Deck 20: Decisions With Private Information

Question 1

When one party to a transaction knows something the other doesn't, there is

A)private information.
B)collusion.
C)exploitation.
D)side information.

Answer 1

A

Question 2

Private information exists when

A)there are secrets known only by all the buyers and sellers in a market.
B)one party to a transaction knows something the other doesn't.
C)information is being bought and sold.
D)the information is useful to certain individuals but not to the population as a group.

Answer 2

B

Question 3

Another name for private information is _____ information.

A)collusive
B)personal
C)asymmetric
D)nonpublic

Answer 3

C

Question 4

Private information creates _____ between parties involved in a transaction.

A)balance
B)cohesiveness
C)division
D)asymmetry

Question 5

When buyers cannot tell whether a product is high or low quality before making the purchase

A)both high-quality and low-quality units of the product will sell for the same price.
B)high-quality and low-quality units of the product will sell at different prices.
C)sellers must let the buyers know the quality of each unit of the product.
D)buyers must let sellers know the quality of the unit that they desire to buy.

Question 6

When buyers cannot tell whether a product is high or low quality before making the purchase, high-quality items end up selling for _____, and low-quality items end up selling for _____ than if the buyer knew the quality before purchase.

A)more; less
B)less; more
C)the same; more
D)less; the same

Question 7

Sellers may choose not to sell a high-quality item when buyers are _____ to tell the quality in advance, and so the buyers _____.

A)not able; pay a high price hoping for high quality
B)not able; are not willing to pay the price of a high-quality product
C)able; pay a high price regardless of quality
D)able; pay a low price

Question 8

A product that has more problems or inferior quality than the average unit available is known as

A)a pickle.
B)an adverse unit.
C)a lemon.
D)a bump unit.

Question 9

When buyers cannot assess the quality of a product before buying, owners of _____ units are more likely to choose to sell their units, and owners of _____ units are less likely to choose to sell their units.

A)moderate-quality; low-quality
B)high-quality; moderate-quality
C)high-quality; low-quality
D)low-quality; high-quality

Question 10

Owners of _____ goods are more likely to sell their units than owners of other types of goods when buyers cannot observe quality before they buy.

A)low-quality
B)high-quality
C)moderate-quality
D)diminishing-quality

Question 11

When buyers cannot judge the quality of a good before buying, the market tends to be skewed toward

A)high prices.
B)lower-quality units.
C)average prices.
D)higher-quality units.

Question 12

Adverse selection of sellers means that each of the following occurs EXCEPT

A)the market price falls when low-quality goods become common.
B)low-quality goods are a large share of what is for sale.
C)the low market price causes sellers of high-quality goods to leave the market.
D)high-quality goods sell at higher prices.

Question 13

More low-quality goods are a large share of the market when buyers cannot observe quality. This is known as

A)adverse selection of sellers.
B)lemon bias.
C)selection quandary of buyers.
D)market quality bias.

Question 14

The adverse selection of sellers is the

A)tendency for buyers to choose to buy from sellers who are not trustworthy even when product quality is high.
B)tendency for the mix of goods to be skewed toward more low-quality goods when buyers can't observe quality.
C)skew in markets when sellers cannot observe quality that leads to lower prices.
D)skew in markets toward buyers who pay less when sellers cannot tell a buyer's willingness to pay.

Question 15

Inga wants to buy a used computer but is nervous about the risk of buying one that could be a lemon. What will induce Inga to buy?

A)She will buy if the seller tells her it is a high-quality computer.
B)She will buy if the computer is only slightly used.
C)She will buy if the price is the price of a low-quality used computer.
D)She will buy if there is another buyer in the market.

Question 16

Benjamin sells used cell phones, and buyers find it difficult to assess the quality of this product before buying. Which of the following statements is NOT consistent with the situation in Benjamin's market?

A)Benjamin may end up selling low-quality used cell phones.
B)Customers will pay only a low price, even if the phone quality is high.
C)Adverse selection of buyers will be present.
D)The market will skew toward low quality.

Question 17

Assume that the value of a high-quality used phone of a particular model is $200. The value of a low-quality model of the same used phone is $100. Assume that 15% are low-quality models and 85% of them are high quality. What will be the case in the market for used phones of that model?

