Question 1

Moral hazard can be reduced by:

Accepted Answer

A)  the use of 100% insurance coverage. 
B)  imposing a deductible on insurance coverage. 
C)  taking away personal stakes for people with private information. 
D)  offering fewer incentives to people with private information to act in a less risky manner. 
A)  the use of 100% insurance coverage. 
B)  imposing a deductible on insurance coverage. 
C)  taking away personal stakes for people with private information. 
D)  offering fewer incentives to people with private information to act in a less risky manner.

Question 2

Moral hazard occurs only when people fail to do what is in their best interest.

Accepted Answer

A) True 
 B)False

Question 3

Lucy decides to buy car insurance because:

Accepted Answer

A)  she wishes to increase her exposure to risk. 
B)  she wants to decrease her exposure to risk. 
C)  she is not risk-averse. 
D)  her marginal utility is not strongly dependent on her income. 
A)  she wishes to increase her exposure to risk. 
B)  she wants to decrease her exposure to risk. 
C)  she is not risk-averse. 
D)  her marginal utility is not strongly dependent on her income.

Question 4

Barcelona and Montreal are similar,except Barcelona has a good public transportation system and Montreal does not.Auto insurance will probably be more expensive in _____ since the _____ for insurance is _____.

Accepted Answer

A)  Barcelona;demand;higher than it is in Montreal 
B)  Barcelona;supply;lower than it is in Montreal 
C)  Montreal;demand;higher than it is in Barcelona 
D)  Montreal;supply;lower than it is in Barcelona 
A)  Barcelona;demand;higher than it is in Montreal 
B)  Barcelona;supply;lower than it is in Montreal 
C)  Montreal;demand;higher than it is in Barcelona 
D)  Montreal;supply;lower than it is in Barcelona

Question 5

Automobile insurance policies include deductibles:

Accepted Answer

A)  to minimize moral hazard. 
B)  because,when it comes to health,most people are risk-averse. 
C)  to minimize adverse selection. 
D)  because many health insurance companies own hospitals. 
A)  to minimize moral hazard. 
B)  because,when it comes to health,most people are risk-averse. 
C)  to minimize adverse selection. 
D)  because many health insurance companies own hospitals.

Question 6

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 7

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)Use Scenario: Diversification.If Morris invests half of his money in the sunglass company and half 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 8

When faced with an insurance policy whose premium exceeds the expected value of the claim:

Accepted Answer

A)  no one will buy it. 
B)  only risk-tolerant individuals will buy it. 
C)  risk-averse individuals will buy it as long as the utility associated with the insurance is greater than the expected utility without the insurance. 
D)  risk-averse individuals will buy it as long as the utility associated with the insurance is less than the expected utility without the insurance. 
A)  no one will buy it. 
B)  only risk-tolerant individuals will buy it. 
C)  risk-averse individuals will buy it as long as the utility associated with the insurance is greater than the expected utility without the insurance. 
D)  risk-averse individuals will buy it as long as the utility associated with the insurance is less than the expected utility without the insurance.

Question 9

People who want to reduce the risk they face may pay other people who are less sensitive to risk to take on some of their risk.As a result:

Accepted Answer

A)  a market for risk is illegal. 
B)  trade in risk reduces mutual gains. 
C)  total risk increases. 
D)  people who are willing to accept more risk will purchase from people who are less willing. 
A)  a market for risk is illegal. 
B)  trade in risk reduces mutual gains. 
C)  total risk increases. 
D)  people who are willing to accept more risk will purchase from people who are less willing.

Question 10

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 11

A fair insurance policy is one whose premium is _____ the expected value of the claims.

Accepted Answer

A)  equal to 
B)  greater than 
C)  less than 
D)  unrelated to 
A)  equal to 
B)  greater than 
C)  less than 
D)  unrelated to

Question 12

Use the following to answer questions :
Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,whereas cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15 000 and a lemon is worth $3 000.
-(Scenario: Used-Car Market)Use Scenario: Used-Car Market.Adverse selection in this used-car market occurs because of:

Accepted Answer

A)  asymmetric information. 
B)  risk-loving behaviour. 
C)  moral hazard. 
D)  diversification. 
A)  asymmetric information. 
B)  risk-loving behaviour. 
C)  moral hazard. 
D)  diversification.

