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Exam 10: Information

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Question 21

Multiple Choice

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Government-mandated participation in the auto insurance market has led to:

A) higher premiums for all participants.
B) lower premiums for all participants.
C) a monopoly in the market.
D) free coverage for some participants.

E) All of the above
F) A) and B)

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Question 22

Multiple Choice

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An insurance company offering both high-deductible and low-deductible plans is an example of:

A) signaling.
B) statistical discrimination.
C) building a reputation.
D) screening.

E) All of the above
F) B) and C)

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Question 23

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Suppose there is a used car market with 500 cars for sale. Buyers know that 250 of the used cars are of poor quality and are worth only $1,000, while the other 250 used cars are of good quality and are worth $3,000. However, buyers do not know which individual cars are of poor quality or good quality. The seller of a car knows the worth of the car. Which of the following statements is true?The equilibrium price of a used car will be $2,000.We expect moral hazard to occur in this market.In equilibrium, only poor quality cars will be sold.

Consider a hypothetical used car market in which fifty percent of the cars for sale are low-quality cars and fifty percent of the cars for sale are high-quality cars. Buyers know that half of the cars are high quality and half are low quality, but they do not know which individual cars are high quality and low quality. Sellers know whether their cars are high quality or low quality. Buyers would be willing to pay at most $2,000 for a low-quality car and at most $8,000 for a high-quality car. Sellers of low-quality cars have a willingness to sell of $1,500. Sellers of high-quality cars have a willingness to sell of $7,000.Which of the following statements is true?

In the principal-agent problem, the agent is a person who:

How can one solve the problems caused by information asymmetry?

Moral hazard can be avoided by:

Joshua's boss is out of town for one week, leaving Joshua alone in the office. Joshua decides to spend more time than usual checking his social media accounts during the day instead of working. This is an example of:

The principal-agent problem occurs:

Consider a hypothetical used car market in which fifty percent of the cars for sale are low-quality cars and fifty percent of the cars for sale are high-quality cars. Buyers know that half of the cars are high quality and half are low quality, but they do not know which individual cars are high quality and low quality. Sellers know whether their cars are high quality or low quality. Buyers would be willing to pay at most $2,000 for a low-quality car and at most $8,000 for a high-quality car. Sellers of low-quality cars have a willingness to sell of $1,500. Sellers of high-quality cars have a willingness to sell of $7,000.Which of the following statements is true?It is efficient for the plums to be sold but not the lemons.Buyers will never buy lemons.The price of a used car will be no more than $2,000.The price of a used car will be no more than $7,000.

Adverse selection arises when:

Consider a hypothetical market for health insurance. Fifty percent of the buyers of insurance are low-cost, healthy individuals who incur an average of $3,000 in healthcare costs each year, and the other fifty percent are high-cost, unhealthy individuals who incur an average of $9,000 in healthcare costs each year. Buyers know whether they are a low-cost type or a high-cost type. However, sellers of insurance do not know if a particular parson is a low-cost or high-cost type; they only know that half of the buyers are low-cost types, and half of the buyers are high-cost types. Healthy buyers would be willing to pay at most $4,000 for an insurance policy, and unhealthy buyers would be willing to pay at most $10,000.Which of the following statements is true?

Which of the following statements about the role of information in markets is true?

When one person knows more than another, it creates a situation:

In the principal-agent problem, the principal is a person who:

Information asymmetry is a situation in which:

Adverse selection occurs in insurance markets because:

Which of the following is an example of a transaction made with incomplete information?

Which of the following markets is subject to adverse selection?

People sometimes make purchases without complete information because: