Deck 17: The Problem of Adverse Selection

Question 1

​Individuals who are more risk averse

A)​buy less insurance
B)buy more insurance
C)are not more or less inclined to buy insurance
D)​are philosophically opposed to insurance

Answer 1

B

Question 2

​A risk averse individual

A)​values a lottery at more than its expected value
B)values a lottery at exactly its expected value
C)values a lottery at less than its expected value
D)​tends to play lots of lotteries

Answer 2

C

Question 3

​The following is not an example of risk aversion

A)​you lock your garage when you have expensive workshop tools
B)you are more careful when you buy a more expensive car
C)Individuals tend to gamble more with their money when the future is uncertain
D)​you only go swimming when the lifeguard is on duty

Answer 3

C

Question 4

​Adverse selection in insurance requires that

A)​all people face the same risk
B)potential customers facing more risk are more interested in purchasing insurance
C)people are not risk averse
D)​insurers can tell higher risk people from lower risk people

Question 5

​The following is not an example of adverse selection

A)​you lock your garage when you have expensive workshop tools
B)you are less careful when you buy a more expensive car
C)Individuals tend to gamble more with their money when the future is certain
D)​you only go swimming when the lifeguard is on duty

Question 6

​The following is not an example of risk aversion

A)​you lock your garage when you have expensive workshop tools
B)you are more careful when you buy a more expensive car
C)Individuals tend to gamble more with their money when the future is certain
D)​you only go swimming when the lifeguard is not on duty

Question 7

​Someone who values a lottery at less than the expected value is

A)​a risk lover
B)risk neutral
C)risk averse
D)​one who tends to play lots of lotteries

Question 8

​Adverse selection in insurance requires that

A)​all people face the same risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are risk averse
D)​insurers can tell higher risk people from lower risk people

Question 9

​Adverse selection is

A)​when people act differently because they are insured
B)when more risk averse people want to be insured more
C)when people at a greater risk want to be insured more
D)​when your guess at a test question is wrong

Question 10

​An individual who is a risk lover

A)​values a lottery at more than its expected value
B)values a lottery at exactly its expected value
C)values a lottery at less than its expected value
D)​tends to play lots of lotteries

Question 11

​Someone who values a lottery at its expected value is

A)​A risk lover
B)Risk neutral
C)Risk averse
D)​most likely to play a lottery

Question 12

​Trades between risk lovers and risk takers

A)​Move assets to lower-value use
B)Move assets to higher value use
C)Create wealth
D)​Both B&C

Question 13

​Adverse selection in insurance implies that

A)​all people face the same risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are not risk averse
D)​insurers cannot tell the risk levels that different individuals face

Question 14

​Adverse selection in insurance requires that

A)​potential customers face different levels of risk
B)potential customers facing more risk are no more interested in purchasing insurance
C)people are not risk averse
D)​insurers can tell higher risk people from lower risk people

Question 15

​The reason some insurance customers are more eager to purchase insurance is

A)​they are more risk averse
B)they are less risk averse
C)they have a greater risk of making a claim
D)​Both A&C

Question 16

​Someone who values a lottery at more than the expected value is

A)​a risk lover
B)risk neutral
C)risk averse
D)​one who tends to play lots of lotteries

Question 17

Individuals who face greater risks​

A)​are more likely to purchase insurance
B)are less likely to purchase insurance
C)are neither more nor less likely to purchase insurance
D)​are risk neutral

Question 18

​Most people buy insurance because they

A)​are risk lovers
B)enjoy the gamble
C)are risk neutral
D)​are risk averse

Question 19

​A risk neutral individual

A)​Values a lottery at more than its expected value
B)Values a lottery at less than its expected value
C)Values a lottery at its expected level
D)​Tends to play a lot of lotteries

Question 20

​The following is not an example of risk aversion

A)​you don't lock your garage when you have expensive workshop tools
B)you are more careful when you buy a more expensive car
C)Individuals tend to gamble more with their money when the future is certain
D)​you only go swimming when the lifeguard is on duty

Question 21

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered an insurance policy for her house to protect her from loss at $3,000,would she buy the insurance?

