consuming the good. 
B)  increase the consumer's expected utility from consuming the good. 
C)  have no impact on the consumer's expected utility from consuming the good. 
D)  reverse the consumer's diminishing marginal utility.

Exam 19: Uncertainty, Risk, and Private Information

In which of the following situations is adverse selection most likely to be a problem?

Which of the following is a principle of the insurance industry?

Use the following to answer questions Figure: Risk Aversion -(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a ____ insurance premium than Bob because she is _____ risk-averse.

Darnell pays $7,300 per year to an insurance company in return for its promise to pay part of his family's medical bills. The $7,300 is Darnell's:

As a result of frequent flooding, the insurance market has noted a positive correlation between flooding and the amount of insurance monies paid out for such floods. Holding demand for insurance constant, if flooding is expected to continue to be a problem:

If the probability that one person will develop a health problem is greater than that of another person and if they buy insurance from the same provider, most likely the person with a higher probability will pay:

The funds that an insurance company may have to pay out are known as the:

Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.

By offering a menu of policies with different premiums and deductibles, insurance companies can _____ their customers; for example, a low-risk customer will often buy insurance with a lower _____ but a higher _____ than a high-risk customer.

Asymmetric, or private, information:

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to _____ as the _____ curve shifts _____.

A fair insurance policy is one whose premium:

A person who is willing to pay an insurance premium to lessen financial risk is said to be:

The insurance industry operates on the principles of:

Warranties that cover the cost of a repair or replacement will:

First Principles

Economic Models- Trade-Offs and Trade

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas- Meddling With Markets

Elasticity

Taxes

The Rational Consumer

International Trade

Decision Making by Individuals and Firms

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Macroeconomics- the Big Picture

Gdp and the Consumer Price Index

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending

Fiscal Policy

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Crises and Consequences

Macroeconomics- Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

Toward a Fuller Understanding

Consumer Preferences and Consumer Choice

Indifference Curve Analysis of Labor Supply

Filters

Use the following to answer questions Figure: Risk Aversion -(Figure: Risk Aversion) Look at the figure Risk Aversion. Bob and Nancy have the same income and total utility. Nancy will be willing to pay a insurance premium than Bob because she is _ risk-averse.

By offering a menu of policies with different premiums and deductibles, insurance companies can ___ their customers; for example, a low-risk customer will often buy insurance with a lower _ but a higher ___ than a high-risk customer.

Suppose the wealth of buyers in the insurance market falls. We would expect insurance premiums to ___ as the _ curve shifts ___.