A)Fewer than 15% of the buyers will expect low quality.
B)Fewer than 15% of the sellers will charge low price.
C)Fewer than 15% of the phones sold will be low quality.
D)More than 15% of the phones sold will be low quality.

Question 18

When sellers have private information, _____ can result.

A)adverse selection
B)a skew toward high-quality
C)disequilibrium
D)risk-seeking

Question 19

Which of the following statements is correct when sellers know more about quality than buyers?

A)High price indicates high quality, but the low price does not imply low quality.
B)Low price indicates low quality, but the high price does not imply high quality.
C)There is a positive relationship between price and product quality.
D)Price is not a reliable indicator of product quality.

Question 20

When quality is not observable by buyers, it is difficult for buyers to purchase

A)at a low price.
B)because they have an advantage over sellers.
C)high-quality products.
D)because of their overconfidence.

Question 21

Adverse selection leads to a market that

A)is efficient.
B)is inefficient.
C)maximizes benefits.
D)maximizes harm.

Question 22

A market will move toward buying and selling low-quality products when

A)sellers have less information than buyers.
B)costs are rising.
C)there is an adverse selection problem due to private information.
D)sellers have no understanding of product quality.

Question 23

Mariko wants to buy a hand-knotted rug made without child labor. What challenge does she face in making this purchase?

A)The marginal benefit curve has a positive slope.
B)The markets for hand-knotted rugs do not function at equilibrium.
C)Most suppliers have no way of knowing whether child labor was used in production.
D)It will be difficult for her to verify seller claims about the use of child labor.

Question 24

Jo wants to buy organic strawberries. Several sellers in her town claim to sell organic strawberries, and their prices range from $2 to $4 per pound. Strawberries that are not labeled as organic sell for $1.50 to $2.50 per pound. What is FALSE about the situation Jo faces in the organic strawberry market?

A)It is not easy for her to verify if the strawberries are organic.
B)Price is not a reliable indicator of whether the strawberries are organic.
C)Sellers have little incentive to sell at a low price.
D)Sellers know more than buyers about whether the strawberries are organic.

Question 25

Which of the following statements is consistent with markets where it is difficult for buyers to assess the quality before purchase?

A)Sellers have incentives to sell high-quality goods at high prices.
B)Price is not a reliable indicator of quality.
C)Sellers need to be skeptical of buyer intent.
D)In spite of the difficulty, the market result will be efficient.

Question 26

When a market is subject to severe adverse selection due to seller private information

A)the market skews toward higher quality.
B)the market skews toward higher prices.
C)all suppliers end up selling low-quality products.
D)buyers have more information than sellers.

Question 27

Pak is one of many sellers of green beans in local farmer's markets where consumers are willing to pay more for organically grown green beans than regular green beans. However, the buyers have no way to verify whether any of the green beans for sale are grown organically. As a result of this

A)the market price tends to be high because all sellers claim to sell organic green beans.
B)green beans are not sold because there is no trust in the market.
C)most of the green beans sold will be organic because sellers want to cater to customers.
D)green beans end up selling at low prices because buyers are skeptical.

Question 28

When a market has an adverse selection problem due to seller's having private information, then

A)buyers have a hard time finding high-quality products to buy.
B)sellers have a hard time producing high-quality products to sell.
C)average price will rise to the level of high-quality products.
D)sellers of low-quality products will leave the market.

Question 29

Sellers of high-quality products tend to leave a market when the

A)buyers have more information than the sellers have.
B)market is subject to adverse selection due to seller's having private information.
C)price is rising.
D)marginal benefit is rising as sales increase.

Question 30

What causes adverse selection problems?

A)Buyers have unrealistic expectations.
B)Sellers have private information.
C)Sellers are not interested in profit.
D)Buyers are not interested in low prices.

Question 31

What are buyers unsure about when a market has an adverse selection problem due to seller's having private information?

A)The number of sellers that are in the market.
B)The level of quality that is desired in the product.
C)The price that each seller is charging.
D)The quality level of the units that are for sale.

Question 32

What condition does NOT need to be present for adverse selection to be a problem?

