Question 1

If a buyer or seller enters into an exchange with another party who has more information, there is

Accepted Answer

A)  symmetric information and moral hazard. 
B)  asymmetric information and adverse selection. 
C)  a negative externality imposed. 
D)  a free-rider problem.

Question 2

Refer to the data provided in Table 17.1 below to answer the following question(s). The table shows the relationship between income and utility for Jane.
Table 17.1
 
-Refer to Table 17.1. From the table, we can see that Jane is

Accepted Answer

A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Jane's attitude toward risk from the table.

Question 3

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet.

Accepted Answer

A) True 
 B)False

Question 4

The insurance industry is susceptible to adverse selection problems, but not problems of moral hazard.

Accepted Answer

A) True 
 B)False

Question 5

Mechanism design can be used to provide employers and employees with the right incentives in labor markets.

Accepted Answer

A) True 
 B)False

Question 6

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow.  Figure 17.2
-Refer to Figure 17.2. Suppose Sam's utility from income is given in the diagram. From this we would say that Sam is

Accepted Answer

A)  risk-neutral. 
B)  risk-loving. 
C)  risk-averse. 
D)  a risk taker.

Question 7

Refer to the data provided in Table 17.5 below to answer the following question(s). The table shows the relationship between income and utility for Lucy.
Table 17.5
 
-Refer to Table 17.5. From the table, we can see that Lucy is

Accepted Answer

A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Lucy's attitude toward risk from the table.

Question 8

The ________ the utilities from each possible outcome of a situation weighted by the probability of that outcome is called expected utility.

Accepted Answer

A)  sum of 
B)  difference in 
C)  change in 
D)  product of

Question 9

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. Since the expected value of this game is $0, the game is called a(n)

Accepted Answer

A)  gamble. 
B)  fair bet. 
C)  even game. 
D)  zero sum game.

Question 10

Refer to the data provided in Table 17.3 below to answer the following question(s). The table shows the relationship between income and utility for Terri.
Table 17.3
 
-Refer to Table 17.3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Terri does not become disabled, she will earn her usual salary of $80,000. Terri has the opportunity to purchase disability insurance which will pay her her full salary in the event she becomes disabled. How much would such an insurance policy be worth to Terri?

Accepted Answer

A)  $0 
B)  less than $20,000 but more than $0 
C)  $20,000 or more 
D)  indeterminate from the given information

Question 11

For most people, as their income increases, their utility from that income ________ at a(n) ________ rate.

Accepted Answer

A)  increases; increasing 
B)  decreases; decreasing 
C)  increases; decreasing 
D)  decreases; increasing

Question 12

Relating to the Economics in Practice on page 358: Which of the following is an example of an advertisement in which the fact that something is not mentioned indicates that the product is unlikely to be desirable?

Accepted Answer

A)  an advertisement for hot dogs that mentions that it meets certain religious dietary requirements but fails to explain those requirements in a way that would be understood by most people 
B)  an advertisement for a sneaker that mentions the endorsement of one sports star but fails to mention the sports stars that have endorsed competing products 
C)  an advertisement for a 30-year old lawn tractor that mentions the color of its paint and the number of cup holders it has but makes no mention of the condition of its engine 
D)  an advertisement for ice cream that describes the variety of flavors available and the way it tastes but makes no mention of the ice cream's nutritional content

Question 13

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
 
-Refer to Table 17.6. From the table, we can see that Isabel is

Accepted Answer

A)  risk-averse. 
B)  risk-loving. 
C)  risk-neutral. 
D)  We cannot determine Isabel's attitude toward risk from the table.

Question 14

An automobile finance company faces an adverse selection problem if borrowers

Accepted Answer

A)  with a greater chance of defaulting on their car loans get loans from the lender. 
B)  with no chance of defaulting on their car loans get loans from the lender. 
C)  choose to get their car loans from a source other than the finance company. 
D)  choose a 5-year loan as opposed to a 2-year loan.

