Deck 15: Asymmetric Information

Question 1

Adverse selection occurs when

A)a person takes more risks that are not known to the life insurance company because he has life insurance.
B)a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.
C)a person is a risk lover.
D)pregnant women with health insurance make more doctor visits than uninsured pregnant women.

Answer 1

a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.

Question 2

The quality of a product

A)is usually unknown to the seller and the buyer.
B)leads to adverse selection.
C)creates noise in a market.
D)is a hidden characteristic.

Answer 2

is a hidden characteristic.

Question 3

In the market for used cars

A)the market is efficient because the cars are bought by the people who value them the most.
B)the market is inefficient because lemons drive out the high quality cars.
C)no cars are sold, because people don't like buying lemons.
D)Not enough information to determine.

Answer 3

Not enough information to determine.

Question 4

In the automobile insurance market, adverse selection occurs when

A)drivers with greater risks buy a policy with large deductibles.
B)drivers with greater risks buy a policy with no deductibles.
C)uninsured drivers drive recklessly.
D)insured drivers drive recklessly.

Question 5

Asymmetric information will always cause

A)efficiency problems.
B)equity problems.
C)Both A and B.
D)None of the above.

Question 6

In the market for used cars, if there is asymmetric information yet all cars sell for the same price

A)there is an efficiency problem and there are equity implications.
B)there is no efficiency problem, but there are equity implications.
C)buyers of lemons win at the expense of buyers of good cars.
D)there is no efficiency problem and there are no equity implications.

Question 7

If information in the market for used motorcycles is symmetric and both buyers and sellers are equally ignorant, then

A)the market is efficient.
B)both good and bad motorcycles will sell for the same price.
C)if only good motorcycles are sold, the price would be higher.
D)All of the above.

Question 8

Adverse selection occurs when there is

A)full information.
B)unobserved behavior.
C)an unobserved characteristic.
D)a worker who shirks because his boss does not watch him.

Question 9

In the market for used cars, if buyers and sellers have perfect information about the quality of cars, then

A)all cars will sell for the same price and there is no asymmetric information problem.
B)all cars will sell for the same price and there is an asymmetric information problem.
C)cars sell for their true value and there is no asymmetric information problem.
D)all cars will sell for the same price and there is a moral hazard problem.

Question 10

Adverse selection can occur when

A)all persons involved in a transaction have full information.
B)one person has information not available to others.
C)post-agreement incentives result in workers shirking.
D)nobody has any information about a particular product.

Question 11

Adverse selection is due to

A)hidden characteristics.
B)hidden actions.
C)symmetric information.
D)moral hazard.

Question 12

If all used cars in a market with symmetric information about quality are sold at the same price, then

A)sellers of good quality cars are subsidizing sellers of lemons.
B)buyers of good quality cars are subsidizing buyers of lemons.
C)sellers of lemons are subsidizing sellers of good quality cars.
D)sellers of good quality cars are subsidizing buyers of lemons.

Question 13

A person practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance. This is an example of

A)moral hazard.
B)adverse selection.
C)signaling.
D)screening.

Question 14

Asymmetric information occurs when

A)everyone has the same information.
B)one person in a transaction has more information than the other.
C)people engaging in a transaction are uncertain about future events.
D)the information available to the people in a transaction is misleading or incomplete.

Question 15

If adverse selection exists in a market

A)the government steps in and shuts it down.
B)the market is considered a "grey market."
C)consumers may not participate in the market at all.
D)total surplus is maximized.

Question 16

Opportunism may occur when

A)both parties have limited information.
B)both parties have full information.
C)one party has information the other does not.
D)All of the above.

Question 17

If adverse selection exists in a market

A)it increases consumer surplus but reduces producer surplus.
B)it reduces consumer and producer surplus.
C)it reduces producer surplus but has no impact on consumer surplus.
D)it increases both consumer and producer surplus.

Question 18

If reckless drivers are more likely to buy automobile insurance than safe drivers are

A)a moral hazard has occurred.
B)adverse selection has occurred.
C)the market for insurance is efficient.
D)then automobile insurance will be fairly priced.

Question 19

What is one of the most important benefits of the Internet?

A)The Internet has increased asymmetric information.
B)The Internet has reduced asymmetric information.
C)The Internet has increased moral hazard.
D)The Internet has increased transaction costs.

