Deck 19: The Problem of Adverse Selection

Question 1

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

Answer 1

B

Question 2

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

Answer 2

A

Question 3

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)a)and c)

Answer 3

D

Question 4

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 5

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

Question 6

Most people buy insurance because they

A)are risk lovers
B)enjoy the gamble
C)are risk neutral
D)want to avoid gambles

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

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 10

The following is an example of risk aversion

A)those applying for a well-paid job tend to be the most qualified
B)more reckless drivers opt for cars with more safety devices
C)the contractor with the lowest bid for a is the most qualified
D)Initial Public Offerings (IPOs)seek investors when prospects look good

Question 11

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 not risk averse
D)insurers cannot tell higher risk people from lower risk people

Question 12

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 13

The following is an example of risk aversion

A)those applying for a well-paid job tend to be unqualified
B)more reckless drivers opt for cars with fewer safety devices
C)the contractor with the lowest bid for a is the most qualified
D)Initial Public Offerings (IPOs)seek investors when prospects look good

Question 14

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 15

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

Question 16

The following is an example of risk aversion

A)those applying for a well-paid job tend to be the most qualified
B)more reckless drivers opt for cars with fewer safety devices
C)the contractor with the lowest bid for a is the most qualified
D)Initial Public Offerings (IPOs)seek investors when prospects look poor

Question 17

The following is an example of risk aversion

A)those applying for a well-paid job tend to be the most qualified
B)more reckless drivers opt for cars with fewer safety devices
C)the contractor with the lowest bid for a is under-qualified
D)Initial Public Offerings (IPOs)seek investors when prospects look good

Question 18

Adverse selection in insurance requires that

A)potential customers face different levels 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 19

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 greater risk want to be insured more
D)when your guess at a test question is wrong

Question 20

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 21

Which is NOT an example of signaling high quality in a social setting

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 22

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 23

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 24

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 25

Which is NOT an example of signaling high quality in a social setting

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 26

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 27

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 28

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 29

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 30

Which is NOT an example of signaling high quality in a social setting

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

Question 31

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 32

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 33

Insurance companies create wealth by

A)reducing the amount of risk that the risk averse must bear
B)reducing the amount of risk that risk lovers must bear
C)increasing the amount of risk that the risk averse must bear
D)increasing the amount of risk that risk lovers must bear

Question 34

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 35

Which is NOT an example of signaling high quality in a social setting

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