A)​Yes because she gets to now enjoy her wealth risk-free
B)No,because she can take the risk and be better off
C)Yes,because she is a risk lover
D)​None of the above

Question 22

​An indication that Insurance companies anticipate adverse selection is

A)​they do not require a deductible
B)they classify clients into different risk types according to their claim history
C)they do not classify clients into different risk types according to pre-existing conditions
D)​they do not require a co-payment

Question 23

​An indication that Insurance companies anticipate adverse selection is

A)​they do not require a deductible
B)they do not classify clients into different risk types according to their claim history
C)they classify clients into different risk types according to pre-existing conditions
D)​they do not require a co-payment

Question 24

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.What is the minimum price an insurance company could offer (if it had no other costs)?

A)​$10,000
B)$3,000
C)$100,000
D)​$5,000

Question 25

​Which firm is not dealing with adverse selection

A)​a manufacturer forgoes a usual 90 day probationary period for new employees
B)a temporary clerical agency requires a typing test
C)a manufacturer requires suppliers to be ISO 9000 certified
D)​Smokers get the worse life insurance rates as non-smokers

Question 26

​The "lemons" problem is that

A)​cars of verifiable high quality are withheld from the used car market
B)cars of verifiable low quality are withheld from the used car market
C)cars of unverifiable high quality are withheld from the used car market
D)​cars of unverifiable low quality are withheld from the used car market

Question 27

​Which is a screen against adverse selection

A)​Insurance companies require homeowners to have smoke detectors
B)Rearview cameras in cars
C)Installing engine monitors to track driving habits of the insured
D)​Prospective secretaries must take a typing test before being hired

Question 28

​Which firm is not dealing with adverse selection

A)​a manufacturer requires a 90 day probationary period for new employees
B)a temporary clerical agency requires a typing test
C)a manufacturer requires suppliers to be ISO 9000 certified
D)​Smokers get the same life insurance rates as non-smokers

Question 29

​Adverse selection happens because

A)​One of the parties has more information about itself then the other party
B)Individuals that the principle want to least select are the ones more likely to apply
C)Parties most likely to accept an offer would be least qualified 
D)​All of the above

Question 30

​Potential solutions to sell a high-quality used car include

A)​offering a warranty
B)selling through a reputable dealer
C)documenting the complete repair history
D)​all of the above

Question 31

​An indication that Insurance companies anticipate adverse selection is

A)​they do not require a deductible
B)they do not classify clients into different risk types according to their claim history
C)they do not classify clients into different risk types according to pre-existing conditions
D)​they require a co-payment

Question 32

​Insurance companies create wealth by

A)​reducing the amount of risk that risk averse individuals must bear
B)reducing the amount of risk that risk loving individuals must bear
C)increasing the amount of risk that risk averse individuals must bear
D)​moving an asset from low to high value use

Question 33

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.What is her expected wealth?

A)​80,000
B)$87,000
C)$97,000
D)​$99,000

Question 34

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered a full coverage insurance policy for her house at $2000,would she buy the insurance?

A)​Yes because she gets to now enjoy her wealth risk-free
B)No,because she can take the risk and be better off
C)Yes,because she gains on average with the insurance
D)​Both A&C

Question 35

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered an insurance policy for her house to protect her from loss at $3,000,what is her expected wealth?

A)​$80,000
B)$87,000
C)$97,000
D)​$99,000

Question 36

​Which firm is not dealing with adverse selection

A)​a manufacturer requires a 90 day probationary period for new employees
B)a temporary clerical agency requires a typing test
C)a manufacturer contracts with suppliers regardless of ISO 9000 status
D)​Smokers get the worse life insurance rates as non-smokers

Question 37

An indication that Insurance companies anticipate adverse selection is​

A)​they require a deductible
B)they do not classify clients into different risk types according to their claim history
C)they do not classify clients into different risk types according to pre-existing conditions
D)​they do not require a co-payment

Question 38

​Which firm is not dealing with adverse selection

A)​a manufacturer requires a 90 day probationary period for new employees
B)a temporary clerical agency hires without verifying typing skills
C)a manufacturer requires suppliers to be ISO 9000 certified
D)​Smokers get the worse life insurance rates as non-smokers

Question 39

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered full coverage for her house at $1,500,what is her expected wealth with the insurance policy?

A)​$80,000
B)$87,000
C)$97,000
D)​$98,500

Question 40

​Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.What is her expected loss?

