Deck 24: Price Discrimination

Question 1

A cab driver taking an out-of-town rider on a longer route to her destination is an example of a(n):

A) adverse selection.
B) information asymmetry.
C) mutually profitable exchange.
D) the principle-agent problem.

Answer 1

information asymmetry.

Question 2

Which is an example of moral hazard?

A) A hair dresser colors poorly a client's hair.
B) A driver drives faster than the speed limit.
C) A car dealership offers a warranty.
D) A car salesman recommends a car that has been wrecked and repaired.

Answer 2

A car salesman recommends a car that has been wrecked and repaired.

Question 3

Angie's List is an example of:

A) creating better incentives to prevent moral hazard.
B) mitigating adverse selection by increasing information.
C) providing better information to customers to prevent moral hazard.
D) preventing all forms of information asymmetries.

Answer 3

providing better information to customers to prevent moral hazard.

Question 4

When an agent tries to exploit information advantage in a dishonest way it is called:

A) adverse selection.
B) an information asymmetry.
C) mutually beneficial trading.
D) moral hazard.

Question 5

When a dentist recommends a costly and unnecessary procedure, this is an example of:

A) moral hazard.
B) the principal-agent problem.
C) mutually beneficial trades.
D) adverse selection.

Question 6

The principal-agent problem is the problem of:

A) an agent trying to exploit an information advantage in a dishonest way.
B) incentivizing an employee to work in the interest of the owner.
C) one party to an exchange having more information than the other party.
D) an offer conveying negative information about the product being offered.

Question 7

_____ occur(s) when an agent tries to exploit information advantage in a dishonest way.

A) Adverse selection
B) Moral hazard
C) Mutually beneficial trades
D) Information asymmetry

Question 8

Which is NOT an example of asymmetric information?

A) an employer not knowing which job candidate will do the best job
B) a used car buyer not knowing the maintenance history of a car for sale
C) a shopper not knowing the quality of the washing machine he is considering buying
D) a doctor prescribing a medication for a patient

Question 9

When a doctor recommends unnecessary surgery to a patient, this is an example of:

A) adverse selection.
B) moral hazard.
C) mutually beneficial trades.
D) the principle-agent problem.

Question 10

When a mechanic recommends an unnecessary repair, this is an example of:

A) adverse selection.
B) the principal-agent problem.
C) mutually beneficial trades.
D) moral hazard.

Question 11

The problem of how a manager can incentivize a worker to work in the interest of the manager is an example of:

A) the principal-agent problem.
B) adverse selection.
C) moral hazard.
D) information asymmetry.

Question 12

When traders know exactly what is being traded:

A) adverse selection exists.
B) trades that occur will be mutually beneficial.
C) moral hazard exists.
D) trades will not be mutually beneficial.

Question 13

Which is an example of asymmetric information?

A) an employer not knowing which job candidate will do the best job
B) a buyer using a compiled report on the quality of a used car
C) a shopper using Internet reviews to help her decide which washing machine to purchase
D) a doctor prescribing a medication for a patient

Question 14

Which is NOT an example of moral hazard?

A) A hair dresser colors poorly a client's hair.
B) A cab driver takes a longer route to the destination to collect a higher fare.
C) A dentist recommends an unnecessary dental procedure.
D) A car salesman recommends a car that has been wrecked.

Question 15

Possible results of asymmetric information include all of the following EXCEPT:

A) new sellers will enter the market sensing profit opportunities.
B) less informed buyers will leave the market.
C) mutually beneficial trades may not occur.
D) trades may occur that are not mutually beneficial.

Question 16

Which is an example of moral hazard?

A) A car dealership recommends that a customer replace barely used tires.
B) A driver drives faster than the speed limit.
C) An unhealthy person purchases health insurance.
D) A driver purchases car insurance.

Question 17

One problem with moral hazard is that:

A) goods and services are produced that no one actually wants or needs.
B) every good produced is unnecessary.
C) no mutually beneficial trades will occur.
D) each good or service produced is wanted or needed.