Question 13

An efficient allocation of risk occurs when those most willing to bear risk insure those who are least willing to bear risk.

Accepted Answer

A) True 
 B)False

Question 14

Moral hazard:

Accepted Answer

A)  increases the ability of markets to allocate risk efficiently. 
B)  decreases the ability of markets to allocate risk efficiently. 
C)  has no impact on the ability of markets to allocate risk efficiently. 
D)  encourages the provision of 100% insurance coverage. 
A)  increases the ability of markets to allocate risk efficiently. 
B)  decreases the ability of markets to allocate risk efficiently. 
C)  has no impact on the ability of markets to allocate risk efficiently. 
D)  encourages the provision of 100% insurance coverage.

Question 15

Rhonda would like a better bicycle,and she considers selling her old one by advertising on the bulletin board in the student center.She decides against it because the used bicycles listed on the board are underpriced.This example illustrates the problem of:

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  positive correlation. 
D)  risk aversion. 
A)  adverse selection. 
B)  moral hazard. 
C)  positive correlation. 
D)  risk aversion.

Question 16

Private information can cause economic inefficiency by preventing mutually beneficial transactions.

Accepted Answer

A) True 
 B)False

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

At the end of the 1980s,Lloyd's of London was in severe financial trouble because of:

Accepted Answer

A)  a major recession in Western Europe and the United States. 
B)  terror attacks by the IRA. 
C)  asbestos claims. 
D)  the war in Iraq. 
A)  a major recession in Western Europe and the United States. 
B)  terror attacks by the IRA. 
C)  asbestos claims. 
D)  the war in Iraq.

Question 19

On any particular day,the probability that it will rain is 25% and that you will be sick is 10%.The probability that both happen on the same day is _____%.

Accepted Answer

A)  0.25 
B)  1 
C)  2.5 
D)  17.5 
A)  0.25 
B)  1 
C)  2.5 
D)  17.5

Question 20

For MOST families,the marginal utility of income is:

Accepted Answer

A)  increasing. 
B)  constant. 
C)  diminishing. 
D)  unknown;the answer depends on the value of income. 
A)  increasing. 
B)  constant. 
C)  diminishing. 
D)  unknown;the answer depends on the value of income.

Exam 20: Uncertainty, risk, and Private Information

Moral hazard can be reduced by:

Moral hazard occurs only when people fail to do what is in their best interest.

Lucy decides to buy car insurance because:

Barcelona and Montreal are similar,except Barcelona has a good public transportation system and Montreal does not.Auto insurance will probably be more expensive in _____ since the _____ for insurance is _____.

Automobile insurance policies include deductibles:

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

When faced with an insurance policy whose premium exceeds the expected value of the claim:

People who want to reduce the risk they face may pay other people who are less sensitive to risk to take on some of their risk.As a result:

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.

A fair insurance policy is one whose premium is _____ the expected value of the claims.

An efficient allocation of risk occurs when those most willing to bear risk insure those who are least willing to bear risk.

Moral hazard:

Rhonda would like a better bicycle,and she considers selling her old one by advertising on the bulletin board in the student center.She decides against it because the used bicycles listed on the board are underpriced.This example illustrates the problem of:

Private information can cause economic inefficiency by preventing mutually beneficial transactions.

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

At the end of the 1980s,Lloyd's of London was in severe financial trouble because of:

On any particular day,the probability that it will rain is 25% and that you will be sick is 10%.The probability that both happen on the same day is _____%.

For MOST families,the marginal utility of income is:

First Principles

Economic Models

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve- Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences

Indifference Curve Analysis

Filters

Barcelona and Montreal are similar,except Barcelona has a good public transportation system and Montreal does not.Auto insurance will probably be more expensive in ___ since the _ for insurance is ___.

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.