A)​$3000
B)$10,000
C)$30,000
D)​$100,000

Question 41

The following is an example of adverse selection​

A)​A majority of those applying for well paid jobs are well qualified
B)More reckless drivers opt for cars with more safety devices
C)Individuals living in less secure neighborhoods want to buy less insurance
D)​Individuals with a strong family history of heart diseases opt to buy less insurance

Question 42

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
If the insurance company can successfully screen both Nadia and Samantha into appropriate contracts,it would earn​

A)​Between a zero and $200 loss
B)Between zero and $200
C)$3500 loss
D)​$3500 gain

Question 43

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
​How much would Samantha be willing to pay for the insurance?

A)​$1000
B)$1100
C)$2500
D)​$2600

Question 44

​Adverse selection represents

A)​Profitable transaction
B)Unconsummated transaction
C)Wealth creating transaction
D)​All of the above

Question 45

​Potential buyers of older homes form their bids from imperfect estimates of a house's value As a consequence,

A)​Lower quality houses are more likely to be up for sale
B)Higher quality houses are more likely to be up for sale
C)Both the higher and lower value houses would be offered for sale
D)No houses would be offered for sale​

Question 46

​In the market for newly developed real estate,adverse selection could occur when

A)​The buyers can observe and detect all the features of the properties
B)The buyers know more about the property than the developers
C)The developers of the property know more about the properties than the buyers
D)​Neither parties knows about the item properly

Question 47

​The following is an example of adverse selection

A)​A majority of those applying for well paid jobs are well qualified
B)More reckless drivers opt for cars with fewer safety devices
C)Individuals living in less secure neighborhoods want to buy more insurance
D)​Individuals with a strong family history of heart diseases opt to buy less insurance

Question 48

​In the market for insurance,low risk customers are not served because

A)​They do not like buying insurance
B)They are more costly to serve
C)Products designed to be attractive to them are also attractive to high risk types.
D)​All of the above

Question 49

​The following is an example of adverse selection

A)​A majority of those applying for well paid jobs are under qualified
B)More reckless drivers opt for cars with fewer safety devices
C)Individuals living in less secure neighborhoods want to buy less insurance
D)​Individuals with a strong family history of heart diseases opt to buy less insurance

Question 50

​In the market for insurance

A)​The high risk customers would remain unserved
B)The low risk customers would remain unserved
C)Both the types of customers would be served
D)​Neither type of customer would be served

Question 51

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
If the company can correctly anticipate the adverse selection,what premiums would it charge?​

A)​$2500
B)$2600
C)$1000
D)​$1100

Question 52

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
​One of the solutions to the adverse selection problem in insurance is

A)​Is to require that only the high risk individuals to buy insurance
B)Is to require that only the low risk individuals buy insurance
C)Is to require everyone to buy insurance
D)​Is to completely ban insurance companies

Question 53

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
​Suppose the insurance company cannot tell them apart but expects them to be different values and charges them an average premium of $1850. How much profit would it make?

A)​$1850
B)Zero-they would break even
C)They would make a loss of $650
D)​They would make a loss of $1100

Question 54

​Which of the following is a possible solution to the adverse selection problem?

A)​Screening
B)Signaling
C)All of the above
D)None of the above​

Question 55

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
​If the insurance company can correctly anticipate the adverse selection,

A)​Only Samantha would buy insurance
B)Only Nadia would buy the insurance
C)Both of them would buy the insurance
D)​Neither of them would buy the insurance

Question 56

​Ideally,insurance companies would like to charge

A)​High premium to low risk clients
B)Low premium to high risk clients
C)The same premium to all clients
D)​High premium to high risk and low premium to low risk clients

Question 57

​As a way to still be able to transact with the low-risk individuals,insurance companies can

A)​Offer them partial insurance
B)Offer them insurance with deductibles
C)Offer them insurance with co-payments
D)​All of the above

Question 58

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
​Suppose the insurance company cannot tell them apart but expects them to be different values and charges them an average premium of $1850.Who is more likely to buy this insurance?

