Question 1

Moral hazard results from _____ information and adverse selection results from _____ information.

Accepted Answer

A)  private; private 
B)  private; public 
C)  public; private 
D)  public; public 
E)  None of the above answers are correct because both are the result of the lemons problem.

Question 2

If a salesperson is paid by the volume of sales he or she makes,then the

Accepted Answer

A)  moral hazard problem is diminished. 
B)  lemons problem can be screened. 
C)  moral hazard problem is enhanced. 
D)  adverse selection problem is enhanced. 
E)  None of the above answers is correct.

Question 3

In an insurance market,moral hazard exists chiefly because of

Accepted Answer

A)  economies of scale. 
B)  adverse selection. 
C)  diseconomies of scale. 
D)  private information. 
E)  public information.

Question 4

"Screening" means that an auto insurance company is

Accepted Answer

A)  enforcing a pooling equilibrium. 
B)  ignoring all private information. 
C)  creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection. 
D)  creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard. 
E)  creating an incentive for a risky driver to reveal that he or she is risky.

Question 5

In the market for automobile insurance,moral hazard implies that

Accepted Answer

A)  those who are insured might take greater risks. 
B)  those who are uninsured might take greater risks. 
C)  insured and uninsured alike will take greater risks. 
D)  screening will have no effect in the market. 
E)  drivers with greater risks are more likely to buy insurance.

Question 6

Private information is a situation in which

Accepted Answer

A)  two parties to an exchange have information that is available to outsiders if they ask. 
B)  one party to an exchange has information that is not available to the other. 
C)  the marginal cost of a person's obtaining additional information is zero. 
D)  the marginal cost of making information available to one more person is zero. 
E)  outsiders have relevant information that is not available to the people in the market.

Question 7

In the used car market,adverse selection creates the lemon problem when

Accepted Answer

A)  sellers cannot judge buyers' creditworthiness. 
B)  buyers believe that sellers will offer only high-priced "good" used cars for sale.. 
C)  buyers believe that sellers will sell only lemons. 
D)  sellers offer warranties on all used cars. 
E)  None of the above answers are correct because it is moral hazard that creates the lemon problem.

Question 8

In the used car market with warranties,the market for lemons (poor quality used cars)is ________ and the market for good cars is ________.

Accepted Answer

A)  efficient; efficient 
B)  inefficient because of over-supply; inefficient because of under-supply 
C)  inefficient because of over-supply; inefficient because of over-supply 
D)  efficient; inefficient because of under-supply 
E)  inefficient because of over-supply; efficient

Question 9

In the market for automobile insurance,adverse selection implies that

Accepted Answer

A)  drivers with greater risks want to buy a policy without deductibles. 
B)  drivers with greater risks want to buy a policy with large deductibles. 
C)  uninsured drivers will drive recklessly. 
D)  insured drivers will drive recklessly. 
E)  moral hazard does not exist in this market.

Question 10

Screening

Accepted Answer

A)  leads to a pooling equilibrium in the insurance market. 
B)  means an uninformed person passes knowledge to an informed person. 
C)  makes no-claim bonuses unnecessary. 
D)  explains why insurance companies offer low-premium, high-deductible policies and high-premium, low-deductible policies. 
E)  makes the insurance market inefficient.

Question 11

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Accepted Answer

A)  reduce; be the same 
B)  reduce; differ 
C)  magnify; be the same 
D)  magnify; differ 
E)  None of the above answers is correct because warranties have nothing to do with private information.

Question 12

Which of the following has a positive externality and hence can be under provided?

Accepted Answer

A)  chronically ill people are not allowed to buy insurance. 
B)  health insurance purchased through an employer 
C)  vaccination 
D)  Health Maintenance Organizations 
E)  None of the above have a positive externality.

Question 13

Moral hazard is

Accepted Answer

A)  the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. 
B)  when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. 
C)  a situation in which only bad quality items are bought and sold. 
D)  absent after a person who dislikes risk buys insurance against the risk. 
E)  an action taken outside a market that conveys information that can be used by that market.

Question 14

In the United States,of all types of insurance,people spend the most on ________ insurance.

