Chapter 11 Problems

B

Because warranties are potentially ________, low-quality goods are ________ to have warranties. A. inexpensive; less likely B. very expensive; less likely C. inexpensive; more likely D. very expensive; more likely (11.5)

C

A dental insurance company charges premiums higher than average dental costs across a population and loses money. When it keeps raising the premiums on its policies, its losses keep rising. The dental insurance company is facing A. the challenge of having private information not known by the buyers. B. the challenge of high growth of demand. C. an adverse selection death spiral. D. sellers with diminishing market power. (11.3)

B

A principal-agent problem can arise when A. a principal uses an agent to accomplish a task the principal wants credit for completing. B. a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions. C. an agent hires a principal to do something on their behalf, and the agent can observe the principal's actions. D. an insurance agent sells a policy to a buyer who uses it as an incentive to behave badly. (11.2)

C

A seller's signal to potential buyers can work well for the seller only when it is A. substantially costlier for sellers of high-quality products to send the signal than for sellers of low-quality goods to do so. B. focused on reinforcing the idea that there are no lemons for sale in the market. C. substantially costlier for sellers of low-quality products to send the signal than for sellers of high-quality goods to do so. D. focused on reinforcing the idea that there are lemons for sale in the market. (11.5)

B

A terminally ill person opts to purchase life insurance without disclosing his or her illness. What type of asymmetric information is this? A. screening B. adverse selection C. signaling D. moral hazard (11.3)

C

According to the principal-agent problem, when the principal hires the agent to complete a task but is unable to watch the agent complete it, the agent has an incentive to A. do exactly what is requested. B. overdeliver. C. underdeliver. D. do the opposite of what is asked. (11.2)

A

Bill is currently claiming unemployment. He reads that unemployment benefits are going to be extended and decides that he does not need to put as much effort into looking for a job. Which type of information asymmetry does the scenario best represent? A. moral hazard B. adverse selection C. moral failure D. screening (11.2)

B

Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should A. offer to pay a price equal to the most she would pay for a lemon. B. offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon. C. offer to pay a price equal to the most she would pay for a good car. D. save up and buy a new car. (11.1)

C

The signaling model in education suggests that earning a degree A. None of these. B. Is what actually makes you more productive, not the content of your coursework. C. Is crucial because it is the costly signal that indicates you are a high-quality worker, even if you did not learn anything of value. D. Is irrelevant as long as you know the material. (11.5)

B

Hidden actions are a type of _____ that creates moral hazard. A. complement B. private information C. risk aversion D. monitoring (11.2)

B, A, C

Indicate whether each of the following statements, regarding education and productivity, apply to the signaling model, the human capital model, or both. a. Policies that increase the amount of schooling will increase productivity. A. signaling model B. human capital model C. both b. When a student graduates from college, they are no more productive than when they started. A. signaling model B. human capital model C. both c. People with more education earn higher wages. A. signaling model B. human capital model C. both (11.5)

A

Reginald, who is chronically ill, opts to purchase health insurance without disclosing his illness. Buffy, who is in perfect health, decides to forego purchasing health insurance altogether. This is an example of A. adverse selection. B. signaling. C. screening. D. moral hazard. (11.3)

A

Rihanna would like a better car, and she considers selling her old one by advertising on Kijiji. She decides against it because the used cars listed on Kijiji are underpriced. This example illustrates the problem of: A. adverse selection. B. moral hazard. C. positive correlation. D. risk aversion. (11.1)

B

Robert got a new job and relocated to a different city. He initially decided to stay in a small apartment close to his office.​ However, he decided to stay in a much bigger and costlier apartment when he found out that his employer would pay him a house rent allowance. This is an example of​ ________. A. adverse selection B. moral hazard C. the free-rider problem D. none of these (11.1)

A

Signaling takes place in markets with ________. A. asymmetric information B. perfect competition C. negative externalities D. positive externalities (11.5)

B

Some health insurance providers pay a single, set amount for the diagnosis and treatment of a specific illness. This payment scheme is meant to reduce: A. the likelihood that doctors will prescribe too few tests to diagnose the patient. B. moral hazard. C. asymmetric information. D. poor incentives. (11.3)

