ECON Mod 10

Which of the following is an example of adverse selection?

A customer buying a defective appliance from a used goods market

What is one of the most important benefits of the Internet?

The internet has reduced asymmetric information

Moral hazard refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.

True

Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in

a larger proportion of lemons being sold and consequently, producer surplus is increased.

Which of the following helps in reducing the problem of adverse selection in health insurance markets?

Insurance mandates

What is moral hazard?

It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.

What is adverse selection?

It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

Buyers in the market for used guitars are getting more pessimistic about the possibility of getting a good guitar. This will cause the price of used guitars to ________ and the percentage of good used guitars to ________

decrease;decrease

A person who starts practicing poisonous snake charming after signing a contract with a health insurance company is an example of

moral hazard

More people started building houses in earthquake-prone regions when the government of Polonia launched an insurance program for houses in this region. This is an example of ________

moral hazard

The basic idea behind moral hazard is that ________.

people tend to take more risks if they do not have to bear the costs of their behavior

Adverse selection in employment is more likely when:

people's abilities are difficult for potential employers to observe.

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

sick people are more likely to want health insurance than healthy people.

If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce

the moral-hazard problem

If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of

the principal-agent problem