A)There is variation in quality of the products in the market.
B)Buyers who are unsure of quality will pay a low price for the product.
C)Consumers have a hard time assessing quality prior to purchase.
D)Sellers who are unsure of quality will sell the product at a low price.

Question 33

Which of the following is NOT a solution to an adverse selection problem due to seller's having private information?

A)The government can provide information or weed out low-quality goods.
B)Buyers can produce the good for themselves.
C)Sellers can signal quality.
D)Third-party verifiers can provide information to buyers.

Question 34

All of the following statements are solutions to an adverse selection problem caused by seller's having private information EXCEPT

A)sellers can signal quality.
B)third-party verifiers can provide information to buyers.
C)the government can provide information or weed out low-quality goods.
D)buyers can signal quality.

Question 35

Which of the following is NOT an example of a solution to an adverse selection problem that is caused by the seller's having private information?

A)The government bans the sale of air conditioners with energy efficiency below a certain standard.
B)A buyer's organization makes a verified list of product characteristics demanded by buyers.
C)An independent organization verifies organic production and publishes a list of certified organic farmers.
D)A producer of a weight loss supplement offers a money-back guarantee that its product works.

Question 36

Which of the following is NOT an example of a solution to an adverse selection problem caused by the seller's having private information?

A)A list of award winners and top-tier producers is published by the organization of experts that judges an annual chocolate bar quality competition.
B)A hairstylist offers a free brief follow-up appointment within a week of a haircut to adjust anything the customer does not like about a cut.
C)A government requires miles-per-gallon labeling on all automobiles sold in the country.
D)A company makes sure that all its employees enter positive product reviews on an online website that reports product reviews.

Question 37

Which of the following is an example of a credible third-party verifier providing helpful information to buyers when it is difficult for them to judge the quality of a health supplement in advance?

A)A product review website allows anyone, including buyers and sellers, to post reviews of a health supplement.
B)Producers provide detailed descriptions of the supplement's features.
C)A research lab publishes a comparative study of the effectiveness of the versions of the supplement produced by 10 companies.
D)The association of all producers of the supplement makes a list of suggested standards for the supplement.

Question 38

Which of the following is NOT an example of a credible third-party verifier providing buyers information that could solve an adverse selection problem due to seller's having private information?

A)Brianna relies on washing machine ratings in a well-regarded consumer magazine that tests and rates products.
B)Mia insists on seeing at least three projects of a given tile layer's work along with getting references from former customers before she will consider hiring him for a bathroom renovation.
C)Martin's car repair company guarantees repair work for 60 days after a repair.
D)Pierre pays a certified home inspector to examine a home he is considering for purchase.

Question 39

Which of the following would NOT be a credible third-party verifier of information on a product?

A)A research laboratory whose research is funded by the company producing the product.
B)A panel of experts on the product that are not employed or funded by producers.
C)An independent organization funded by subscribers to its magazine that is dedicated to verifying product quality claims.
D)A certified home inspector who will inspect homes for a set fee and provide a report on its condition.

Question 40

In which of the following would a third-party verifier not be helpful for shoppers to gain information about a product?

A)A verifying organization can test the product or hire experts to test the product to verify its quality or claims.
B)A verifying organization can provide information on the experiences of past users of the product, verifying that the experiences are from actual users of the product who are not tied to the producer.
C)A consumer can send questions about the product quality to the producer to learn more about the production.
D)A consumer could hire a trusted expert to examine a particular unit of the product that he wants.

Question 41

When producers signal customers, they are

A)advertising the product's price using mass media.
B)using a banner or sound to attract attention to their product.
C)using a third-party to convince customers to buy.
D)taking action to convey private information credibly.

Question 42

An action taken to convey private information credibly is known as

A)an advertisement.
B)collusion.
C)a signal.
D)a memo.

Question 43

Natalia is graduating from university and seeking her first full-time job. She wants the employers to know that she is a hard worker who pursues excellence in her work. What sort of signal could she use to convey this?

A)The prospective employers ask for letters of recommendation from professors who can verify her work as a student.
B)In her cover letter for a job application, Natalia notes that she was student worker of the year twice during her four years of part-time work at the university.
C)At a job interview, the employer asks her if she is a hard worker.
D)She works hard at her current student part-time job.

Question 44

Which one of the following is NOT an example of a seller offering signals of quality?

