Question 1

If the opportunity cost of sending a market signal if too great for risky people and low enough for safe people, there will exist a(n)

Accepted Answer

A)   pooling equilibrium
B)   separating equilibrium
C)   adverse equilibrium B

Question 2

Co-insurance is an example of how a market failure due to moral hazard can be solved __________ government intervention.

Accepted Answer

A)   with
B)   partially by
C)   without C

Question 3

Because of a moral hazard problem, a market will

Accepted Answer

A)   succeed
B)   fail
C)   reach equilibrium B

Question 4

Explain why insurance markets fail.

Accepted Answer

The answer of Explain why insurance markets fail....

Question 5

The amount any agent will have to pay in the event that the situation being covered by the insurance company occurs is called the co-insurance (deductible).

Accepted Answer

A) True 
 B)False

Question 6

An example of market signaling in the auto insurance market is

Accepted Answer

A)   paying a higher deductible on comprehensive coverage
B)   qualifying for a good student discount
C)   Both answers are correct

Question 7

If a reputation for bad service would ruin a restaurant, the owner of the restaurant cannot afford to hire

Accepted Answer

A)   good workers
B)   bad workers
C)   any workers

Question 8

An insurance lacks the information needed to distinguish between safe and risky people and therefore charges everyone the same average premium. As a result, the ________ people will not buy insurance, and the industry will be selling only to ________ people.

Accepted Answer

A)   risk-neutral, safe
B)   safe, risky
C)   risky, safe

Question 9

What are the pros and cons of market signaling?

Accepted Answer

The answer of What are the pros and cons of...

Question 10

When the buyers and sellers in a market have different amounts of information, there exists asymmetric information.

Accepted Answer

A) True 
 B)False

Question 11

A separating equilibrium is an equilibrium where different types play differently so their types can be inferred by their actions.

Accepted Answer

A) True 
 B)False

Question 12

You are approved for an insurance policy that protects your truck. The next day you become a reckless driver. This is an example of

Accepted Answer

A)   illogical behavior
B)   social welfare
C)   moral hazard

Question 13

Does market failure due to moral hazard in the insurance industry mean that government must intervene?

Accepted Answer

The answer of Does market failure due to moral hazard...

Question 14

Free-market advocates would never suggest using signaling to solve problems of adverse selection.

Accepted Answer

A) True 
 B)False

Question 15

Market signaling does not produce

Accepted Answer

A)   Pareto-optimal results
B)   separating equilibria
C)   market solutions to adverse selection

Question 16

If employers cannot distinguish between good and bad workers, then the employers must offer all workers a wage that reflects the __________ productivity of all workers in the population.

Accepted Answer

A)   total
B)   average
C)   marginal

Question 17

Compare and contrast adverse selection in the insurance industry and in employment decisions.

Accepted Answer

The answer of Compare and contrast adverse selection in the...

Question 18

Tipping is a(n) ____________ solution.

Accepted Answer

A)   nonmarket
B)   immoral hazard
C)   market

Question 19

The existence of a separating equilibrium depends upon differences in

Accepted Answer

A)   opportunity cost
B)   sunk cost
C)   marginal cost

Question 20

If an insurance company selects its risks from the population in an adverse way, the company will probably

Accepted Answer

A)   earn extra-normal profits
B)   suffer severe losses
C)   barely break even

Exam 23: Moral Hazard and Adverse Selection: Informational Market Failures

If the opportunity cost of sending a market signal if too great for risky people and low enough for safe people, there will exist a(n)

Co-insurance is an example of how a market failure due to moral hazard can be solved __________ government intervention.

Because of a moral hazard problem, a market will

Explain why insurance markets fail.

The amount any agent will have to pay in the event that the situation being covered by the insurance company occurs is called the co-insurance (deductible).

An example of market signaling in the auto insurance market is

If a reputation for bad service would ruin a restaurant, the owner of the restaurant cannot afford to hire

An insurance lacks the information needed to distinguish between safe and risky people and therefore charges everyone the same average premium. As a result, the people will not buy insurance, and the industry will be selling only to people.

What are the pros and cons of market signaling?

When the buyers and sellers in a market have different amounts of information, there exists asymmetric information.

A separating equilibrium is an equilibrium where different types play differently so their types can be inferred by their actions.

You are approved for an insurance policy that protects your truck. The next day you become a reckless driver. This is an example of

Does market failure due to moral hazard in the insurance industry mean that government must intervene?

Free-market advocates would never suggest using signaling to solve problems of adverse selection.

Market signaling does not produce

If employers cannot distinguish between good and bad workers, then the employers must offer all workers a wage that reflects the __________ productivity of all workers in the population.

Compare and contrast adverse selection in the insurance industry and in employment decisions.

Tipping is a(n) ____________ solution.

The existence of a separating equilibrium depends upon differences in

If an insurance company selects its risks from the population in an adverse way, the company will probably