Question 1

In markets with asymmetric information

Accepted Answer

A)  moral hazard causes adverse selection which in turn causes asymmetric information. 
B)  adverse selection causes moral hazard which in turn causes asymmetric information. 
C)  asymmetric information causes moral hazard and then it causes adverse selection. 
D)  asymmetric information causes adverse selection and then it causes moral hazard.

Question 2

The cost of group health insurance is lower than if an individual buys a policy on his own because

Accepted Answer

A)  the problem of adverse selection is reduced. 
B)  moral hazard costs of a group tend to move to a low average. 
C)  it is easier for the company to deny claims from a large group. 
D)  insuring a group eliminates the problem of buyers having more information than the seller.

Question 3

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale. The main reason for the elimination of profits is

Accepted Answer

A)  after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat. 
B)  firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses. 
C)  the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls. 
D)  after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.

Question 4

One reason why adverse selection problems arise in health insurance markets is that

Accepted Answer

A)  sick people are more likely to want health insurance than healthy people. 
B)  because of advances in medical technology, people are living longer. These medical advances are costly and drive up the price of insurance for everyone. 
C)  the average age of citizens of the United States has increased in recent years, and will continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their medical bills will have to be paid by younger workers. 
D)  fewer men and women are choosing medical careers because of the increase in the cost of malpractice insurance.

Question 5

'When it comes to public goods, individuals do not reveal their true preferences because it is not in their self-interest to do so.' Evaluate this statement.

Accepted Answer

The answer of 'When it comes to public goods, individuals...

Question 6

What is the relationship between market failure and government failure?

Accepted Answer

The answer of What is the relationship between market failure...

Question 7

One effect of adverse selection in a market is that the equilibrium quantity of the product may be smaller than it would have been if there were no information problems.

Accepted Answer

A) True 
 B)False

Question 8

-Refer to Figure 14-2. Suppose Amit and Bree know each other's preferences so that it is not possible for one to deceive the other. Which of the following statements best describes the circumstances under which the optimal quantity of street lights could be achieved?

Accepted Answer

A)  The optimal quantity will be installed only if the two parties agree to pay according to their willingness to pay as indicated by their respective demand curves. 
B)  Because there are only two consumers, it is likely that private bargaining will result in the optimal quantity being installed. 
C)  The optimal quantity will be installed only if the two parties split the cost of installation equally. 
D)  The optimal quantity will be installed only if Bree pays for the entire installation cost.

Question 9

-Refer to Figure 14-1. The figure above represents the market for pecans. Assume that this is a competitive market. Which of the following is true?

Accepted Answer

A)  If the price of pecans is $3, the output will be economically efficient but there will be a deadweight loss. 
B)  If the price of pecans is $9, consumers will purchase more than the economically efficient output. 
C)  Both 4000 pounds and 12 000 pounds are economically inefficient rates of output. 
D)  If the price of pecans is $3, producers will sell 12 000 pounds of pecans but this output will be economically inefficient.

Question 10

What is moral hazard?

Accepted Answer

A)  It refers to the private, self-interested actions that people pursue, which, when taken collectively, lead to a loss in economic surplus. 
B)  It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off. 
C)  It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. 
D)  It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.

Question 11

Negative externalities and the tragedy of the commons are problems that have a common source. What is this common source?

Accepted Answer

A)  self-interest motives of producers and consumers 
B)  a lack of concern for human rights 
C)  a lack of competition 
D)  a lack of clearly defined and enforced property rights

Question 12

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

Accepted Answer

A)  the sum of consumer surplus and producer surplus is at a maximum. 
B)  economic surplus is minimised. 
C)  the sum of the benefits to firms is equal to the sum of the benefits to consumers. 
D)  the sum of consumer surplus and producer surplus is minimised.

Question 13

Which of the following individuals is most likely to purchase a life insurance policy that pays out an annual income beginning at a certain age until the individual's death?

Accepted Answer

A)  Ian, who expects to have a short life expectancy because of an illness 
B)  Bradley who has six young children 
C)  Avril, a tax attorney who wants to avoid adverse selection 
D)  Alma, who expects to live a long life, based on her family history

Question 14

Which of the following is a disadvantage of trademarking a firm's product?

Accepted Answer

A)  A trademark differentiates a firm's product. 
B)  A trademark conveys information about the product to the public. 
C)  A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name. 
D)  A trademark does not affect demand for the firm's product.

Question 15

-Refer to Figure 14-1. The figure above represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $3, what changes in the market would result in an economically efficient output?

Accepted Answer

A)  The price would increase, the quantity supplied would decrease, and the quantity demanded would increase. 
B)  The quantity supplied would increase, the quantity demanded would decrease and the equilibrium price would increase. 
C)  The price would increase, the demand would decrease and the supply would increase. 
D)  The price would increase, the quantity demanded would decrease and the quantity supplied would increase.

Question 16

Adverse selection is a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

Accepted Answer

A) True 
 B)False

Question 17

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

Accepted Answer

A) True 
 B)False

Question 18

If a buyer in an economic transaction has more information than the seller, the buyer benefits at the expense of the seller. This phenomenon is due to

Accepted Answer

A)  moral hazard. 
B)  adverse selection. 
C)  economically irrational behaviour. 
D)  gains from trade.

Question 19

Which of the following is a possible solution when a scarce resource is subject to the tragedy of the commons?

Accepted Answer

A)  Access to the commons can be restricted through community norms and laws. 
B)  Offer subsidies to consumers. 
C)  Force people to move away from the commons. 
D)  Persuade people to use less of the scarce resource through an advertising campaign.

Question 20

Advertising is the action of a firm that is intended to maintain the differentiation of its product over time.

Accepted Answer

A) True 
 B)False

Exam 14: Government Intervention in the Market

In markets with asymmetric information

The cost of group health insurance is lower than if an individual buys a policy on his own because

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale. The main reason for the elimination of profits is

One reason why adverse selection problems arise in health insurance markets is that

'When it comes to public goods, individuals do not reveal their true preferences because it is not in their self-interest to do so.' Evaluate this statement.

What is the relationship between market failure and government failure?

One effect of adverse selection in a market is that the equilibrium quantity of the product may be smaller than it would have been if there were no information problems.

-Refer to Figure 14-2. Suppose Amit and Bree know each other's preferences so that it is not possible for one to deceive the other. Which of the following statements best describes the circumstances under which the optimal quantity of street lights could be achieved?

-Refer to Figure 14-1. The figure above represents the market for pecans. Assume that this is a competitive market. Which of the following is true?

What is moral hazard?

Negative externalities and the tragedy of the commons are problems that have a common source. What is this common source?

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

Which of the following individuals is most likely to purchase a life insurance policy that pays out an annual income beginning at a certain age until the individual's death?

Which of the following is a disadvantage of trademarking a firm's product?

-Refer to Figure 14-1. The figure above represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $3, what changes in the market would result in an economically efficient output?

Adverse selection is a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

If a buyer in an economic transaction has more information than the seller, the buyer benefits at the expense of the seller. This phenomenon is due to

Which of the following is a possible solution when a scarce resource is subject to the tragedy of the commons?

Advertising is the action of a firm that is intended to maintain the differentiation of its product over time.