A)Chau asks customers to write reviews of her manicures on a website for local businesses.
B)Hui Er proofreads her job application and cover letter four times to make sure it shows that she is careful about details.
C)Mak offers a money-back guarantee on his product.
D)Ian's Auto Body Shop offers a warranty on its work.

Question 45

A seller's signal about product quality is useful to potential customers when it

A)makes it more difficult for the customer to learn about the products of other producers.
B)reduces the profit margin so that customers don't feel exploited.
C)gives customers verification about things they already know.
D)helps them differentiate between high- and low-quality versions of the product.

Question 46

A seller's signal to potential buyers can work well for the seller only when it is

A)focused on reinforcing the idea that there are lemons for sale in the market.
B)focused on reinforcing the idea that there are no lemons for sale in the market.
C)substantially costlier for sellers of high-quality products to send the signal than for sellers of low-quality goods to do so.
D)substantially costlier for sellers of low-quality products to send the signal than for sellers of high-quality goods to do so.

Question 47

When a signal from sellers to buyers is effective, then sellers

A)of high-quality products can charge a higher price than sellers of low-quality products.
B)of low-quality products can charge the same price as sellers of high-quality products.
C)know which buyers are willing to pay a high price.
D)know which buyers are not interested in quality.

Question 48

The three ways that government policy can solve an adverse selection problem do NOT include

A)regulating quality.
B)requiring that buyers purchase a particular product.
C)providing information to buyers.
D)giving sellers an incentive to reveal truthful information.

Question 49

The three ways that government policy can solve an adverse selection problem do NOT include

A)limiting the number of sellers.
B)providing information directly to buyers.
C)regulating quality.
D)giving sellers an incentive to reveal truthful information.

Question 50

Which of the following is an example of a government reducing adverse selection by eliminating the lowest-quality products in a market?

A)Requiring that sellers reveal to buyers any known flaws in the product.
B)Requiring a skill or knowledge-based license to offer the product or service.
C)Offering accurate information to buyers.
D)Allowing firms to go out of business if they have insufficient customers.

Question 51

If low-quality goods are not allowed to be sold, then the problem of adverse selection due to seller's having private information will

A)grow.
B)not be affected.
C)lessen slightly.
D)disappear.

Question 52

If sellers charge only one price in a market where buyers have private information, then sellers

A)end up with a mix of customers skewed toward expensive customers.
B)end up with a mix of customers skewed toward less expensive customers.
C)can avoid adverse selection.
D)will flourish as much as possible.

Question 53

When buyers know more than sellers about how costly the buyers are likely to be to the sellers, then

A)sellers are likely to charge a price that drives the most expensive customers out of the market.
B)buyers will exert pressure on sellers to charge a price based on the least expensive customers.
C)buyers will exert pressure on sellers to charge a price based on the most expensive customers.
D)sellers are likely to charge a price that drives the least expensive customers out of the market.

Question 54

When buyers have private information, the risk to sellers is that they will

A)end up with disproportionately high-cost customers.
B)end up with disproportionately low-cost customers.
C)have an advantage over buyers.
D)be more influential than buyers.

Question 55

The tendency for the mix of buyers to be skewed toward more high-cost buyers when sellers don't know buyers' type is known as

A)adverse buyer bias.
B)high-cost discrimination bias.
C)adverse selection of buyers.
D)private information bias.

Question 56

The adverse selection of buyers is the tendency

A)of buyers to make purchases that are not in their best interests.
B)of sellers to target advertising toward individuals who are unlikely to buy.
C)for the sellers to be skewed to high prices when buyers want low prices.
D)for the mix of buyers to be skewed toward more high-cost buyers when sellers don't know buyers' types.

Question 57

When buyers have private information, they

A)know more about how costly they will be to sellers than the sellers know.
B)have access to information about the sellers that sellers prefer to keep private.
C)tend to favor more specialized versions of products.
D)are at a disadvantage in making purchases.

Question 58

When buyers have private information and sellers charge a single price based on the average cost of buyers, then

A)the mix of buyers will be skewed toward those who are less costly for sellers.
B)the mix of buyers will be skewed toward those who are more costly for sellers.
C)buyers who would be lower-cost buyers will be more likely to buy.
D)buyers who would be higher-cost buyers will be less likely to buy.

