Question 1

In the market for auto insurance,in a pooling equilibrium,

Accepted Answer

A)  risky and safe drivers pay the same premium for insurance. 
B)  risky drivers pay a larger premium than do safe drivers for insurance. 
C)  risky drivers pay a smaller premium than do safe drivers for insurance. 
D)  risky drivers cannot obtain insurance. 
E)  safe drivers cannot obtain insurance. 
A)  risky and safe drivers pay the same premium for insurance. 
B)  risky drivers pay a larger premium than do safe drivers for insurance. 
C)  risky drivers pay a smaller premium than do safe drivers for insurance. 
D)  risky drivers cannot obtain insurance. 
E)  safe drivers cannot obtain insurance. A

Question 2

Which of the following is an example of moral hazard?

Accepted Answer

A)  I hire you to work in my garden for a fixed fee, and you work hard all day. 
B)  I hire you to work at an hourly rate and you work as slowly as possible. 
C)  You apply for the job only because I pay a fixed wage per day, no matter how much or little you do. 
D)  You agree to be paid by the weed to work in my garden, and then you work hard. 
E)  You agree to be paid by the weed to work in my garden, and then you don't work hard. 
A)  I hire you to work in my garden for a fixed fee, and you work hard all day. 
B)  I hire you to work at an hourly rate and you work as slowly as possible. 
C)  You apply for the job only because I pay a fixed wage per day, no matter how much or little you do. 
D)  You agree to be paid by the weed to work in my garden, and then you work hard. 
E)  You agree to be paid by the weed to work in my garden, and then you don't work hard. B

Question 3

In the health insurance market,adverse selection occurs when

Accepted Answer

A)  chronically ill people buy health insurance. 
B)  insured people go to the doctor unnecessarily. 
C)  patients sue their doctor. 
D)  people with health insurance tend to behave more recklessly. 
E)  chronically ill people are unable to buy health insurance. 
A)  chronically ill people buy health insurance. 
B)  insured people go to the doctor unnecessarily. 
C)  patients sue their doctor. 
D)  people with health insurance tend to behave more recklessly. 
E)  chronically ill people are unable to buy health insurance. A

Question 4

Asymmetric information means that

Accepted Answer

A)  the buyer must have information that the seller does not have. 
B)  the seller must have information that the buyer does not have. 
C)  the buyer and seller have the same information. 
D)  either the buyer has information that the seller does not have or the seller has information that the buyer does not have. 
E)  None of the above answers is correct. 
A)  the buyer must have information that the seller does not have. 
B)  the seller must have information that the buyer does not have. 
C)  the buyer and seller have the same information. 
D)  either the buyer has information that the seller does not have or the seller has information that the buyer does not have. 
E)  None of the above answers is correct.

Question 5

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. 
E)  outsiders have relevant information that is not available to the people in the market. 
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. 
E)  outsiders have relevant information that is not available to the people in the market.

Question 6

Moral hazard typically occurs because

Accepted Answer

A)  people are dishonest. 
B)  agreements sometimes create incentives that are costly to monitor so people can act in their self-interest. 
C)  workers possess diminishing marginal productivity. 
D)  screening leads to informed people revealing their relevant private information. 
E)  workers possess adverse selection. 
A)  people are dishonest. 
B)  agreements sometimes create incentives that are costly to monitor so people can act in their self-interest. 
C)  workers possess diminishing marginal productivity. 
D)  screening leads to informed people revealing their relevant private information. 
E)  workers possess adverse selection.

Question 7

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  the lemon problem. 
D)  inefficiency. 
E)  a pooling equilibrium. 
A)  moral hazard. 
B)  adverse selection. 
C)  the lemon problem. 
D)  inefficiency. 
E)  a pooling equilibrium.

Question 8

When an auto insurance company is screening,it is

Accepted Answer

A)  ignoring the possibility of moral hazard in order to minimize adverse selection. 
B)  attempting to keep its private information private. 
C)  trying to determine if a driver is an aggressive driver or a safe driver. 
D)  making its private information public. 
E)  marketing its policies to customers. 
A)  ignoring the possibility of moral hazard in order to minimize adverse selection. 
B)  attempting to keep its private information private. 
C)  trying to determine if a driver is an aggressive driver or a safe driver. 
D)  making its private information public. 
E)  marketing its policies to customers.

Question 9

Moral hazard is

Accepted Answer

A)  the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. 
B)  when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. 
C)  a situation in which only bad quality items are bought and sold. 
D)  absent after a person who dislikes risk buys insurance against the risk. 
E)  an action taken outside a market that conveys information that can be used by that market. 
A)  the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. 
B)  when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. 
C)  a situation in which only bad quality items are bought and sold. 
D)  absent after a person who dislikes risk buys insurance against the risk. 
E)  an action taken outside a market that conveys information that can be used by that market.

Question 10

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  a separating equilibrium. 
D)  signaling. 
E)  the lemons problem. 
A)  adverse selection. 
B)  moral hazard. 
C)  a separating equilibrium. 
D)  signaling. 
E)  the lemons problem.

Question 11

In the United States,of all types of insurance,people spend the most on ________ insurance.

Accepted Answer

A)  health 
B)  hurricane 
C)  auto 
D)  life 
E)  property and casualty 
A)  health 
B)  hurricane 
C)  auto 
D)  life 
E)  property and casualty

Question 12

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-The market for aggressive drivers is illustrated in ________,and the market for safe drivers is illustrated in ________.

Accepted Answer

A)  Figure A; Figure A also 
B)  Figure B; Figure A 
C)  Figure A; Figure B 
D)  Figure B; Figure B also 
E)  More information is needed to answer the question. 
A)  Figure A; Figure A also 
B)  Figure B; Figure A 
C)  Figure A; Figure B 
D)  Figure B; Figure B also 
E)  More information is needed to answer the question.