Question 20

If a health insurer charges a rate equal to the average cost of health care for the entire population, then it is likely that

A)everyone buys health insurance.
B)unhealthy people will not buy health insurance.
C)healthy people will not buy health insurance.
D)nobody will buy health insurance.

Question 21

Life insurance companies often give applicants a physical examination to prevent

A)the person from dying before obtaining the policy.
B)signaling.
C)adverse selection.
D)profit maximization.

Question 22

Firms are able to price discriminate

A)when all customers are uninformed about quality differences.
B)when no customers are uninformed about quality differences.
C)when some customers are uninformed about quality differences.
D)when there is full information about quality available to all customers.

Question 23

An uninformed party can use ________ to learn about the information held by the informed party.

A)signaling
B)screening
C)a warranty
D)educational attainment

Question 24

Assume Health Insurance is provided universally by the government. This would

A)eliminate the problems of adverse selection.
B)result in adverse selection.
C)eliminate the problems of moral hazard.
D)All of the above.

Question 25

If all consumers are uninformed about the quality of a product

A)firms can increase profit by selling the same product under a different name at a different price.
B)firms will not be able to price discriminate.
C)firms will price discriminate.
D)firms will increase profits by charging different prices for the same product.

Question 26

If bad drivers can usually avoid being ticketed by the police, then insurance companies will

A)use drivers' driving record as a signal.
B)use drivers' driving record as a screening device.
C)not be able to use drivers' driving record as a screening device.
D)request driving records directly from the police and not from the individual applicant.

Question 27

To reduce adverse selection

A)firms can use screening.
B)both consumers and firms can use screening.
C)the government could eliminate all monopolies and oligopolies.
D)Both B and C.

Question 28

Which of the following is a method for solving the problem of adverse selection?

A)truth in advertising laws
B)product liability laws
C)food labeling requirements
D)All of the above.

Question 29

If the government provides universal health insurance, what screening process will the government need?

A)It won't need a screening test.
B)It will only give health insurance to non-smokers.
C)It won't use screening tests but it will use statistical discrimination.
D)It won't use screening tests but it will use signals.

Question 30

The requirement that all drivers must carry auto insurance reduces

A)moral hazard.
B)the effectiveness of signaling.
C)adverse selection.
D)the chance of auto accidents.

Question 31

Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid

A)adverse selection.
B)moral hazard.
C)screening.
D)signaling.

Question 32

A noisy monopoly

A)will be regulated by the Federal Trade Commission until it reduces its noise emissions.
B)sells products under its own label for a low price, and sells the virtually identical product with the same quality under a private label for a higher price.
C)sells products under its own label for a high price, and sells the virtually identical product with the same quality under a private label for a lower price.
D)leverages the Lemon Law to sell both good and poor quality goods for the same price.

Question 33

Some companies subject their applicants to extensive tests. Why?

A)to reduce the informational asymmetry between the firm and the applicant
B)to screen the applicant to avoid the problem of adverse selection
C)to gather more information about the applicant
D)All of the above.

Question 34

A firm that can sell essentially the same product with the same quality under different brand names that have different perceived quality, the firm

A)has a moral hazard problem.
B)creates noise in the market.
C)creates an arbitrage opportunity.
D)is engaging in unfair trading practices.

Question 35

A physical examination is NOT a good screening device for life insurance companies if

A)life-threatening diseases are usually undetected.
B)doctors cannot be easily bribed to write a good report.
C)medical history is a good predictor of life expectancy.
D)one's current state of health is a good predictor of life expectancy.

Question 36

If a life insurance company does NOT require a medical exam of its policyholders, it is most likely that the company

A)charges above-average premiums.
B)charges below-average premiums.
C)charges no premiums.
D)has only very healthy policyholders.

Question 37

One method for solving the adverse selection problem is

A)to restrict the ability of the party with information from taking advantage of hidden information.
B)by having the government run all firms.
C)to close down firms with bad reputations.
D)All of the above.

Question 38

Selling the same product under different brand names allows a firm to price discriminate as long as

A)customers know the products are identical.
B)customers do not know the products are identical.
C)the products really are not the same.
D)the firm lets customers know that the products are identical.

Question 39

A consumer could screen the quality of a pizza joint by

A)asking friends.
B)using online rating sites.
C)watching the chef prepare the pizza.
D)All of the above.