Question 18

Moral hazard is the problem of:

A) an agent trying to exploit an information advantage in a dishonest way.
B) incentivizing an employee to work in the interest of the owner.
C) one party to an exchange having more information than the other party.
D) an offer conveying negative information about the product being offered.

Question 19

Information asymmetry is the problem of:

A) an agent trying to exploit an information advantage in a dishonest way.
B) incentivizing an employee to work in the interest of the owner.
C) one party to an exchange having more information than the other party.
D) an offer conveying negative information about the product being offered.

Question 20

When one party to an exchange has more or better information than the other party, it is called:

A) adverse selection.
B) information asymmetry.
C) moral hazard.
D) the principle-agent problem.

Question 21

Paying a lawyer on a contingency fee-the lawyer is paid only if the case is won-solves moral hazard by:

A) aligning the incentives of the buyer and sellers.
B) creating more information.
C) providing the service free.
D) reducing the free-rider problem.

Question 22

Buyers and sellers facing asymmetric information:

A) are not able to solve the problem of asymmetric information.
B) have no reason to solve the problem of asymmetric information.
C) have an incentive to solve the problem of asymmetric information.
D) do not bear the results of asymmetric information.

Question 23

When sellers pay ratings agencies to rate their goods or services:

A) buyers of the goods and services will be more likely to buy.
B) the ratings are very likely to be accurate.
C) they are less likely to give better ratings than if buyers paid.
D) they are more likely to give better ratings than if buyers paid.

Question 24

The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was (were):

A) moral hazard.
B) the principal-agent problem.
C) mutually beneficial trades.
D) adverse selection.

Question 25

Ratings and reviews can fail at mitigating moral hazard if:

A) ratings fully inform consumers of the quality of the product.
B) reviewers always review honestly.
C) not all products are reviewed.
D) ratings are faked or exaggerated.

Question 26

Many forms of information are a _____, which means that it is difficult to exclude users from using the good.

A) public good
B) private good
C) information good
D) signaling good

Question 27

Which is NOT a way to lessen moral hazard?

A) provide better access to ratings and reviews
B) split the selling of a service from the diagnosis of need for the service
C) allow the sellers of a product to pay for the ratings or reviews of a product
D) allow buyers to get a second opinion of the diagnosis

Question 28

A doctor who provides a second opinion knows she will not be performing any other service. This solves moral hazard by:

A) creating more information.
B) providing the service free.
C) aligning the incentives of the buyer and sellers.
D) reducing the free-rider problem.

Question 29

Many forms of information are a public good, which means that:

A) all information is free, so users do not have to pay for it.
B) all information is costless to obtain.
C) it is difficult to exclude nonpayers from using it.
D) information is readily available to users.

Question 30

Obstetricians are paid more for delivering a baby via caesarian section. This can create:

A) mutually beneficial trades.
B) the principal-agent problem.
C) adverse selection.
D) moral hazard.

Question 31

Because home inspectors are not allowed to profit from any repairs they recommend, there is a reduction in:

A) mutually beneficial trades.
B) the principal-agent problem.
C) adverse selection.
D) moral hazard.

Question 32

Allowing a patient to get a second opinion on a diagnosis would help reduce:

A) moral hazard.
B) the principal-agent problem.
C) mutually beneficial trades.
D) adverse selection.

Question 33

Examples of ratings agencies that help reduce moral hazard include all of the following EXCEPT:

A) Consumer Reports.
B) Standard and Poors.
C) Moody's.
D) eBay.

Question 34

When the buyer of a house pays for a home inspection, this reduces:

A) mutually beneficial trades.
B) the principal-agent problem.
C) moral hazard.
D) adverse selection.

Question 35

Ratings and reviews of mechanics on the Internet:

A) make it easier to avoid shady mechanics, thus reducing moral hazard.
B) raise the cost to mechanics of exploiting their adverse selection advantage.
C) make it easier for mechanics to take advantage of their information advantage.
D) completely prevent all forms of information asymmetries.