A)​Samantha
B)Nadia
C)Both of them
D)​None of them

Question 59

​Potential buyers of older homes form their bids from imperfect estimates of a house's value.As a consequence,

A)​High-value houses would remain unsold
B)Low value houses would remain unsold
C)Both of the houses would be sold
D)​All of the above

Question 60

​Use the following setup for questions
Both Nadia and Samantha are applying to insure their car against theft.Nadia lives in a secure neighborhood,where the probability of theft is 10%.Samantha lives in a lesser secure neighborhood where the probability of theft is 25%.Both Nadia and Samantha own cars worth $10,000,and are willing to pay $100 over expected loss for insurance.
​How much would Nadia be willing to pay for the insurance?

A)​$900
B)$1000
C)$1100
D)​$1200

Question 61

​To signal to your insurance company that you are a low risk individual,you should

A)​Accept an insurance policy with a high deductible
B)Accept an insurance policy with a low deductible
C)Accept an insurance policy with no co-payments
D)​None of the above

Question 62

Wearing an expensive business suit to an interview is a kind of​

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 63

​A firm hiring only MBAs,regardless of the self-professed skill set is an example of

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 64

​Screening is

A)​actions by the informed party to reveal her true risks
B)actions by the informed party to conceal her true risks
C)actions by the uninformed party to uncover the true risks
D)​actions by the uninformed party to conceal the true risks

Question 65

If you buy an insurance policy with a low deductible and no co-payments,you would end up paying​

A)​A higher premium
B)A lower premium
C)The premium of a low risk individual
D)​Both B&C

Question 66

The following is an example of adverse selection​

A)​A majority of those applying for well paid jobs are well qualified
B)More reckless drivers opt for cars with fewer safety devices
C)Individuals living in less secure neighborhoods want to buy less insurance
D)​Individuals with a strong family history of heart diseases opt to buy more insurance

Question 67

Grooming well for a big date is a​

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 68

Which of the following is NOT a way to signal high quality​

A)​wearing a business suit on a job interview
B)scrimping on the tip for the waiter after a dinner date
C)offering an expensive engagement ring to your bride
D)​Visiting the beauty salon before a big date

Question 69

​Signaling is

A)​actions by the informed party to reveal her true risks
B)actions by the informed party to conceal her true risks
C)actions by the uninformed party to uncover the true risks
D)​actions by the uninformed party to conceal the true risks

Question 70

​Sally would only agree to a second date with Andy if she sees him leave a generous tip for the waiter on their first dinner date.This is an example of a

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 71

​To signal to your insurance company that you are a low risk individual,to secure a lower premium,you should

A)​Accept an insurance policy with a high deductible
B)Accept an insurance policy with a low deductible
C)Accept an insurance policy with a co-payment
D)​Both A&C

Question 72

​Offering an expensive engagement ring to your (future)bride is a

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 73

​Which of the following is NOT a way to signal high quality

A)​wearing everyday clothes to a job interview
B)leaving a big tip for the waiter after a dinner date
C)offering an expensive engagement ring to your bride
D)​Visiting the beauty salon before a big date

Question 74

​For a screen to be successful,

A)​High risk individuals must not be able to pose as low risk individuals
B)It must not be profitable for high risk individuals to pose as low risk individuals
C)High risk individuals should be able to pose as low risk individuals
D)​None of the above

Question 75

​To signal to your insurance company that you are a low risk individual you should

A)​Accept an insurance policy with no co-payments
B)Accept an insurance policy with co-payments
C)Accept an insurance policy with a low deductible
D)​None of the above

Question 76

​Leaving a handsome tip for the waiter in full view of your dinner date is a

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 77

A bride accepting a proposal only if the ring is expensive enough is a​

A)​Screening mechanism
B)Signaling mechanism
C)Way to waste money
D)​None of the above

Question 78

​Which of the following is NOT a way to signal high quality

A)​wearing a business suit on a job interview
B)leaving a big tip for the waiter after a dinner date
C)offering an expensive engagement ring to your bride
D)​Doing messy chores before a big date

Question 79

​Lara will agree to a second date with Tom only if,on their first date,Tom is well mannered and well dressed.Lara is using a

A)​Screening mechanism
B)Signaling mechanism
C)All of the above
D)​None of the above

Question 80

​Which of the following is NOT a way to signal high quality

A)​wearing a business suit on a job interview
B)leaving a big tip for the waiter after a dinner date
C)offering a cheap engagement ring to your bride
D)​Visiting the beauty salon before a big date