Question 15

Jacinda, a college student, waits tables at a local diner to earn extra cash. In order to differentiate herself from other wait staff, Jacinda took a life saving course from the local hospital, where she learned the proper procedures to use in cases of choking. This is an example of a market signal.

Accepted Answer

A) True 
 B)False

Question 16

Refer to the data provided in Table 17.6 below to answer the following question(s). The table shows the relationship between income and utility for Isabel.
Table 17.6
 
-Refer to Table 17.6. Suppose Isabel has a 25% chance of becoming disabled in any given year. If she does become disabled, she will earn $0. If Isabel does not become disabled, she will earn her usual salary of $160,000. Isabel has the opportunity to purchase disability insurance for $40,000 which will pay her her full salary in the event she becomes disabled. Would Isabel purchase such a policy?

Accepted Answer

A)  yes 
B)  no 
C)  maybe 
D)  indeterminate from the given information

Question 17

Adverse selection and moral hazard are problems that arise in the presence of asymmetric information.

Accepted Answer

A) True 
 B)False

Question 18

Consider the following game. You pick a card from a standard 52-card deck and each time you select an ace, you get $520. For all other cards you must pay $26. This game is not a fair bet.

Accepted Answer

A) True 
 B)False

Question 19

Buyers and sellers use ________ to communicate the quality of goods and services in a world of uncertainty.

Accepted Answer

A)  asymmetric information 
B)  market signals 
C)  expected value 
D)  moral hazards

Question 20

For a given individual, as their income decreases, their utility from that income

Accepted Answer

A)  increases at an increasing rate. 
B)  decreases at a decreasing rate. 
C)  increases at a decreasing rate. 
D)  decreases at an increasing rate.

Exam 17: Uncertainty and Asymmetric Information

If a buyer or seller enters into an exchange with another party who has more information, there is

Refer to the data provided in Table 17.1 below to answer the following question(s) . The table shows the relationship between income and utility for Jane. Table 17.1 -Refer to Table 17.1. From the table, we can see that Jane is

Consider the following game. You pick a card from a deck and each time you select an ace, you get $260. For all other cards you must pay $13. This game is a fair bet.

The insurance industry is susceptible to adverse selection problems, but not problems of moral hazard.

Mechanism design can be used to provide employers and employees with the right incentives in labor markets.

Refer to the information provided in Figure 17.2 below to answer the question(s) that follow. Figure 17.2 -Refer to Figure 17.2. Suppose Sam's utility from income is given in the diagram. From this we would say that Sam is

Refer to the data provided in Table 17.5 below to answer the following question(s) . The table shows the relationship between income and utility for Lucy. Table 17.5 -Refer to Table 17.5. From the table, we can see that Lucy is

The ________ the utilities from each possible outcome of a situation weighted by the probability of that outcome is called expected utility.

Consider the following game. You roll a six-sided die and each time you roll a 6, you get $30. For all other outcomes you pay $6. Since the expected value of this game is $0, the game is called a(n)

For most people, as their income increases, their utility from that income at a(n) rate.

Relating to the Economics in Practice on page 358: Which of the following is an example of an advertisement in which the fact that something is not mentioned indicates that the product is unlikely to be desirable?

Refer to the data provided in Table 17.6 below to answer the following question(s) . The table shows the relationship between income and utility for Isabel. Table 17.6 -Refer to Table 17.6. From the table, we can see that Isabel is

An automobile finance company faces an adverse selection problem if borrowers

Jacinda, a college student, waits tables at a local diner to earn extra cash. In order to differentiate herself from other wait staff, Jacinda took a life saving course from the local hospital, where she learned the proper procedures to use in cases of choking. This is an example of a market signal.

Adverse selection and moral hazard are problems that arise in the presence of asymmetric information.

Consider the following game. You pick a card from a standard 52-card deck and each time you select an ace, you get $520. For all other cards you must pay $26. This game is not a fair bet.

Buyers and sellers use ________ to communicate the quality of goods and services in a world of uncertainty.

For a given individual, as their income decreases, their utility from that income