Question 36

A real estate agent who is paid on a contingency fee may not reduce moral hazard as well as a lawyer paid on a contingency fee because:

A) the lawyer is bound by an oath to represent her client well.
B) the real estate agent's contingency fee is based on time to sale completion.
C) the real estate agent's payment is smaller, therefore he may not wait for the best offer on his client's house.
D) the lawyer's job takes much longer to complete, therefore she will work harder.

Question 37

Ratings and reviews on online stores are examples of:

A) creating better incentives to prevent moral hazard.
B) mitigating adverse selection by increasing information.
C) providing better information to customers to prevent moral hazard.
D) preventing all forms of information asymmetries.

Question 38

Universities who report information to U.S. News and World Report:

A) may manipulate the data they send to ensure a higher ranking.
B) always provide accurate data, so that the rankings are useful.
C) sometimes will not admit students until they re-take the SAT, ensuring higher scores.
D) are forbidden to use their rankings in advertisements.

Question 39

Aligning the incentives of buyers and sellers may help to reduce:

A) mutually beneficial trades.
B) moral hazard.
C) adverse selection.
D) the principal-agent problem.

Question 40

The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was generally attributed to:

A) the fact that customers desiring the ratings paid for them.
B) the fact that the sellers of the securities paid for the ratings.
C) overzealousness in the securities market.
D) the wave of foreclosures prior to and during the financial crash.

Question 41

If only sick people buy health insurance:

A) insurance companies must raise the price of policies.
B) healthy people will find health insurance policies worth more.
C) doctors will prescribe more health services than their insured patients need.
D) insurance companies will be able to lower the price of the policies.

Question 42

Adverse selection is the problem of:

A) an agent trying to exploit an information advantage in a dishonest way.
B) incentivizing an employee to work in the interest of the owner.
C) one party to an exchange having more information than the other party.
D) an offer conveying negative information about the product being offered.

Question 43

The adverse selection death spiral refers to the process of _____ people finding the price of health insurance to be _____, and the market eventually dying.

A) healthy; too low
B) healthy; too high
C) unhealthy; too low
D) unhealthy; too high

Question 44

An example of a credible promise is a used car that:

A) is sold with a CARFAX report.
B) is sold to a family member.
C) is certified and carries a warranty.
D) has been inspected by a mechanic.

Question 45

The adverse selection death spiral is caused by the changing composition of health insurance policy buyers from:

A) healthy to mostly unhealthy.
B) unhealthy to healthy.
C) unhealthy to evenly distributed between healthy and unhealthy.
D) evenly distributed between healthy and unhealthy to mostly unhealthy.

Question 46

The market for used cars is:

A) full of moral hazards that prevent the efficient functioning of the market.
B) active and well-functioning because of market institutions that developed to mitigate adverse selection.
C) contains many instances of adverse selection, which prevent it from functioning efficiently.
D) exhibit the principal-agent problem that prevent buyers from knowing the quality of the car they want to purchase.

Question 47

In the market for used cars, half of the cars are of good quality and would sell for $8,000, while half of the cars are of poor quality and would sell for $6,000. If a buyer possessed no information about the quality of the car she was considering, what would she be willing to pay for it?

A) $8,000
B) $7,000
C) $6,000
D) The buyer would choose not to buy because of the lack of information.

Question 48

In the market for used cars, half of the cars are of good quality and would sell for $10,000, while half of the cars are of poor quality and would sell for $6,000. If a buyer possessed no information about the quality of the car she was considering, what would she be willing to pay for it?

A) $10,000
B) $6,000
C) $8,000
D) $4,000

Question 49

In the market for used cars, half of the cars are of good quality and would sell for $14,000, while half of the cars are of poor quality and would sell for $10,000. If a buyer possessed no information about the quality of the car she was considering, what would she be willing to pay for it?