Question 40

If some consumers think that two detergents have differing qualities, such as brand-name vs. private label detergents, wheres other consumers know that the detergents are identical, then the detergent producer can

A)reduce its costs.
B)engage in a special type of price discrimination.
C)avoid moral hazard.
D)None of the above.

Question 41

Signals solve the adverse selection problem

A)if the signal is an advertisement placed in the New York Times or other top-tier publication.
B)only if the signal is viewed as credible.
C)when the signal is expensive to produce.
D)if the signaling firm is known to be a profit-maximizer.

Question 42

Requiring that barbers have licenses, restricts entry and

A)raises the average quality of hair cuts.
B)increases the costs of getting a hair cut.
C)may increase or decrease welfare.
D)All of the above.

Question 43

Which of the following reduces the effects of asymmetric information?

A)repeat purchases
B)warranties
C)building a reputation
D)All of the above.

Question 44

Restricting entry to a profession through licensing or certification requirements

A)increases welfare.
B)decreases welfare.
C)may increase or decrease welfare.
D)leaves welfare unchanged.

Question 45

Explain why some people who are applying for a job at a bank dress up, arrive early, and have their paperwork neatly completed for the job interview.

Question 46

Explain how product liability laws can reduce adverse selection.

Question 47

eBay has a seller reputation system to provide

A)consumers with a signal concerning seller quality.
B)sellers a chance to signal other sellers concerning their quality.
C)a reduction in monopoly power.
D)improvements in investor relations.

Question 48

An informed party can use ________ to give information to an uninformed or lesser-informed party.

A)signaling
B)screening
C)an individual mandate
D)market noise

Question 49

A person starts practicing poisonous snake charming after signing a contract with a health insurance company. This is an example of

A)moral hazard.
B)adverse selection.
C)signaling.
D)screening.

Question 50

A college education can be a signal because

A)a college education is expensive.
B)those who graduate college have successful parents, and are therefore also likely to be successful.
C)highly capable people are more likely to finish college than those with low capabilities.
D)college teaches useful skills and gives valuable training.

Question 51

If a student achieves a high SAT score, this

A)sends a signal to a college that the applicant will be a good college student.
B)does not act as a screening device.
C)is a moral hazard.
D)provides a college with no information.

Question 52

Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews)review its product rather than doing it within the firm?

A)J.D. Power provides less credibility.
B)J.D. Power provides greater credibility.
C)J.D. Power is more honest than the average firm.
D)J.D. Power has a government monopoly in providing product satisfaction reviews.

Question 53

What role does a company like J.D. Power (which provides product satisfaction reviews)serve?

A)It provides a screening test.
B)It provides a signal of quality.
C)It reduces moral hazard.
D)It reduces costs of giving surveys.

Question 54

Which firm provides the better signal when trying to decide which of the firms' stock to buy?

A)Firm A, which uses an independent accounting firm for auditing.
B)Firm B, which uses an internal group for auditing.
C)Firm C, which has seen its stock go up by $20 per share in the last week.
D)Firm D, which hasn't been under SEC investigation for over 5 years.

Question 55

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

A)a warranty on a lemon is costly to the seller.
B)warranties are offered on all cars.
C)warranties are only offered on lemons.
D)a warranty on a good car is a false signal.

Question 56

What is one reason the eBay seller reputation system is important?

A)eBay transactions tend to be isolated, one-off transactions.
B)eBay transactions tend to be repeat sales between the same seller and buyers.
C)eBay transactions often involve stolen products.
D)eBay transactions require a larger percentage than, say, Amazon transactions.

Question 57

Moral hazard is due to

A)hidden characteristics.
B)hidden actions.
C)symmetric information.
D)adverse selection.

Question 58

Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

Question 59

The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of

A)government overreach.
B)screening.
C)signalling using established standards.
D)licensing to restrict entry by helmet manufacturers.

Question 60

How can a warranty at the seller's expense signal that a product is of high quality?

Question 61

If a principal and agent enter into a fixed-fee contract where the agent pays the principal a licensing fee

A)the principal bears all the risk.
B)the agent bears all the risk.
C)the principal and agent share the risk.
D)Unable to determine with the information given.

Question 62

Assume health insurance is provided universally by the government. This would

A)force every taxpayer to bear the costs of adverse selection.
B)force every taxpayer to bear the costs of moral hazard.
C)force the government to deal with adverse selection problems.
D)force foreign governments to deal with moral hazard problems.