Question 59

A dental insurance company charges premiums higher than average dental costs across a population and loses money. When it keeps raising the premiums on its policies, its losses keep rising. The dental insurance company is facing

A)the challenge of having private information not known by the buyers.
B)sellers with diminishing market power.
C)an adverse selection death spiral.
D)the challenge of high growth of demand.

Question 60

When buyers have private information, which group of buyers will have the most difficult time making a purchase at a price no higher than their costs?

A)Extremely high-cost buyers
B)High-cost buyers
C)Average-cost buyers
D)Low-cost buyers

Question 61

Which of the following worsens adverse selection due to buyers having private information?

A)Buyers have the choice to buy or not buy whenever they want to.
B)Buyers have constraints on their ability to buy or not buy whenever they want to.
C)Sellers have very limited ability to change price.
D)Sellers have flexibility to lower price but not to raise price.

Question 62

When people are risk averse, the price they are willing to pay for insurance _____ the actuarially fair price.

A)must be lower than
B)may be higher than
C)must be equal to
D)may be equal to or lower than but not higher than

Question 63

How do risk-averse buyers affect adverse selection in a market where buyers have private information?

A)Risk-averse buyers reverse the adverse selection problem from a seller problem to a buyer problem.
B)Risk-averse buyers reverse the adverse selection problem from a buyer problem to a seller problem.
C)Risk aversion in buyers will reduce adverse selection.
D)Risk aversion in buyers will increase adverse selection.

Question 64

Which seller is most likely to face adverse selection problems due to buyers having private information?

A)A lawyer gives clients a choice of paying $500 per hour or paying a flat fee of $6,000 for up to 12 hours of work plus $500 per hour for any work beyond 12 hours.
B)An accountant prices his services for completing tax returns individually, with each person's price based on the number of schedules and forms that need to be used to complete each return.
C)A toy store offers a special sale of "buy one, get one free" on puzzles.
D)A clothing store advertises free hemming alterations on pants and then adjusts its price on pants to add in the average cost of hemming based on the proportion of the population that is taller or shorter than average.

Question 65

Which pricing approach for a restaurant would have the greatest risk of adverse selection due to buyers having private information?

A)Offering a set price all-you-can-eat buffet.
B)Offering small- and large-plate versions of each entrée with different prices.
C)Pricing each menu item based on its cost of production.
D)Charging a price per ounce and weighing each plate.

Question 66

The owner of an apartment building is deciding what rent to charge and how to cover any damages. A lease with a monthly rent of $1,000 would cover expenses, including normal wear and tear but no additional damage. Which of the following lease options would create an adverse selection of buyers due to private information?

A)Rent of $1,000 plus a one-time, nonrefundable cleaning fee of $300.
B)Rent of $1,100 plus a security and cleaning deposit of $500 that will be refunded less any damage repairs or cleaning.
C)Rent of $1,000 plus a security and cleaning deposit of $1,500 that will be refunded less any damage repairs or cleaning.
D)Rent of $1,300.

Question 67

Ari had gastric by-pass surgery for weight loss and can eat very little at a meal. Which of the following restaurants will she be most likely to buy from if she wants to pay only for food that she eats?

A)An all-you-can-eat-buffet with a set price.
B)Each plate (entrée with two sides) is priced based on the cost of production.
C)All entrees and all sides are priced based on the cost of production.
D)A discount is given if a dessert is ordered with a dinner plate.

Question 68

Zhang Wei is opening an auto repair shop. Which of the following pricing approaches might disproportionately attract buyers who have cars in worse-than-average condition?

A)Three-tier pricing for repairs based on an initial assessment of repair needs - low-cost, average-cost, and high-cost repairs.
B)An hourly charge for time spent on repair plus cost of parts.
C)An hourly charge so the price is based on how long it takes to complete the repair.
D)A flat fee based on average costs for all repairs, with a 30-day guarantee.

Question 69

Merced (5 feet tall) and Tina (6 feet tall) are the shortest and tallest members of a women's choir who need to have matching floor-length outfits made. Each wants to pay as little as possible for her outfit. Which tailor would Merced prefer?