Accepted Answer

A)  health 
B)  hurricane 
C)  auto 
D)  life 
E)  property and casualty

Question 15

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

Accepted Answer

A)  adverse selection.. 
B)  moral hazard. 
C)  a separating equilibrium. 
D)  signaling. 
E)  the lemons problem.

Question 16

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers.
-In a separating equilibrium,aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________.

Accepted Answer

A)  $1,000; $1,000 
B)  $800; $1,200 
C)  $1,200; $800 
D)  $1,000; $800 
E)  $1,200; $1,000

Question 17

In the used car market with no warranties,the equilibrium is a ________ and there is ________.

Accepted Answer

A)  pooling equilibrium; inefficiency, partly because of over-supply of good cars 
B)  pooling equilibrium; inefficiency, partly because of over-supply of lemons 
C)  separating equilibrium; no inefficiency 
D)  separating equilibrium; inefficiency, partly because of over-supply of lemons 
E)  pooling equilibrium; no inefficiency

Question 18

In the health insurance market,moral hazard occurs when

Accepted Answer

A)  chronically ill people buy insurance. 
B)  chronically ill people cannot buy insurance. 
C)  insured people adopt an unhealthy lifestyle. 
D)  patients sue their doctor. 
E)  chronically ill people refuse appropriate medical treatment.

Question 19

In the insurance market,moral hazard and adverse selection are the result of

Accepted Answer

A)  poorly functioning markets. 
B)  government intervention. 
C)  private information. 
D)  treachery. 
E)  a separating equilibrium.

Question 20

Because Don has health insurance,he is more likely to see the doctor when he has a cold.This is an example of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  the lemons problem. 
D)  both moral hazard and adverse selection. 
E)  private information.

Exam 12: Markets With Private Information

Moral hazard results from _ information and adverse selection results from _ information.

If a salesperson is paid by the volume of sales he or she makes,then the

In an insurance market,moral hazard exists chiefly because of

"Screening" means that an auto insurance company is

In the market for automobile insurance,moral hazard implies that

Private information is a situation in which

In the used car market,adverse selection creates the lemon problem when

In the used car market with warranties,the market for lemons (poor quality used cars) is and the market for good cars is .

In the market for automobile insurance,adverse selection implies that

Screening

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .

Which of the following has a positive externality and hence can be under provided?

Moral hazard is

In the United States,of all types of insurance,people spend the most on ________ insurance.

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -In a separating equilibrium,aggressive drivers pay a premium of and safe drivers pay a premium of .

In the used car market with no warranties,the equilibrium is a and there is .

In the health insurance market,moral hazard occurs when

In the insurance market,moral hazard and adverse selection are the result of

Because Don has health insurance,he is more likely to see the doctor when he has a cold.This is an example of

Exam 12: Markets With Private Information

Moral hazard results from _____ information and adverse selection results from _____ information.

If a salesperson is paid by the volume of sales he or she makes,then the

In an insurance market,moral hazard exists chiefly because of

"Screening" means that an auto insurance company is

In the market for automobile insurance,moral hazard implies that

Private information is a situation in which

In the used car market,adverse selection creates the lemon problem when

In the used car market with warranties,the market for lemons (poor quality used cars) is ________ and the market for good cars is ________.

In the market for automobile insurance,adverse selection implies that

Screening

Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.

Which of the following has a positive externality and hence can be under provided?

Moral hazard is

In the United States,of all types of insurance,people spend the most on ________ insurance.

The fact that people who know they are risky drivers are more likely to buy auto insurance reflects

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -In a separating equilibrium,aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________.

In the used car market with no warranties,the equilibrium is a ________ and there is ________.

In the health insurance market,moral hazard occurs when

In the insurance market,moral hazard and adverse selection are the result of

Because Don has health insurance,he is more likely to see the doctor when he has a cold.This is an example of

Moral hazard results from _ information and adverse selection results from _ information.

In the used car market with warranties,the market for lemons (poor quality used cars) is and the market for good cars is .

Warranties in the used car market the problem of private information thereby causing the price of good and bad used cars to .

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. -In a separating equilibrium,aggressive drivers pay a premium of and safe drivers pay a premium of .

In the used car market with no warranties,the equilibrium is a and there is .