A

Suppose that a recent study shows that non‑fatal traffic accidents have risen due to an increase in aggressive driving. This information comes after the implementation of mandatory seat belt laws requiring all drivers and passengers to wear seat belts. This relationship could be an example of A. moral hazard. B. adverse selection. C. a public good. D. tragedy of the commons. E. the free‑rider problem. (11.2)

C, A, A

Suppose there are only two types of people, healthy people who never get sick and unhealthy people who have very high health care costs. Suppose that each person can work for one of only two firms. The firm of Globo‑Gym pays all health insurance costs and their insurance covers all possible health issues. The company Buy‑n‑Large pays a small part of the health insurance costs and requires high copayments, but they also pay higher wages to compensate healthy people for their health costs but not unhealthy people. Also, assume that the two firms produce the exact same product and the types of work employees perform at the firms are identical. Which type of workers will likely work for Globo‑Gym? A. healthy workers only B. both types C. unhealthy workers only Which type of workers will likely work for Buy‑n‑Large? A. healthy workers only B. unhealthy workers only C. both types We see the sorting this way because of A. adverse selection. B. moral hazard. (11.3)

B

Taren earns a certificate in a software program that is used by professionals in the field in which Taren wants to start a career. Obtaining the certificate: A. increases the moral hazard of hiring Taren. B. signals that Taren is a good candidate for the job. C. eliminates the principal-agent problem between Taren and her employer. D. indicates that Taren is less qualified than other candidates. (11.5)

B

Markus is considering an investment that has a 30% chance of providing a value in utility worth $20,000 and a 70% chance of incurring a loss of utility worth $7,000. What is Markus's expected utility from this investment? A. $10,900 B. $1,100 C. $4,900 D. $6,000 (11.1)

B

Obtaining a college education signals that a potential employee: A. is wealthy enough to afford college. B. has determination and a relatively high IQ. C. is not a very good worker. D. knows much of the information needed to do the job without training. (11.5)

CC

Offering a warranty is an example of: A. moral hazard. B. adverse selection. C. signaling. D. the principal-agent problem. (11.5)

A

Pak is one of many sellers of green beans in local farmer's markets where consumers are willing to pay more for organically grown green beans than regular green beans. However, the buyers have no way to verify whether any of the green beans for sale are grown organically. As a result of this A. green beans end up selling at low prices because buyers are skeptical. B. most of the green beans sold will be organic because sellers want to cater to customers. C. the market price tends to be high because all sellers claim to sell organic green beans. D. green beans are not sold because there is no trust in the market. (11.1)

A

The adverse selection of sellers is the A. tendency for the mix of goods to be skewed toward more low-quality goods when buyers can't observe quality. B. skew in markets when sellers cannot observe quality that leads to lower prices. C. skew in markets toward buyers who pay less when sellers cannot tell a buyer's willingness to pay. D. tendency for buyers to choose to buy from sellers who are not trustworthy even when product quality is high. (11.1)

C

The death spiral in health insurance is caused by: A. asymmetric information. B. moral hazard. C. adverse selection. D. the principal-agent problem. (11.3)

D

What worsens adverse selection in a dental insurance market where buyers have private information? A. Grouping buyers by a risk factor and charging a premium based on risk. B. Requiring that each buyer's premium be based on that specific buyer's costs. C. Selling only to risk-averse buyers. D. Allowing buyers to opt-in and opt-out of the market at any time they desire. (11.3)

B

When a principal-agent problem occurs, the agent engages in actions that A. are impulsive rather than planned and that end up working against the agent's best interest. B. the principal can't observe, and they are not in the principal's best interest. C. result in lemons that harm the agent rather than the principal. D. are based on risk aversion rather than the principal's best interest. (11.2)

B

Which is NOT an example of moral hazard? A. A car salesman recommends an overpriced warranty. B. A restaurant serves an undercooked meal. C. A car repair shop recommends new tires to replace old ones that are still good. D. A physician recommends an unnecessary diagnostic test. (11.2)

A

Which is an example of moral hazard? A. A car salesman recommends a car that has been wrecked and repaired. B. A driver drives faster than the speed limit. C. A hairdresser colors a client's hair poorly. D. A car dealership offers a warranty. (11.2)