Question 13

Explain the concept of moral hazard.Give an example.

Accepted Answer

Moral hazard exists when one of the part

Question 14

In the market for automobile insurance,adverse selection implies that

Accepted Answer

A)  drivers with greater risks want to buy a policy without deductibles. 
B)  drivers with greater risks want to buy a policy with large deductibles. 
C)  uninsured drivers will drive recklessly. 
D)  insured drivers will drive recklessly. 
E)  moral hazard does not exist in this market. 
A)  drivers with greater risks want to buy a policy without deductibles. 
B)  drivers with greater risks want to buy a policy with large deductibles. 
C)  uninsured drivers will drive recklessly. 
D)  insured drivers will drive recklessly. 
E)  moral hazard does not exist in this market.

Question 15

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 
E)  None of the above answers is correct because both are the result of the lemons problem. 
A)  private; private 
B)  private; public 
C)  public; private 
D)  public; public 
E)  None of the above answers is correct because both are the result of the lemons problem.

Question 16

In the used car market,with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

Accepted Answer

A)  less than; equal to 
B)  equal to; less than 
C)  equal to; more than 
D)  more than; more than 
E)  equal to; equal to 
A)  less than; equal to 
B)  equal to; less than 
C)  equal to; more than 
D)  more than; more than 
E)  equal to; equal to

Question 17

"Screening" means that an auto insurance company is

Accepted Answer

A)  enforcing a pooling equilibrium. 
B)  ignoring all private information. 
C)  creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection. 
D)  creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard. 
E)  creating an incentive for a risky driver to reveal that he or she is risky. 
A)  enforcing a pooling equilibrium. 
B)  ignoring all private information. 
C)  creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection. 
D)  creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard. 
E)  creating an incentive for a risky driver to reveal that he or she is risky.

Question 18

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a ________ deductible and a ________ premium.

Accepted Answer

A)  high; high 
B)  high; low 
C)  low; high 
D)  low; low 
E)  None of the above answers is correct because private information has no effect in the market for auto insurance. 
A)  high; high 
B)  high; low 
C)  low; high 
D)  low; low 
E)  None of the above answers is correct because private information has no effect in the market for auto insurance.

Question 19

Insurance companies

Accepted Answer

A)  pool risk and enable everyone to share the costs of bad outcomes. 
B)  never can earn a profit because they accept risk. 
C)  eliminate the risk of a bad outcome. 
D)  know who will have a bad outcome. 
E)  are risk averse. 
A)  pool risk and enable everyone to share the costs of bad outcomes. 
B)  never can earn a profit because they accept risk. 
C)  eliminate the risk of a bad outcome. 
D)  know who will have a bad outcome. 
E)  are risk averse.

Question 20

What is the private information in the market for health-care insurance? What is the private information in the market for health care?

Accepted Answer

The private information in the market fo

In the market for auto insurance,in a pooling equilibrium,

Which of the following is an example of moral hazard?

In the health insurance market,adverse selection occurs when

Asymmetric information means that

Private information is a situation in which

Moral hazard typically occurs because

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

When an auto insurance company is screening,it is

Moral hazard is

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

In the United States,of all types of insurance,people spend the most on ________ insurance.

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -The market for aggressive drivers is illustrated in ,and the market for safe drivers is illustrated in .

Explain the concept of moral hazard.Give an example.

In the market for automobile insurance,adverse selection implies that

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

In the used car market,with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

"Screening" means that an auto insurance company is

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a deductible and a premium.

Insurance companies

What is the private information in the market for health-care insurance? What is the private information in the market for health care?

Getting Started

The U.S.and Global Economies

The Economic Problem

Demand and Supply

Elasticities of Demand and Supply

Efficiency and Fairness of Markets

Government Actions in Markets

Taxes

Global Markets in Action

Externalities

Public Goods and Common Resources

Consumer Choice and Demand

Production and Cost

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Markets for Factors of Production

Economic Inequality

Filters

Exam 12: Markets with Private Information

In the market for auto insurance,in a pooling equilibrium,

Which of the following is an example of moral hazard?

In the health insurance market,adverse selection occurs when

Asymmetric information means that

Private information is a situation in which

Moral hazard typically occurs because

Ben is an aggressive driver so he is more likely to buy auto insurance.This situation illustrates the idea of

When an auto insurance company is screening,it is

Moral hazard is

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

In the United States,of all types of insurance,people spend the most on ________ insurance.

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -The market for aggressive drivers is illustrated in ________,and the market for safe drivers is illustrated in ________.

Explain the concept of moral hazard.Give an example.

In the market for automobile insurance,adverse selection implies that

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

In the used car market,with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car.

"Screening" means that an auto insurance company is

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a ________ deductible and a ________ premium.

Insurance companies

What is the private information in the market for health-care insurance? What is the private information in the market for health care?

Getting Started

The U.S.and Global Economies

The Economic Problem

Demand and Supply

Elasticities of Demand and Supply

Efficiency and Fairness of Markets

Government Actions in Markets

Taxes

Global Markets in Action

Externalities

Public Goods and Common Resources

Consumer Choice and Demand

Production and Cost

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Markets for Factors of Production

Economic Inequality

Filters

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -The market for aggressive drivers is illustrated in ,and the market for safe drivers is illustrated in .

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

In the used car market,with a pooling equilibrium the price of a lemon is the price of a good used car and with a separating equilibrium the price of a lemon is the price of a good used car.

If you have private information that you are a riskier driver than your record indicates,you are likely to buy an insurance policy that has a deductible and a premium.