Question 63

In the presence of asymmetric information, a contingent contract

A)achieves production efficiency.
B)can lead to opportunistic behavior on the part of the agent.
C)is impossible to write.
D)will result in the principal earning all of the profit.

Question 64

If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage

A)the principal bears all the risk.
B)the agent bears all the risk.
C)the principal and agent share the risk.
D)Unable to determine with the information given.

Question 65

What is one potential problem with nationalized health care?

A)It might not reduce moral hazard.
B)It is guaranteed to solve the principal-agent problem.
C)It would be efficient in risk bearing.
D)It might cost too much.

Question 66

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract

A)efficiency is achieved.
B)the client bears all of the risk.
C)the lawyer has an incentive to lie about his hours worked.
D)All of the above.

Question 67

In a store that sells souvenirs, suppose an agent receives a $1 commission for each unit sold, and the principal receives the residual profit. As a result

A)joint profit is maximized.
B)the agent will sell until the principal's marginal cost equals $1.
C)no agent would enter into such a contract.
D)the agent wishes to sell as many units as he can.

Question 68

If an agent is risk averse and a principal is risk neutral, if the agent pays the principal a fixed fee

A)all risk is eliminated.
B)the risk neutral person bears all the risk while the risk averse person bears none.
C)the risk averse person bears all the risk while the risk neutral person bears none.
D)the principal and agent share risk equally.

Question 69

In a principal-agent relationship, moral hazard might occur if

A)the agent can hide his actions from the principal.
B)the principal and agent are married.
C)payoffs are based on a state of nature.
D)the principal can hide her actions from the agent.

Question 70

If an agent is risk neutral and a principal is risk averse, which of the following contracts would be efficient in risk bearing?

A)A fixed fee is paid to the agent.
B)A fixed fee is paid to the principal.
C)An hourly rate is paid to the agent.
D)The agent enjoys a share of the profit.

Question 71

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will receive a share of the settlement if the plaintiff wins. Under this contract

A)efficiency cannot be achieved.
B)the client bears all of the risk.
C)the lawyer bears all of the risk.
D)the risk is shared.

Question 72

In the presence of asymmetric information, a fixed-fee contract

A)achieves production efficiency.
B)can lead to opportunistic behavior on the part of the agent.
C)is impossible to write.
D)will result in the principal earning all of the profit.

Question 73

In a contingent contract

A)the risk neutral party bears the risk.
B)monitoring is not possible.
C)the principal will be at a disadvantage.
D)the payoffs are dependent upon another variable, such as revenue or profit.

Question 74

Which of the following is most likely to be a feature of a state-contingent contract?

A)The agent pays the principal a higher licensing fee when demand is high compared to when demand is low.
B)The agent makes the same wage regardless of demand.
C)The agent, who lives in Nevada, earns more money on out-of-state sales (e.g., sales to California or New York)than in-state sales.
D)The restaurant owner (principal)pays the waiter (agent)more when it is snowing or raining outside.

Question 75

Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

A)The lawyer is paid by the hour.
B)The lawyer receives a share of the settlement.
C)The lawyer receives a fixed fee.
D)The lawyer pays the client a fee for the right to the entire settlement.

Question 76

Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

A)The agent pays a fixed fee to the principal for the right to all future payoffs.
B)The agent works for the principal on an hourly basis.
C)The agent receives a share of the profit.
D)The agent works for the principal on a per unit basis.

Question 77

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract

A)efficiency is not achieved.
B)the client bears all of the risk.
C)the lawyer has an incentive to lie about his hours worked.
D)All of the above.

Question 78

When a person has health insurance, they often have to pay nothing or very little (called a "copay")to see a doctor. This might result in

A)their being overly healthy.
B)a principal-agent problem.
C)some moral hazard, since people might overuse the benefit.
D)an adverse selection problem.

Question 79

Contingent contracts

A)are inefficient when monitoring is possible.
B)equally divide the risk between principal and agent.
C)can be used when monitoring is not reasonably possible.
D)put the risk on the principal.

Question 80

If a principal and agent have an efficient contract, then

A)one of them must be more risk-averse than the other.
B)neither can be made better off without harming the other.
C)they must have symmetric information.
D)the principal bears more of the risk.