A) $14,000
B) $10,000
C) $12,000
D) The buyer would choose not to buy because of the lack of information.

Question 50

Designing a contract that aligns the interests of the buyer with the interests of the seller would reduce:

A) a mutually beneficial trade.
B) moral hazard.
C) adverse selection.
D) the principal-agent problem.

Question 51

A used car will sell for the price of a poor-quality used car even if it is high quality because:

A) only poor-quality used cars will be for sale.
B) there is no reason to believe that good-quality used cars will be for sale.
C) owners of good-quality used cars won't want to sell their cars.
D) only poor quality cars will sell.

Question 52

A credible promise is:

A) a promise that is believed.
B) a promise that is backed up by a contract.
C) a promise the promisor has an incentive to keep.
D) always comes to pass.

Question 53

Buyers of used cars can reduce adverse selection in all of the following ways EXCEPT:

A) offering a price equal to the value of a low-quality used car.
B) having a mechanic look over the used car.
C) requesting a warranty.
D) requesting a "CARFAX" report.

Question 54

An example of adverse selection is:

A) a doctor prescribing an unnecessary procedure.
B) a real estate agent selling a house faster and at a lower price.
C) a politician using information unknown to voters to profit.
D) an unhealthy person buying health insurance.

Question 55

If the price of health insurance is set where health insurance companies can cover the expected costs of selling the policies:

A) healthy people may find the cost of the policies too high and not purchase them.
B) unhealthy people will find health insurance policies worth more.
C) doctors will prescribe more health services than their insured patients need.
D) insurance companies will be able to lower the price of the policies.

Question 56

Sellers of good-quality used cars are not able to sell for a price they are willing to accept. This is:

A) moral hazard.
B) a principal-agent problem.
C) an information asymmetry.
D) a market failure.

Question 57

Bureaucrats have more information than politicians and may use that information in their own interest. This is:

A) a mutually beneficial trade.
B) moral hazard.
C) adverse selection.
D) the principal-agent problem.

Question 58

If some used car sellers will sell their good-quality used car even when the price offered is low, then:

A) the price of used cars will decrease.
B) low-quality used cars will not sell.
C) sellers of low quality cars will have to sell at a lower price.
D) the price of used cars will increase.

Question 59

When a health insurance company sells an insurance policy, adverse selection suggests:

A) only unhealthy people will purchase a policy.
B) people will purchase the insurance and then use more health care than they need.
C) doctors will prescribe more health services than their insured patients need.
D) people who purchase the policies will demand more expensive procedures.

Question 60

Politicians have more information than voters and may not use that information in the interest of the public. This is:

A) a mutually beneficial trade.
B) moral hazard.
C) adverse selection.
D) the principal-agent problem.

Question 61

Health insurance leads to _____ because doctors, patients, and hospitals all know that the insurance company will be paying the bills.

A) adverse selection
B) information asymmetry
C) moral hazard
D) the principal-agent problem

Question 62

The Affordable Care Act:

A) has no requirements for coverage characteristics for health insurance policies.
B) requires only wealthy people to purchase health insurance.
C) provides health insurance free of cost to all individuals and families.
D) subsidizes the purchase of health insurance for poorer individuals and families.

Question 63

Policy makers expect the individual mandate, which compels many individuals to purchase health insurance by law, to do all of the following EXCEPT:

A) prevent the adverse selection death spiral.
B) reduce the costs of health insurance for unhealthy people.
C) increase the coverage of health insurance.
D) reduce health care demand.

Question 64

An insurance company can prevent the adverse selection death spiral by selling to groups of people such as groups of employees in a workplace. This will allow the insurance company to:

A) increase the chances that both healthy and unhealthy people will sign up for coverage.
B) increase the chances that only healthy people will sign up for coverage.
C) force both healthy and unhealthy people to sign up for coverage.
D) charge higher prices because the employer will pay the premiums.

Question 65

All of the following are examples of signaling EXCEPT:

A) offering a long warranty on a vehicle.
B) offering to work for a less-than-market salary.
C) requiring people to purchase health insurance.
D) obtaining a college degree.