A)Each choir member pays $120 for eight hours of sewing and $100 for five yards of fabric, which are the average sewing and fabric costs.
B)Each choir member pays $15 per hour for sewing and $80 to $120 for fabric based on the actual amount needed for that member's garment.
C)There is two-tier pricing based on height, with choir members paying either $210 or $230.
D)Each choir member pays $15 per hour for sewing and $100 for five yards of fabric.

Question 70

Merced (5 feet tall) and Tina (6 feet tall) are the shortest and tallest members of a women's choir who need to have matching floor-length outfits made. Each wants to pay as little as possible for her outfit. Which tailor would Tina prefer?

A)Each choir member pays $120 for eight hours of sewing and $100 for five yards of fabric, which are the average sewing and fabric costs.
B)Each choir member pays $15 per hour for sewing and $80 to $120 for fabric based on the actual amount needed for that member's garment.
C)There is two-tier pricing based on height, with choir members paying either $210 or $230.
D)Each choir member pays $15 per hour for sewing and $100 for five yards of fabric.

Question 71

In an insurance market, what may help ease the problems of adverse selection due to buyers having private information?

A)Utility maximization
B)Risk aversion
C)Hidden-customer quality
D)Third-party verifiers of product quality

Question 72

What worsens adverse selection in a dental insurance market where buyers have private information?

A)Selling only to risk-averse buyers.
B)Grouping buyers by a risk factor and charging a premium based on risk.
C)Requiring that each buyer's premium be based on that specific buyer's costs.
D)Allowing buyers to opt-in and opt-out of the market at any time they desire.

Question 73

Which of the following is NOT a solution to adverse selection when buyers have private information?

A)The government can increase information, offer subsidies, enforce mandates, or provide insurance.
B)Sellers can offer different contracts so that buyers separate themselves.
C)Sellers can use information that is related to buyers' likely costs.
D)Sellers can simplify by charging a single average price.

Question 74

Which of the following is NOT a solution to adverse selection when buyers have private information?

A)Sellers can use information that is related to buyers' likely costs.
B)The penalty for being a high-cost customer is reduced.
C)The government can increase information, offer subsidies, enforce mandates, or provide insurance.
D)Sellers can offer different contracts so that buyers separate themselves.

Question 75

The solutions to adverse selection in a market where buyers have private information focus on

A)reducing buyer choice so that customers are forced into purchasing the product whether they need it or not.
B)raising market price so that sellers can cover costs of all customers, including high-cost customers.
C)helping sellers get more information about their customers so they can distinguish between high- and low-cost customers.
D)reducing seller costs so that price will cover costs.

Question 76

Which of the following factors can health insurers NOT use as a basis for different premiums on health insurance policies?

A)age
B)smoker or nonsmoker
C)regular exerciser or not
D)sex

Question 77

The government can help solve a market problem with adverse selection in each of the following ways EXCEPT

A)providing insurance.
B)requiring that everyone buy insurance.
C)reducing the need for insurance.
D)providing incentives for buyers to reveal private information.

Question 78

To reduce their disadvantage due to buyers having private information, auto insurers try to

A)raise the price of all policies.
B)collect information from customers that relate to how costly the customer will be to the insurer.
C)create incentives for buyers to be high-cost buyers so that they will pay more for insurance.
D)reduce the costs of providing insurance.

Question 79

An automobile insurance agency offers two policy options - one with a deductible of $400 and a premium of $1,900 and another with a deductible of $900 and a premium of $1,500. What is the auto insurer trying to achieve by offering these two options?

A)Charging a high deductible to low-cost customers will reduce their incentive to buy insurance.
B)Charging a high deductible to high-cost customers will induce them to buy insurance.
C)Low-cost customers will buy the $1,900 one, and high-cost customers will buy the $1,500 one.
D)Low-cost customers will buy the $1,500 one, and high-cost customers will buy the $1,900 one.

Question 80

Which of the following is NOT a method used by a government to reduce adverse selection due to buyers' private information in a product market?

A)The government imposes laws with penalties for insurance fraud.
B)The government provides insurance to all and pays for it with tax revenue.
C)The government helps the population become less risk-averse.
D)The government subsidizes the cost of insurance so that more people buy it.