C

Which is the best definition for the term moral hazard? A. when people engage in hazardous activities because of a deficient moral code B. when businesses pursue profit at the expense of employee well-being C. when people who are not responsible for the entire costs of their actions take riskier actions than they would otherwise take D. when imperfect information implies that people must choose from an undesirable selection of goods E. when people take unwise risks F. when one side of an economic transaction has more information about the good being exchanged than the other side has G. when consumers must decide whether to purchase goods from firms with potentially objectionable business practices (11.2)

A

Which of the following is NOT an example of a solution to an adverse selection problem caused by the seller's having private information? A. A company makes sure that all its employees enter positive product reviews on an online website that reports product reviews. B. A hairstylist offers a free brief follow-up appointment within a week of a haircut to adjust anything the customer does not like about a cut. C. A government requires miles-per-gallon labeling on all automobiles sold in the country. D. A list of award winners and top-tier producers is published by the organization of experts that judges an annual chocolate bar quality competition. (11.1)

B

Which of the following is an example of a principal-agent problem? A. Jeff, a CEO, puts pressure on his staff to increase productivity. B. Maria slacks off at work when her boss is on vacation. C. Ingrid is highly risk-averse and tends to over-insure against loss. D. Jordan buys a new car that seems to have more flaws than the average new car. (11.2)

A

Which of the following refers to the​ principal-agent problem in the market for health​ care? A. Doctors pursuing their own interests rather than the interests of their patients. B. Doctors pursuing only the interests of their patients rather than the interest of society. C. Doctors pursuing the interests of health insurance providers rather than the interests of their patients. D. A conflict of interest between doctors and health insurance companies. (11.3)

D

Which of the following would NOT be a credible third-party verifier of information on a product? A. A panel of experts on the product that are not employed or funded by producers. B. A certified home inspector who will inspect homes for a set fee and provide a report on its condition. C. An independent organization funded by subscribers to its magazine that is dedicated to verifying product quality claims. D. A research laboratory whose research is funded by the company producing the product. (11.5)

D

Which one of the following is NOT an example of a seller offering signals of quality? A. Hui Er proofreads her job application and cover letter four times to make sure it shows that she is careful about details. B. Ian's Auto Body Shop offers a warranty on its work. C. Mak offers a money-back guarantee on his product. D. Chau asks customers to write reviews of her manicures on a website for local businesses. (11.5)

D

Which pricing approach for a restaurant would have the greatest risk of adverse selection due to buyers having private information? A. Offering small- and large-plate versions of each entrée with different prices. B. Pricing each menu item based on its cost of production. C. Charging a price per ounce and weighing each plate. D. Offering a set price all-you-can-eat buffet. (11.1)

D, C

Which statement is the best definition of the term adverse selection? A. when either a buyer or seller knows more about a product's quality than does the other party and this extra knowledge has no effect on either party B. when competitive forces drive inefficient firms out of the market and leave only efficient firms in existence C. when complete information is available to all parties involved in the purchase of a product D. when more information is available to one side of the market (i.e., buyer or seller), resulting in the less knowledgeable party incurring costs as a result of this information deficiency E. when people engage in riskier behavior than they would otherwise because insurance prevents them from facing the true costs of their actions Which statement is not an example of adverse selection? A. Relative to all cars with similar observable characteristics, those in the used car market are less reliable. B. Individuals who expect more health problems are more likely to buy generous health insurance policies. C. A person does not buy a car alarm because auto theft is covered in her insurance policy. (11.1)

B

Who is least likely to buy health insurance when individuals have private information about their health and health insurance is optional? A. An obese person B. A young adult in good health C. A person who has a family history of cancer D. A person who is 60 years old and in good health (11.3)

B

You are a government policymaker with the responsibility to propose a policy that will reduce adverse selection in the health insurance market. Which of the following policies would achieve that goal? A. The government will fund a public information campaign to reduce risk aversion. B. The government will subsidize the cost of health insurance. C. The government will protect the people's right to keep their personal information private. D. The government will ensure that people can opt-in and opt-out of health insurance at any time. (11.3)