Question 66

An insurance company can prevent the adverse selection death spiral by requiring purchasers to have a medical exam. This will allow the insurance company to:

A) charge higher prices to healthy people.
B) prevent unhealthy people from purchasing health insurance.
C) prevent healthy people from purchasing health insurance.
D) charge higher prices to unhealthy people.

Question 67

As a matter of law, employer-provided health insurance policies:

A) have unlimited ability to raise premiums on sick employees.
B) can offer different benefits to healthy and unhealthy employees.
C) can deny any employee coverage in the plan.
D) have only a limited ability to kick out or raise rates for individuals who become very ill.

Question 68

People who value their health:

A) will buy only cheap health insurance policies.
B) are less likely to purchase health insurance.
C) are more likely to purchase health insurance.
D) will always buy health insurance policies.

Question 69

The adverse selection death spiral in health insurance can be prevented by:

A) not selling to unhealthy people.
B) requiring people to only purchase health insurance in individual policy markets.
C) requiring health exams prior to issuing a policy and charging higher prices to unhealthy people.
D) making policy buyers aware of the potential for the death spiral.

Question 70

Most insurance plans in the United States are:

A) individual policies.
B) simple policies covering only simple procedures.
C) individual policies purchased through employers.
D) group plans purchased by employers for their employees.

Question 71

Critics of the Affordable Care Act argue that it will increase moral hazard because:

A) people who now have insurance will use more health care.
B) people will not purchase the expensive insurance.
C) people will not use as much health care.
D) doctors will not prescribe as many procedures.

Question 72

An expensive action that is taken to reveal information is called a(n):

A) adverse selection.
B) signal.
C) credible promise.
D) principal-agent problem.

Question 73

People who value their health and therefore purchase health insurance policies:

A) increase adverse selection in the health insurance market.
B) reduce moral hazard in the health insurance market.
C) do not help the health insurance death spiral.
D) moderate the health insurance death spiral.

Question 74

Critics of the Affordable Care Act argue that it may _____ adverse selection but _____ moral hazard.

A) decrease; increase
B) increase; decrease
C) increase; leave unchanged
D) decrease; leave unchanged

Question 75

The adverse selection death spiral in health insurance can be prevented by:

A) selling health insurance plans to groups, such as through the workplace.
B) requiring people to only purchase health insurance in individual policy markets.
C) requiring health exams prior to issuing a policy and charging higher prices to healthy people.
D) making policy buyers aware of the potential for the death spiral.

Question 76

Critics of the Affordable Care Act argue that it will:

A) prevent the adverse selection death spiral.
B) reduce the costs of health insurance for unhealthy people.
C) increase the coverage of health insurance.
D) increase health care demand.

Question 77

Supporters of the Affordable Care Act argue that:

A) even if the purchase of health insurance is voluntary, the subsidies will prevent the adverse selection death spiral.
B) the individual mandate will prevent the adverse selection death spiral.
C) pushing sick people into purchasing health insurance will cause the adverse selection death spiral.
D) subsidizing the purchase of health insurance for poorer individuals and families will reduce the adverse selection death spiral.

Question 78

A signal:

A) is an offer that conveys negative information about the product.
B) is an agent trying to exploit an information advantage in a dishonest way.
C) occurs when one party to a transaction has more information than the other party.
D) is an expensive action that is taken to reveal information.

Question 79

An example of unnecessary spending in health care due to moral hazard is (are):

A) out-patient surgery centers.
B) nuclear particle accelerators.
C) obstetric services.
D) emergency rooms.

Question 80

The adverse selection death spiral in health insurance can be prevented by:

A) selling health insurance plans to groups, such as through the workplace.
B) requiring people to only purchase health insurance in individual policy markets.
C) requiring health exams prior to issuing a policy and charging higher prices to healthy people.
D) making policy buyers aware of the potential for the death spiral.